BCAJ | Bombay Chartered Accountant Journal

Tea Development allowance- Section 33AB- A. Y. 2000-01- Composite income: Deduction to be allowed from total composite income derived from growing and manufacturing tea- Rule 8 shall apply thereafter to apportion resultant income-

Singlo (India) Tea Ltd. vs. CIT; 382 ITR 537 (Cal):

The assessee company was engaged in the business of growing, manufacturing and selling tea. In the A. Y. 2000-01, the assessee had claimed deduction of tea development allowance u/s. 33AB of the Act at the rate of 20% on the composite income of Rs. 25,54,855/-. The Assessing Officer held that the deduction u/s. 33AB has to be allowed only from the non-agricultural component of the composite income determined under rule 8. The Tribunal upheld the decision of the Assessing Officer.

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

“The deduction u/s. 33AB is to be allowed from the total composite income derived from growing and manufacturing tea and only after such deduction is made, shall rule 8(1) be applied to apportion the resultant income into 60% agricultural income, not taxable under the Act and balance 40% taxable under the Act.”

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Charitable purpose- S/s. 2(15), 12A of I. T. Act 1961- A. Y. 2009-10- Premises let for running educational institutions- Auditorium let out to outsiders for commercial purpose- Incidental to principal object of promotion of educational activities- Will not fall in category of “advancement of any other object of general public utility” in section 2(15)- Cancellation of registration not justified-

DIT vs. Lala Lajpatrai Memorial Trust; 383 ITR 345 (Bom)

The assessee is a charitable trust with the object of “advancement of education” and was registered u/s. 12A of the Income-tax Act, 1961. The main object of the trust was promotion of education. The assessee trust owned a plot of land having a building consisting of an auditorium on the ground floor and class rooms from second to seventh floors. This building was let out to an educational institute which conducts junior college, senior college, law college, etc., and sixth and seventh floors were let out to run a management institute. The assesee claimed exemption of the income received by it from letting out the premises. A show cause notice was issued calling upon the assessee to explain why the rents received should not be treated as falling under the category of “any other object of general public utility” attracting the first proviso to section 2(15) of the Act. The assessee trust claimed that the object of its establishment was “advancement of education” which fell within the definition of charitable purpose as defined u/s. 2(15) of the Act. The assessee relied on Circular No. 11 of 2008 dated 19/12/2008 contending that the first proviso to section 2(15) would not be attracted to its case. The Director of Income-tax withdrew the registration of the assessee. The Appellate Tribunal set aside the order withdrawing the registration.

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

“i) The letting out of the premises was in consonance with the objects of the trust which was to conduct colleges and schools and achieve advancement of education.

ii) Admittedly, the premises were let out on a nominal rent. The Director of Income-tax had overlooked that the principal purpose for which the premises was let out was for conducting educational activity. There was no material before the authority to show that the sixth and seventh floors were used for any other purpose which was not an educational purpose. The service charges received in respect of the sixth and seventh floors were on account of educational purpose.

iii) Letting out of the auditorium was not the dominant object of the assessee and admittedly, the auditorium was incidentally let out to outsiders for commercial purposes. Letting out was incidental and not the principal activity of the assesee. The first proviso to section 2(15) would not be attracted. In the course of letting out, the assessee had incurred expenses for electricity and air conditioners.

iv) Under these circumstances, separate books of account could not be insisted upon as the activity became part and parcel of the educational activities carried out by the assessee and the benefit of exemption u/s. 11(4A) could not be denied. There was no fault with the order passed by the Appellate tribunal.”

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Capital gains- Transfer- S/s. 45(1), (4) – A. Y. 1992- 93- Conversion of firm to company- Takeover of business of firm with assets by private limited company with same partners as shareholders in same proportion: Subsequent revaluation of assets- No dissolution of partnership- No consideration accrued or received on transfer of assets: Transaction not transfer giving rise to capital gains-

CADD Centre vs. ACIT; 383 ITR 258 (Mad)

The assessee was a firm with two partners having equal shares. A private limited company was formed on 21/11/1991 and took over the business of the firm and its assets. The assets were revalued on 30/11/1991. The partners immediately before succession became the shareholders in the same proportion as in the capital account of the firm on the date of succession. For the A. Y. 1992-93, the Assessing Officer concluded that the transfer of the business assets of the firm to the company constituted distribution of assets which gave rise to capital gains taxable u/s. 45(4) of the Income-tax Act, 1961. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) When firm is transformed into a company, there is no distribution of assets and no transfer of capital assets as contemplated by section 45(1) of the Income-tax Act, 1961.

ii) There is no authority for the proposition that even in cases where the subsisting partners of a firm transfer assets to a company, there would be a transfer, covered under the expression “or otherwise in section 45(4). When a firm is transformed into a company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence there is no liability to pay tax on capital gains.

iii) There was no transfer of assets because
(a) no consideration was received or accrued on transfer of assets from the firm to the company,
(b) the firm had only revalued its assets which did not amount to transfer,
(c) the provision of section 45(4) of the Act, was applicable only when the firm was dissolved. The vesting of the property in the company was not consequent or incidental to a transfer.”

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Appeal to High Court- Section 260A- Competency of appeal- Decision of Tribunal following earlier decision- No appeal from earlier decision- No affidavit explaining reasons: Appeal not competent-

CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

Dealing with the competency of the Appeal before the High Court u/s. 160A of the Income-tax Act, 1961, the Bombay High Court held as under:

“i) Where the issue in controversy stands settled by decisions of High Courts or the Tribunal in any other case and the Department has accepted that decision the Department ought not to agitate the issue further unless there is some cogent justification such as change in law or some later decision of a higher forum.

ii) In such cases appropriately the appeal memo itself must specify the reason for preferring an appeal failing which at least before admission the officer concerned should file an affidavit pointing out the reasons for filing the appeal. It is only when the court is satisfied with the reasons given, that the merits of the issue need be examined of purposes of admission.”

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Appeal to Appellate Tribunal- No appearance by assessee’s counsel on date of hearing due to death in family- Refusal by Tribunal to grant adjournment and matter decided on merits: Violation of principles of natural justice- Order of Tribunal quashed and direction to decide matter on merits after hearing parties-

Zuari Global Ltd. vs. Princ. CIT; 383 ITR 171(Bom):

In an appeal before the Tribunal filed by the assessee, the assessee’s counsel could not appear on the date of hearing owing to a death in his family. The Tribunal refused to grant an adjournment and proceeded to decide the matter on merits. On appeal by the assessee, the Bombay High Court set aside the decision of the Tribunal and held as under:

“i) Considering that the assessee was not unnecessarily delaying the matter and as on the relevant date there was justifiable reason which prevented counsel for the assessee from being present before the Tribunal, the Tribunal was not justified to refuse an adjournment. Failure to grant a short adjournment has resulted in passing the order in breach of the principle of natural justice.

ii) The order of the Tribunal is quashed and set aside. The tribunal is directed to decide the appeals afresh after hearing the parties in accordance with law.”

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Business Expenditure – Provision for interest in terms of compromise agreement with bank is an ascertained liability.

CIT v. Modern Spinners Ltd. (2016) 382 ITR 472 (SC)

The assessee filed a return for the assessment year 1995- 96 on Novembr 24, 1995, declaring a loss of Rs.57,99,781. During the course of the assessment proceedings, the Assessing Officer specifically required the assessee to show cause why the provision of interest of Rs.49.23 lakh should not be disallowed as the provision amounted to unascertained liability. After granting opportunity to the assessee, the deduction for the said amount of interest was disallowed by the Assessing Officer. Against this order, the assessee preferred an appeal which was also dismissed by the Commissioner of Income Tax (Appeals). The view taken by the Assessing Officer as well as the Commissioner of Income Tax (Appeals), was set aside by the Income-tax Appellate Tribunal upon appeal by the assessee.

The Tribunal held that the assessee had provided interest liability only at the rate of 10 per cent which was as per the compromise agreement with the bank and not as per the original terms and conditions of loan. Therefore, it could not be treated to be a contingent liability, rather it was an ascertained liability. According to the Tribunal the assessee could not be penalized for claiming less interest liability.

The High Court dismissed the appeal of the Revenue holding that it was not an unilateral act on the part of the assessee but was a bilateral consented action on behalf of the parties which was of binding in terms of the agreement and as such it could not be termed as an unascertained liability.

On further appeal by the Revenue to the Supreme Court it was held that the matter was covered against the Revenue by the judgment of the Supreme Court in Taparia Ltd. vs. Joint CIT [2015] 372 ITR 605 (SC).

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Export – Special Deduction – Computation of deduction u/s. 80HHC – 90% of the net commission (and not gross) has to be reduced from the profits of the business for determining deduction under section 80HHC.

Veejay Marketing vs. CIT [2016] 382 ITR 395 (SC)

While completing the assessment for the assessment years 1993-94 and 1994-95 u/s. 143(3) of the Act, the Assessing Officer found that the assessee had reduced 90 per cent of the net commission while working out the profits of business under the Explanation (baa) to section 80HHC of the Act.

The Assessing Officer held that 90 per cent of gross commission receipts had to be deducted from the profits of the business and accordingly, allowed deductions under section 80HHC for the said assessment years on that basis.

Aggrieved against the said orders of the Assessing officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). The Appellate authority held that only 90 per cent of the net commission had to be deducted from the profit of the business and accordingly, directed the Assessing Officer to redo the exercise.

Against the said orders of the Commissioner of Income Tax (Appeals), the Revenue preferred appeals before the Income-tax Appellate Tribunal.

The Income-tax Appellate Tribunal, by following the decision of the Income-tax Appellate Tribunal, Delhi Bench ‘E’ (Special Bench) in Lalsons Enterprises vs. Deputy CIT [2004] 89 ITD 25 (Delhi) [SB], held that only 90 per cent of the net commission had to be reduced from the profit of the business for determining deduction under section 80HHC of the Act.

Against the said order of the Tribunal, the Revenue filed the appeals before the High Court.

By following the ratio laid down in the CIT vs. Chinnapandi [2006] 282 ITR 389 (Mad), in which it was held that 90% of the gross interest had to be reduced from the profits of the business for determining deduction under section 80HHC, the High Court held that the reasons given by the Tribunal in the impugned order were not sustainable. Accordingly, the order of the Tribunal was set aside.

On appeal to the Supreme Court, it was held that these cases were covered by the decision in ACG Associated Capsules Private Ltd. (Formerly Associated Capsules Private Ltd.) vs. CIT [2012] 343 ITR 89 (SC). Accordingly, the issue arising in the appeal was answered in favour of the assessee and against the Revenue. The Supreme Court allowed the appeals and the order of the High Court was set aside and the matter was remanded to the Assessing Officer for a fresh consideration.,

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Refund –When an amount though found refundable to the assessee is utilised by the Department, interest is payable u/s. 244(1A) for the period of such utilization.

CIT v. Jyotsna Holding P. Ltd. [2016] 382 ITR 451 (SC)

The
Supreme Court took note of the facts in respect of the assessment year 1987-88
(similar fact situation appeared in respects of all three assessment years viz.
1985-86, 1986-87 and 1987-88.) For the assessment year 1987- 88, the respondent
filed its return on the basis of self tax assessment made by it and paid a sum
of Rs.3,23,68,834 on September 12, 1987. The assessment was made u/s. 143(3) by
the assessing authority on March 28, 1988, as per which an amount of
Rs.2,03,29,841 was found refunable to the respondent/assessee. Instead of
immediate refund of this amount, the assessing authority ordered that the same
would be adjusted against the demand for the year 1986-87. It was ultimately
adjusted on July 25, 1991. The question that arose, in these circumstances, was
as to whether the assessee would be entitled to interest on the aforesaid
amount which was kept by the Revenue for the period from March 28, 1988 to July
25, 1991. The assessee claimed the interest, which request was rejected by
Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed
the appeal of the assessee against the order of the Assessing Officer by
invoking the provisions of section 244(1A) of the Income-tax Act and held that
the interest was payable on the aforesaid amount. This order was upheld by the
Income-tax Appellate Tribunal as well as by the High Court.

On appeal, the
Supreme Court after going through the order of High Court did not find anything
wrong with the same. According to the Supreme Court the amount in question,
though found refundable to the assessee, was utilized by the Department and,
therefore, interest was payable u/s. 244(1A) of the Income-tax Act.

