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Category: Direct Taxes

49. DTAA between India and Germany – Amount received by assessee – international airlines as IATP members by rendering technical facilities i.e. line maintenance facilities to other member airlines at various Indian airports being covered under Article 8(4) of DTAA between India and Germany and article 8(1) and 8(3) of DTAA between India and Netherlands respectively, was not liable to tax in India

DIT vs. KLM Royal Dutch Airlines; 2017] 78 taxmann.com 1
(Delhi):

The assessees namely ‘Lufthansa’ and ‘KLM’, were
international airlines with headquarters and controlling offices in Cologne,
Germany and Amsterdam, Netherlands respectively and branch offices in India.
They operated aircraft in the international traffic business; these activities
were also carried out in India inasmuch as they operated aircraft in
international traffic from, and to, various Indian airports. Both the assessees
were members of the International Airlines Technical Pool (‘IATP’ or the
‘Pool’). As IATP members they extended minimal technical facilities (line
maintenance facilities) to other International Air Transport Association
(‘IATA’) member airlines at Indian airports. The assessees claimed that the
amounts received from various IATP member airlines for the above services
rendered in India were not taxable in India. The Assessing Officer held that
such amounts received by them in India were taxable, holding that these
activities were not covered under the term ‘Air Transport Services’. He held
that the assessees’ branch offices in India constituted permanent
establishments and, therefore, the income relating to the engineering and
traffic handling was taxable in India, as the same was not covered under
article 7 of DTAA. The Tribunal held that the assessees profit due to participation
in a pool was covered under article 8(4) of the DTAA between India and Germany
and by articles 8(1) and 8(3) of DTAA between India and Netherlands and such
profit could not be brought to tax in India.

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

“i)   While interpreting tax treaties and
conventions, the emphasis is upon the context in the instrument itself, and
‘any subsequent agreement between the parties’ as to the interpretation of the
treaty or the application of its provisions. The expression ‘profit from the
operation of ship or aircraft in international traffic’ has not been defined in
the Indo-Dutch DTAA, or in the Indo-German DTAA.

ii)   The Tribunal while explaining the meaning of
profit from the operation of ships or aircraft in international traffic in both
Lufthansa and the KLM cases took into consideration the bye-laws of IATP,
because this organisation authorised its members to share aircrafts, aircrafts
pooling, ground handling equipment and manpower all over the world. The
Tribunal also considered the relevant clauses of the IATP manual and held that
any receipt by the assessee due to participation in the IATP pool as provided
in its manual and dealt with in article 8(4) of Indo-German DTAA will not be
taxable in India under article 8(1); a similar finding was rendered in the case
of KLM too.

iii)   The assessees participated in the IATP pool
and earned certain revenues from such activities and also incurred expenditure.
There is, clear reciprocity as to the extension of services; IATP membership is
premised upon each participating member being able to provide facilities for
which it was formed (line services, OMR services, etc.) of a required mandate
standard. As there was reciprocity in the rendering and availing of services,
there was clearly participation in the pool; in terms of the two DTAAs
(Indo-German and India-Netherlands) the profits from such participation were
not taxable in India.”

48. Demonetisation – PMGKY deposit scheme – Where person from whom cash was seized during demonetisation 2016 and he was not tried under any provision of law, he would be eligible to deposit amount in PMGKY deposit scheme on or before 30-3-2017

Vishal Jain vs. State of Punjab; [2017] 78 taxmann.com 172
(P&H):

The assessee was travelling in a cab from Delhi carrying Rs.
30 lakh. The cash amount was seized by police officials and handed over to
Income-tax Officers. The assessee filed a writ petition seeking declaration
against action of respondents in depriving him of cash amount, unconditional
release of amount to petitioner; with a further prayer to permit him to have
his advocate present during his interrogation. He further seeked refrain of any
coercive action against him alleging to the aforesaid dispute; with a liberty
to avail the remedy under ‘Pradhan Mantri Garib Kalyan Yojana, 2016’ by
depositing the aforesaid amount, tax, surcharge and penalty.

The Punjab and Haryana High Court allowed the petition and
held as under:

“i)   The case of the petitioner has to be examined
as per the aforementioned Scheme, in view of the amendment Act, notification
and circular. Though he is eligible yet cannot be deprived of the statutory
entitlement to declare and deposit his undisclosed income or pay tax, surcharge
and penalty. The aforementioned scheme has been promulgated for a limited
period with effect from 17-12-2016 to 31-3-2017.

ii)   From the provisions of the scheme, it is
evident that a person can avail the remedy of declaration. Last date for
submitting the Form 1 as prescribed in the rules may be made at anytime on or
before 31-3-2017. The explanation is in tune of section 199 (o) of the Finance
Act as the petitioner has made a categoric statement that he is not involved in
any of the offences as referred above.

iii)   The use of the words “in relation of
prosecution of any offence” instead of “in relation to investigating
for any of the offence” clearly shows legislative intent of provisions
would apply only if the charge sheet or complaint is filed for prosecuting any
person under any of the aforementioned provisions of Act and not merely when
investigations are going on.

iv)  In the instant case, as per the petitioner’s
claim, no complaint or charge sheet is pending against him. The alleged
undisclosed seized income of the petitioner, as per the statement of Yatinder
Sharma, has been handed over to Income-tax department and summons, has already
been served upon the petitioner.

v)   The petitioner is not, thus, trying to
falsify to project undisclosed income as duly accounted for availing the
remedy. Since the petitioner is not amongst the persons mentioned in paragraph
8 of the circular No. 43 of 2016, being not eligible for availing the PMGKY
Deposit Scheme, therefore, the Income-tax Officer cannot, deny the petitioner
adjustment from his cash account seized by the department, tax charge and
penalty.

vi)  Economic offences are very serious and have a
wider ramification. The statutory investing scheme appears to be positive
process for not only enhancing the revenue collection but at the same time, it
is an opportunity for reforming those who had earlier failed to make true and
correct disclosure of income in normal course by taking into consideration the
provisions of the aforementioned Scheme.

vii)  The prayer of the petitioner of taking any
coercive steps appears to be genuine. The writ petition can be disposed of with
a direction to respondents not to take any coercive action against the
petitioner and he may be granted a permission to take the assistance of a
lawyer to be present at visible but not audible distance during his
interrogation and recording of statement in connection with said seizure in the
instant case or any proceedings consequential thereto.

viii) However, prayer of the petitioner for directing
unconditional return of the seize amount is hereby rejected. In case, the
petitioner submits any application to the Income-tax Department, the
authorities can look into matter for the purpose of declaration of undisclosed
income by availing the remedy under the PMGKY Scheme. They shall consider the
same and pass an appropriate order thereon as it enables the Government to earn
straightway 50 per cent of the amount, 25 per cent for depositing of the bonds
and 25 per cent to be deposited in the account which shall be released only
after 4 years. While releasing the amount after 4 years, the Income-tax
Authorities can release the same only when there is no outstanding amount due
towards them from the petitioner.”

47. Business expenditure- Disallowance u/s. 14A – A. Y. 2008-09- Where securities in question constituted assessee’s stock-in-trade and assessee did not hold securities to earn dividend or interest but traded in them and dividend or interest accruing thereon was only a by-product thereof or an incidental benefit arising therefrom, same would not be subject to provisions of section 14A

Principal CIT vs. State Bank of Patiala; [2017] 78
taxmann.com 3 (P&H):

The assessee held shares and securities as stock-in-trade and
not for earning dividend. Incidentally, the assessee earned dividend which was
exempt from tax. For the A. Y. 2008-09, the assessee claimed that no
disallowance was warranted u/s. 14A of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”), as the shares were
held as stock-in-trade and not as investment for earning dividend. The learned
Assessing Officer rejected the claim and made disallowance u/s. 14A applying
Rule 8D. The Tribunal allowed the assessee’s claim and deleted the addition.

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

“i)   What is of vital importance in the above
judgment are the observations emphasised by us. Each of them expressly states
that what is disallowed is expenditure incurred to “earn” exempt
income. The words “in relation to” in section 14A must be construed
accordingly. Thus, the words “in relation to” apply to earning exempt
income. The importance of the observation is this.

ii)   We have held that the securities in question
constituted the assessee’s stock-in-trade and the income that arises on account
of the purchase and sale of the securities is its business income and is
brought to tax as such. That income is not exempt from tax and, therefore, the
expenditure incurred in relation thereto does not fall within the ambit of
section 14A.

iii)   Now, the dividend and interest are income.
The question then is whether the assessee can be said to have incurred any
expenditure at all or any part of the said expenditure in respect of the exempt
income viz. dividend and interest that arose out of the securities that
constituted the assessee’s stock-in-trade. The answer must be in the negative.
The purpose of the purchase of the said securities was not to earn income
arising therefrom, namely, dividend and interest, but to earn profits from
trading in i.e. purchasing and selling the same. It is axiomatic, therefore,
that the entire expenditure including administrative costs was incurred for the
purchase and sale of the stock-in-trade and, therefore, towards earning the
business income from the trading activity of purchasing and selling the
securities. Irrespective of whether the securities yielded any income arising
therefrom, such as, dividend or interest, no expenditure was incurred in
relation to the same.

iv)  In CCI Ltd. vs. JCIT [2012] 250 CTR 291
(Karn), the Karnataka High Court held that when the assessee has not
retained shares with the intention of earning dividend income and that the
dividend income is incidental to the business of sale of shares it cannot be
said that the expenditure incurred in acquiring the shares has to be
apportioned to the extent of dividend income and that should be disallowed from
deduction.

v)   A financial decision of an assessee that
trades in securities may and, in fact, would factor in the dividend or interest
that the securities it acquires as its stock-in-trade yields or is likely to
yield. Such a decision would be taken for acquisition, retention and disposal
of the securities. That, however, is a financial consideration not with a view
to earning the dividend or interest but with a view to assessing the price at
which the security ought to be acquired, retained and sold. In other words,
such dividend or interest is an aspect that the assessee takes into
consideration for incurring the expenditure for the purpose of acquiring the
stock-in-trade and dealing with it thereafter as well as for the sale thereof.
This is entirely different from saying that the expenditure is incurred for
earning the dividend or interest. Once it is found that no expenditure was
incurred in earning this income, there would be no further expenditure in
relation thereto that falls within the ambit of section 14A.”

Section 10A – Claim for deduction u/s. 10A cannot be denied merely beause the assessee has inadvertently omitted to furnish the relevant details relating to deduction u/s. 10A in the appropriate columns of the return of income filed electronically

10.  ACIT vs. Albert A. Kallati
ITAT  Mumbai `A’ Bench
Before B. R. Baskaran (AM) and Amit Shukla (JM)
ITA No.: 2888/Mum/2013
A.Y.: 2009-10. Date of Order: 3rd August, 2016.
Counsel for revenue / assessee: Reepal Tralshawala / Sachchidanand Dubey

FACTS
The assessee, a manufacturer of diamond studded gold jewellery having manufacturing unit located in SEZ, filed his return of income for the year under consideration on 30.9.2009.  Subsequently, he revised his return of income twice.  In all the three returns of income, the assessee did not show any claim for deduction u/s. 10A of the Act, even though the total income was shown at Rs. Nil in the original return. Hence, the Assessing Officer (AO) did not allow deduction u/s. 10A of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who called for a remand report wherein the AO submitted that the assessee had been allowed deduction u/s.10A of the Act in AY 2006-07 to 2008-09.  Before the CIT(A) the assessee submitted the relevant details relating to deduction u/s. 10A which were inadvertently omitted to be furnished int eh appropriate columns of the return of income filed electronically. The CIT(A) was convinced that there was a genuine mistake and accordingly, he directed the AO to allow the deduction.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that there was no dispute with regard to the fact that the assessee is eligible for deduction u/s. 10A of the Act for the year under consideration.  The AO did not allow the claim, since it was not claimed in the return of income.  However, the conduct of the assessee shows that he assessee had intended to claim the same, but the relevant details were omitted to be entered in the return of income.  The Tribunal held that the inadvertent omission so made should not come in the way of the assessee to claim the deduction, which he is legally entitled to.  The Tribunal upheld the order of the CIT(A).

The appeal filed by the revenue was dismissed.

Section 54G – Unutilised amount of capital gain deposited on or before date of filing of return u/s. 139(5) will qualify for deduction u/s. 54G.

6. [2017] 79 taxmann.com 250 (Kolkata – Trib.)

DCIT vs. Kilburn Engineering Ltd.

ITA No. : 1987 (Kol) of 2013

A.Y.: 2009-10 Date of Order: 
1st March, 2017

FACTS 

The assessee’s industrial undertaking was situated in
Bhandup, Mumbai an urban area. Under a scheme to shift its factory to a
non-urban area, the assessee sold its land & building to HDIL under two
agreements dated 8.11.2007 and 30.1.2009 for a consideration of Rs. 115 crore.
Sale consideration was payable in instalments. 
Long term capital gain of Rs. 81,57,21,820 resulted on sale of property
at Bhandup.

For claiming deduction u/s. 54G, the amount of capital gain
not utilised for the purposes mentioned in section 54G(1) has to be deposited
in an account with a bank, in accordance with the notified scheme, and has to
be utilised for the purposes mentioned in section 54G(1). Further, such
unutilised amount of capital gain has to be deposited in an account on or
before the due date of furnishing the return of income u/s. 139 of the Act.
Section 54G(2) further provides that such deposit should be made in any case
not later than due date applicable to the assessee for furnishing return of
income u/s. 139(1) of the Act. In the original return, the assessee claimed Rs.
25,61,43,054 to be exempt u/s. 54G. Subsequently, the assessee deposited Rs. 10
crore in capital gains account on 30.3.2010. In the revised return of income
filed on 28.10.2010, the assessee claimed Rs. 35,61,43,054 to be exempt u/s.
54G.

The Assessing Officer disallowed the additional claim of
exemption of Rs. 10 crore on the ground that the deposit was made after due
date of filing return of income u/s. 139(1).

Aggrieved, the assessee preferred an appeal to the CIT(A).
The CIT(A) noted that the assessee had deposited Rs. 47,33,55,000 but has
claimed deduction of Rs. 35,61,43,054. He observed that the buyer had defaulted
in making payments to the assessee on due dates. In absence of receipt of
money, it was impossible to deposit amount in capital gain account specially
for the assessee which has come out of BIFR only because of receipt of money
from sale of land. He relied on the judgment of Kolkata Bench of the Tribunal
in the case of Chanchal Kumar Sircar vs. ITO [2012] 50 OST 289 (Kol.)
and the decision of Pune Bench of the Tribunal in the case of Mahesh
Nemichandra Ganeshwade vs. ITO [2012] 51 SOT 155 (Pune). He held that the
assessee is permitted to deposit money within the due date of filing `revised
return’ permitted u/s. 139(5) and filing a revised return subsequently. 