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WRITE – BACK OF LOANS – SECTIONS 41 (1) & 28 (iv)

ISSUE FOR CONSIDERATION

On account of the inability to repay a borrower, may write-back a part of the
amount due or the full amount so due, in pursuance of the negotiations with the
lender or otherwise. It is usual to come across cases of write back of
liability towards repayment of loans taken by an assesssee in the course of his
business. The amount so written back is credited to the profit & loss
account of the year of write back or is credited to the reserves.

Important issues arise, under the income-tax law, concerning the treatment and
taxability of the amount written back. Will such a write back attract the
provisions of section 41 (1) of the Act and be taxed in the hands of the
assesssee in the year of write back? Alternatively, will the write back attract
the provisions of section 28 (i) or (iv) of the Act and be taxed in the hands
of the assesssee? Whether the fact that the borrowings were made for the
purposes of acquiring a capital asset, make any difference to liability for
taxation? Whether it can be said that the write back does not represent any
benefit or a perquisite for the assessment and is hence not taxable?

Conflicting decisions are rendered by the courts over a period of years
requiring us to take a fresh view of the issues on hand. Recently, the Madras
High Court has taken a view that the amount of loan written back by the
borrower is taxable in his hands in contrast to its own decision delivered a
few years ago.

Iskraemeco Regent Ltd ‘s case.

The issue arose in the case of Iskraemeco Regent Ltd. vs. CIT, 331 ITR 317
(Mad.). In that case the assessee, engaged in the business of manufacturing
energy meters, obtained a term loan from State Bank Of India for the purchase
of capital assets, both by way of import as well as in the local market. The
company also procured credit facility, through cash credit account, for import
of capital assets as well as for meeting the working capital requirements.

The assessee was declared a sick industrial company by the BIFR, which had
sanctioned a scheme for its revival, and in pursuance thereto, the State Bank
of India waived the outstanding dues of principal amount of about Rs.5 crores
and the interest outstanding for a sum of about Rs. 2 crores under the one time
settlement scheme. The assessee credited the waiver of principal amount to the
“Capital Reserve Account” in the balance sheet treating it as capital
in nature and the waiver of interest was credited to its “Profit and Loss
Account” for the financial year ending 31.03.2001 corresponding to the
assessment year 2001-02.

The assessee filed its return declaring its total income assessable at Rs.
45,160 after setting off the carried forward business losses and unabsorbed
depreciation. The AO in assessing the total income added the amounts of loan
and interest waived under the head business income by applying the provisions
of section 41(1) and section 28(iv) of the Act.

The appeals filed by the
assessee, before the Commissioner of Income Tax (Appeals) and the Tribunal,
were dismissed on the ground that the issue in appeal was no longer res integra
in as much as the same had already been concluded by the judgment in CIT vs.
T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344(SC). Aggrieved by the order
of the tribunal, the assessee preferred an appeal to the high court by raising
the following substantial questions of law;

“Whether the learned
Tribunal misdirected itself in law, and it adopted a wholly erroneous
approach, in interpreting the provisions of Section 28(iv) of the
Income-tax Act, 1961, to hold that the sum of Rs.5,07,78,410/-
representing the principal loan amount, waived by the bank under the One
Time Settlement Scheme (OTS), and credited by the appellant assessee to
its Capital Reserve Account, in its Balance Sheet drawn as at 31st March,
2001, is assessable to tax as a revenue receipt in the assessment for the
assessment year 2001-02; and whether the findings of the learned Tribunal
to this effect were wholly unreasonable, based on irrelevant
considerations, contrary to the facts and evidence on record and/or
otherwise perverse?
Whether the decision of the
Hon’ble Supreme Court in CIT vs. T.V.Sundaram Iyengar & Sons Ltd.
[1996] 222 ITR 344, applied by the learned Tribunal in passing its said
impugned order dated 26th March, 2010, has any application whatsoever, in
the facts and circumstances of the instant case, and particularly in
relation to section 28(iv) of the said Act?
Whether on a correct
interpretation of section 28(iv) of the Income Tax Act, 1961, the Tribunal
ought to have held that the principal amount of loan waived by the Bank
under the OTS, not being a trading liability and also not being a
“benefit or perquisite, whether convertible into money or not”,
the expression used in the said section, did not constitute revenue
receipt and/or business income of the appellant assessee assessable to tax
in its assessment for the assessment year 2001-02?
Whether ………….
Whether
……………..

On behalf
of the assessee it was submitted that:—

it was not in dispute that
the assessee had obtained loan from the State Bank of India for the purchase
of fixed assets, both within the country and outside the country, which
were admittedly capital assets. It was a pure loan transaction and the
same could never be termed as a trading transaction.
the loan was obtained for
the purchase of capital assets and the waiver amounted to a capital
receipt and not a revenue receipt.
it was not involved in any
business involving the transaction of money lending .
the AO had not gone behind
the loan arrangement and the loan arrangement in its entirety was not
obliterated by the waiver, considering the fact that the assessee had paid
a sum of Rs. 5 crores from the date of receipt of the loan.
a grave error was committed
in mechanically applying the judgment rendered by the apex court in T.V.
Sundaram Iyengar & Sons Ltd.’s case (supra ) without appreciating the
factual scenario that the loan had been obtained towards the purchase of
capital assets and not for a business transaction. The facts involved in
the judgment referred above disclosed that the transaction therein was a
trading transaction as against the facts involved in the assessee’s case.
reliance was placed on the
decisions in the cases of Mahindra & Mahindra Ltd. vs. CIT, 261 ITR
501(Bom.), CIT v. Alchemic (P.) Ltd., 130 ITR 168 and CIT vs. Mafatlal
Gangabhai & Co. (P.) Ltd.219 ITR 644 (SC).
relying on the decision in
the case of Solid Containers Ltd. vs. Dy. CIT, 308 ITR 417 it was
submitted that, in a case where a transaction involved a purchase related
to capital assets, a waiver made of the loan taken for the said purchase
would not constitute a business receipt.
the reasoning of the
authorities that, section 28(iv) of the Act was applicable to a money
transaction was totally misconceived and contrary to the provision itself.
Section 28(iv) provided for chargeability of profits and gains of business
or profession with relation to the value of any benefit or perquisite
arising out of business or the exercise of profession and therefore the
same would not include a money transaction. Since in the present case on
hand, the transaction involved a loan transaction, being a transaction of
money, section 28(iv) had no application.
Section 41(1) also did not
apply as it mandated that there had to be an actual allowance or deduction
made for the purpose of computing under the said section. In as much as
there was no allowance or deduction in the present case on hand, the
question of application of section 41(1) also did not arise for
consideration.
in support of the
contentions, the company placed reliance on the following judgments, CIT
vs. P. Ganesa Chettiar, 133 ITR 103 (Mad.), CIT vs. A.V.M. Ltd., 146 ITR
355 , Alchemic Pvt. Ltd.’s case (supra), Mafatlal Gangabhai & Co. (P.)
Ltd.’s case (supra ) and Dy. CIT v. Garden Silk Mills Ltd., 320 ITR 720
(Guj.) to submit that section 28(iv) had no application to a money
transaction. In so far as the scope of section 41(1) was concerned, the
judgments in Polyflex (India) (P.) Ltd. vs. CIT, 257 ITR 343 (SC) and
Tirunelveli Motor Bus Service Co. (P.) Ltd. vs. CIT, 78 ITR 55 (SC) were
relied upon by the company. the combOn behalf of the Revenue it was
submitted that:—ined reading of section 41(1) and section 28(iv) showed
that the words “whether in cash or any other manner” as found in
s. 41(1) had not been incorporated in section 28(iv) which was indicative
of the fact that section 28(iv) did not cover a cash transaction.

On behalf
of the Revenue it was submitted that:

the appellate authorities
had not rejected the company’s appeal on application of section 28(iv) but
was on application of section 28(i)of the Act and therefore, the findings
rendered by the authorities below had to be seen in the context of the
provisions contained in section 28(i) of the Act.
the ratio laid down by the
apex court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), held
good and had been followed in CIT vs. Rajasthan Golden Transport Co. (P.)
Ltd., 249 ITR 723, CIT v. Sundaram Industries Ltd., 253 ITR 396, CIT vs.
Aries Advertising (P.) Ltd., 255 ITR 510 and the authorities below had
rightly applied the same in rejecting the case of the assessee.
it was not in dispute that
the amount had been borrowed by the assessee for the purpose of his
business and once the said amount was used for business, the question as
to whether it had been used for the purchase of capital assets or revenue
receipts was immaterial. The assessee having become richer by the
settlement, the said transaction would partake the character of the income
assessable to tax. Even assuming an amount was utilised towards the
capital assets, it would take the character of a revenue receipt,
subsequently. The borrowal and waiver were in the course of business
during carrying on of which the benefit accrued to the assessee and hence
was taxable. If the amount was received in pursuance to a business or a
contractual liability, then it was taxable as income.
relying on Jay Engg. Works
Ltd. v. CIT, 311 ITR 299 it was submitted that the facts involved in the
cases relied upon by the assessee company were different and that some of
the judgments had been rendered prior to the decision in the case of T.V.
Sundaram Iyengar & Sons Ltd.’s (supra). The Madras high court after
considering the submissions of the parties to the dispute observed and
held that;-
the assessee was not
trading in money transactions. A grant of loan by a bank could not be
termed as a trading transaction and it could not also be construed to be
in the course of business. Indisputably, the assessee obtained the loan
for the purpose of investing in its capital assets. The facts involved in
the present case were totally different than the facts involved in T.V.
Sundaram Iyengar & Sons Ltd.’s case (supra). What had been done in the
present case was a mere waiver of loan. There was no change of character
with regard to the original receipt which was capital in nature into that
of a trading transaction. There was a marked difference between a loan and
a security deposit.
every deposit of money would
not constitute a trading receipt. Even though a receipt might be in
connection with the business, it could not be said that every such receipt
was a trading receipt. Therefore, the amount referable to the loans
obtained by the assessee towards the purchase of its capital asset would
not constitute a trading receipt. The finding of the court had been
fortified by the judgment of this Court in A.V.M. Ltd.’s case (supra).
the same contention had been
raised on behalf of the revenue before the Bombay High Court in Solid
Containers Ltd.’s case (supra), by relying upon the judgment rendered in
T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), however, in the said
case, a finding was given that the money was received by the assessee in
the course of carrying on his business and the agreement was completely
obliterated and the loan in its entirety was completely waived and the
loan itself was taken for a trading activity and on waiving it was
retained in business by the assessee. In the said judgment, the court had
distinguished its earlier judgment rendered in Mahindra & Mahindra
Ltd.’s case (supra) by highlighting that in the facts of the Solid
Container’s case, there was a trading transaction and the money received
was used towards a business transaction and accordingly the ratio laid
down in. T.V. Sundaram Iyengar & Sons Ltd.’s case (supra) was
applicable.
therefore, the above said
facts indicated that the ratio laid down in T.V. Sundaram Iyengar &
Sons Ltd.’s case (supra) had no application at all to the facts and
circumstances of the present case on hand. Hence, the authorities below
had wrongly applied the ratio laid down in T.V. Sundaram Iyengar &
Sons Ltd.’s case (supra) and the orders passed by them could not be
sustained. In the matter of applicability or otherwise of section 28(iv)
and 41(1), the court deemed it fit to give its views even though the
Revenue had conceded that the said provisions did not apply to the present
case. It observed that;-
Section 28(iv) of the Act
dealt with the benefit or perquisite received in kind. Such a benefit or
perquisite received in kind other than in cash would be an income as
defined u/s. 2(24) of the Act. In other words, to any transaction which
involved money, section 28(iv) had no application.
the transaction in the
present case being a loan transaction having no application with respect
to section 28(iv), the same could not be termed as an income within the
purview of section 2(24) of the said Act. In other words, in as much as
section 28(iv) was not applicable to the transactions on hand, it could
not be termed as income which could be made taxable as receipt. A receipt
which did not have any character of an income being that of a loan could
not be made eligible to tax.

Section 41(1) could apply only to
a trading liability. A loan received for the purpose of capital asset would not
constitute a trading liability.

Ramaniyam Homes P Ltd .’s case,

The issue once again arose recently before the Madras High Court, in the Tax
Case (Appeal) No.278 of 2014, in the case of CIT v. Ramaniyam Homes P Ltd., in
an appeal filed u/s 260-A of the Act. In that case, the assessee filed a return
of income for the assessment year 2006-07 admitting a total loss of
Rs.2,42,20,780. It was found by the AO that the assessee was indebted to the
Indian Bank which bank, vide a letter dated 15.2.2006, had mooted a proposal
for a one time settlement requiring the company to pay Rs.10.50 crore on or
before 30.4.2006 against which the company paid only a sum of Rs.93,89,000 by
that date.

The AO appears to have held that the One Time Settlement Scheme was accepted by
the assessee during the year and the interest waived was taxable u/s 41(1) of
the Act and the balance was taxable u/s 28(iv) of the Act. The CIT(Appeals)
held that the mere acceptance of the conditional offer of the bank under the
One Time Settlement Scheme, without complying with the substantive part of the
terms and conditions, would not give a vested right of waiver and therefore,
interest waived to the extent of Rs.1.68 Crores was not exigible to tax u/
s.41(1) and consequently, he deleted the addition of Rs.1,67,74,868. On the
issue of addition u/s 28(iv), he followed the decision in the case of Iskraemeco
Regent Limited vs. CIT, (supra) and held that Section 28(iv) had no application
to cases involving waiver of principal amounts of loans. In the appeal of the
Revenue, on the issue of the deletion of the principal portion of the term loan
waived by the bank, the Tribunal held in para 12 of its order that the term
loan had admittedly been used by the assessee for acquiring capital assets and
following the decision of the jurisdictional Madras high court in the case of
Iskraemeco Regent Limited(supra) it confirmed the order of the first appellate
authority.

In the appeal by the revenue to the high court, the following substantial
questions of law were raised therein:-

• ” Whether on the facts and in the circumstances of the case, the Income
Tax Appellate Tribunal was right in holding that the amount representing the
principal loan amount waived by the bank under the one time settlement scheme
which the assessee received during the course of its business is not exigible
to tax?
• Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal ought to have seen that the waiver of principal amount would
constitute income falling under Section 28(iv) of the Income Tax Act being the
benefit arising for the business?”

The Revenue invited attention to the definition of the expressions
“income” and “total income” u/s. (24) and (45) of section 2
and the provisions of the charging section 4 as well as the relevant provisions
of sections 28(iv), 41(1) and 59. It was contended that the principal amount of
loan waived by the bank under the one time settlement was a taxable receipt
coming within the definition of the expression “income” by relying
upon the decisions in cases of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. 222
ITR 344(SC), Solid Containers Ltd. vs. DCIT, 308 ITR 417 (Bom.), Logitronics P
Ltd. v. CIT,333 ITR 386 and Rollatainers Ltd. vs. CIT, 339 ITR 54.

In so far as the decision in Iskraemeco Regent Limited was concerned, it was
submitted that the Supreme Court had already granted leave to the Department
and the decision was the subject matter of Civil Appeal No.5751 of 2011, on the
file of the Supreme Court, and the Court was entitled to consider the issue
independently. At the outset, the Madras high court examined the decision in
Iskraemeco Regent Limited, since the appellate authorities had merely followed
the said decision. The court found that in the said decision it was held that a
loan transaction had no application with respect to s.28(iv) of the Act and
that the same could not be termed as an income within the purview of section
2(24).The Madras high court thereafter examined the statutory provisions and
also the decisions relied upon by the contesting parties in support of their
respective submissions. The Madras high court in particular examined the
decisions in the cases of T.V. Sundram Iyengar & Sons Ltd. (SC), Solid
Containers Ltd.(Bom), Mahindra & Mahindra (Bom.) and Logitronics P.
Ltd.(Del.) and Rollatainers Ltd. (Del).

The court noted that the law as expounded by the Delhi High Court appeared to
be that if a loan had been taken for acquiring a capital asset, waiver thereof
would not amount to any income exigible to tax and if the loan was taken for
trading purposes and was also treated as such from the beginning in the books
of account, the waiver thereof might result in the income, more so when it was
transferred to the profit and loss account. Having noted so, the court observed
that;

the Delhi High Court, both in
Logitronics as well as in Rollatainers cases, did not take note of one fallacy
in the reasoning given in paragraph 27.1 of the decision of the Madras high
court rendered in Iskraemeco Regent Limited’s case.
in paragraph 27.1 of the
decision in Iskraemeco Regent Limited’s case, it was held that s.28(iv)
spoke only about a benefit or perquisite received in kind and that
therefore, it had no application to any transaction involving money which
was actually based upon the decision of the Bombay High Court in Mahindra
& Mahindra Ltd.(supra), which, in turn, had relied upon the decision
of the Delhi High Court in the case of Ravinder Singh vs. C.I.T.205 I.T.R.
353.
with great respect, the
above reasoning did not appear to be correct in the light of the express
language of section 28(iv). What was treated as income chargeable to
income tax under the head ‘profits and gains of business or profession’
u/s 28(iv), was “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.”
therefore, it was not the
actual receipt of money, but the receipt of a benefit or perquisite, which
had a monetary value, whether such benefit or perquisite was convertible
into money or not, which was what was covered by section 28(iv). For
instance, if a gift voucher was issued, enabling the holder of the voucher
to have a dinner in a restaurant, it was a benefit or perquisite, which
had a monetary value. If the holder of the voucher was entitled to
transfer it to someone else for a monetary consideration, it became a
perquisite, convertible in to money. Irrespective of whether it was
convertible into money or not, to attract section 28(iv) it was sufficient
that it had a monetary value.
a monetary transaction, in
the true sense of the term, can also have a value.
we do not know why it should
not happen in the case of waiver of a part of the loan. Therefore, the
finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent
Limited that Section 28(iv) had no application to any transaction, which
involved money, was a sweeping statement and might not stand in the light
of the express language of section 28(iv).
in our considered view, the
waiver of a portion of the loan would certainly tantamount to the value of
a benefit. The benefit might not arise from “the business” of
the assessee. But, it certainly arose from “business”.
the absence of the prefix
“the” to the word “business” made a world of
difference. The Madras high court thereafter dealt with the issue of the
distinction, sought to be made, between the waiver of a portion of the
loan taken for the purpose of acquiring capital assets on the one hand and
the waiver of a portion of the loan taken for the purpose of trading
activities on the other hand. In the context, it held that;-
in so far as accounting
practices were concerned, no such distinction existed. Irrespective of the
purpose for which, a loan was availed by an assessee, the amount of loan
was always treated as a liability and it got reflected in the balance
sheet as such. When a repayment was made in monthly, quarterly, half
yearly or yearly installments, the payment was divided into two
components, one relating to interest and another relating to a portion of
the principal. To the extent of the principal repaid, the liability as
reflected in the balance sheet got reduced. The interest paid on the
principal amount of loan, would be allowed as deduction, in computing the
income under the head “profits and gains of business or
profession”, as per the provisions of the Act.
Section 36(1)(iii) made a
distinction where under the amount of interest paid in respect of capital
borrowed for the purpose of business or profession was allowed as
deduction, in computing the income referred to in section 28. But, the
proviso there under stated that any amount of interest paid in respect of
capital borrowed for acquisition of an asset for extension of existing
business or profession, whether capitalised in the books of account or not
for any period beginning from the date on which the capital was borrowed
for the acquisition of the asset, till the date on which such asset was
put to use, should not be allowed as deduction.
therefore, it was clear that
the moment the asset was put to use, then the interest paid in respect of
the capital borrowed for acquiring the asset, could be allowed as
deduction. When the loan amount borrowed for acquiring an asset got wiped
off by repayment, two entries were made in the books of account, one in
the profit and loss account where payments were entered and another in the
balance sheet where the amount of un repaid loan was reflected on the side
of the liability.
when a portion of the loan
was reduced, not by repayment, but by the lender writing it off (either
under a one time settlement scheme or otherwise), only one entry got into
the books, as a natural entry. A double entry system of accounting would
not permit of one entry. Therefore, when a portion of the loan was waived,
the total amount of loan shown on the liabilities side of the balance
sheet was reduced and the amount shown as capital reserves, was increased
to the extent of waiver. Alternatively, the amount representing the waived
portion of the loan was shown as a capital receipt in the profit and loss
account itself.
these aspects had not been
taken note of in Iskraemeco Regent Ltd.
In view of the above, the
Madras High court decided the issue in favour of the Revenue and the
appeal filed by the Revenue was allowed without any costs.

Observations

The issue
under consideration, of the write back of loans, has over the years turned
rotten and worse, has produced many off shoots. The sheer size of the quantum
involving this issue is another reason for addressing it at the earliest.
Settlement between the lenders and the borrowers is an everyday phenomenon and
the issues arising there from require to be handled with care importantly, due
to the fact that the borrower involved is admittedly in a precarious financial
health that can be worsened by the additional tax borrowings that may not have
been intended by the legislature.

It is time proper that a clear guideline is provided by the CBDT as regards the
Revenue’s understanding of the subject and its desired tax treatment. This
clarification is necessary in view of the fact that varied stands have been
taken by the Revenue before the courts in different cases. It is also most
desired that the apex court addresses the issue, at the earliest, in view of
the conflicting stands of the high courts, sometimes of the same high court, as
is seen by the conflicting decision of the Madras High Court and to an extent
of the Bombay High Court.

A classic case is the case of a company which has
been declared sick, under a statue, by the Board of Industrial & Financial
Reconstruction. The Board on one side mandates the lenders to compromise their
dues, in the interest of the financial health of the company, but, on the other
side, rests on the fringe when it comes to saving a sick company from
consequences of tax, directly arising out of the reliefs granted by it. We are
of the firm view that the relief from taxation should be granted in respect of
a sick company as has been done by some courts even where the CBDT has resisted
the tax relief before the BIFR.

Section 41(1) of the Act brings to tax the value of a benefit in respect of a
trading liability accruing to an assesssee by way of remission or cessation
thereof. The said section also seeks to tax the amount obtained by an
assesssee, in cash or otherwise in respect of a loss or an expenditure. In both
the cases, the charge of tax is attracted provided an allowance or deduction
has been granted to the assesssee. A charge once attracted, is placed in the
year of relief. By and large, the issues about the applicability of section
41(1) are settled. An understanding seems to have been reached that no
liability to tax arises unless an allowance or deduction has been granted to an
assesssee and subsequent thereto a relief has been obtained by him or a benefit
has accrued to him. Obviously in a case of a loan taken, the provisions of
s.41(1) should not be attracted unless the issue involves the settlement of an
interest, on the loan taken, for which a deduction was allowed.

Section 28(i) provides that the profits or gains of any business or profession
which was carried on during the year shall be chargeable to income tax under
the head “profits and gains of business or profession”. Section
28(iv) brings to tax the value of any benefit or perquisite, whether
convertible into money or not arising from business or the exercise of a
profession. The issue of taxation of a write back of a loan mainly revolves
around application of section 28. The questions that arise, in addressing the
issue are;

Whether a relief from
repayment of loan taken can be held to be profits or gains of business
carried on during the year? In other words, can a loan be said to have
been taken by the person in the ordinary course of his business where he
is not engaged in the business of granting of loans and advances? Will
such a transaction be treated as a trading transaction?
Will it make any difference
whether the loan was taken for the purpose of acquiring a capital asset or
was taken for meeting the working capital requirements of the business?
Will the relief, if any,
resulting on settlement be construed as a benefit or a perquisite arising
from the business?
Has the apex court in the
case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a write back
of loan shall be liable to be taxed as business income and that too only
where it was taken for the purposes of meeting a trading liability?

For the sake of brevity, we place our views on each of the above issues,
so identified, instead of referring and analyzing the entire case law on the
subject including the facts of the said T.V.Sundaram Iyengar & Sons Ltd
(supra)’s case . A reader however is advised to do so.

Section 28(i) brings to tax profits or gains from business carried on during
the year. Unless the profits arise from the business that was carried on during
the year, a charge under section 28(i) fails. An ordinary businessman, not
engaged in the business of money lending, etc, cannot be said to be engaged in
the business of receiving or granting loans and therefore no profits can be
said to have arisen from such a business. The Act makes a clear distinction
between an ordinary business and the business of granting any loans or advances
for the purposes of section 36(2) and section 73, for example. Accordingly, a
waiver of loan and it’s consequential write back cannot be said to be
representing any profits and gains arising from the business carried on during
the year. This finding should hold true in respect of all businessmen other
than the one engaged in the business of receiving and granting loans. The
transactions of loans are on capital account only and holding it otherwise will
lead to a situation where under a write off of an irrecoverable loan, advanced
in the past, will have to be allowed as a deduction in all cases. A loan taken
is a thing with which a person does his business; he carries on his business
with the funds borrowed. He does not deal in them; his business is that of
dealing in things other than the funds borrowed. He is a user of funds and not
a dealer of funds. He does not derive any profits from such funds nor is he
expected to derive any and rather derives profits from optimum use of such
funds in his business.