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the Punjab & Haryana High
Court, in the case of CIT vs. Jagriti Agarwal (2011) 203 Taxman 203, has
held that if the deposit is made within the time limit mentioned in section
139(4) of the Act, deduction cannot be denied to an assessee. The Tribunal held
that since section 139(5) is akin to section 139(4), the ratio of this decision
will hold good in the context of a revised return filed u/s. 139(5) as well.
The Tribunal held the deposit of Rs. 10 crore made on 30.3.2010 to be within
the time limit mentioned in section 54G(2) of the Act.

The Tribunal also held that the decision of the ITAT Kolkata
bench in the case of Chanchal Kumar Sircar and the decision of the Pune Bench
in the case of Mahesh Nemichandra Ganeshwade support the plea of the assessee.
It noted that in these two decisions it is held the period of six months for
making deposit u/s. 54EC of the Act should be reckoned from the dates of actual
receipt of the consideration because if the assessee receives part payment as
on the date of transfer and receives part payment after six months then it
would lead to an impossible situation by asking assessee to invest money in
specified asset before actual receipt of the same. It observed that even on
this basis the order of CIT(A) deserves to be upheld.

The Tribunal dismissed the appeal filed by the
revenue.

53. TDS- Fees for technical services or for execution of contract-Sections 9(1)(vii), 194C, 194J and 201(1) – A. Y. 2011-12- Deployment of technical personnel not for and on behalf of customer but for and on behalf of contractor for execution of contract- Consideration paid not for professional or technical services rendered to assessee- Section 194C is applicable and not 194J

Principal CIT(TDS) Vs. BHEL; 390 ITR 322 (P&H):

For the A. Y. 2012-13, the Assessing Officer found that the
assessee had made payments to five contractors in respect of various contracts
and deducted tax in respect thereof u/s. 194C Act, at the rate of 2% and paid
to the Government treasury. He found that all the contracts involved the
provision of professional and technical services which fell within the ambit of
the provisions of section 194J and not u/s. 194C. The Assessing Officer held
that the contracts were not only for the erection and installation work, but
also for the commissioning, testing and trial operation of the various
equipment and other related machinery and that under the terms of the contract
it was the duty of the contractor to provide all types of labour, supervisors,
engineers, inspectors, measuring and testing equipments, testing and
commissioning for the execution of the project in accordance with the
specifications of the assessee. He held that the level of human intervention
was high and sophisticated and accordingly held the assessee to be in default
u/s. 201(1A) of the Act for not deducting tax at source u/s. 194J. The
Commissioner (Appeals) held that the scope of the work given to the
sub-contractors involved construction work, welding, erection, alignment,
transportation of equipment and materials with the help of machines which did
not fall within the scope of technical services as defined in Explanation 2 to
section 9(1)(vii). He also held that merely because technical personel were
employed in the execution of contract it did not follow that the contract was
one for technical services. He allowed the appeal filed by the assessee. The
Tribunal upheld the decision of the Commissioner (Appeals).  

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

“i)   The contract entered into between the
assessee and each of the contractors did not involve supply of professional and
technical services at least within the meaning of section 194J Act. Therefore,
considerations paid under the contracts were not for professional or technical
services rendered by the contractors to the assessee and section 194J was not
applicable.

ii)   The technical personel were deployed not for
and on behalf of the customer, but for and on behalf of the contractor itself
with a view to ensuring that the contractor supplied the equipment in
accordance with the contractual specifications. The nature of human
intervention is reflected in the terms and conditions of the agreement itself.

iii) Questions are decided in favour of the
assessee. The appeal is, therefore, dismissed.”

Section 271AAA – Penalty u/s. 271AAA cannot be levied in a case where the revenue had not asked the assessee the manner of earning undisclosed income.

12   [2017] 83 taxmann.com 231 (Ahmedabad – Trib.)

ACIT  vs. Shreenarayan Sitaram Mundra

ITA No. : 2878 (Ahd) of
2013

A. Y. : 2010-11                                                   

Date of Order:  18th May, 2017

FACTS  

In the course of search,
the assessee, an individual engaged in the business of manufacturing and
trading of textiles admitted an unaccounted income of Rs. 2 crore and included
the said amount of Rs. 2 crore in the total income of Rs. 2.21 crore declared
in the return of income filed in response to notice issued u/s. 153A.  The returned income was assessed to be total
income. 

The Assessing Officer (AO)
imposed a penalty u/s. 271AAA on the ground that the assessee had not specified
the manner in which income declared was earned which is one of the conditions
u/s. 271AAA for being exonerated from penalty. 

Aggrieved, the assessee
preferred an appeal to the CIT(A) who noted that the assessee had in his
statement mentioned that the said sum of Rs. 2 crore was earned by him from taxable
business and moreover, it was also substantiated by the assessee in his
statement and the  declaration of the
said undisclosed income earned was based on entries as mentioned in the
impounded documents inventorised in the form of `receivables’ and due taxes had
been paid on the said declared income while filing return of income.  The CIT(A) held that the conditions required
to be satisfied for non-imposition of penalty had been satisfied by the
assessee.  He allowed the appeal filed by
the assessee.

Aggrieved, the revenue
preferred an appeal to the Tribunal.

HELD  

The Tribunal noted that the
Revenue is aggrieved by non-compliance of the section 271AAA(2)(i) of the
Act.  As per section 271AAA(2)(i), one of
the conditions for obtaining relief from the imposition of penalty u/s.271AAA
is that the assessee in the statement recorded u/s.132(4) of the Act admits the
undisclosed income and ‘specifies the manner’ in which such income has been
derived. Section 271AAA(2)(ii) casts obligation on the part of the assessee to
‘substantiate the manner’ in which the undisclosed income was derived. The
Tribunal held that s/s.(2)(ii) finds its genesis from s/s. 2(i) of the Act. It
noted that admittedly, the Revenue is not aggrieved by the condition stipulated
in s/s. 2(ii) of the Act. Impliedly, the Revenue admits that the assessee has
not failed to substantiate the manner in which the undisclosed income derived.
This being so, it follows by necessary implication that the assessee has not
failed to specify the manner at the first place when substantiation thereof has
not been called into question by the Revenue. Thus, the case of the Revenue
requires to be summarily dismissed on this ground alone. Notwithstanding, the
assessee has replied to the query raised while recording the statement as
called for. The revenue does not appear to have quizzed the assessee for
satisfying the manner in which the purported undisclosed income has been
derived. The income considered as an undisclosed income in the statement u/s.
132(4) has been duly incorporated in the return filed pursuant to search.
Therefore, the revenue in our view now cannot plead deficiency on the part of
the assessee to specify the manner which has not been called into question at
the time of search. The Tribunal noted that no where in the assessment order or
in the penalty order, the revenue has made out a case that the manner of
earning undisclosed income was enquired into post search stage either.  It stated that the revenue has not pointed
out any query which remained unreplied or evaded in the course of search or
post search investigation. The Tribunal held that looking from any angle, it is
difficult to hold in favor of the revenue. The Tribunal upheld the order passed
by CIT(A).

The Tribunal dismissed the appeal filed by the assessee.

9 Brought forward business losses – can be set off against the gains arising from any business or profession – though chargeable to tax under any other head of income : Set off of brought forward unabsorbed depreciation against the short term capital gain

Commissioner of Income
Tax, vs. M/s. Hickson & Dadajee Pvt. Ltd. [ Income tax Appeal no 1493 of
2014 dt : 28/02/2017 (Bombay High Court)].

[M/s.
Hickson & Dadajee Pvt. Ltd, VS ACIT [ ITA No: 5882/M/2012 dated 28/02/2014
; A Y: 2009-10 .
Mum.  ITAT ]

The assessee
company, carrying on the business of manufacturing of dyes and dyes
international, harmless food colours as well as construction business, filed
its return of income for the year under consideration on 28-9-2011 declaring
total income of Rs. 1,23,70,170/-. In the said year, the assessee had derived
income from sale of plant & machinery and building which was offered to tax
as deemed short term capital gain u/s. 50 of the Act, 1961. Against the said
income, brought forward business losses of the earlier year and unabsorbed
depreciation were set off by the assessee. The A.O., however, did not allow the
claim of the assessee for such set off on the ground that the income from sale
of plant & machinery and building was chargeable to tax as short term capital
gain u/s. 50 of the Act.

 

On appeal,
the ld. CIT(A) upheld the order of the A.O. on this issue relying on the
decision of the Mumbai Bench of the Tribunal in the case of Dura Foam
Industries Pvt. Ltd. vs. JCIT (ITA No. 4917 & 4918/Mum/2008).

 

Aggrieved by
the order of the ld. CIT(A), the assessee has preferred this appeal before the
Tribunal. Tribunal find that assessee’s appeal is squarely covered by the
decision of the co-ordinate Bench of this Tribunal in the case of Digital
Electronics Ltd. vs. Addl. CIT reported in 49 SOT 65 wherein the claim of
the assessee for set off of brought forward business losses against the short
term capital gain on sale of factory building, plant and machinery was
disallowed by the A.O. on the ground that as per section 72 of the Act, the
brought forward business losses could be set off only against profits and gains
of business or profession. Tribunal allowed the claim of the assessee for set
off of brought forward business losses against short term capital gain.

 

The Tribunal
respectfully follow the decision of the co-ordinate Bench of the  Tribunal in the said case and direct the A.O.
to allow the claim of the assessee for set off of brought forward business
losses against the deemed short term capital gain arising from sale of plant
& machinery and building.

Being aggrieved, the Revenue carried the issue in
appeal to the High Court. The Hon.  High
Court observed  that the Revenue has
accepted  the decision of the Tribunal in
Digital Electronics Ltd. (supra). Further no distinguishing features in
the present facts had been shown to the court, which would warrant taking of a
different view from that taken by the Tribunal in Digital Electronics Ltd. (supra)
and accepted by the Revenue. In the above view, appeal of revenue was  dismissed.

As regards
the issue involved relating to the assessee’s claim for set off of brought
forward unabsorbed depreciation against the short term capital gain the Court
observed that same was  also covered in
favour of the assessee by the decision of CIT vs. Hindustan Unilever Ltd. (2016)
72 taxman.com 325 wherein this Court upheld the view of the Tribunal in
following the decision of Gujarat High Court in General Motors India
(P.)Ltd. vs. Dy. CIT (Special Civil Application No. 1773 of 2012 dated
23-8-2012) wherein a similar issue was decided in favour of the assessee.

Accordingly, appeal
dismissed.

8 Charitable Purpose – The activity of sale of milk being incidental to its Panjrapole activity – does not amount to carrying on of any business activity – it is not in contravention to the proviso to section 2(15) of the Act

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole. [ Income tax Appeal no 1695 of
2014, dt : 20/03/2017 (Bombay High Court)].

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole.] [ITA NO. 1198/Mum/2012;  Bench : J ; dated 26/03/2014 ; A Y: 2009-10 .
Mum.  ITAT ]

The assessee trust is over 130 years old and
registered with the Charity Commissioner since 1953. The assessee was granted
Certificate of Registration under Section 12A of the Act. By Finance (No.2)
Act, 2009, the definition of “Charitable Purpose” u/s. 2(15) of the Act was
amended w.e.f. 12th April, 2009. Therefore, in view of the newly
added proviso, charitable purpose would not include advancement of any other
object of general purpose utility, if it involves carrying out activities in
the nature of trade, commerce or business, with receipts in excess of Rs.10
lakhs. In view of the above amendment, the DIT (Exemption) issued a show cause
notice that the income and expenditure account of the assessee, revealed income
on account of sale of milk at Rs.1.57 crore and income from interest and
dividend at Rs.58.34 lakh. Thus, indicating that the activities carried out by
the assessee of selling milk was in the nature of trade, commerce or business.

In its
reply, the assessee pointed out that it is running a Panjrapole i.e. for
protection of cows and oxen for over last 130 years. The activity of selling
milk was incidental to its Panjrapole activity and in any case did not involve
any trade, commerce or business, so as to be hit by the newly added proviso to
section 2(15) of the Act.

The DIT(E)
cancelled the respondent’s registration under the Act by invoking section
12AA(3) of the Act. The basis for cancellation of the registration was that in
view of the newly added proviso to section 2(15) of the Act, its income by way
of sale of milk, interest and dividend being in excess of Rs.10 lakhs the
assessee would cease to be a trust for charitable purpose. The DIT (E) further
records in his order the fact that the assessee was earning only Rs.3.76 lakhs
from its aforesaid activity of selling milk would not detract from the
application of the newly added proviso to section 2(15) of the Act. This for
the reason that the proviso as applicable is receipt based and not profit /
income based.

Being
aggrieved, the assessee filed an appeal to the Tribunal. The Tribunal records
the following facts : ( a) the fundamental / dominant function of the Trust is
to provide asylum to old, maimed, sick, weak, disabled and stray animals and
birds particularly cows; (b) that only 25% of the cows being looked after yield
milk and it is these milk yielding cows which support the balance 75% of the
cows which are non milk yielding; (c) that the milk needs to be procured from
the cows otherwise it will be detrimental to the health of the cows, if not
fatal; (d) the milk so procured is distributed free of charge to children,
schools, hospitals etc. and the balance amount of milk remaining after such free
distribution is sold to the general public at nominal rate; (e) the assessee is
selling milk at subsidized rates; and (f) nothing has been brought on record to
suggest that the Trust conducted its affairs solely on commercial basis.

The Tribunal 
after recording the above facts inter alia placed reliance on a decision
of the Tribunal in the case of Sabarmati Ashram Gaushala Trust vs. ADIT (Exem)
25 ITR 701 on an identical facts situation wherein it has been held that
the activities of selling milk by a Panjrapole will not by itself make the
newly added proviso to section 2(15) of the Act applicable. Further, reliance
was also placed in the impugned order upon the decision of the Delhi High Court
in ICAI vs. Director General of Income Tax (Exemption) 347 ITR 99 to
hold that the activities of selling milk by the assessee would be incidental in
running a Panjrapole in view of the proviso to section 2(15) of the Act. Thus,
the appeal of the assessee was allowed. 

On appeal by the Revenue the Hon. High Court observed
that  there is no bar in law to a Trust
selling its produce at market price as held 
by the Gujarat High Court   in
Sabarmati Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 dated 15th
January, 2014. In fact, the above factor alone will not make it an activity of
trade, commerce or business or even in its nature.

The Court also referred to another decision of the
Delhi High Court in Institute of Chartered Accountants of India & Anr.
(ICAI) vs. Director General of Income Tax (Exemption) & Ors. 358 ITR
91, where the Court held that the expression “business”, “trade” or “commerce”
as used in the first proviso must, thus, be interpreted restrictively and where
the dominant object of an organisation is charitable any incidental activity
for furtherance of the object would not fall within the expressions “business”,
“trade” or “commerce”.” (emphasis supplied).