Once it is accepted that an ordinary businessman obtains a loan for the purpose
of carrying on his business, it is natural to accept that the purpose of loan
would not make any difference. Unless a loan is inextricably linked to the
regular business and its customers, it is not possible to hold that a purpose
for which a loan was taken will have any material bearing on its eventual
transaction. With great respect, we beg to differ with the view which seeks to
make a distinction, for the purposes of taxation, on the basis of the purpose
for which a loan is taken. In our opinion, the purpose for which a loan is
taken is immaterial unless the assesssee is in the business of dealing in loans
or the loan taken is inextricably linked to his business deal. The Madras high
court is spot on in the case of Ramaniyam Homes P.Ltd. (supra) when it
concludes on this aspect of the issue by holding that there is no difference
between a loan taken for the purpose of a capital asset or for meeting working
capital requirements.

Section 28(iv) reads as: “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.” From a reading, it is noticed that a benefit or a perquisite
should arise from business and if so it would be taxable whether its value can
be converted into money or not. The twin conditions are cumulative in nature
and both of them require satisfaction before a charge of taxation is attracted.
The use of the expression “whether convertible into money or not”
clearly indicate that the benefit or perquisite is the one which is capable of
being converted into cash but is certainly not the cash itself. Had it been so
then the expression would have been “whether received in cash or in
kind”. Section 41(1) explicitly uses the expression ‘whether in cash or in
any other manner”. The intention of the legislature is adequately
communicated by the use of appropriate expression; the intention being to bring
to tax such benefit or perquisite i.e. received in kind irrespective of its
possibility to convert in money or not. Again, the use of the term ‘value’,
supports such an interpretation in as much as cash carries the same value and
therefore does not require any prefix. Even otherwise can a remission in a loan
liability ever be construed as a benefit or perquisite and be considered to
have arisen from a business are the questions that remain open for being
addressed before a charge u/s 28(iv) is completed.

An interesting aspect of section 28(iv) is brought out by the Madras High Court
in paragraph 39 of the decision in the case of Ramaniyam Homes P Ltd.’s
(supra). The Madras High Court, in the context of applicability of section
28(iv), held that a benefit might not arise from “the business” of
the assesssee but it certainly arose from “business” and the absence
of the prefix “the” to the word “business” made a world of
difference. It seems that the court would have taken a different view had the
prefix “the” before the word “business” been placed in
section 28(iv). Had that been so the court would have concluded that the waiver
of loan did not attract the provisions of section 28(iv)!! In our very
respectful opinion, the logic supplied requires a reconsideration. The court
has failed to appreciate that the benefit or perquisite, for application of
section 28(iv), has to be from a business even though not from the specific business.
In the absence of any other business, the question of attracting section 28(iv)
does not arise at all. Even otherwise the legislative intent does not seem to
support such an interpretation which is evident from a bare reading of section
28(i) and section 28(va) which has consciously used the prefix “any’
before the term expression “business” to convey the wider scope of
the provisions.

The apex court in the case of T.V.Sundaram Iyengar & Sons Ltd (supra)
has neither, explicitly nor implicitly, stated that a loan on being written
back would attain the character of income. It was a case wherein the assessee
had received deposits from it’s customers for the purposes of the trading
transactions carried on with the customers . The said deposits or a part of it
got adjusted against regular trading transactions and the excess balance
remaining with the assessee was carried in the balance sheet as the liability
to creditors. On a later day it was found that the said excess balance so
obtained from the customers was not repayable and the company wrote back the
said liability by crediting the same to the profit & loss account. It is in
such facts that the Supreme Court held that a write back of such non-repayable
deposits were to be treated as business income.

It is a settled position of law that every receipt need not be an income even
though the amount may be received as a part of the business activity of the
assesssee. It is also a settled position in law that a receipt, originally of a
capital nature, will not change its character merely by a lapse of time subject
to an exception in respect of an amount received in the course of a trading
activity, for example, advances received from a customer or a deposit received
from a contractor or a customer or a supplier or margin money received for
security of performance by the customer. An act of borrowing a loan is not a
trading transaction in that manner.

In exceptional cases a receipt originally of a capital nature would, with lapse
of time, attain the character of an income. It is this principle of law which
was propounded in the case of Jay’s- The Jewellers Ltd, 1947 (29 TC 274) (KB)
that was followed by the Supreme Court in the case of Karamchand Thapar Sons
222 ITR 112 (SC) and was reconfirmed in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra). The Supreme Court in the said case of T.V.Sundaram Iyengar
& Sons Ltd (supra) had clearly restricted the application of the exception
to the case of an amount received as a part of the trading operations where a trading
liability was incurred out of an ordinary trading transaction. In our opinion,
a transaction of a loan borrowed for the purposes of funding a trading activity
can never be considered as a transaction that could be covered by the above
mentioned tests laid down by the Supreme Court. An ordinary loan, at its
inception, is of a capital character and retains its character even with the
flux of time it does not change even where it was later on waived.

Another important part of the facts in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra) was that in the said case the unclaimed deposit representing
excess balance was credited to the profit & loss account of the company and
it is this fact which had influenced the Supreme Court when it observed that
“when the assessee itself had treated the money as its own money and taken
the amount to its profit & loss account then the amounts were assessable in
the hands of the assessee”. It appears that all those decisions of the
courts require a reconsideration wherein the courts relying on the ratio of the
decision in the case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a
waiver of an ordinary loan was to be treated as income. The high courts had
failed to notice that in all such cases before them the amount received did not
have any trading character which was so in the case of T.V.Sundaram Iyengar
& Sons Ltd (supra).

Attention of the reader is invited to the following pertinent
observations of the author on page 1095 of the 10th edition of Kanga &
Palkhivala’s The Law and Practice of Income Tax in the context of the ratio of
the decision in the case of T.V. Sundaram Iyengar & Sons Ltd (supra).

“The Supreme Court erroneously held that crediting deposits that had been
given by the parties to a profit and loss account after they had reminded
unclaimed for a long period of time, would definitely be trade surplus and part
of assessee’s taxable income. Surprisingly, the court did not even refer to the
statutory provisions of section 41(1). It failed to note that unless the
assesssee had claimed an allowance or deduction in respect of a loss of
expenditure or trading liability, the subsequent cessation of liability would
not attract section 41(1)”. Also see the later decision of the Supreme
Court in the case of Kesaria Tea, 254 ITR 434.

The Supreme Court in a later decision in the case of Travancore Rubber, 243 ITR
158 has reconciled the legal position and reemphasised that unless a different
quality is imprinted on the receipt by a subsequent event, a receipt which is
not in the first instance a trading receipt cannot become a trading receipt by
any subsequent process. Under the circumstances it is very respectfully
observed that the decisions delivered by different high courts simply relying
on the ratio of the decision in the case of T.V.Sundaram Iyengar & Sons Ltd
(supra) require a fresh application of mind.

shailesh.kwebmaker

RULES FOR INTERPRETATION OF TAX STATUTES – PAR T – III

Introduction
In the April and May issues of the BCAJ I had discussed the basic rules of interpretation of tax statutes and have tried to explain some rules with binding precedents. Other rules / concepts are dealt with hereunder and hereafter.

1. Rules of Consistency, Resjudicata & Estoppel :

The principle of consistency is a principle of equity and would not override
the clear provisions of law. It is well accepted that each assessment year is
separate and if a particular aspect was not objected to in one year, it would
not fetter the Assessing Officer from correcting the same in a subsequent year
as the principles of res judicata are not applicable to tax proceedings. In Radhasaomi
Satsang the Supreme Court held that (page 329 of 193-ITR) : “where a
fundamental aspect permeating through the different assessment years has been
found as a fact one way or the other and parties have allowed that position to
be sustained by not challenging the order, it would not be at all appropriate
to allow the position to be changed in a subsequent year”. As is apparent
from the said decision, the rule of consistency has limited application – where
a fundamental aspect permeates through several assessment years; the said
aspect has been found as a fact one way or the other; and the parties have not
challenged the said finding and allowed the position to sustain over the years.
Clearly, the said principle will have no application where the position
canvassed militates against an express provision of law as held by Delhi High
Court in Honey Enterprises vs. C.I.T. (2016) 381-ITR-258 at 278.

1.1. In Radhasaomi itself, the Supreme Court acknowledged that there is
no res judicata, as regards assessment orders, and assessments for one year may
not bind the officer for the next year. This is consistent with the view of the
Supreme Court that there is no such thing as res judicata in income-tax
matters’ (Raja Bahadur Visheshwara Singh vs. CIT (1961) 41-ITR- 685 (SC); AIR
1961 SC 1062). Similarly, erroneous or mistaken views cannot fetter the
authorities into repeating them, by application of a rule such as estoppel, for
the reason that being an equitable principle, it has to yield to the mandate of
law. A deeper reflection would show that blind adherence to the rule of
consistency would lead to anomalous results, for the reason that it would
endanger the unequal application of laws, and direct the tax authorities to
adopt varied interpretations, to suit individual assessees, subjective to their
convenience – a result at once debilitating and destructive of the rule of law.
The rule of consistency cannot be of inflexible application.

1.2. Res judicata does not apply in matters pertaining to tax for different
assessment years because res judicata applies to debar courts from entertaining
issues on the same cause of action whereas the cause of action for each
assessment year is distinct. The courts will generally adopt an earlier
pronouncement of the law or a conclusion of fact unless there is a new ground
urged or a material change in the factual position. The reason why courts have
held parties to the opinion expressed in a decision in one assessment year to
the same opinion in a subsequent year is not because of any principle of res
judicata but because of the theory of precedent or precedential value of the
earlier pronouncement. Where the facts and law in a subsequent assessment year
are the same, no authority whether quasi-judicial or judicial can generally be
permitted to take a different view. This mandate is subject only to the usual
gateways of distinguishing the earlier decision or where the earlier decision
is per incuriam. However, these are fetters only on a co-ordinate Bench, which,
failing the possibility of availing of either of these gateways, may yet differ
with the view expressed and refer the matter to a Bench of superior
jurisdiction. In tax cases relating to a subsequent year involving the same
issues as in the earlier year, the court can differ from the view expressed if
the case is distinguishable as per incuriam, as held by the Apex Court in
Bharat Sanchar Nigam Ltd. vs. Union of India (2006) 282-ITR-273 (SC) at
276-277.

1.3. Estoppel normally means estopped from re agitating same issue. However,
it is settled position in law that there cannot be an estoppel against a
statute. There is no provision in the statute which permits a compromise
assessment. The above position was indicated by the apex court in Union of
India vs. Banwari Lal Agarwal (1999) 238-ITR-461 (S.C.).

2. Actus Curiae Neminem gravabit :

An act of the Court should not prejudice anyone and the maxim actus curiae
neminem gravabit is squarely applicable. It is the duty of the Court to see
that the process of the court is not abused and if the court’s process has been
abused by making a statement and the same court is made aware of it, especially
a writ court, it can always recall its own order, for the concession which
forms the base is erroneous. It is a well settled proposition of law that no
tax payer should suffer on account of inadvertent omission or mistake of an
authority, because to do justice is inherent and dispensation of justice should
not suffer. It is equally well settled that any order on concession has no binding
effect and there is no waiver or estoppel against statue.

3. Same word in different statues :

In interpreting a taxing statute, the doctrine of “aspect”
legislation must be kept in mind. It is a basic canon of interpretation that
each statute defines the expressions used in it and that definition should not
be used for interpreting any other statute unless in any other cognate statute
there is no definition, and the extrapolation would be justified as held by
Kerala High Court in All Kerala Chartered Accountants’ Association vs. Union of
India & Others (2002) 258-ITR-679 at 680. “A particular word occurring
in one section of the Act having a particular object, cannot carry the same
meaning when used in a different section of the same Act, which is enacted for
a different purpose. In other words, one word occurring in different sections
of the same Act can have different meanings, if the objects of the two sections
are different and they operate in different fields as held by the Supreme Court
in J.C.I.T. vs. Saheli Leasing and Industries Ltd. (2010) 324-ITR-170 at 171.