The Court observed
that  the Revenue has not been able to
show that the view taken by the Apex Court in Surat Art Silk Cloth
Manufacturers’ Association (supra), Gujarat High Court in Sabarmati
Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 (supra) and the
Delhi High Court in ICAI 347 ITR 99 (supra) and ICAI and Anr. 358 ITR 91
(supra) laying down the dominant activity test should not be followed.
Therefore, it was held that the question as proposed does not give rise to any
substantial question of law. Thus, appeal was dismissed.

7 Assessee entitled to raise claims not made in ROI before appellate authorities – which not made in ROI Expenses incurred for issuance of FCCBs is revenue in nature – even if the FCCB are convertible into equity at a later date

CIT vs. M/s. Faze Three Ltd. [ Income tax Appeal no 1761
of 2014, dt : 16/03/2017 (Bombay High Court)].

[M/s. Faze Three Ltd
vs. ACIT. [ITA No.5449/MUM/2011 ;  Bench
: F ; date:16/08/2013 ; A Y: 2007- 2008. MUM. 
ITAT ]

In the course of assessment the assessee filed
a letter claiming deduction of Rs. 2.24 crore towards expenses incurred on
issue of FCCBs. It was claimed that the assessee missed to lodge claim for
deduction in the computation of total income. The AO refused the claim by
relying on the decision of the Hon’ble Supreme Court in Goetz India vs. CIT [284
ITR 323] by assigning the reason that since revised return was not filed, this
claim was not entertainable. The learned CIT(A) upheld the assessment order on
this issue.

The Tribunal held that
there is no bar on the appellate authorities in considering a claim made by the
assessee otherwise than by filing a revised return. Thus, the question arose
for consideration was as to whether the expenses on issue of FCCBs can be
allowed as deduction or not.

The Tribunal relied on
the decision of Hon’ble Rajasthan High Court in CIT vs. Secure Meters Ltd. [(2010)
321 ITR 611 (Raj.)] wherein it has been 
held that the debentures when issued are only a loan. Any expenses
incurred on issuing debenture, whether convertible or non-convertible is
allowable deduction. Similarly, the Hon’ble Punjab & Haryana High Court in CIT
vs. Sukhjit Starch & Chemicals Ltd. [(2010) 326 ITR 29 (P&H)] has
also held that the expenditure on the issue of convertible debentures is
admissible. The Tribunal observed  that
there is no qualitative difference between the issuance of debentures or bonds.
Both fall in the realm of loan. Thus the Tribunal  held 
that the assessee was entitled to 
deduction for this amount.

Being aggrieved, the
Revenue filed an appeal to the High Court. The Court observed  that the preliminary  issue arising herein stands concluded against
the Revenue and in favour of the Assessee by the decision of this Court in CIT
vs. Pruthvi Brokers and Shareholders Pvt. Ltd., 349 ITR 336 .

As regards, the expenditure incurred on the
issue of FCCBs should be considered as capital expenditure and not be allowed
as revenue expenditure. The Hon Court 
relied on the decision of the Delhi High Court in CIT vs. Havells
India Ltd., 352 ITR 376 – wherein on an identical fact situation, the
appeal of the Revenue was dismissed. The Revenue was  not able to show any reason which would
require the court to take a view different from that taken by the various High
Courts in the country on an identical issue. In the above circumstances, the
revenue, Appeal was  dismissed.

Sections 40(a)(ia), 194I – U/s. 194I tax is not required to be deducted on reimbursements and therefore, the amount so reimbursed cannot be disallowed u/s. 40(a)(ia)

9.  Aditya Birla Minacs Worldwide Ltd. vs. ACIT
ITAT Mumbai `A’ Bench
Before B. R. Baskaran (AM) and Amit Shukla (JM)
ITA No.: 4549/Mum/2014
A.Y.: 2007-08. Date of Order: 2nd August, 2016
Counsel for assessee / revenue: Ronak G. Doshi / A. Ramachandran

FACTS
The assessee reimbursed rent and parking charges amounting to Rs. 71.49 lakh to its holding company, PSI Data System Ltd.  The holding company had entered into a rent agreement with M/s Golf Links. The assessee entered into a Memorandum of Understanding with its holding company on 1.4.2006 pursuant to which the assessee company would occupy a portion of premises taken on lease by the holding company and the holding company shall apportion the rent payment with the assessee company in the ratio of space actually utilised by the assessee.  The MOU also provided that all statutory liabilities in relation to rental facilities such as TDS, service tax, are the responsibilities of the holding company.  

During the year under consideration, the assessee reimbursed a sum of Rs. 71,49,545 to its holding company as its share of rental expenditure incurred by the holding company. The assessee did not deduct tax at source from the said payment on the reasoning that the liability to deduct tax at source from the rent payment paid to the landlord was taken up by the holding company.  The landlord, M/s Golf Links, had obtained a certificate u/s. 197(1) for non-deduction of tax at source, therefore, the holding company did not deduct tax at source from the rent paid by it to the landlord.  The holding company had obtained no deduction certificate for payments covered by sections 194A, 194C and 194J.  It was also submitted to the AO that the holding company was of a bonafide belief that reimbursement of rent from the assessee would not form part of its income in its hands and hence it did not obtain  specific certificate for payments covered by section 194I.  

The AO held that the assessee should have deducted tax from rent payments made by the assessee to its holding company. He disallowed Rs. 71,49,545 by invoking provisions of section 40(a)(ia) 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.

HELD
The Tribunal noted that the rental agreement has been entered into between the holding company and the land lord and hence the inference drawn by the tax authorities is against the facts available on record. The Tribunal observed that an identical issue was considered by the co-ordinate bench of the Tribunal in the case of Prime Broking Co. (I) Ltd. vs. ACIT (ITA No. 6627/Mum/2010 dated 19.10.2012) and the Tribunal held that the provisions of section 194I shall not apply to reimbursement of rent.  The decision rendered by the Tribunal has since been upheld by the Bombay High Court vide its order dated 9th June, 2015 reported in 2015-TIOL-1472-HC-Bom-IT.

The Tribunal further observed that the return of income of the holding company for the year under consideration has been accepted. Since the payment received from the assessee towards rent has been offered in the return of income filed by the holding company, the provisions of section 40(a)(ia) cannot be applied to the case of the assessee as per the second proviso thereto, which is held to be retrospective by the Delhi High Court in the case of Ansal Land Mark Township (P.) Ltd. (377 ITR 635)(Del).  

Considering the ratio of the judgments of the Bombay High Court and the Delhi High Court, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition made u/s. 40(a)(ia) of the Act relating to reimbursement of rent.

Section 41(1) – Amounts shown in Balance Sheet cannot be deemed to be cases of “cessation of liability” only because they are outstanding for several years. The AO has to establish with evidence that there has been a cessation of liability with regard to the outstanding creditors.

8.  ITO vs. Vikram A. Pradhan

ITAT  Mumbai `F’ Bench
Before Jason P. Boaz (AM) and Sandeep Gosain (AM)
ITA No.: 2212/Mum/2012
A.Y.: 2008-09.  Date of Order: 24th August, 2016
Counsel for revenue / assessee: M. V. Rajguru / None

FACTS

In the course of assessment proceedings the Assessing Officer (AO) observed that the assessee’s balance sheet reflected creditors of Rs. 33,44,827.  Upon enquiry, the assessee submitted that these are old creditors pertaining to the period when he carried out business in Indore and that these have been carried forward for past 7 to 8 years and are unpaid due to disputes with the creditors.

The AO considered the entire creditors balance outstanding aggregating to Rs. 33,44,827 as income of the assessee by invoking section 41(1) as cessation of liability for the reason that these are old amounts and pertain to assessee’s old place of business and still remain unpaid.

Aggrieved, the assessee preferred an appeal to the CIT(A) who after considering the material on record and also referring to the judicial pronouncements of the Apex Court in the case of CIT vs. Sugauli Sugar Works (P.) Ltd. 236 ITR 518 (SC) and UOI vs. J. K. Synthetics Ltd. (199 ITR 14)(SC) held that in the case on hand there was no write back of liability payable to creditors which is disclosed in the assessee’s balance sheet.  He also observed that no independent inquiries were carried out by the AO to establish that these creditors have written off the debts appearing in their respective account.  He held that the AO was not justified in unilaterally deciding that the amounts reflected as liabilities in the balance sheet of the assessee have ceased to exist within the meaning of section 41(1) of the Act.  He allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the AO has failed to cause enquiries to be made with or notices issued to creditors to ascertain from them whether they have remitted the dues from the assessees in their books of account.  The fact that the creditors outstanding balances were not written back in the assessee’s books of account, but rather stood reflected in the asseessee’s balance sheet clearly establishes that there is no cessation of liability.  On the contrary, it is an acknowledgement by the assessee of existing debts it owes to its creditors.  It further observed that no material has been brought on record by the AO to show that there was remission or cessation of liability.  When the AO was of the view that there was cessation of liability in the case on hand, it was incumbent upon him to cause necessary enquiries to be made in order to bring on record material evidence to establish the requirement for invoking the provisions of section 41(1) of the Act.  The very fact that the assessee reflects these amounts as creditors in his Balance Sheet is an acknowledgement of his liability to these creditors and this also extends the period of limitation u/s.18 of the Limitation Act.  Once the assessee acknowledges that the debts to creditors are outstanding in his Balance Sheet, that he is liable to pay his creditors, Revenue cannot suo moto conclude that the creditors have remitted their liability or that the liability has otherwise ceased to exist, without bringing on record any material evidence to the contrary.  Since the AO had not brought on record any material evidence to establish that there was cessation of liability in respect of the outstanding creditors reflected in the Balance Sheet, the Tribunal concurred with the finding of the CIT(A) that the addition of Rs. 33,44,827 u/s. 41(1) of the Act is unsustainable.

The Tribunal dismissed the appeal filed by the Revenue.

Sections 271(1)(c), 271AAA – Penalty levied u/s. 271(1)(c) to a case covered by section 271AAA is void

7.  Nukala Ramakrishna Eluru vs. DCIT
ITAT  Vishakapatnam Bench
Before V. Durga Rao (JM) and G. Manjunatha (AM)
ITA Nos.: 189 to 192/Vizag/2014
A.Ys.: 2005-06 to 2008-09.   Date of Order: 16th September, 2016.
Counsel for assessee / revenue: C. Subramanyam / T.S.N. Murthy

FACTS

On 16.11.2007,  a search u/s. 132 of the Act was conducted in the residential as well as business premises of the assessee, engaged in the business of rearing and trading of fish and other ancillary business activities.   During the course of search, department unearthed details of investments made in the purchase of immovable properties standing in the name of the assessee and his family members  including business concerns.  The assessee filed his return of income for AY 2008-09 on 30.09.2008 declaring total income of Rs. 75,39,560.  This return of income was revised on 14.9.2009 and a total income of Rs. 1,82,84,170 was declared in the revised return of income.  Subsequently, this return of income was again revised and in the final revised return of income the income disclosed was Rs. 4,10,32,920.

The AO assessed the total income of the assessee to be Rs. 4,10,32,990. He initiated penalty proceedings u/s. 271(1)(c) of the Act and after asking the assessee to explain why penalty should not be levied for concealment of particulars of income or furnishing inaccurate particulars of income, he levied penalty u/s. 271(1)(c).

Aggrieved, the assessee preferred an appeal to the CIT(A) who directed the AO to levy penalty on the difference between Rs. 1,82,84170 (being total income in first revised return) and Rs. 75,39,560 (being total income in the original return of income).

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended on his behalf that the levy of penalty for AY 2008-09 u/s. 271(1)(c) of the Act was void ab initio.

HELD

In the present case on hand, on perusal of the facts available on record we find that the search had taken place on 16.11.2007 which falls under the assessment year 2008-09 which is the year before us.  The year before us was therefore, covered by the Explanation of specified previous year as per Explanation (b) to section 271AAA of the Act.  It is not in dispute that the income in question has been assessed as income of the assessment year 2008-09 i.e. specified previous year.  The AO himself has treated the undisclosed income of the assessee as such.  Once we come to the conclusion that the year before us is a specified previous year and the undisclosed income belongs to this year, an inevitable finding in view of the discussions above is that the provisions of section 271AAA will come into play to deal with penalty for concealment of particulars of income.  It is clear from the above fact that the AO has not invoked the correct provisions of law for levying penalty for concealment of income.  Therefore, we are of the view that the AO erred in levying penalty u/s. 271(1)(c) of the Act, when a specific provision is provided by way of section 271AAA to deal with penalty provisions, in cases where search took place on or after 1.6.2007.

The Tribunal considering the facts and circumstances of the case and also the ratio of the decision of the Delhi Bench of the Tribunal in the case of DCIT vs. Subhash M. Patel in ITA No. 256/AHD/2012 dated 20.7.2012, held that the penalty order passed by the AO under s. 271(1)(c) of the Act, is void ab initio and liable to be quashed.

The Tribunal quashed the penalty order passed by the AO u/s. 271(1)(c) of the Act for AY 2008-09.

The appeal filed by the assessee was allowed.

Sections 51 and 56 – Clause (ix) of section 56(2) (inserted w.e.f. 01.04.2015) which lays down that amount of advance received for sale of property shall be treated as income if the same is forfeited and negotiations do not result in transfer of such capital asset and corresponding proviso to section 51 (inserted with effect from 01-04-2015) which states that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction of the said amount shall be done in computing the cost of acquisition when the said property is ultimately sold, do not have a retrospective effect.

[2016] 160 ITD 426 (Mumbai Trib.) ITO vs. Fiesta Properties (P.) Ltd.
A.Y.: 2010-11 Date of Order: 11th August, 2016

Section 41(1) read with Sections 28(i) and 51- Prior to 01.04.2015, if an assessee builder had received advance towards sale property held by it as a capital asset and the same was standing as liability in balance sheet of the assessee and if the actual sale transfer didn’t materialise, then the said amount would not be taxable u/s. 41(1) on writing off of corresponding amount by transferee but would be deducted u/s. 51 from cost of acquisition in computing capital gain when the property is ultimately sold.

FACTS

The assessee company was engaged, interalia, in the business of construction of properties. During the year under consideration, the assessee company had shown income mainly from rent under the head ‘Income from house property’ and also ‘Income from business’.

During the course of assessment proceedings, the AO noted that there was a liability of Rs.3.74 crore as shown in the balance sheet of the assessee, in the name of M/s Dawat-E-Hadiyah Trust. The said liability was created in the year 1995, when the assessee had received the said amount from the said trust as an advance for sale of assessee’s property. The AO conducted enquiries from M/s. Dawat-E-Hadiyah Trust, who vide their letter dated 29.11.2012 replied that the liability had been written off in the year under consideration.

AO was of the view that the assessee being in the business of construction had trading liability and hence, the cessation of said liability should be treated as income of the assessee u/s. 41(1) of the Act. Accordingly, he added the said amount of Rs.3.74 crore to the total income of the assessee. The AO also observed that though both the assessee as well as M/s Dawat-E-Hadiyah Trust, contended that the transaction was in respect of transfer of property, but both the parties failed to furnish any proof that the transaction was for an immovable property. Without any documentation, a property transaction of the magnitude of Rs. 3.74 crore in the year 1995 was beyond comprehension. Since there was no supporting evidence, the AO held that the advance received by the assessee from M/s Dawat-E-Hadiyah Trust was an interest-free unsecured deposit in the course of the business of the assessee company. Thus, on the ground of cessation of the liability, the AO added the amount of Rs. 3.74 crore u/s. 41(1) of the Act.

Being aggrieved, the assessee filed appeal before CIT(A). It was submitted that the impugned amount was received by the assessee with regard to sale of property located at Chennai. The assessee also furnished copies of the correspondences between itself and M/s Dawat-E-Hadiyah Trust indicating that all through, the intention of the advance received was for transfer of the assessee’s property at Madras and when the deal did not materialise, the said M/s Dawat-E-Hadiyah started demanding its money back. Copies of all these correspondences were also furnished before the AO. After considering the entire submissions it was held by CIT(A) that impugned amount was not taxable in the hands of the assessee either u/s. 41(1) or u/s. 28(iv) or under any other provisions of the Act and that whenever the impugned property is sold by the assessee, the cost of acquisition of the property shall be reduced by the amount of Rs.3.74 crore for the purpose of computation of capital gains in view of provisions of section 51 of the Act.

On revenue’s appeal before the Tribunal:

HELD

The admitted facts on record are that assessee has been showing its rental income from its properties, including the impugned property located at Madras and the same has also been assessed by the AO under the head ‘Income from house property’. These properties have been undoubtedly shown as capital assets in the balance-sheet and never have been declared as stock-in-trade. This position has all along been accepted by the revenue.

Further, as far as the assessee is concerned, the liability of Rs.3.74 crore is still outstanding in the name of aforesaid party. The CIT(A) has recorded a clear and categorical finding that correspondence between the assessee company and said party revealed that the transaction was in respect of assessee’s property located at Madras. But, the transaction could not be completed. This factual finding could not be rebutted by the Ld DR. Thus, as per facts and records brought before us, aforesaid property is undoubtedly capital asset of the assessee company. Under these circumstances, it has been rightly held by the CIT(A) that the impugned amount of advance received towards sale of immovable property being capital asset of the assessee company, cannot be taxed under the provisions of section 41(1) or section 28(iv) of the Act, especially due to the fact that the legislature has provided the specific provision in this regard, i.e. section 51 of the Act.

Clause (ix) of section 56(2), inserted w.e.f. 01-04-2015, clearly lays down that amount of advance received for sale of property shall be treated as income if the same is forfeited and negotiations do not result in transfer of such capital asset. Also proviso, introduced with effect from 01-04-2015 to section 51, states that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction of the said amount shall be done in computing the cost of acquisition when the said property is ultimately sold.

These provisions are not clarificatory in nature. These provisions lay down a substantive law creating additional tax liability upon an assessee and, therefore, this cannot have retrospective effect. Further, with the insertion of these provisions, it becomes clear that earlier the law was not like this. Thus, for the year before us, i.e. A.Y. 2010-11, the then existing provisions of section 51 shall be applicable which clearly provides that the amount of advance received should be reduced from the cost of acquisition of asset.

Thus, the action of CIT(A) in directing the AO to delete the addition of Rs.3.74 crore which was made by the AO u/s. 41(1) of the Act, is hereby upheld.

9. Genuineness of trust – a breach/contravention of the Bombay Public Trust Act, 1950-would not result in the trust being disqualified from being approved u/s. 80G.

D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust. [ Income tax Appeal no. 902 of 2014 dt : 15/10/2016
(Bombay High Court)].

[D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust., [dated 13/11/2013 ; A Y: 2011-12. Mum. ITAT ]

The assessee is a Charitable Trust duly
registered u/s. 12AA Act. On 2nd December, 2011, the assessee Trust
applied to the Director of Income Tax (Exemption) for renewal of Certificate /
approval u/s. 80G. The application was rejected by the Director of Income Tax
(Exemption). This rejection was on the ground that the Trust had obtained
unsecured loan of Rs. 50 lakh from third parties without obtaining prior
approval of the Charity Commissioner as required u/s. 36A(3) of the Bombay
Public Trust Act, 1950. Thus, concluding that the assessee is not a genuine
trust.

Being aggrieved, the assessee filed an
appeal to the Tribunal. The Tribunal by the impugned order held that there is
no dispute that the assessee fully satisfied the conditions specified in
section 80G(5) of the Act for approval there under. It further observed that
there is no requirement under the Act that a breach / contravention of the
Bombay Public Trust Act, 1950 would result in the trust being disqualified from
being approved u/s. 80G of the Act. It held that the very fact that the Revenue
had not initiated any action u/s. 12AA of the Act to revoke its registration
would imply that the activities of the Trust are genuine.

Moreover, the Tribunal also records the fact
that the Charity Commissioner has not taken any action against the assessee for
violation of the provisions of section 36A of the Bombay Public Trust Act, 1950
in having borrowed funds without its prior permission. In the aforesaid circumstances,
the appeal of the assessee was allowed.

The Revenue appealed before the High Court
and urged that the Trust is not a genuine trust in as much as it has been
borrowing funds on regular basis from third persons and has been repaying it by
borrowing further funds from other parties on regular basis.

The Hon. High Court find that the impugned
order of the Tribunal has on the basis of the clear provision of section 80G
recorded that the assessee completely satisfies/fulfils all the conditions
specified in section 80G(5) for the purposes of availing benefit u/s. 80G. This
coupled with the fact that the Revenue itself has also not taken any
proceedings to have the registration cancelled, would itself imply that the
Revenue does consider the Trust to be a genuine trust.

It is an undisputed position that the assessee
satisfies all conditions for approval of the trust u/s. 80G. Therefore, it is
not open to the Authorities to refuse approval by imposing conditions which are
not mentioned in Section 80G. In the above circumstances, the impugned order of
the Tribunal was upheld. Therefore,
the appeal was dismissed.

8. Interpretation – SUBLATO FUNDAMENTO CEDIT OPUS – Once the foundation is removed, the superstructure falls.

Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd. [Income tax Appeal no 573 of 2014 dt :
01/10/2016 (Bombay High Court)].

[Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd., [dated 06/10/2013 ; A Y: 2006-07. Mum. ITAT
]

The assessee is in construction business.
During the AY: 2006 – 07, the assessee had paid share application money to one
M/s. Siddhivinayak Realities Pvt. Ltd. The Assessing Officer added the amount
of Rs.10.35 crore as deemed dividend on a substantive basis in the hands of
Siddhivinayak Realities Pvt. Ltd. and on a protective basis in the hands of its
director Mr. Vikas Oberoi in their assessment orders. Being aggrieved, both
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr. Vikas Oberoi challenged their
orders of assessment holding that they are in receipt of deemed dividend. Their
appeals were allowed by the CIT(A) holding that they could not be charged to
tax on the amount of Rs.10.35 crores as recipients of deemed dividend u/s.
2(22)(e).

Being aggrieved by the order of CIT(A), the
Revenue filed an appeal to the Tribunal which was dismissed. Thereafter, the
Revenue filed an appeal to High court, being in the case of M/s.Siddhivinayak
Realities Pvt. Ltd. and Mr. Vikas Oberoi. The High Court by orders dated 4th
July 2014 and 8th June 2016, respectively, dismissed both the
Revenue’s appeals from the orders of the Tribunal holding that M/s.
Siddhivinayak Realities Pvt. Ltd. and Vikas Oberoi cannot be charged to tax as
recipients of deemed dividend.

In the meantime, pending the aforesaid
proceedings, the ACIT (TDS) passed an order dated 11th February 2011
u/s. 201(1) and 201(1A) of the Act holding the assessee to be an assessee in
default for not having deducted tax on the deemed dividend of Rs.10.35 crore
paid to M/s. Siddhivinayak Realities Pvt. Ltd. The assessee, being aggrieved,
filed an appeal to the CIT (A). The appeal of the assessee was allowed by the
CIT (A) holding that as in the appellate proceedings in respect of M/s.
Siddhivinayak Realities Pvt. Ltd. and Mr. ikas Oberoi, the addition of income
to the extent of Rs.10.35 crore u/s. 2(22)(e) of the Act on substantive and
protective basis had been deleted, there was no taxable income which had to
suffer tax deduction at source. Consequently, no failure to deduct tax could
arise.

Being aggrieved, the Revenue carried the
issue in further appeal to the Tribunal. The Tribunal upheld the order of the
CIT (Appeals) holding that once the addition made on account of deemed dividend
is deleted in the hands of the recipient of the amount of Rs.10.35 crore, there
could be no failure to deduct tax at source thereon. Thus, the consequent
demand u/s. 201(1) and 201(1A) upon the assessee was not justified.

Being aggrieved, the Revenue filed an appeal
before High Court. The High Court held that both the CIT (A) as well as the
Tribunal in these (TDS) proceedings have held that as the very basis for
holding the assessee liable for failure to deduct tax did not subsist, the TDS
proceedings must also fail. This was in view of the orders passed in the case
of recipients i.e. M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi in
appeal by the authorities under the Act including this Court that they were not
liable to any tax as they had not received any deemed dividend u/s. 2(22)(e).
Once the foundation is removed, the superstructure falls (sublato fundamento
Cedit opus). The grievance of the Revenue is that in TDS proceedings, one
must ignore the orders passed in the hands of the recipients i.e.
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi.

The Court observed that the officers of the
Revenue while administering the TDS provisions are not outside the scope of the
Act and orders passed under the Act in respect of the character of the payment
made under the Act are binding upon them. The fact that at the time the order
of the ACIT (TDS) was passed, there was basis to do so does not mean that
orders passed on income in the hands of the recipients will have no bearing in
deciding its validity. One must not ignore the fact that this order of the TDS
officer is tentative in nature and its existence would depend upon the nature
of receipt in the hands of the recipient and subject to the orders passed in
respect thereof by appropriate court. In the above view, the appeal was
dismissed.

Section 54F – The assessee cannot be denied deduction u/s. 54F, if the assessee makes investment in residential house within the time limit prescribed u/s. 54F but is unable to get the title of the flat registered in his name or unable to get the possession of the flat due to fault of the builder.

10.   [2016] 159 ITD 964 (Mumbai Trib.) (SMC)

Rajeev B. Shah vs. ITO
A.Y.: 2010-11      Date of Order: 8th July, 2016

FACTS

During the year under consideration, the assessee had sold one plot of land and had claimed deduction u/s. 54F for investment of sale proceeds in an under-construction flat.

The Developer had allotted, flat No. 602 of 6th floor, to the assessee.

The AO rejected the claim of deduction u/s. 54F of the Act on the ground that the property was incomplete and document related to purchase of property was not registered even after three years of the said investment.

Aggrieved, the assessee preferred appeal before the CIT(A), who also confirmed the action of the AO by stating that merely because a so-called letter of allotment was issued in a building which was never given permission for construction beyond two floors, it cannot be said that for the purpose of section 54F, the appellant’s obligation ended as soon as he issued the cheque.

Aggrieved, the assessee filed appeal before the Tribunal.

HELD

We find that the facts in question are not disputed and the only issue is that whether assessee is eligible for deduction u/s 54F, when the assessee has made investment in purchase of residential house within the time limit prescribed u/s. 54F but is unable to get the title of the flat registered in his name or is unable to get the possession of the flat due to fault of the builder.

The intention of the assessee is very clear that he has invested almost the entire sale consideration of land in purchase of this residential flat. It is another issue that the flat could not be completed and the suit, directing the builder to complete the construction, filed by the assessee, is pending before the Hon’ble BombayHigh Court.

It is impossible for the assessee to complete formalities such as taking over possession for getting the flat registered in his name and this cannot be the reason for denying the claim of the assessee for deduction u/s. 54F of the Act.

Hence, the appeal filed by the assessee is allowed.

7. Reopening of assessment – the reasons for reopening must be based on some material – the material used by the AO for forming his opinion must have some bearing or nexus with escapement of income – If not, the reopening notice would be clearly without jurisdiction: Section 148.

Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co.  
[ Income tax Appeal no. 670 of 2014, dt : 04/10/2016 (Bombay High
Court)].

[Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co,. [ITA No. 3930/MUM/2006, 3897/MUM/2006,
746/MUM/2007; Bench : L ; dated 19/07/2013; AYs: 2000-2001, 2003-2004. Mum.
ITAT ]

The Assessee is a Project Contractor. It
awarded a contract by Kondapalli Power Corporation Ltd.(KPCL), Andhra Pradesh
to set up a power plant on a turnkey basis. Further, KPCL had awarded an
onshore contract to the Assessee for supply of goods and services along with
the commissioning of the plant. KPCL also awarded an offshore supply contract
to Hanjung DCM Co. Ltd. (Hanjung) for supply of equipment valued at US$ 103
million. The equipment valued at US$ 103 million was supplied by Hanjung and
taken delivery of outside India by the Assessee for and on behalf of KPCL. The
aforesaid equipment was lost during its transit after the Assessee took
delivery from Hanjung. As the insurance claim was not honoured, the Assessee
filed a suit against the Insurance Company for recovery of US$ 103 million. The
regular assessment proceeding was completed for the subject  A.Y. u/s. 143(3).

A reopening notice was issued by the
Assessing Officer for the subject A.Y. and the reasons to believe that income
chargeable to tax has escaped assessment u/s. 147 of the Act. During the course
of assessment proceedings, it was noticed that there was another contract
titled “Offshore Equipment Supply Contract” also dated 1st February,
1998 entered into between M/s. Lanco Kondapalli Power Private Limited and M/s.
Hanjung DCM Co. Ltd. (Hanjung). The AO had reason to believe that income of US$
51.5 million chargeable to tax has escaped assessment. Issue notice u/s. 148.

The assessee during the assessment
proceedings consequent to reopening notice dated 26th March 2004
submitted that the same is without jurisdiction and, therefore, must be
quashed. Nevertheless, the AO proceeded on the basis that in the suit filed by
the Assessee in the Secunderabad Court against the Insurance Company it had
claimed to have supplied equipment valued at US$ 103 million which was lost.