“The words and expressions defined in one statute as judicially
interpreted do not afford a guide to the construction of the same words or
expressions in another statute unless both the statutes are pari materia
legislations or it is specifically provided in one statute to give the same
meaning to the words as defined in another satute as held in Jagatram Ahuja vs.
C.I.T. (2000) 246-ITR-609 at 610 (SC).

4. Rules to yield to the Act :

Rules are made by the prescribed authority, while Act is enacted by the
Legislature, hence rules are subservient to the Act and cannot override the
Act. If there is conflict the Act would prevail over the rules. Rules are
subordinate legislation. Subordinate legislation does not carry the same degree
of immunity as enjoyed by a statute passed by a competent Legislature.
Subordinate legislation may be questioned on any of the grounds on which
plenary legislation is questioned; in addition, it may also be questioned on
the ground that it does not conform to the statute under which it is made. It
may further be questioned in the ground that it is inconsistent with the
provisions of the Act, or that it is contrary to some other statute applicable
in the same subject-matter. It may be struck down as arbitrary or contrary to
the statute if it fails to take into account vital facts which expressly or by
necessary implication are required to be taken into account by the statute or
the Constitution. Subordinate legislation can also be questioned on the ground
that it is manifestly arbitrary and unjust. It can also be questioned on the
ground that it violates article 14 of the Constitution of India as held in J.
K. Industries Ltd. and Another vs. Union of India (2008) 297-ITR-176 at
178-179.

5. Literal Interpretation & Casus Omissus :

The principles of interpretation are well-settled :
(i) a statute has to be read as a whole and the effort should be to give full
effect to all the provisions;
(ii) interpretation should not render any provision redundant or nugatory;
(iii) the provisions should be read harmoniously so as to give effect to all
the provisions;
(iv) if some provision specifically deals with a subject-matter, the general
provision or a residual provision cannot be invoked for that subject as held in
C.I.T. vs. Roadmaster Industries of India (P) Ltd. (2009) 315-ITR-66 (P&H).
Except where there is a specific provision of the Income-tax Act which
derogates from any other statutory law or personal law, the provision will have
to be considered in the light of the relevant branches of law as held in C.I.T.
vs. Bagyalakshmi & Co. (1965) 55-ITR-660 (SC).

5.1. When the language of a statute is clear and unambiguous, the courts are to
interpret the same in its literal sense and not to give a meaning which would
cause violence to the provisions of the statute, as held in Britania Industries
Ltd. vs. C.I.T. (2005) 278-ITR-546 at 547 (SC). It is a well settled principle
of law that the court cannot read anything into a statutory provision or a
stipulated condition which is plain and unambiguous. A statute is an edict of
the Legislature. The language employed in a statute is the determinative factor
of legislative intention. While interpreting a provision the court only
interprets the law and cannot legislate it. If a provision of law is misused
and subjected to the abuse of process of law, it is for the Legislature to
amend, modify or repeal it, if deemed necessary. Legislative casus omissus
cannot be supplied by judicial interpretative process.

A casus omissus ought not to be created by interpretation, save in some case of
strong necessity” as held in Union of India vs. Dharmendra Textiles
Processors and Others (2008) 306-ITR-277 at page 278 (SC).

5.2. I f the construction of a statutory provision on its plain reading leads
to a clear meaning, such a construction has to be adopted without any external
aid as held in C.I.T. vs. Rajasthan Financial Corporation (2007) 295-ITR-195
(Raj F.B.). A taxing statute is to be construed strictly : in a taxing statute
one has to look merely at what is said in the relevant provision. There is no
presumption as to a tax. Nothing is to be read in, nothing is to be implied.
There is no room for any intendment. There is no equity about a tax. In
interpreting a taxing statute the court must look squarely at the words of the
statute and interpret them. Considerations of hardship, injustice and equity
are entirely out of place in interpreting a taxing statute as held in Ajmera
Housing Corporation and Another vs. C.I.T. (2010) 326-ITR-642 (SC).

5.3. In construing a contract, the terms and conditions thereof are to be read
as a whole. A contract must be construed keeping in view the intention of the
parties. No doubt, the applicability of the tax laws would depend upon the
nature of the contract, but the same should not be construed keeping in view
the taxing provisions as held in Ishikawajima – Harima Heavy Industries Ltd.
vs. Director of Income-tax (2007) 288-ITR-408 (SC). The provisions of a section
have to be interpreted on their plain language and not on the basis of
apprehension of the Department. A statute is normally not construed to provide
for a double benefit unless it is specifically so stipulated or is clear from
the scheme of the Act as held in Catholic Syrian Bank Ltd. vs. C.I.T. (2012)
343-ITR-270 (SC). Where any deduction is admissible under two Sections and
there is no specific provision of denial of double deduction, deduction under
both the sections can be claimed and deserves to be allowed.

5.4. It is cardinal principle of interpretation that a construction resulting
in unreasonably harsh and absurd results must be avoided. The cardinal
principle of tax law that the law to be applied has to be the law in force in
the assessment year is qualified by an exception when it is provided expressly
or by necessary implication. That the law which is in force in the assessment
year would prevail is not an absolute principle and exception can be either
express or implied by necessary implication as held in C.I.T. vs. Sarkar
Builders (2015) 375-ITR-392 (SC)

5.5. The cardinal rule of construction of statutes is to read the statute
literally that is, by giving to the words used by legislature their ordinary
natural and grammatical meaning. If, however, such a reading leads to absurdity
and the words are susceptible of another meaning the Court may adopt the same.
But if no such alternative construction is possible, the Court must adopt the
ordinary rule of literal interpretation. It is well known rule of
interpretation of statutes that the text and the context of the entire Act must
be looked into while interpreting any of the expressions used in a statute The
Courts must look to the object, which the statute seeks to achieve while interpreting
any of the provisions of the Act. A purposive approach for interpreting the Act
is necessary.

5.6. It is a settled principle of rule of interpretation that the Court cannot
read any words which are not mentioned in the Section nor can substitute any
words in place of those mentioned in the section and at the same time cannot
ignore the words mentioned in the section. Equally well settled rule of
interpretation is that if the language of statute is plain, simple, clear and
unambiguous then the words of statute have to be interpreted by giving them
their natural meaning as observed in Smita Subhash Sawant vs. Jagdeshwari
Jagdish Amin AIR 2016 S.C. 1409 at 1416.

6. Interpretations – favourable to the tax payer to be adopted.

It is
well settled, if two interpretations are possible, then invariably the court
would adopt that interpretation which is in favour of the taxpayer and against
the Revenue as held in Pradip J. Mehta vs. C.I.T. (2008) 300-ITR-231 (SC).
While dealing with a taxing provision, the principle of ‘strict interpretation’
should be applied. The court shall not interpret the statutory provision in
such a manner which would create an additional fiscal burden on a person. It
would never be done by invoking the provisions of another Act, which are not
attracted. It is also trite that while two interpretations are possible, the
court ordinarily would interpret the provisions in favour of a taxpayer and
against the Revenue as held in Sneh Enterprises vs. Commissioner of Customs
(2006) 7-SCC-714.

7. Doctrine of Ejusdem generis :

Birds of the same feather fly to-gether. The rule of ejusdem generis is applied
where the words or language of which in a section is in continuation and where
the general words are followed by specific words that relates to a specific
class or category. The Supreme Court in the case of C.I.T. vs. Mcdowel and
Company Ltd. (2010 AIR SCW 2634) held : “The principle of statutory
interpretation is well known and well settled that when particular words
pertaining to a class, category or genus are followed by general words are
construed as limited to things of the same kind as those specified. This rule
is known as the rule of ejusdem generis. It applies when :

(1) the statute contains an enumeration of specific words;
(2) the subjects of enumeration constitute a class or category;
(3) that class or category is not exhausted by the enumeration;
(4) the general terms follow the enumeration; and
(5) there is no indication of a different legislative intent. The maxim ejusdem
generis is attracted where the words preceding the general words pertain to
class genus and not a heterogeneous collection of items as held in the case of
Housing Board, Haryana (AIR 1996 SC 434). Same view has been iterated in Union
of India vs. Alok Kumar AIR 2010 S.C. 2735.

7.1. General words in a statute must receive general construction. This is,
however, subject to the exception that if the subject-matter of the statute or
the context in which the words are used, so requires a restrictive meaning is
in permissible to the words to know the intention of the Legislature. When a
restrictive meaning is given to general words, the two rules often applied are
noscitur a sociis and ejusdem generis. Noscitur a sociis literally means that
the meaning of the word is to be judged by the company it keeps. When two or
more words which are susceptible of analogous meaning are coupled together,
they are understood to be used in their cognate sense. The expression ejusdem
generis – “of the same kind or nature” – signifies a principle of
construction whereby words in a statute which are otherwise wide but are
associated in the text with more limited words are, by implication given a
restricted operation and are limited to matters of the same class of genus as preceding
them.

8. “Mutatis Mutandis” & “As if” :

Earl Jowitt’s ‘The Dictionary of English Law 1959) defines ‘mutatis mutandis’
as ‘with the necessary changes in points of detail’. Black’s Law Dictionary
(Revised 4th Edn, 1968) defines ‘mutatis mutandis’ as ‘with the necessary
changes in points of detail, meaning that matters or things are generally the
same, but to be altered when necessary, as to names, offices, and the like…..
‘Extension of an earlier Act mutatis mutandis to a later Act, brings in the idea
of adaptation, but so far only as it is necessary for the purpose, making a
change without altering the essential nature of the things changed, subject of
course to express provisions made in the later Act. It is necessary to read and
to construe the two Acts together as if the two Acts are one and while doing so
to give effect to the provisions of the Act which is a later one in preference
to the provisions of the Principal Act wherever the Act has manifested an
intention to modify the Principal Act.

8.1. “The expression “mutatis mutandis” itself implies
applicability of any provision with necessary changes in points of detail. The
phrase “mutatis mutandis” implies that a provision contained in other
part of the statute or other statutes would have application as it is with
certain changes in points of detail as held in R.S.I.D.I. Corpn. vs. Diamond
and Gen Development Corporation Ltd. AIR 2013 SC 1241.

8.2. The expression “as if”, is used to make one applicable in
respect of the other. The words “as if” create a legal fiction. By
it, when a person is “deemed to be” something, the only meaning
possible is that, while in reality he is not that something, but for the
purposes of the Act of legislature he is required to be treated that something,
and not otherwise. It is a well settled rule of interpretation that, in
construing the scope of a legal fiction, it would be proper and even necessary,
to assume all those facts on the basis of which alone, such fiction can
operate. The words “as if”, in fact show the distinction between two
things and, such words must be used only for a limited purpose. They further
show that a legal fiction must be limited to the purpose for which it was
created. “The statute says that you must imagine a certain state of affairs;
it does not say that having done so, you must cause or permit your imagination
to boggle when it comes to the inevitable corollaries of that state of
affairs”. “It is now axiomatic that when a legal fiction is
incorporated in a statute, the court has to ascertain for what purpose the
fiction is created. After ascertaining the purpose, full effect must be given
to the statutory fiction and it should be carried to its logical conclusion.
The court has to assume all the facts and consequences which are incidental or
inevitable corollaries to giving effect to the fiction. The legal effect of the
words ‘as if he were’ in the definition of owner in section 3(n) of the
Nationalisation Act read with section 2(1) of the Mines Act is that although
the petitioners were not the owners, they being the contractors for the working
of the mine in question, were to be treated as such though, in fact, they were
not so”, as held in Rajasthan State Industrial Development and Investment
Corporation vs. Diamond and Gem Development Corporation Ltd. AIR-2013-1241 at
1251.

9. Approbate and Reprobate :

A party cannot be permitted to “blow hot-blow cold”, “fast and
loose” or “approbate and reprobate”. Where one knowingly accepts
the benefits of a contract, or conveyance, or of an order, he is estopped from
denying the validity of, or the binding effect of such contract, or conveyance,
or order upon himself. This rule is applied to ensure equity, however, it must
not be applied in such a manner, so as to violate the principles of, what is
right and, of good conscience. It is evident that the doctrine of election is
based on the rule of estoppel the principle that one cannot approbate and
reprobate is inherent in it. The doctrine of estoppel by election is one among
the species of estoppels in pais (or equitable estoppel), which is a rule of
equity. By this law, a person may be precluded, by way of his actions, or
conduct, or silence when it is his duty to speak, from asserting a right which
he would have otherwise had.