The Assessing Officer placed reliance on
para 5 of the plaint, which reads as under :

“ 5. MAIN SUPPLY CONTRACT “

Under the terms
of contract dated 15th February 1998 (“Supply Contract”) between
Plaintiff and LKPL, Plaintiff agreed to supply equipment, materials and design
for the construction of LKPL’s combined cycle power plant at Kondapalli IDA,
Andhra Pradesh in India (the “Kondapalli Project”). The value of this Supply
Contract was about US$ 103 million.” It was on the aforesaid basis that the AO
sought to justify his reasons to believe that income chargeable to tax has
escaped assessment and, therefore, proceeded to hold even on merits against the
Assessee.

On appeal, the CIT(A) examined all the
facts. These facts included not only the suit as filed but also the terms of
the contract and scope of work, in particular the responsibility of the parties
there under. Based on this examination, the CIT(A) concluded that in terms of
its obligation to insure the goods/equipment during transit, the appellant had
taken out an Insurance policy as a contractor with KPCL as the principal. Based
on this policy coupled with the plaint as filed, the CIT(A) observed that the
plaint has to be read as a whole. So read, the nature of the relationship
between the parties as described in paragraph 4 thereof, which, as extracted in
the order, reads as under :

“4. A brief reference to the parties
involved in relation to the subject matter of this suit is as follows :

a. Lanco Kondapalli Power Pvt. Limited (formerly a public limited
company) (‘LKPL’) is the owner of the Kondapalli Power Project.

b. Plaintiff is the EPC
contractor for the Kondapalli Power Project, and an assured under the policy
issued by Defendant.

 i. Encon Services Limited (‘Encon’) is the subcontractor of Plaintiff
for transportation of the GT & GTG from Kakinada to Machilipatnam.

j.   Seaways Shipping Limited
(‘SSL’) was appointed by Encon for inland transportation of GT & GTG from
Kakinada to Machilipatnam, and was the character of ‘Jala Hamsa’ and ‘AmethiI’.

n. Aistom are the suppliers of the GT & GTC, from whom Plaintiff
arranged to procure the replacement equipment for ensuring completion of the
project.”

The CIT(A) came to the conclusion that on
the basis of the words used in para 5 of the plaint, it cannot be established
that the assessee had supplied (as owner) the equipment, material and design,
and that the word “supply” only refers to the responsibilities of the assessee
for setting up of the power project as per the onshore contract. The reasons as
recorded do not therefore suggest any link between the material found by him and
his conclusion that there was reason to believe that the income chargeable has
escaped assessment. He, therefore, concluded that there was no reason to form a
belief that income chargeable to tax has escaped assessment.

On appeal by the Revenue, the Tribunal, by
the impugned order, confirmed the finding of the CIT(A).

The Hon. High Court observed that at the
stage of a notice of reopening, the AO does not have to “establish” that any
income has escaped assessment. However the AO must simply be shown to have
formed an opinion, which, in turn, is supported by reasons. The reasons
themselves must be based on some material. A minimum requirement one would
expect in the face of this scheme of things is that the material used by the AO
for forming his opinion must have some bearing or nexus with escapement of
income. If not, the reopening notice would be clearly without jurisdiction. In
the present case, the material used by the AO for purportedly forming this
opinion is the description of the assessee of itself as “a supplier” of the
equipment in an EPC contract, which inter alia required it to take offshore
delivery of the equipment from a foreign vendor and supply and install the same
onshore. Mere description as a “supplier” in a suit by the assessee against the
insurance company claiming an insurance claim for loss of equipment, when the
assessee insured the equipment jointly with the purchaser, can possibly have no
connection with the escapement of any income arising out of sale of the
equipment. Since that was the only material used by the AO for issuance of the
reopening notice, the notice is without any legal basis or justification. In
these circumstances, the order of the coordinate bench for Assessment Years
1999-2000 and 2002-2003 also supports the Respondent’s contention that they
were not suppliers of the equipment and no income assessable to tax has escaped
assessment. It’s obligation was to insure the goods/equipment during transit
done by it either on its own or through a subcontractor.

The Hon. High Court also found that, the
contract provided that the contractor, i.e. Assessee will provide/arrange at
its own cost in the joint name of the owner and contractor a comprehensive
insurance cover to the project, including any damage to the goods during transit.
It was in that context that the Assessee had made a claim for insurance. Taking
into account the concurrent findings of fact arrived at by the CIT(A) and by
the Tribunal, and that nothing has been shown to indicate that the finding is
perverse the appeal was dismissed.

6. Penalty – CIT(A) could not have imposed penalty on a new ground which was not the basis for initiation of penalty – penalty could be only on the ground on which it was initiated – Not liable for penalty : u/s. 271(1)(c)

CIT vs. Acme Associates. [ Income tax
Appeal no 640 of 2014 dated : 17/10/2016 (Bombay High Court)].

[Acme Associates vs. ACIT. [ITA No.
649/MUM/2011; Bench : I; dated 13/09/2013 ; A Y: 2005- 2006.( MUM.)  ITAT ]

The assessee is in the business of Real
Estate Development. For the A.Y. 2005-06, the assessee has filed its ROI ,
declaring a income of Rs. 2.04 crore claiming 100% deduction u/s. 80IB(10).
During the course of the assessment proceedings, the AO noticed that two
buyers, viz. Ms. Sulbha M. Waghle and Mr. Mangesh G. Waghle had entered into
joint agreement for purchase of flats which in the aggregate exceeded 1,000
sq.ft. Consequently, AO disallowed the deduction claimed u/s. 801B(10) and
initiated penalty proceedings u/s. 271(1)(c) on the aforesaid ground for furnishing
inaccurate information/concealing income.

The assessee carried the issue in appeal to
the CIT(A). During pendency of the appeal, a search action u/s. 132 was carried
out on the assessee group. Consequent to which, notices u/s.153A were issued to
the assessee including one for the subject A Y 2005-06. In the above
circumstances, the assessee withdrew its appeal for A.Y. 2005-06 pending before
CIT(A). Thereafter, by order dated 30th March, 2010, the AO imposed
penalty upon assessee u/s. 271(1)(c). This was on the very ground on which the
AO had initiated penalty proceedings viz. selling of flats to two members of
the family which in the aggregate was in excess of 1000 sq.ft. of built up
area. Therefore concluding that the Assessee has furnished incorrect
particulars of income/concealed particulars of income. Consequently, a penalty
was imposed.

Being aggrieved, the assessee carried the
order of the AO imposing penalty u/s. 271(1)(c) to CIT(A). The CIT (A)
confirmed the penalty imposed by the AO. However, the confirmation was on a
completely new and different ground viz. that during search proceedings, the
assessee had made disclosure that the project in respect of which deduction
u/s. 801B(10) was being claimed was not completed before the due date i.e. 31st
March 2008. Thus confirming the order dated 30th March, 2010.
It is to be noted that CIT(A) in its order did not deal with the issue on which
the AO had initiated and confirmed the penalty upon the assessee.

Being aggrieved, the assessee filed a
further appeal to the Tribunal. The Tribunal held that the initiation and
confirmation of penalty by the AO u/s. 271(1)(c) was not on the ground that the
project was not completed by the due date, on which the CIT (A) confirmed the
penalty. Thus, the Tribunal held that this could not be done by the CIT(A) as
the penalty proceedings were initiated on account of selling flats of an area
in excess of 1000 sq.ft. i.e. a ground different from the ground on which
the   CIT(A) confirmed the penalty. The
order also noted the fact that at the time when the return of income was filed
on 31st October 2005, it was not possible to predict whether the
project would be completed on or before the specified date 31st
March 2008. Further, the Tribunal also examined the issue on which the
Assessing Officer had imposed penalty, namely, selling of two flats to the
members of same family, the area of which in the aggregate exceeded 1000 sq.ft.
built up and held that no material was brought on record that assessee had
constructed a flat of more than 1000 sq.ft. built up area or that the assessee
had sold any unit of more than 1000 sq.ft. It renders a finding of fact that
after units had been sold the buyers had joined two flats resulting in a flat
in excess of 1000 sq.ft. In the aforesaid view, the Tribunal held that there is
no furnishing of inaccurate particulars and/ or concealing of income warranting
the imposition of penalty u/s. 271(1)(c).

The Hon. High Court in the revenue appeal
held that, it was the original ground on basis of which penalty was initiated,
that the assessee was required to offer explanation during penalty proceedings
to establish that the claim as made in the return of income was not on account
of furnishing of inaccurate particulars of income or concealment of income vis-a-vis
of selling flat having area 1000 sq.ft. The AO under the Act also considered
the assessee’s explanation in the context in which the penalty proceedings were
initiated and did not rightly place any reliance upon the subsequent events. In
an appeal from the order of the Assessing Officer, the CIT(A) could not have
imposed penalty on a new ground which was not the basis for initiation of
penalty. The appeal before the CIT(A) was with regard to issue of penalty u/s.
271(1)(c) only on the ground on which the penalty proceedings were initiated in
the assessment order. Although the powers of CIT(A) are coterminous with that
of the AO, the imposition of penalty could be only the ground on which it was
initiated. This is not the case, where the CIT(A) had independently initiated
penalty proceedings on a new ground in an order in quantum proceedings in
appeal from the Assessment Order. This alone could lead to the imposition of
penalty u/s. 271(1)(c) on the new ground. The ground on which the penalty was
initiated and penalty imposed by the AO, namely, that the flat had been sold in
the project which was in excess of 1000 sq.ft., the Tribunal has recorded a
finding of fact that the flats were sold individually by two separate
agreements individually to the purchasers in joint names. However, two flats
were subsequently joined by the purchasers aggregating the size of two flats to
1000 sq.ft. built up purchased from the assessee. This is finding of fact which
has not been shown to be perverse or arbitrary. In the above view, revenue
appeal was dismissed.

28. TDS – Interest u/s. 28 of Land Acquisition Act- capital gain or income from other sources – Sections 45, 56 and 194A – Interest assessable as capital gain – Tax not deductible at source on such interest

Movaliya Bhikhubhai Balabhai vs. ITO; 388
ITR 343 (Guj):

Pursuant to acquisition of land of the
assessee, by a Court order dated 23/03/2011, additional compensation was
awarded with interest. The executive engineer proposed to deduct tax at source
of Rs. 2,07,416/- u/s. 194A. The assessee made an application to the Assessing
Officer u/s. 197 to issue certificate
for Nil deduction of tax. The Assessing Officer rejected the application.

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

“i)  In the case of CIT vs.
Ghanshyam (HUF) 315 ITR 1 (SC), the Supreme Court held that it is clear
that whereas interest u/s. 34 of the Land Acquisition Act, 1894 is not treated
as a part of income subject to tax, interest earned u/s. 28, which is on
enhanced compensation or consideration making it exigible to tax u/s.
45(5).  The substitution of section 145A
by the Finance (No. 2) Act, 2009 was not in connection with the decision of the
Supreme Court in CIT vs. Ghanshyam (HUF) 315 ITR 1 (SC), but brought to
mitigate the hardship caused to the assessee on account of the decision of the
Supreme Court in Rama Bai vs. CIT 181 ITR 400 (SC), whereby it was held
that arrears of interest computed on delayed or enhanced compensation shall be
taxable on accrual basis.

ii)  Therefore, the words
“interest received on compensation or enhanced compensation” in section 145A of
the Act have to be construed in the manner interpreted by the Supreme Court in CIT
vs. Ghanshyam (HUF) 315 ITR 1 (SC). As a necessary corollary, therefore,
the payment made u/s. 28 of the 1894 Act is interest as envisaged u/s.
145A  and cannot be treated as income
from other sources.

iii) The Assessing Officer was not
justified in requiring the deduction of tax at source u/s. 194A in respect of
such interest. The assessee was, therefore, entitled to refund of the amount
wrongly deducted u/s. 194A .”

27. Revision – Limitation – Section 263 – A. Y. 2007-08 – Reassessment in respect of items other than item sought to be revised by Commissioner – Period of limitation begins from original assessment – Not from date of reassessment in which item was not in question

I. G. Electronics India Pvt. Ltd. vs.
Principal CIT; 388 ITR 135 (All):

For the A. Y. 2007-08, the assessment u/s.
143(3) was completed on 31/10/2011. Sales tax incentive received from UP
Government was treated as revenue receipt, but the sales tax subsidy received
from the Maharashtra Government was not treated as revenue receipt and
accordingly was accepted as capital receipt. Subsequently, a reassessment order
u/s. 147 was passed on 15/03/2015 making disallowance u/s. 40(a)(i), on account
of non-deduction of tax at source. Thereafter, on 08/06/2016, the Principal
Commissioner issued notice u/s. 263, on the ground that the sales tax subsidy
accruing to the assessee under the scheme of the Government of Maharashtra was
not brought to tax as revenue receipt.

The Allowed High Court allowed the writ
petition filed by the assessee challenging the notice u/s. 263 and held
as under:

“i)  Limitation prescribed u/s.
263(2) for exercise of power u/s. sub-section (1) thereof is two years from the
end of financial year in which the order sought to be revised was passed.

ii)  The reassessment order was
not for review or reassessment of the entire case but only in respect of a
particular item. In all other respects, the original assessment order was
maintained, and addition made by assessment order dated 26/03/2015 was added in
the income assessed in the original assessment order. Though the notice u/s.
263(1) referred to the reassessment order, in fact, it referred to a
discrepancy in the regular assessment order dated 31/10/2011, wherein the
incentive of value added tax from Maharashtra Government received by the
assessee was allowed to be deducted. This incentive had no concern with the
reassessment proceedings in the order dated 26/03/2015.

iii)  Since the notice issued
by the Principal Commissioner was in reference to a discrepancy in the original
assessment order dated 31/10/2011 and not the reassessment order dated
26/03/2015, the limitation would run from the dated of the regular order of
assessment and therefore, the notice was barred by limitation prescribed u/s.
263(2). Impugned notice dated 08/06/2016 is quashed.”

26. TDS – Payment of salary to priests and nuns of catholic institutions – Ultimate beneficiaries congregation or dioceses with benefit of exemption from tax – No liability to deduct tax at source

Holy Cross Primary School vs. CBDT; 388
ITR 162 (Mad):

The assessee filed writ petition for
quashing of the letter dated 07/10/2015 of the Income-tax Department and the
Circular of the Director of Treasuries dated 26/10/2015 insisting in deduction
of tax at source from the salaries of the religious nuns and priests in the
service of the assessee school contending that, the concerned religious priests
and nuns did not take the salaries, but were ultimately depositing it with the
concerned diocese or congregation or institution only which are exempt from tax.

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

“Tax need not be deducted at source in so
far as the payments of salaries of the religious priests and nuns of the
catholic institutions who were attached to the respective congregation or
dioceses who were already exempted from the purview of the income tax liability
as on the date of the order.”