10. Legal Fiction – Deeming Provision :

Legislature is competent to create a legal fiction, for the purpose of assuming
existence of a fact which does not really exist. In interpreting the provision
creating a legal fiction, the Court is to ascertain for what purpose the
fiction is created and after ascertaining this, the Court is to assume all
those facts and consequences which are incidental or inevitable corollaries to
the giving effect to the fiction. This Court in Delhi Cloth and General Mills
Company Limited vs. State of Rajasthan : (AIR 1996 SC 2930) held that what can
be deemed to exist under a legal fiction are facts and not legal consequences
which do not flow from the law as it stands. When a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the Court is entitled and bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to.

10.1. It would be quite wrong to carry this fiction beyond its originally
intended purpose so as to deem a person in fact lawfully here not to be here at
all. The intention of a deeming provision, in laying down a hypothesis shall be
carried so far as necessary to achieve the legislative purpose but no further.
“When a Statute enacts that something shall be deemed to have been done,
which, in fact and truth was not done, the Court is entitled and bound to
ascertain for what purposes and between what persons the statutory fiction is
to be resorted to”. “If you are bidden to treat an imaginary state of
affairs as real, you must surely, unless prohibited from doing so, also imagine
as real the consequences and incidents, which, if the putative state of affairs
had in fact existed, must inevitably have flowed from or accompanied it…. The Statute
says that you must imagine a certain state of affairs; it does not say that
having done so, you must cause or permit your imagination to boggle when it
comes to the inevitable corollaries of that state of affairs”. In The
Bengal immunity Co.Ltd. vs. State of Bihar and Others AIR 1955 SC 661, the
majority in the Constitution Bench have opined that legal fictions are created
only for some definite purpose.

10.2. In State of Tamil Nadu vs. Arooran Sugars Ltd. AIR 1997 SC 1815 : the
Constitution Bench, while dealing with the deeming provision in a statute,
ruled that the role of a provision in a statute creating legal fiction is well
settled, and eventually, it was held that when a statute creates a legal
fiction saying that something shall be deemed to have been done which in fact
and truth has not been done, the Court has to examine and ascertain as to for
what purpose and between which persons such a statutory fiction is to be
resorted to and thereafter, the courts have to give full effect to such a statutory
fiction and it has to be carried to its logical conclusion. The principle that
can be culled out is that it is the bounden duty of the court to ascertain for
what purpose the legal fiction has been created. It is also the duty of the
court to imagine the fiction with all real consequences and instances unless
prohibited from doing so. That apart, the use of the term ‘deemed’ has to be
read in its context and further the fullest logical purpose and import are to
be understood. It is because in modern legislation, the term ‘deemed’ has been
used for manifold purposes. The object of the legislature has to be kept in
mind.

shailesh.kwebmaker

THE FINANCE ACT, 2016

1. Back ground:

The Finance Minister, Shri Arun Jaitley, presented his third Budget with the Finance Bill, 2016, in the Lok Sabha on 29th February, 2016. After some discussions, the Parliament has passed the Budget with some amendments. The President has given his assent to the Finance Act, 2016, on 14th May, 2016. There are in all 241 Sections in the Finance Act, 2016, which include 115 sections which deal with amendments in the Income tax Act, 1961. The Finance Minister has divided his tax proposals in nine categories such as (i) Relief to small tax payers (ii) Measures to boost growth and employment generation (iii) Incentivising domestic value addition to help Make in India (iv) Measures for moving towards a pensioned society (v) Measures for promoting affordable housing (vi) Additional resource mobilization for agriculture, rural economy and clean environment (vii) Reducing litigation and providing certainty in taxation (viii) Simplification and rationalization of taxation and (ix) Use of Technology for creating accountability.

1.1 It will be noticed that one of the objectives stated above is “Reducing Litigation and providing certainty in taxation.” In this context, Paragraphs 163 to 165 of the Budget Speech outline his “Dispute Resolution Scheme”.

1.2 One of the important features of this year’s Budget is that a “Income Declaration Scheme, 2016,” has been announced in Sections 181 to 199 of the Finance Act, 2016. .

1.3 In Para 187 of the Budget Speech he has stated that the Direct Tax Proposals will result in revenue loss of Rs.1,060 Cr., and Indirect Tax Proposals will yield additional revenue of Rs.20,670 Cr. Thus the net revenue gain from this year’s proposals will be of Rs.19,610 Cr.

1.4 In this article some of the important amendments made in the Income tax Act by the Finance Act, 2016, have been discussed. These amendments have only prospective effect.

2. Rates of taxes:

2.1 There are no changes in the tax slabs, rates of Income tax or rates of education cess for all categories of assesses, other than companies. As per the announcement made earlier, in this Budget a beginning to reduce the corporate rates in a phased manner has been made. In the case of an Individual, HUF, AOP and BOI whose total income is more than Rs. 1 crore, the surcharge has been increased from 12% to 15%. This has been done to tax the super rich Individuals, HUF etc. There is no change in rate of surcharge in other cases.

In the case of a Resident Individual having total income not exceeding Rs. 5 Lakh Rebate Upto Rs. 2,000/- or tax payable whichever is less is allowable upto A.Y. 2016- 17. This Rebate in now increased upto Rs. 5,000/- or tax payable, whichever is less, for A.Y. 2017-18.

2.2 The surcharge on income tax will be as under in A.Y. 2016-17 and 2017-18:

Note: The rate of surcharge on Dividend Distribution Tax u/s 115- 0, Tax payable on Buy back of Shares u/s 115-QA and Income Distribution tax payable by M.F u/s 115R is 12% as in earlier years.

The existing rate of 3% of Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and Surcharge will continue in A.Y. 2017-18.

2.3 In view of the above, the effective maximum marginal rate of tax
(including Surcharge and Education Cess) will be as under in A.Y. 2017 – 18:

2.4 I n the case of a Domestic Company, which is newly set up on or after 1.3.2016, engaged in the business of Manufacture or Production and Research in relation to, or distribution of articles manufactured or produced by it, the rate of Income tax for A.Y. 2017-18 will be 25% plus applicable surcharge and education cess. This will be subject to following conditions stated in new section 115 BA

(i) Such company shall not be entitled to claim deduction u/s 10AA, 32(1)(iia), 32 AC, 32AD, 33AB, 33ABA, 35(1)(ii), (iia), (iii), (2AA), 2(AB), 35AC, 35AD, 35CCC, 35CCD as well as under Chapter VIA Part C i.e. sections 80H, to 80RRB (excluding section 80 JJAA).

(ii) Such company will not be entitled to claim set off of loss carried forward from earlier years if the same is attributed to the above deductions. Such carried forward loss shall be deemed to have been allowed and will not be allowed in any subsequent year.

(iii) Depreciation u/s 32 {other than u/s 32(1)(iia)} shall be deducted in the manner as may be prescribed.

(iv) The above concessional rate u/s 115 BA will be available at the option of the assessee company. Such option is to be exercised before the due date for filing Return of Income for the first year after incorporation of the company. Further, such option once exercised, cannot be withdrawn by the company in any subsequent year.

2.5 A new section 115 BBDA has been inserted w.e.f. A.Y. 2017-18 (F.Y 2016-17). This section provides that in the case of any resident individual, HUF or a Firm (including LLP) if the total income for A.Y. 2017-18 and onwards includes Dividend from domestic company or companies, in excess of Rs. 10 Lakh, the dividend upto Rs 10 Lakh will be exempt u/s 10(34) but the excess over Rs 10 Lakh will be chargeable to tax at the rate of 10% plus applicable surcharge and education cess. It is also provided that no deduction in respect of any expenditure or allowance or set off of loss shall be allowed under any provision of the Income tax Act against such dividend.

2.6 Section 115JB is amended from A.Y:2017-18 to provide that in the case of a Company located in International Financial Services Centre and deriving its income solely in convertible Foreign Exchange, the MAT u/s 115JB shall be chargeable at the rate of 9% instead of 18.5%.

3. Tax deduction at source:

3.1 The Income tax Simplification Committee, under the Chairmanship of Justice R.V. Easwar, has suggested in its Interim Report that the provisions relating to tax deduction at source (TDS) should be simplified.

The committee has suggested higher threshold limits and lower rates for TDS in respect of payment u/s 193 to 194 LD. The Finance Minister has accepted this recommendation only partially and amended various sections of the Income tax Act for TDS w.e.f. 1.6.2016 as under:

(i) Revision in Threshold Limit for tds unde r variou s sections.

(ii) Revision in Rates of tds under various Sections

(iii) Provision for TDS under Section 194 K (Income in respect of Units) and section 194L (Payment of compensation on acquisition of capital Asset) deleted w.e.f. 1.6.2016.

3.2 The provisions for issue of certificates for lower or non-deduction of tax at source by an assessing officer u/s 197 have been extended with effect from 1st June, 2016, to cover income payable to a unit holder in respect of units of alternate investment funds (AIFs Category I or II), which is subject to TDS u/s 194LBB, and income payable to a resident investor in respect of investment in a securitization trust, which is subject to TDS u/s 194LBC.

3.3 The provision for non- deduction of TDS on issue of a declaration u/s 197A, has been extended to cover payments of rent, on which tax is deductible u/s 194-I, with effect from 1st June, 2016.

3.4 Section 206AA provides for higher rate of TDS at either the prescribed rate or at the rate of 20%, whichever is higher, if the payee does not furnish his Permanent Account Number to the payer. There has been litigation as to whether this provision applies to foreign companies and non-residents. With effect from 1st June, 2016, the provisions of this section will not apply to a foreign company or to a non-resident in respect of payment of interest on long-term bonds referred to in Section 194 LC or any other payment subject to prescribed conditions. The Finance Minister has announced that any payment to Non-Resident will not attract the higher rate of TDS (i.e 20%) u/s 206AA if any alternate document, as may be prescribed, is furnished.

3.5 TAX COLLECTION AT SOURCE (TCS ): Section 206C has been amended w.e.f. 1.6.2016 to provide as under:

(i) u/s 206C (1D), at present, tax is to be collected by seller of bullion or jewellery at 1% if the payment is made by the purchaser of bullion (exceeding Rs 2 Lakh) or Jewellery (exceeding Rs. 5 Lakh).

(ii) The above requirement of TCS is now enlarged from 1.6.2016 to the effect that the seller will have to collect tax @ 1% if purchase of any other goods or services for amount exceeding Rs 2,00,000/- is made and the purchaser / service receiver makes payment for the same in cash. It may be noted that this provision will not apply to payments by such class of buyers who comply with the conditions as may be prescribed. It is also provided that the above requirement of TCS will not apply where tax is required to be deducted at source by the payer under chapter XVII-B of the Income tax Act.

(iii) New clause (IF) added in this section provides that w.e.f. 1.6.2016 seller of a Motor Vehicle of the value exceeding 10 Lacs will have to collect from the buyer tax @ 1% of the sale consideration. This provision for TCS will apply even if payment for purchase of Motor vehicle is made by cheque.

(iv) The above provisions have been made to enable the Government to bring high value transactions in the tax net.

4. Exemptions and Deductions:

In order to give benefit to assessees certain amendments are made in the Income tax Act as under:

4.1 Section 10 – Income not included in total income: This section is amended from A.Y. 2017-18 (F.Y. 2016-17) as under:

(i) SECTION 10(12A) – This is a new provision. At present deduction is available for contribution made to National Pension Scheme (NPS) u/s 80 CCD. Withdrawal of such contribution along with the accumulated income from the NPS on account of closure or opting out of NPS is taxable in the year of withdrawal if deduction was claimed in the earlier years.

It is now provided that out of any such withdrawal from NPS, 40% of the amount will be exempt u/s 10(12A). However, the whole amount received by the nominee on death of the assessee under the circumstances referred to in section 80CCD (3) (a) shall be exempt from tax. Section 80CCD (3) is also amended for this purpose.

(ii) SECTION 10(13) – At present, any payment from an approved superannuation fund to an employee on his retirement is exempt from tax. The scope of this exemption is now extended by new subclause (v) to transfer of an amount to the account of the assessee under NPS as referred to in section 80CCD and notified by the Government.