25. Capital gains – Section 50C: A. Y. 2006-07 – Stamp duty value higher than sale price- Reference to DVO – Valuation by DVO binding on AO

Principal CIT vs. Ravjibhai Nagjibhai
Thesia; 388 ITR 358 (Guj):

In the A. Y. 2006-07, the assessee sold his
land for a consideration of Rs. 16 lakh. The Stamp Valuation Authority valued
the property at Rs. 2,33,70,600/-. The case was therefore referred to the DVO
at the request of the assessee u/s. 50C(2). The DVO valued the property at Rs.
24,15,000/-. However, the Assessing Officer passed the assessment order before
the report of the DVO was received treating the difference of Rs. 2,17,70,600/-
as undisclosed income. The Commissioner (Appeals) and the Tribunal deleted the
addition and held that the capital gain has to be computed u/s. 50C on the
basis of the valuation by the DVO.

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

“i)  Once a reference was made
by the Assessing Officer u/s. 50C of the Act, to the DVO, for valuation of the
capital asset, the Assessing Officer was obliged to complete the assessment in
conformity with the estimation made by the DVO.

ii)  Under sub-section (2) of
section 50C, it was such lower valuation which was required to be taken into consideration
for the purposes of assessment. There was no legal infirmity in the orders of
the appellate authorities warranting interference.”

31 Transfer pricing – Computation of arm’s length price – Section 92C, r.w.s. 144C – A. Ys. 2007-08 and 2008-09 – Failure of Assessing Officer to adhere to mandatory requirement of section 144C(1) and first pass a draft assessment order would result in invalidation of final assessment order and consequent demand notices and penalty proceedings

Turner International India (P.) Ltd. vs. ACIT; [2017] 82
taxmann.com 125 (Delhi):

For the A. Y. 2007-08, the assessee petitioner filed its
return on 31st October 2007, declaring its income at Rs.
10,69,43,491/-. This was later revised on 31st March, 2009 to claim
a higher TDS. As far as A. Y. 2008-09 is concerned, the Petitioner filed a
return of income on 30th September, 2008 declaring its income at Rs.
35,04,23,465/-. In respect of both the returns, since there were international
transactions involving the Assessee, a reference was made by the AO to the
Transfer Pricing Officer (‘TPO’). In respect of both the A.Ys., two separate
orders were passed by the TPO on 29th October, 2010 (in respect of
AY 2007-08) and 17th October, 2011 (in respect of AY 2008-09), in
respect of the Distribution Activity segment. On the basis of the above orders
of the TPO, draft Assessment Orders were passed by the AO. These were objected
to by the Petitioner before the Dispute Resolution Panel (‘DRP’). After the DRP
concurred with the TPO, final assessment orders were passed by the AO. These
were appealed against by the Petitioner before the ITAT. By a common order
dated 14th January 2013, in both the appeals pertaining to the two
A. Ys., the ITAT observed that neither the Petitioner nor the TPO had taken
into consideration appropriate comparables and, therefore, the determination of
arms length price (‘ALP’) was not justifiable. While setting aside the order of
the DRP, the ITAT remanded the matters to the AO for undertaking a transfer
pricing study afresh and framing an assessment in accordance with law.

Following the above order of the ITAT, fresh notices were
sent on 2nd August, 2013 by the TPO to the Petitioner u/s. 92CA(2)
of the Act, 1961. Two separate orders were passed by the TPO on 30th
January, 2015 proposing an upward adjustment to the total income of the
Petitioner for each of the A. Ys. Pursuant to the above order, the AO on 31st
March, 2015 passed final Assessment Orders in respect of both A.Ys. u/ss.
254/143(3)/144C(13)r.w.s. 92CA(4) of the Act confirming the additions as
proposed by the TPO. Accompanying the aforementioned final Assessment Orders
were notices of demand u/s. 156 of the Act and notices u/s. 271(1)(c) of the
Act initiating penalty proceedings.

The assessee filed writ petitions challenging the said orders
and the penalty proceedings. The Delhi High Court allowed the writ petition and
held as under:

“i)   The short ground on
which the aforementioned final assessment orders and the consequent demand
notices have been challenged is that there was non-compliance with the
mandatory provision contained in section 144C(1) of the Act requiring the AO to
first frame draft assessment orders. The question whether the final assessment
order stands vitiated for failure to adhere to the mandatory requirements of
first passing draft assessment order in terms of Section 144C(1) of the Act is
no longer res intregra. There is a long series of decisions to which reference
would be made presently. In Zuari Cement Ltd. vs. ACIT (decision dated
21st February, 2013 in WP(C) No.5557/2012), the Division Bench (DB)
of the Andhra Pradesh High Court categorically held that the failure to pass a
draft assessment order u/s. 144C (1) of the Act would result in rendering the
final assessment order “without jurisdiction, null and void and
unenforceable.” In that case, the consequent demand notice was also set
aside. The decision of the Andhra Pradesh High Court was affirmed by the
Supreme Court by the dismissal of the Revenue’s SLP (C) [CC No. 16694/2013] on
27th September, 2013.

ii)   In Vijay
Television (P) Ltd. vs. Dispute Resolution Panel [2014] 369 ITR 113/225 Taxman
35/46 taxmann.com 100 (Mad.), a similar question arose. There, the Revenue
sought to rectify a mistake by issuing a corrigendum after the final assessment
order was passed. Consequently, not only the final assessment order but also
the corrigendum issued thereafter was challenged. Following the decision of the
Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra) and a
number of other decisions, the Madras High Court in Vijay Television (P) Ltd.
case(supra) quashed the final order of the AO and the demand notice.
Interestingly, even as regards the corrigendum issued, the Madras High Court
held that it was beyond the time permissible for issuance of such corrigendum
and, therefore, it could not be sustained in law.

iii)   Recently, this
Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie vs. Union of India
[2016] 388 ITR 383/241 Taxman 38/68 taxmann.com 377, following the decision
of the Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra),
the Madras High Court in Vijay Television (P) Ltd. (supra) as well as
the Bombay High Court in International Air Transport Association vs. Dy. CIT
[2016] 241 Taxman 249/68 taxmann.com 246, came to the same conclusion.

iv)  Mr. Dileep Shivpuri,
learned counsel for the Revenue sought to contend that the failure to adhere to
the mandatory requirement of issuing a draft assessment order u/s. 144C (1) of
the Act would, at best, be a curable defect. According to him, the matter must
be restored to the AO to pass a draft assessment order and for the Petitioner,
thereafter, to pursue the matter before the DRP. The Court is unable to accept
the above submission. The legal position as explained in the above decisions is
unambiguous. The failure by the AO to adhere to the mandatory requirement of
section 144C (1) of the Act and first pass a draft assessment order would
result in invalidation of the final assessment order and the consequent demand
notices and penalty proceedings.

v)  For
the aforementioned reasons, the final assessment orders dated 31st
March, 2015 passed by the AO for AYs 2007-08 and 2008-09, the consequential
demand notices issued by the AO and the initiation of penalty proceedings are
hereby set aside.”

30 Speculation business – Loss – Section 73, Explanation – Penalty u/s. 271(1)(c) – A. Y. 2001-02 – Allotment of shares – No purchase of shares- Loss on sale of shares – Not from speculation business – Question of penalty u/s. 271(1)(c) also would not arise

AMP Spinning and Weaving Mills P. Ltd. vs. ITO; 393 ITR
349 (Guj):

The assessee was a dealer in chemicals and in shares. In the
public issues of certain companies, the assessee applied for and also allotted
shares which it eventually sold and in the process suffered losses. The
assessee claimed set off of the loss as business loss. The Assessing Officer
rejected the claim and contention of the assessee that the application for
shares from the primary market and loss incurred on sale of such shares did not
fall within the purview of speculation loss under the provisions of the
Explanation to section 73 of the Act. This was upheld by the Tribunal. However,
the Tribunal cancelled the consequent penalty imposed by the Assessing Officer
u/s. 271(1)(c) of the Act.

The Gujarat High Court allowed the assessee’s appeal and
dismissed the appeal filed by the Department and held as under:

“i)   Section 73 of the
Income-tax Act, 1961 deals with carry forward and set off of losses from
speculation business. The Explanation to section 73 is a deeming provision
whereunder if the specified conditions are satisfied, purchase and sale of
shares are deemed speculation activities. There is a vital difference between
“creation” and “transfer” of shares. The words “allotment of shares” have been
used to indicate the creation of shares by appropriation out of the
unappropriated share capital to a particular person. A share is a chose in
action. A chose in action implies existence of some person entitled to the
rights in action in contradistinction from rights in possession. There is a
difference between issue of a share to a subscriber and the purchase of a share
from an existing shareholder. The first case is that of creation whereas the
second case is that of transfer of a chose in action.

ii)   Getting the shares
on allotment did not amount to purchase of the shares. The loss incurred on the
sale of the shares was not a loss in speculation business.

iii)   Accordingly, the
question of levy of penalty u/s. 271(1)(c) would not arise.”

29 Income Declaration Scheme 2016 – Assessee not filing returns for A. Y. 2010-11 onwards owing to internal problems – Declaration under Scheme for A. Y. 2010-11 onwards – Advance tax paid and tax deducted at source for those years – Assessee entitled to credit of advance tax and TDS

Kumudam Publications Pvt. Ltd. vs. CBDT; 393 ITR 599
(Del):

For the A. Y. 2010-11 onwards, the assessee company did not
file returns due to non-appointment of statutory auditor and certain internal
disputes in the company which led to litigations. It deposited the advance tax
and the tax deducted at source and Rs. 16,49,23,433 had been paid towards tax
liability by or on behalf of it. Anticipating that proceedings might be
initiated by the Department for its failure to file returns u/s. 139, the
assessee applied u/s. 119(2)(b) and sought permission to file returns ”based on
the unaudited accounts or in any other manner”. Pending disposal of the
application, the assessee also made a declaration under the Income Disclosure
Scheme, 2016 for all the assessment years on the basis of its unaudited
accounts. The details of the total tax payable including the interest and
penalty under the Scheme was Rs. 19.60 crore against which the advance tax paid
and the tax deducted at source to its benefit was Rs. 16.49 crore and the net
due of Rs. 3.11 crore, after giving credit to the sums paid, were disclosed by
the assessee in its declaration. In response to the declaration, the assessee
received an order from the Principal Commissioner demanding tax of Rs. 19.60
crore. The assesee’s representation and reminder letters to the Department and
e-mails to the Chairman CBDT requesting clarification that the net tax payable
was Rs. 3.11 crore only, were not responded to.

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

“i)   There was no bar,
express or implied which precluded the reckoning or taking into account of
previously paid amounts which has nexus with the period sought to be covered by
the Income Declaration Scheme, 2016. There should be something which provides a
clear insight that Parliament wished that past amounts were not to be reckoned
at all for purpose of payments. All that the words of the statute enjoined were
that the tax and surcharge amounts under the Scheme “shall be paid on or before
a date to be notified”. Those words necessarily referred to all payments and
were not limited in their meaning to what was paid immediately before, or, in
the proximity of the declaration filed.

ii)   The provisions of
section 182 of the Finance Act, 2016 stated that for the purposes of the Income
Declaration Scheme, 2016, the undefined terms and expressions should be
understood in terms of the Income-tax Act, 1961, by incorporating those into
the 2016 Act and the Scheme.

iii)   “Undisclosed
income” which was the foundational provision to be invoked by the declarant,
thus, was based on the definition in section 132(1)(c) of the 1961 Act. The
only bar discernible under the scheme as evident from section 189 of the 2016
Act was that “a declarant under the Scheme shall not be entitled, in respect of
undisclosed income declared or any amount of tax and surcharge paid thereon, to
reopen any assessment or reassessment made under the Income-tax Act, 1961 or
the Wealth-tax Act, 1957, or claim any setoff or relief in any appeal, reference
or any other proceeding in relation to any such assessment”. Therefore, there
was no bar for an assessee or declarant to claim credit of advance tax amounts
paid previously which pertained to the assessment years or periods for which it
sought benefits under the Scheme, 2016.

iv)  The respondents were
directed to process the assessee’s application under the 2016 Scheme giving
adjustment or credit to the amounts paid as advance tax and tax deducted at
source to its account.”

28 Depreciation – Additional depreciation – Section 32(1)(iia) – A. Y. 2006-07 – Acquisition of machinery in previous year and installation during A. Y. – Assessee entitled to additional depreciation at 20%

Princ. CIT vs. IDMC Ltd.; 393 ITR 441 (Guj):

The assessee was in the business of fabrication and
manufacture. For the A. Y. 2006-07, in assessment u/s. 143(3), its total income
was assessed at Nil after the Assessing Officer allowed its claim on additional
depreciation of 20% u/s. 32(1)(iia) of the Act, 1961, on account of its newly
purchased machinery. The machinery was purchased in the preceding year, but was
installed in the relevant year (A. Y. 2006-07). The Department audit party
raised the objection that as the machinery was purchased before March 31, 2005,
the claim of additional depreciation was not allowable to the assessee.
Therefore, in reassessment proceedings, the Assessing Officer disallowed the
assessee’s claim for additional depreciation. The Appellate Tribunal allowed
the assessee’s claim.

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

“i)   The purpose and
object of section 32(1)(iia) of the  Act,
1961 is to encourage the manufacturing sector by allowing the deduction of a
further sum equal to 20% of the actual cost of machinery or plant acquired and
installed. Therefore, the underlying object and purpose is to encourage the
industries by permitting the assessee in setting up the new undertaking or
installing a new plant and machinery to claim the benefit of additional
depreciation.

ii)   No error had been
committed by the Appellate Tribunal in allowing the additional depreciation at
the rate of 20% u/s. 32(1)(iia) of the Act on the plant and machinery installed
by the assessee after March 31, 2005, the year in question. The purpose and
object of granting additional depreciation u/s. 32(1)(iia) was to encourage
industries and to give a boost to the manufacturing sector by permitting the
assessees setting up new undertakings or installation of new plant and
machinery an additional depreciation allowance.

iii)  Thus
the provisions of section 32(1)(iia) was required to be interpreted reasonably
and purposively as the strict and literal reading of section 32(1)(iia) would
lead to an absurd result denying the additional depreciation to the assessee
though the assessee had installed new plant and machinery. The question of law
is answered against the revenue and in favour of the assessee.”