(iii) SECTION 10(15) – At present, interest on Gold Deposit Bonds issued under Gold Deposit Scheme 1999 is exempt. It is now provides that interest on Deposit Certificates issued under the Gold Monetization Scheme, 2015, will also be exempt from tax.

A consequential amendment is made in section 2(14) that such Deposit Certificates issued under the above scheme will not be considered as a Capital Asset. Therefore, any gain on transfer of such Deposit Certificates will also be exempt from Capital Gains tax.

(iv) SECTION 10(23FC) – At present interest received by a Business Trust from a Special Purpose Vehicle is exempt from tax. It is now provided that Dividend received by such Trust from a Specified Domestic Company as referred to in the newly inserted clause (7) of section 115-0 will also be exempt from tax.

(v) SECTION 10(38) – This section grants exemption from tax in respect of long – term capital gain from transfer of equity share where STT is paid. It is now provided that in respect of long term capital gain arising from transfer of equity shares through a recognized Stock Exchange Located in International Financial Service Centre (IFSC), where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

(vi) SECTION 10(48A) – This is a new provision. It is now provided that income of a Foreign Company on account of storage of Crude Oil in India and sale of such Crude Oil to any person resident in India will not be taxable. This is subject to terms and conditions of the agreement entered into with the Central Government.

(vii) SECTION 10(50) – This is a new provision. It provides that income arising from specified services as stated in chapter VIII (Sections 160 to 177) of the Finance Act, 2016, shall be exempt from tax. Chapter VIII deals with “Equalization Levy”. This provision will be applicable after the above Chapter VIII of the Finance Act, 2016 comes into force.

4.2 SECTION 10AA – DEDUCTION TO SEZ UNITS : This section grants 100% deduction to income of newly established units in SEZ (i.e eligible business) which begin activity of manufacture, production or rendering services on or after 1.4.2006. This is subject to conditions provided in section 10AA. Now a sun-set clause is added in this section whereby such Units which commence such eligible business on or after 1.4.2021 will not be able to claim deduction under section 10AA.

4.3 SECTION 17 – PERQUISITES: At present, u/s 17(2)(vii) contribution to approved Superannuation Fund by the employee upto Rs. 1 Lakh is exempt from tax. This limit is now increased to Rs.1.5 Lakh from A.Y. 2017 – 18.

4.4 SECTION 80EE – DEDUCTION FOR INTEREST ON LOAN FOR RESIDENTIAL HOUSE: The existing section 80EE granted deduction for interest on housing loan to a limited extent. This section is replaced w.e.f. A.Y. 2017-18 to provide for deduction upto Rs. 50,000/- in respect of interest on Housing Loan taken by an individual from the Financial Institution or Housing Finance Company if the following conditions are complied with.

(i) Loan should be sanctioned during 1.4.2016 to 31.3.2017.

(ii) Loan amount should not exceed Rs.35 Lakh and the value of the Residential House should not exceed Rs 50 Lakh.

(iii) The assessee should not own any other Residential House on the date of sanction of the Loan.

(iv) The above deduction can be claimed in A.Y. 2017- 18 and in subsequent years.

It may be noted that the above deduction can be claimed even if the Residential House is not for self occupation and is let out. Further, the above deduction can be claimed in addition to deduction of interest upto Rs. 30,000/- (Rs 2 Lakh in specified cases) allowable for interest on housing loan for self-occupied residential house property.

4.5 SECTION 80GG – DEDUCTION FOR RENT : At present, an assessee can claim deduction for expenditure incurred on Rent for Residential House occupied by himself if he is not in receipt of House Rent Allowance from his employer subject to certain conditions. This deduction is limited to Rs 2,000/- P.M. or 25% of total income or actual rent paid in excess of 10% of total income whichever is less. The above limit of Rs 2,000/- P.M. is now increased to Rs 5,000/- P.M. effective from A.Y. 2017-18.

4.6 SECTION 80-IA – DEDUCTION TO INFRASTRUCTURE UNDERTAKINGS: Section 80 – 1A(4) grants exemption to infrastructure undertakings subject to certain conditions. It is now provided that this exemption will not be available to an undertaking which starts the development or operation and maintenance of the infrastructure facility on or after 1.4.2017.

4.7 SECTION 80 – IA B – DEDUCTION TO INDUSTRIAL UNDERTAKING: By amendment of this section it is provided that the provisions of Section 80-IAB shall not apply to an assessee, being a Developer, where the development of SEZ begins on or after 1.4.2017.

4.8 SECTION 80 – IAC – THE INCENTIVES FOR START UPS:

(i) With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, this new section is inserted w.e.f. A.Y. 2017-18. It provides for 100% deduction of the profits and gains derived by an Eligible Start-UP (Company or LLP) from a business involving Innovation, Development, Deployment or Commercialization of new products, processes or services driven by technology or intellectual property. This deduction is available at the option of the assessee for any three consecutive assessment years out of five years starting from the date of incorporation.

(ii) Eligible start-up means a company or LLP incorporated between 1.4.2016 to 31.3.2019. The turnover of the business should be less than Rs 25 Crores in any of the years between 1.4.2016 to 31.3.2021. Further, such company / LLP should hold a certificate for eligible business from the Inter Ministerial Board of Certification.

(iii) It is necessary to ensure that such start-up is not formed by splitting up or reconstruction of a business already in existence or by transfer of machinery or plant previously used for any other purpose, subject to certain exceptions provided in the section.

(iv) With a view to encourage an Individual or HUF to invest in such a start-up company or LLP, section 50 GB has been amended to grant exemption from Capital Gain Tax if the capital gain on sale of Residential House is invested in such a company or LLP. Similarly, a new section 54 EE has been inserted to grant deduction upto Rs. 50 Lacs if investment is made in such a company or LLP out of capital gain arising on transfer of long term specified asset.

4.9 SECTION 80 – IB – DEDUCTION TO CERTAIN INDUSTRIAL UNDERTAKINGS:
The deduction granted to certain specified Industrial Undertakings stated in Section 80 – 1B(9)(ii),(iv) and (v) will be discontinued in respect of Industrial undertakings started on or after 1.4.2017.

4.10 SECTION 80 – IBA – DEDUCTION TO CERTAIN HOUSING PROJECTS

This is a new section which provides for 100% deduction in respect of profits and gains of eligible Housing Projects of Affordable Residential Units from A.Y. 2017-18. The section applies to assessees engaged in developing and building Housing Projects approved by the competent Authority after 1.6. 2016 but before 1.4.2019. This deduction is subject to following conditions:

(i) The project is completed within a period of three years from the date on which the building plan of such project is first approved and it shall be deemed to have been completed only when certificate of completion of project is obtained from the Competent Authority.

(ii) The built-up area of the shops and commercial establishments does not exceed 3% of the aggregate built up area.

(iii) If the project is located in Delhi, Mumbai, Chennai or Kolkata or within 25 km from the municipal limits of these cities:

(a) It is on a plot of land measuring not less than 1000 sq. meters

(b) The residential unit does not exceed 30 square meters and

(iv) If the project is located in any other area:

(a) It is on a plot of land measuring not less than 2,000 sq. meters

(b) The residential unit does not exceed 60 square meters and

(v) In both above cases the project is the only project on the land specified above.

(vi) The assessee maintains separate books of account.

(vii) If the housing project is not completed within the specified period of three years, deduction availed in the earlier years will be taxed in the year in which the period of completion expires. The definitions, of certain terms such as ‘housing project’, ’ built-up area’ etc. are also given in section 80-IBA(6)

(viii) The benefit under this section is not available to a person who executes the Housing Project as a works contract awarded by any other person (including any state or Central Government)

4.11 SECTION 80JJAA – INCENTIVE FOR EMPLOYMENT GENERATION:

At present, an assessee engaged in manufacture of goods in a factory can claim deduction of 30% of additional wages paid to new regular workmen for 3 assessment years. This deduction can be claimed in respect of additional wages paid to a workman employed for 300 days or more in the relevant year. Further, there should be an increase of at least 10% in the existing workforce employed on the last date of the preceding year. The existing section will apply in A.Y. 2016-17 and earlier years. New Section 80JJAA has been inserted w.e.f. AY 2017-18.

This new section applies to all assesses who are required to get their accounts audited u/s 44AB. The deduction allowable is 30% of additional employee cost for a period of 3 assessment years from the year in which such additional employment is provided. This deduction is subject to the following conditions:

(i) The business should not be formed by splitting up, or the reconstruction of an existing business.

(ii) The business should not be acquired by the assessee by way of transfer from any other business or as a result of any business reorganization.

(iii) Additional employee cost means total emoluments paid to additional employees employed during the year. However, in the first year of a new business, emoluments paid or payable to employees employed during the previous year shall be deemed to be the additional employee cost. Accordingly, deduction will be allowed on that basis in such a case.

(iv) No deduction will be available in case of existing business, if there is no increase in number of employees during the year as compared to number of employees employed on the last day of the preceding year or the emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system.

(v) Additional employee would not include employee whose total emoluments are more than Rs. 25,000 per month or an employee whose entire contribution under Employees’ Pension Scheme notified in accordance with Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, is paid by the Government or if an employee has been employed for less than 240 days in a year or the employee does not participate in recognized provident fund.

(vi) Emoluments means all payments made to the regular employees. This does not include contribution to P.F., Pension Fund or other statutory funds. Similarly, it does not include lump-sum payable to employee on termination of service, Superannuation, Voluntary Retirement etc.

(vii) The assessee will have to furnish Audit Report from a Chartered Accountant in the prescribed form.

4.12 FOURTH SCHEDULE – PART A: Rule 8 of this Schedule is amended from A.Y:2017-18 to grant exemption to the employee if the entire balance standing to the credit of the employee in a recognized Provident Fund is transferred to his account in the National Pension Scheme referred to in Section 80CCD.

5. CHARITABLE TRUSTS:

5.1 A new chapter XII – EB (Sections 115 TD, 115 TE and 115TF) has been inserted in the Income tax Act effective from 1.6.2016. The provisions of these sections are very harsh and are likely to create great hardship to trustees of charitable trusts. In the Explanatory Memorandum to Finance Bill, 2016, it is explained that “there is no provision in the Income tax Act which ensure that the corpus and asset base of a trust accreted over a period of time, with promise of it being used for charitable purpose, continues to be utilized for charitable purposes. In the absence of a clear provision, it is always possible for charitable trusts to transfer assets to a non-charitable trust. In order to ensure that the intended purpose of exemption availed by the trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an Exist Tax which is attracted when the charitable organization is converted into a non-charitable organization”. It appears that the stringent provisions in section 115TD to 115 TF have been inserted to achieve this objective. This is another blow to charitable trusts. Since these sections apply to all trusts and institutions registered u/s 12A/12AA which claim exemption u/s 10(23C) or 11, they will apply to all charitable or religious trusts claiming exemption u/s 11 and education institutions, hospitals etc., claiming exemption u/s 10(23C).

5.2 Broadly stated these sections provide as under:

(i) A trust or an institution shall be deemed to have been converted into any form not eligible for registration u/s 12AA in a previous year, if,

(a) The registration granted to it u/s 12AA has been cancelled; or

(b) It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has not applied for fresh registration u/s 12AA in the said previous year; or has filed application for fresh registration u/s 12AA but the said application has been rejected.

(ii) Under the Section 115TD, it has been provided that the accretion in income (accreted income) of the trust or institution will be taxable on

(a) Conversion of trust or institution into a form not eligible for registration u/s 12 AA, or

(b) On merger into an entity not having similar objects and registered u/s 12AA, or

(c) On non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved u/s 10(23C) within a period of twelve months from end of month of dissolution. The accreted income will be the amount of aggregate of total assets as reduced by the liability as on the specified date.

(iii) The assets and the liability of the charitable organization which has been transferred to another charitable organization within specified time would be excluded while calculating the accreted income. Similarly, any asset which is directly acquired out of Agricultural Income of the Trust or institution will be excluded while computing accreted income. It is not clear whether Agricultural Land Settled in Trust or received by the Trust by way of Donation will be excluded from such computation.

(iv) Any asset acquired by the Trust or Institution during the period before registration is granted u/s 12A / 12AA and no benefit u/s 11 has been enjoyed during this period, will be excluded from the above computation of accreted income.

(v) The method of valuation of such assets / liability will be prescribed by Rules.