27 Charitable purpose – Exemption u/s. 10(23C)(via) – A. Y. 2011-12 – Application for approval cannot be rejected on ground assessee charges fees for educational courses or it entered into arrangements with other institutions to set up satellite centers to give medical treatment or its treatment involved layered subsidisation programme – Rejection of application not justified

Venu Charitable Society vs. DGIT; 393 ITR 63 (Del):

The assessee was registered u/s. 12A of the Act,1961 and also
obtained approval u/s. 80G of the Act. It was also notified for exemption u/s.
35AC of the Act by the National Committee for Promotion of Social and Economic
Welfare. The assessee was notified u/s.10(23C)(via) of the Act for the A. Ys.
2005-06 to 2007-08. But it did not file application for renewal of exemption
for the A. Ys. 2008-09 to 2010-11. In the return of income filed for those
years, the assessee claimed exemption u/s. 11 of the Act in respect of income
earned and applied for charitable purposes, the Assessing Officer while
completing the assessment for the A. Ys. 2005-06 to 2009-10 held that the
activities of the society fell within the ambit of section 2(15) of the Act,
i.e. charitable purpose. The assessee thereafter applied through Form 56D for
grant of exemption u/s. 10(23C)(via) of the Act for the A. Ys. 2011-12 onwards.
The Department rejected the exemption application inter alia on the
ground that (a) the assessee did not exist solely for philanthropic purposes
but for purpose of profit; (b) it had entered into collaboration agreements
with other hospitals and trusts for running satellite hospitals with profit
motive; (c) it provided educational courses such as medical training
programmes, long term super speciality medical programmes in ophthalmology and
was earning profit from those activities; (d) the memorandum of the assessee
society contained objects other than health care; and lastly, that it had made
no application for renewal of exemption u/s. 10(23C)(via) for the A. Ys.
2007-08 to 2010-11.

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

“i)   The objects of the assessee
society were solely for the purpose of education and medical care and not for
purposes of profit. Only if it was found that the assessee was carrying on its
activities for the purpose of profit, contrary to its objects, would the
prescribed authority be justified in rejecting the application for approval
u/s. 10(23C)(via) of the Act.

ii)   Merely because it
charges fees for educational courses or that it enters into arrangements with
other institutions to set up satellite centres, to give medical treatment, or
that its treatment involved a layered subsidisation programme, that would not
justify rejection of its application. Therefore, denial of exemption u/s. 10
23C)(via) was not justified and the order was to be quashed.

iii)  The
Revenue is directed to consider the petitioners application, process it and
pass necessary orders in accordance with law within four weeks from today.”

26 Capital gains – Transfer – Joint development agreement (JDA) – Section 2(47), r.w.s. 53A of the Transfer of Property Act, 1882 – A. Y. 2008-09 – Assessee was member of cooperative housing society which owned certain land – Society entered into tripartite JDA with developers but the JDA was not registered – Assessee was entitled to receive monetary consideration partly in money and balance as a part of built up property – During relevant assessment year, assessee actually received proportionate amount – Unregistered JDA does not fall u/s. 53A of Transfer of Property Act; does not amount to transfer – Tribunal was justified in holding that assessee was not liable to capital gain tax

Princ. CIT vs. Dr. Amrik Singh Basra; [2017] 82
taxmann.com 186 (P & H):

The assessee was a member of a cooperative housing building
society. The society entered into a tripartite ‘JDA’ with developers, viz.,
‘HASH’ and ‘THDC’ under which it was agreed that HASH and THDC would undertake
development of land owned and registered in the name of the society. The agreed
consideration to be paid by the developers was to be disbursed to each individual
member of the society partly in monetary and balance in terms of built up
property. The assessee was entitled to receive proportionate amount.

The Assessing Officer held that impugned transaction involved
allowing the possession of the immovable property to be taken or retained in
part performance of contract of the nature referred to in section 53A of 1882
Act; and thus, it would be treated as transfer for purposes of Income-tax Act.
The Assessing Officer concluded that the assessee was liable to tax during
current assessment year under consideration on the entire amount
received/receivable in future under the head ‘capital gains’. Commissioner
(Appeals) and the Tribunal deleted the addition.

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

“i)   The High Court in
the case of C. S. Atwal vs. CIT [2015] 378 ITR 244/234 Taxman 69/59
taxmann.com 359 (P&H) had arrived at the conclusion that:

–     The parties had
agreed for pro-rata transfer of land.

–     No possession had
been given by the transferor to the transferee of the entire land in part
performance in JDA so as to fall within the domain of section 53A of 1882 Act.

–     The possession
delivered, if at all, was as a licencee for the development of the property and
not in the capacity of a transferee.

–     Further section 53A
of 1882 Act, by incorporation, stood embodied in section 2(47)(v) and all the
essential ingredients of section 53A of 1882 Act were required to be fulfilled.
In the absence of registration of JDA, the agreement does not fall u/s. 53A of
the 1982 Act and consequently s. 2(47)(v) does not apply.

ii)   The
appellant-revenue has not been able to controvert the applicability of the
decision rendered in C.S. Atwal’s case (supra). The substantial
questions of law claimed in these appeals are answered accordingly.
Consequently, both the appeals stand dismissed.”

25 Business expenditure – Capital or revenue – Section 37 – A. Y. 2005-06 – Lease rent paid for plot allotted for period of 10 years by Gujarat Maritime Board – Allowable as revenue expenditure

CIT vs. Mahavir Inductomelt P. Ltd.; 394 ITR 50(Guj):

For the A. Y. 2005-06, the assessee claimed deduction of a
sum of Rs. 18,66,450 as premium paid on plot allotted by the Gujarat Maritime
Board as expenditure in its business of ship breaking. The assessee paid this
amount as premium on leasehold property. According to the Assessing Officer,
the assessee acquired this plot from the Board under lease and the lease
agreement was for 10 years and accordingly, this was a capital asset and
payment made for acquiring capital asset was capital expenditure. The Assessing
Officer allowed deduction only of one tenth of the expenditure. The
Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i)   The amount paid by
the assessee with respect to plot allotted by the Board was allowable as
revenue expenditure.

ii)   The
appeal is dismissed.“

24 Business expenditure – Accrued or contingent liability- A. Y.s. 2001-02 and 2002-03 – Award of damages with interest in arbitration made rule of court – Assessee disputing award of damages and interest and dispute pending before Division Bench – Grant of stay by Division Bench does not relieve assessee from liability of interest – Entitled to deduction on interest

National Agricultural Co-operative Marketing Federation of
India Ltd. vs. CIT; 393 ITR 666 (Del):

For the A.Y.s 2001-02 to 2003-04, the assessee claimed
deduction of interest payable to A, on account of an arbitration award on the
outstanding amount of the award. The Court made the award rule of the Court in
proceedings initiated by A  u/s.5 of the
Foreign Awards (Recognition and Enforcement) Act, 1961 and held that  A was entitled to interest. On appeal by the
assessee against such award, the Court granted stay of the execution of the
decree. The Assessing Officer disallowed the claim for deduction by the
assessee for the A. Y. 2001-02 and 2003-04 and held that the liability of the
assessee was contingent and that it had not been entered in the books of account.
The Appellate Tribunal allowed deduction of interest for the A. Y. 2003-04.

The members of the Appellate Tribunal who heard the appeals
for the A. Y.s. 2001-02 and 2002-03 disagreed with the earlier order for the A.
Y. 2003-04. A reference was made to the Special Bench of the Appellate Tribunal
which held that the assessee had not incurred the liability for the payment of
the interest at the end of the assessment years in question and that under the
mercantile system of accounting, deduction could be granted only where the
incurring of the liability was a certainty. It held that there was no legally
enforceable liability of interest that existed against the assessee. It further
held that where the claim to damages and interest thereon was disputed by the
assessee in a Court, the deduction could not be allowed for the interest on such
damages. It concluded that as a result of the stay order granted by the
Division Bench of the Court, the liability of the assessee to pay interest
remained suspended from the date of stay.

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

“i)   With the award
being made rule of the Court by a single judge, the mere fact that the judgment
and decree was stayed by the Division Bench would not relieve the assessee of
its obligation to pay in terms thereof to A. Such liability had commenced in
the previous year in which the judgment and decree was passed by the single
judge. The order of the Special Bench of the Appellate Tribunal confirming the
disallowance of interest was unsustainable.

ii)   Appeal
is allowed.”

23 Appeal to High Court – Limitation – Appeal by Department – Receipt of copy of order of Tribunal by any of officers in Department including Commissioner (Judicial) will trigger period of limitation – Internal arrangements by Department changing jurisdiction of its officers will not alter period of limitation – Administrative instructions for administrative convenience of Department do not override statute particularly section 260A(2)(a)

CIT vs. Odeon Builders P. Ltd.; 393 ITR 27 (Del)(FB):

On 29/10/2014, the Tribunal had passed a common order in a
batch of 115 cases. A certified copy thereof was received in the office of the
CIT, Ghaziabad on 19/12/2014 and in the office of the Principal Commissioner
Delhi on 28/04/2015. The Department filed an appeal before the High Court on
25/08/2015. Assessee contended that the appeal was filed beyond the limitation
period. The Department explained that at the time the appeals were heard by the
Tribunal, the Commissioner, Ghaziabad was the concerned Commissioner and pursuant
to certain administrative orders issued by the Department, the jurisdiction
relating to the assessee was transferred to the Commissioner, Delhi. The
certified copy was received by the Commissioner, Delhi on 28/04/2015 and the
Commissioner, Delhi thereafter took a decision regarding filing of appeals.
Another appeal against the order of the Tribunal dated 16/05/2014 was filed by
the Department in the High Court on 14/01/2015. The assessee contended that in
accordance with the stamp borne on the certified copy of the order, the Copy of
the order was available with the Commissioner (Judicial) on July 23, 2014 and
with the Commissioner (Central) on July 25, 2014 and therefore, the appeal
which was filed on January 14, 2015 was beyond 120 days from the date of
receipt of the certified copy. The Department contended that limitation would
start to run only from the date of service of the order of the Tribunal on the
concerned Commissioner having jurisdiction over the assessee.

The Full Bench of the Delhi High Court held as under:

“i)   The word “received”
occurring in section 260A(2)(a) of the Income-tax Act, (hereinafter for the
sake of brevity referred to as the “Act”) 1961 would mean received by
any of the named officers of the Department, including the Commissioner
(Judicial). The provision names four particular officers, i.e., the Principal
Commissioner, Commissioner, Principal Chief Commissioner, and Chief
Commissioner of Income Tax. These were the only designated officers who could
receive a copy of the order. In the absence of a qualifying prefix “concerned”,
the receipt of a copy of the order of the Tribunal by any of those officers in
the Department including the Commissioner (Judicial), would trigger the period
of limitation.

ii)   The statute was not
concerned with the internal arrangements that the Department might make by
changing the jurisdiction of its officers. It was for the officer of the
Department who first received a copy of the Tribunal’s order to reach in time
to the officer who was to take a decision regarding the filing of an appeal.

iii)   Where there was a
common order of the Tribunal covering the several appeals, limitation would
begin to run when a certified copy was received first by either the
Commissioner (Judicial) or one of the officers of the Department and not only
when the Commissioner “concerned” receives it. When the same Commissioner had
jurisdiction for more than one assessee, the limitation would begin to run for
all from earliest of the dates when the Departmental representative of the
Commissioner (Judicial) or any Commissioner first receives the order in any of
the cases forming part of the batch disposed by the common order.

iv)  If there were four
separate orders passed, the limitation would begin to run when such separate
orders are received first by any officer of the Department.

v)   Instructions issued
by the Department for its administrative convenience could not alter the time
when limitation would begin to run u/s.260A(2)(a) of the Act. Administrative
instructions are for the administrative convenience of the Department and would
not override the statute, in particular section 260A(2)(a) of the Act.”

15. Krishna Enterprises vs. Addl. CIT (Mum) Members: R. C. Sharma (AM) and Ravish Sood (JM) ITA No. 5402/Mum/2014 A.Y.: 2007-08. Dated: 23rd November, 2016. Counsel for assessee / revenue: Sashank Dandu / A. Ramachandran

Section 50C – AO is not justified in
substituting the value determined by DVO for the sale consideration disclosed
by the assessee in a case where the difference between the sale consideration
of the property as shown by the assessee and FMV determined by the DVO u/s.
50C(2) is less than 10 percent.

FACTS  

On 07.8.2006, the assessee sold four flats
for a consideration of Rs. 1,96,60,000. 
Since the sale agreements were not registered it was submitted that it
was not possible to determine the stamp duty value as per the provisions of
section 50C of the Act.  The Assessing
Officer (AO) referred the valuation of these flats to DVO who declared the
value of the flats to be Rs. 2,07,51,130. 
The difference between the valuation as done by the DVO and the amount
of consideration was added by the AO in assessee’s income u/s. 50C. 

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where it was argued on its behalf that the provisions of
section 50C are not applicable to the facts of the case in AY 2007-08 and since
the total addition is only a small percentage (5.5%) of the total consideration
it needs to be ignored for computing long term capital gain by relying on the
ratio of the decision of Pune bench of the tribunal in the case of Rahul
Constructions vs. DCIT (Pune)(Trib) 38 DTR 19 (2010)(ITA No. 1543 / Pn/2007). 

HELD  

Since the transactions were entered during
the financial year 2006-07 which is prior to 1.10.2009, being the date from
which the amendment to section 50C is effective, as per CBDT Circular No.
5/2010 dated 3.6.2010, the provisions of section 50C are not applicable in so
far as sales deed so executed were not registered with the Stamp Duty Valuation
Authority.  Also, since the difference
between the sale consideration of the property shown by the assessee and the
FMV determined by the DVO u/s. 50C(2) is less than 10%, AO was not justified in
substituting the value determined by the DVO for the sale consideration
disclosed by the assessee. 

The Tribunal allowed the appeal filed by the
assessee.

18. [2017] 77 taxmann.com 49 (Delhi – Trib.) Gopal Saran Darbari vs. ITO A.Ys.: 2007-08 & 2008-09 Date of Order: 25th October, 2016

Section 54 – Even if an assessee acquires a
new house on credit i.e. the payment for which may be made in future, the
assessee cannot be denied the benefit of deduction u/s. 54.

FACTS 

For AY 2007-08,
the assessee in his return of income filed u/s. 139(1) returned long term
capital gain of Rs. Nil after deduction of Rs. 51,27,000 u/s. 54 of the
Act.  This sum of Rs. 51,27,000 comprised
of Rs. 35,00,000 deposited in Capital Gain Account and Rs. 15,27,000 paid to
Ajay Enterprises, a builder, for booking the flat.  During the course of assessment proceedings,
the Assessing Officer, on examination of receipts issued by the builder,
noticed that the assessee had booked two flats viz. A-907 and C-408 and payment
of Rs. 15,27,000 to the builder comprised of Rs. 5,77,000 for Flat No. A-907
and Rs. 9,50,000 for Flat No. C-408.  The
assessee admitted that the amount of Rs. 9,50,000 invested for flat no. C-408
was wrongly considered u/s. 54.  The
Assessing Officer (AO) worked out capital gain after indexation to be Rs.
49,78,349 and allowed deduction of Rs. 40,77,000 u/s. 54 – comprising of Rs.
35,00,000 deposited in capital gain account and Rs. 5,77,000 paid to builder
for flat A-907.  The AO assessed long
term capital gain to be Rs. 9,01,349.

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 assessee has upto 4.12.2008
invested a total sum of Rs. 61,74,683 for purchase of a new house, therefore
there was substantive compliance of section 54 by making required investment in
the new house within the period specified u/s. 54.  For this proposition reliance was placed on
the following decisions –

I)   ITO vs. Smt. Sapana
Dimri [2012] 50 SOT 96 (Delhi)

     ii)  CIT vs. Ms. Jagriti Aggarwal [2011] 339 ITR 610 (P & H)

iii)  Kishore H. Galaiya vs.
ITO [2012] 137 ITD 229 (Mum)

iv) CIT vs. Rajesh Kumar
Jalan [2006] 286 ITR 274 (Gau)

v)  K. S. Ramchandran vs.
ITO [IT Appeal No. 941 (Mds.) of 2011]

HELD 

The Tribunal noted that the assessee had not
surrendered or offered the amount of Rs. 9,50,000 for addition. Before the AO
the assessee stated that the amount of Rs.9.50 lakh should not be considered as
investment u/s. 54.  Even without considering
this amount of Rs. 9.50 lakh, the actual investment by the assessee in purchase
of eligible new house within the specified period of 3 years was more than the
long term capital gain.

Even if an assessee acquires a new house on
credit i.e. the payment for which may be made in future, the assessee cannot be
denied the benefit of deduction u/s. 54 because what is required by sub-clause
(i) is that cost of new house should be equal to or more than the amount of
long term capital gain.

The requirement to invest in a bank account
under the capital gain account scheme is a procedural requirement to ensure
that investment is made in a residential house as claimed in the return of
income. Merely because of technical breach / non-compliance the benefit due to
the assessee by the legislature cannot be denied particularly when there is
substantive compliance made.  Section 54
is a beneficial section and as held by the Apex Court in Bajaj Tempo Ltd.
vs. CIT [1992] 196 ITR 188 (SC) the provisions of a beneficial section
should be construed liberally.

For the above stated reasons and having
considered the ratio of the decisions relied upon by the assessee, the Tribunal
deleted the addition of Rs. 9,01,349.

The Tribunal allowed the appeal filed by the
assessee.

14. Kanungo Ferromet Pvt. Ltd vs. Addl. CIT (Mum) Members : Mahavir Singh (JM) and Ramit Kochar (AM) ITA No. 995/Mum/2014 A.Y.: 2005-06. Date of Order: 4th January, 2016. Counsel for assessee / revenue: Rajkumar Singh / Vikash Kumar Agarwal

Section 271E – Penalty u/s. 271E cannot be
levied in a case where repayment is made by an account payee cheque, though in
the name of the director of the company.

FACTS  

During assessment year 2004-05, the assessee
company, in the normal course of its business, advanced a sum of Rs. 15 lakh to
Shri R. Bhaskaran.  The advance was given
for intended business deal by the assessee company which could not materialise
and therefore the said advance payment was returned by Shri R. Bhaskaran, in
the assessment year 2005-06, through account payee cheque in the name of the
Director of the assessee company Shri Om Prakash Kanungo instead of paying it
back directly to the assessee company. 
The assessee company passed a journal entry debiting the loan account of
Shri Om Prakash Kanungo, Director of the company and credited the advance
account of Shri R. Bhaskaran.

The Assessing Officer (AO) held that the
provisions of section 269T are violated since according to him the assessee
company has received the repayment of the sum of Rs. 15 lakh advanced by it to
R. Bhaskaran in cash.  He levied penalty
u/s. 271E of the Act for violation of the provisions of section 269T of the
Act. 

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD  

The repayment is made by account payee
cheque although in the name of one of the directors of the assessee company.
The Tribunal found that there is a reasonable cause rather the payment is
through account payee cheque.  In its
view, there was no violation of provisions of section 269T and consequential
penalty u/s. 271E was without any basis. 

The Tribunal deleted the penalty and allowed
the appeal filed by the assessee.

20. [2017] 77 taxmann.com 153 (Kolkata – Trib.) BMW Industries Ltd. vs. DCIT A.Y.: 2011-12 Date of Order: 2nd December, 2016

Section
80IA  – The expression ‘owned’ referred
to in section 80IA(4)(1)(a) refers to ownership of the enterprise and not the
ownership of the infrastructure facility that is created.

The definition of `Infrastructure
facility’  as mentioned in Explanation to
section 80IA(4)(i) covers any road including toll road.  It need not be coming under expressway or
highway category.

FACTS 

The assessee filed its return of income
showing total income of Rs.20,48,49,810. 
In arriving at the total income the assessee claimed deduction of Rs.
1,49,16,548 u/s. 80IA(4)(i) towards profits derived from developing, operating
and maintaining infrastructure facility. The Assessing Officer (AO) examined
the claim and reduced it by a sum of Rs. 2,78,385 being amount of proportionate
head office expenses allocated by him towards this unit. 

The CIT in
exercise of his powers u/s. 263 was of the view that the order of the AO in so
far as it relates to allowing the claim of the assessee for deduction u/s.
80IA(4)(i) of the Act was erroneous and prejudicial to the interest of the
revenue.  According to him, the assessee
was merely executing the job of civil construction on the basis of works
contract awarded by Executive Engineer. 
He was also of the view that the roads constructed by the assessee were
not coming under expressway or highway category as mentioned in the Explanation
to the section.  The assessee was not a
developer of an infrastructure facility and was not eligible to claim deduction
u/s. 80IA(4)(i).

HELD

The Tribunal observed that it cannot be said
that the AO failed to deal the specific facts of the case as per law and has
not scrutinised/verified the details in respect of the issues raised in the
show cause notice u/s. 263 of the Act.

The expression “owned” in
sub-clause (a) of clause (1) of sub-section (4) of section 80-IA of the Act
refers to ownership of the enterprise and not the ownership of the
infrastructure facility that is created. The ownership of the enterprise should
be that of a company and not any other person like individual, HUF, Firm etc.
sub-clause (a), clause (i) of sub-section (4) of section 80-IA uses the word
“it” and that denotes the enterprise carrying on the business. The
word “it” cannot be related to the infrastructure facility,
particularly in view of the fact that infrastructure facility includes Rail system,
Highway project, Water treatment system, Irrigation project, a Port, an Airport
or an Inland port which cannot be owned by any one. Even otherwise, the word
“it” is used to denote an enterprise. Therefore, there is no
requirement that the assessee should have been the owner of the infrastructure
facility.

The question as to whether the assessee is
‘developer’ or ‘contractor’ has to be tested in the light of the decisions
rendered on the issue by the Hon’ble Bombay High Court in the case of ABG Heavy
Industries (supra) and the order of the Division Bench of ITAT giving
effect to the larger bench (third member) decision in the case of B.T. Patil
& Sons (supra). According to these decisions, what is to be seen is
as to whether the assessee has shouldered out Investment & technical risk
in respect of the work executed and it is liable for liquidated damages if it
failed to fulfill the obligation laid down in the agreement. The liability that
was assumed by the assessee under terms of the contract would be obligations
involving the development of an infrastructure facility. The assessee has also
in its employment technically and administratively qualified team of persons.
If the above conditions are satisfied then it would not be correct to say that
assessee is merely a contractor and not a developer. Without giving adverse
finding on the above tests, the CIT could not conclude that the order of the AO
was erroneous and prejudicial to the interest of the revenue.

As regards the observation of the CIT that
the roads construed by the Assessee were not coming under expressway or highway
category as mentioned in the Explanation to section 80IA(4)(i) of the Act,
which defines Infrastructure facility for the purpose of claiming deduction
under the aforesaid section the Tribunal held that the definition covers any
road including toll road. It need not be coming under expressway or highway
category.

The Tribunal allowed the appeal filed by the
assessee.

19. [2016] 76 taxmann.com 165 (Bangalore – Trib.) S. K. Properties vs. ITO A.Y.: 2007-08 Date of Orderd: 4th November, 2016

Sections
5, 145  – In case of a developer selling
plots, income in respect of sale of plots can be recognised only in the year in
which conveyance deed executed is registered in favour of the buyers and it in
that year that development expenditure incurred as expenditure or expenditure
likely to be incurred on the plot is to be allowed.  This is in consonance with provisions of AS 9
which clearly lays down that matching is required to be done on accrual basis
in respect of income offered to tax. 

FACTS 

The assessee firm, engaged in the business
of development of property, recognised revenue only in the year in which the
plots were sold and conveyance deed registered. It filed its return of income
declaring total income to be Rs. Nil. 
The Assessing Officer (AO), in the course of assessment proceedings was
of the view that revenue should be recognised at every stage of receipt of sale
consideration.  He, therefore, rejected
the method of accounting followed by the assessee and assessed the total income
to be Rs. 2,37,37,172.

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 revenue in respect of sale of plots
can be recognised only when the risk and rewards and ownership of the plots are
transferred to the buyers till such time the revenue cannot be recognised on
sale of plots.

HELD 

The Tribunal observed that the assessee has
recognised the income in respect of sale of plots by adopting Completed
Contract Method, whereas, the AO is of the view that income should be offered
to tax received on year to year basis based on the stage of receipt of
consideration, irrespective of the fact that the title in the plots have been
passed on to the buyer or not. It also noted that the plots formed part of
stock-in-trade of the assessee firm and are immovable properties.The title in
immovable property can be passed only in terms of the provisions of the
Transfer of Property Act. 

The Tribunal noted the ratio of the decision
of the Karnataka High Court in the case of Wipro Ltd. vs. DCIT [2016] 382
ITR 179 (Kar.) and held that the provisions of section 2(47) of the Act
have no application to the transactions of stock-in-trade. In this case, the
stock-in-trade is immovable property and the title in immovable property can be
transferred or alienated in accordance with the provisions of the Transfer of
Properties Act. The right, title or interest in the immovable property can be
transferred only by way of registering the conveyance deed executed in this
behalf. Even the Accounting Standard 9 dealing with the recognition of income
also lays down that the income in respect of transfer of immovable property can
be recognised only when the risks, rewards and ownership of the property is
transferred to the buyer.

It held that the matter requires a fresh
examination by the AO in the light of the above position of law. The Tribunal
remanded the matter back to the file of the AO with a direction that the income
in respect of sale of plots can be recognised only in the year in which
conveyance deed executed is registered in favour of the buyers and to allow the
development expenditure incurred as expenditure or the expenditure likely to be
incurred on the plots sold as expenditure. It held that this direction also
goes in line with and is in consonance with the provisions of Accounting
Standard 9 which clearly lays down that matching is required to be done on
accrual basis in respect of the income offered to tax and upheld by Hon’ble
Supreme Court in the case of Taparia Tools Ltd. vs. Jt. CIT [2015] 372 ITR
605 (SC).

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.”

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 15th 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.

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

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 2nd
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 2nd August, 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 2nd
August, 2013. The Tribunal in the impugned order dated 4th 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 2nd 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 2nd 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 4th
December, 2013 was quashed and set aside.

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 23rd 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 25th
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 25th
August, 2005 and letter dated 17th 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 17th 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 25th October, 2005 read with the letter
dated 17th October, 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.

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 27th February,
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 29th August,
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 30th December, 2008 u/s.
143(3) r.w.s 254 of the Act giving effect to the order dated 29th
August, 2007 of the Tribunal.

The Finance (No.2) Act of
2009 amended section 115JB of the Act with retrospective effect from 1st April,
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 19th August, 2010 u/s. 154 rectified its order dated 30th
December, 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 27th February, 2004 with the order dated 30th December,
2008. Therefore, any rectification of the order dated 27th February,
2004 is required to be done within 4 years from 27th 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 30th 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.

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.”

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.”

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.”

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 1st April and 30th September of the
assessment year. If an application is filed prior to 1st 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 1st 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 1st day 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 1st
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.”

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.”

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 21st February, 2006. The final sale took place under a Sale
Deed dated 5th 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 2nd 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 5th
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 5th April, 2007
records in clause (d) thereof the fact that the Agreement to Sale had been
entered into on 21st 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 10th
May, 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 22nd 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.”

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.”

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.”

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 1st 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 1st April
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.

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.)

(c) Earnest Towers (P.) Ltd. [2015] 155 ITD
372 (Kol. – 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 10th 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.

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 16th 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

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

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

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

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 30th March
2016 (“existing AS”).

Income Computation and Disclosure Standards (ICDS)

The Central Government vide Notification No. SO 892(E) dated
31st March 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 1st March 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 1st
January 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;

(c) the
stage of completion of the transaction at the end of the reporting period can
be measured reliably; and

(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 1st January 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 31st March 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 31st 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 31st March 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 31st March 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,

(c) convertible securities, and

(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.

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: 31st March, 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.

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: 15th 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.

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: 21st 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.

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: 17th April, 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.

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.

(c)  Such advance or loan should have been made
after the 31st day of May, 1987.”

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.

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;

(c) the location of such right, property or
information is in India.

 

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.

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 1st February, 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 31st
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 1st
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 1st 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 1/5th 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 31st December of the relevant
assessment year.

Rs. 1,000

Rs. 5,000

In any
other case i.E return is furnished after 31st 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
1st April 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 15th
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 15th
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 1st 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.

(c)      The assessee files the return including
such income and pays tax and interest due before the specified date.

(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.

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.

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.

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.”

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.”

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.”

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.”

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.”

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.”

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):

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.”

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.

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.”

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.”

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. _

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.”

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). _

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 1st day 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 7th 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 30th 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 1st June,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. _

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.

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.

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.

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.

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 7th 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 7th May, 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 7th May, 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 7th May, 2008. This on
the ground that the certificate was operative only from the date of issue i.e.
7th 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 7th May, 2008 and
admittedly paid thereafter. In the above view the Tribunal  held that the liability to deduct tax at
source only arose post 7th 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 7th 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 7th
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.

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 20th
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 20th November, 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.

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.

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.”

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.”

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 9th 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 1st April 2000 to 31st
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.

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

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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.

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

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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.

[2016] 157 ITD 626 (Delhi Trib.) Chander Shekhar Aggarwal vs. Asst. CIT A.Y. 2011-12. Date of Order:11th January, 2016

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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.

(2016) 134 DTR 113 (Mum) Sunil Gavaskar vs. ITO A.Ys.: 2001-02 & 2002-03 Date of Order: 16th March, 2016

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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

[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

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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.

[2016] 69 taxmann.com 244 (Pune – Trib.) Cooper Corporation (P.) Ltd. vs. DCIT A.Y.: 2008-09 Date of order: 29th April, 2016

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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.

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.]

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[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

(c) Set off of short term capital loss.

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.

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

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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.

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.]

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[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.

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 )]

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(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.

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-

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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.”

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-

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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).”

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-

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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.”