(vi) The accreted income will be taxable at the maximum marginal rate (i.e. 30% plus applicable surcharge and education cess) in addition to any income chargeable to tax in the hands of the entity. This tax will be the final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it will be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

(vii) The principal officer or trustee of the trust has to deposit the above tax within 14 days of the due date as under:

(a) Date on which the time limit to file appeal to the Tribunal u/s 253 against order cancelling Registration u/s 12AA expires if no appeal is filed.

(b) If such appeal is filed but the Tribunal confirms such cancellation, the date on which Tribunal order is received.

(d) When the period of 12 months end from the date of dissolution of trust if the assets are not transferred to an entity registered u/s 12A / 12AA.

(viii) Section 115 TE provides that if there is delay in payment of the above Exist Tax, the person responsible for payment of such tax will have to pay interest at the rate of 1% P.M. or part of the month.

5.3 Section 115TF provides that the principal officer or any trustee of the trust will considered as assessee in default if the above tax and interest is not paid before the due date. In other words, they can be made personally responsible for payment of such tax and interest. It is also provided that the non-charitable entity with which the trust has merged or to whom the assets of the trust are transferred will also be liable to pay the above exist tax and interest. However, the liability of such an entity will be limited to the value of the assets of the trust transferred to such entity.

6. INCOME FROM HOUSE PROPERTY:

6.1 Under Section 24 (b) interest paid on loan taken on or after 1-4-1999 for acquiring or constructing a residential house for self occupation is allowed as deduction subject to the limit of Rs.2 Lakh. This deduction is available provided the acquisition or construction is completed within 3 years from the end of the financial year in which loan was taken. By amendment of this section this period is now extended to 5 years from A.Y. 2017-18.

6.2 Existing Sections 25A, 25AA and 25B dealing with taxation of unrealised rent are now consolidated into a new section 25A from A.Y. 2017-18. The new section provides that arrears of rent or amount of unrealised rent which is received by the assessee in subsequent years shall be chargeable to tax as income of the financial year in which such rent is received. This amount will be taxable in the year of receipt whether the assessee is owner of the property or not. The assessee will be entitled to claim deduction of 30% of such arrears of rent which is taxable on receipt basis.

7. INCOME FROM BUSINESS OR PROFESSION:

7.1 INCOME-SECTION 2(24)(XVIII ): The definition of “income” u/s 2(24) was widened by insertion of clause (xviii) last year. Under this definition any receipt from the Government or any authority, body or agency in the form of subsidy, grant etc., is considered as income. However, if any subsidy, grant etc., is required to be deducted from the cost of any asset under Explanation (10) of section 43(1) is not considered as income. Amendment in the section, effective from A.Y.2017-18, now provides that any subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or the State Government will not be considered as income. It may be noted that u/s 2(24) (xviii) no destinction is made between Government Grants of a capital nature and revenue grants. From the wording of the section it is not clear as to whether subsidy or grant received to set up any business or to complete a project will be exempt as held by the Supreme Court in the case of Sahney Steel and Press Works Ltd vs. CIT (228 ITR 253). Further, from the amendment made this year, it is not clear whether subsidy or grant by a State Government for the purpose of corpus of a trust or Institution established by the Government will be exempt.

7.2 NON-COMPETE FEES RECEIVABLE BY A PROFESSIONAL – SECTION 28(VA): At present a Noncompete Fees receivable in cash or kind is chargeable to tax in the case of a person carrying on a Business u/s 28(va). This section is amended w.e.f. A.Y. 2017-18 to extend this provision to a person carrying on a profession. Consequential amendment is also made in section 55 to treat cost of acquisition or cost of improvement as ‘NIL’ in the case of right to carry on any profession. In view of this, any amount received on account of transfer of right to carry on any profession will be taxable as capital gains.

7.3 ADDITIONAL DEPRECIATION – SECTION 32(1)(IIA ) : At present benefit of Additional Depreciation at 20% of actual cost of new plant and machinery is available to the assessee engaged in generation or generation and distribution of power. It is now provided that from A.Y. 2017-18 the benefit can be claimed also by an assessee engaged in Generation, Transmission or Distribution of power.

7.4 INVESTMENT ALLOWANCE – SECTION 32 AC : This section was amended by the Finance (No.2) Act, 2014 w.e.f. A.Y 2015-16. At present it provides for deduction of 15% of cost of new plant and machinery acquired and installed during the year if the total cost of such plant & machinery is more than Rs.25 crore. From reading the section it was not clear whether the benefit of the section can be claimed only if the plant or machinery is purchased and installed in the same year. By amendment of this section, effective from A.Y. 2016-17, it is now provided that even if the plant or machinery is acquired in one yare but installed in a subsequent year, the benefit of deduction can be claimed in the year of installation. Therefore, if the new plant or machinery is acquired in an earlier year but installed on or before 31.3.2017, deduction can be claimed in the year of installation.

7.5 WEIGHTED DEDUCTION FOR SPECIFIED PURPOSES:

In line with the Government policy for reduction of rates of taxes in a phased manner and reduction of incentives provided in the Income tax Act, section 35,35AC, 35AD, 35CCC and 35CCD have been amended w.e.f. A.Y 2018- 19 as under:

7.6 EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM – SECTION 35ABA: (i) This is a new section inserted w.e.f. A.Y. 2017-18. It provides for deduction for capital expenditure incurred for acquiring any right to use spectrum for telecommunication services. The actual amount paid will be allowed to be spread over the period of right to use the license and allowed as a deduction in each year. This deduction will be allowed starting from the year in which the spectrum fee is paid. If such fee is paid before the business to operate telecommunication services is started, deduction will be allowed from the year in which business commences. It is also provided that provisions of section 35ABB(2) to (8) relating to transfer of licence, amalgamation and demerger will apply to spectrum also.

(ii) It is also provided that if deduction is claimed and granted for part of the capital expenditure, as stated above, in any year, the same will be withdrawn in any subsequent year if there is failure to comply with any of the provisions of this section. Such withdrawal can be made by rectification of the earlier assessments u/s 154.

7.7 DEDUCTION FOR EXPENDITURE ON SPECIFIED BUSINESS – SECTION 35AD: (i) At present, deduction of 100% of capital expenditure is allowed in the case of an assessee engaged in certain

specified business listed in section 35AD(8). In respect of business listed in section 35AD (i),(ii),(v), (vii) and (viii) such deduction is allowed at 150% of the capital expenditure. From A.Y. 2018-19 such expenditure will be allowed at 100% only.

(ii) Further, the list of specified business in section 35AD(8) has been expanded. By this amendment, effective from A.Y. 2018-19, capital expenditure in the business of “Developing or Maintaining and Operating or Developing, Maintaining and Operating a new Infrastructure facility” which commences operation on or after 1.4.2017 will be entitled to the benefit u/s 35AD. This is subject to the condition that such business is owned by (i) an Indian Company or a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act and (ii) such entity has entered into an agreement with the Central or State Government or Local authority or any Statutory body Developing, Maintaining etc., of the new Infrastructure facility.

7.8 NBFC – DEDUCTION FOR PROVISION FOR DOUBTFUL DEBTS – SECTION 36(1),(VIIIA )
Deduction for provision for Bad and Doubtful Debts is allowed at present to Banks u/s 36(1)(viiia) subject to certain conditions. This benefit is now extended to a NBFC also. This amendment is effective from A.Y. 2017- 18. This deduction cannot exceed 5% of the total income computed before making deduction under this section and deduction under Chapter VI A.

7.9 DISALLOWANCE OF EQUALISATION LEVY – SECTION 40(a): This is a new provision which is effective from 1.6.2016. Chapter VIII of the Finance Act, 2016, provides for payment of Equalisation Levy on certain payments to Non-Residents for specified services. Now, section 40(a)(ib) provides that if this Levy is not deposited with the Government before the due date for filing Return of Income u/s 139(1), deduction for the payment to Non- Resident will not be allowed to the assessee. If the above Levy is deposited after the such due date for filing Return of Income, the deduction for the payment to Non-Resident will be allowed in the year of deposit of this Levy with the Government.

7.10 DEDUCTION ON ACTUAL PAYMENT – SECTION 43B: This section is amended w.e.f. A.Y. 2017- 18 to provide that any amount payable to Indian Railways for use of Railway Assets will be allowed only in the year in which actual payment is made. However, if such actual payment is made before the due date for filing the Return of Income u/s 139(1), for the year in which it was payable, deduction will be allowed in the year in which the amount was payable. This provision will apply to rent payable in premises of Indian Railways taken on rent or such similar transactions.

7.11 TAX AUDIT – SECTION 44AB: At present a person carrying a profession is required to get his accounts audited if his gross receipts exceed Rs.25 Lakh in any Financial Year. This limit is increased to Rs.50 Lakh from A.Y. 2017-18. In a case where the profits are not declared in accordance with provisions of section 44AD (Business) or 44ADA (Profession) the assessee will have to get the accounts audited u/s 44AB irrespective of the amount of turnover or gross receipts.

7.12 PRESUMPTIVE BASIS OF COMPUTING BUSINESS INCOME – SECTION 44AD:

(i) This section provides for computation of Business Income in the case of an eligible assessee engaged in eligible business at 8% of total turnover or gross receipts in any financial year. For this purpose the limit for turnover or gross receipts was Rs. 1 Cr. This has now been increased to Rs. 2 Cr., from A.Y. 2017-18.

(ii) Section 44AD (2) provides that in the case of a Firm / LLP declaring profit on presumptive basis, deduction for salary and interest paid by the Firm / LLP to its partners is allowable. This provision is deleted w.e.f. AY. 2017-18. Hence no such deduction will be allowed. It may be noted that the partner will have to pay tax on such salary or interest received from the Firm/LLP.

(iii) Section 44AD(4) is replaced by another section 44AD(4) from A.Y. 2017-18. It is now provided that any eligible person who carries on eligible business and declares profit at 8% or more of total turnover or gross receipts for any year in accordance with this section, but does not declare profit on such presumptive basis in any of the five subsequent years, shall not be eligible to claim the benefit of taxation on presumptive basis under this section for 5 subsequent assessment years. In view of this, such assessee will be required to maintain books as provided in section 44AA and get the accounts audited u/s 44AB.

7.13 PRESUMPTIVE BASIS OF COMPUTING INCOME FROM PROFESSION – SECTION 44ADA:

(i) This is a new provision which will come into force from A.Y. 2017-18. This provision will benefit resident professionals who carry on the profession on a small scale and the yearly gross receipts are less than Rs. 50 Lacs. Broadly stated the provisions of the new section 44ADA are as under:

a) The section is applicable to every resident assessee who is engaged in any profession covered by section 44AA(1) i.e. legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession as is notified by the Board in the Official Gazette. The Explanatory Memorandum states that this section is applicable only to individuals, HUF and partnership firms (excluding LLPs). However the wording of the Section makes it clear that it applies to all resident assesses.

b) Presumptive profit shall be 50% of the total gross receipts or sum claimed to have been earned from such profession, whichever is higher.

c) Deductions under sections 30 to 38 shall be deemed to have been allowed and no further deduction under these sections will be allowed.

d) The written down value of any asset used for the purpose of profession shall be deemed to have been calculated as if the depreciation is claimed and allowed as a deduction.

e) The assessee is required to maintain books of account and also get them audited if he declares profit below 50% of the gross receipts.

(ii) It may be noted from the above that there is no provision in Section 44ADA for deduction of salary and interest paid by a Firm or LLP to its partners. Therefore, if a professional Firm/LLP offers 50% of its gross receipts for tax under this section, the partners will have to pay tax on salary and interest received by the partners.

(iii) It may be noted that Justice Easwar Committee has suggested in its report that taxation of income on presumptive basis is popular with small business entities as they are not required to maintain books or get their accounts audited. The committee has, therefore, suggested that this scheme should be extended to persons engaged in the profession. In para 5.1 of their report it is stated that “the committee recommends the introduction of a presumptive income scheme whereby income from profession will be estimated to be thirty three and one-third (33 1/3%) of the total receipts in the previous year. The benefit of this scheme will be restricted to professionals whose total receipts do not exceed one crore rupees during the financial year”. From the provisions of new section 44ADA it will be noticed that the above recommendation has been partly implemented.

(iv) A question for consideration is whether remuneration and interest on capital received by a partner of a firm or LLP engaged in any profession can be considered as income from the profession within the meaning of section 44 ADA. It is possible to take a view that this is income from profession as section 28(v) provides that “any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm” shall be chargeable under the head “Profits and gains of Business or Profession”. Even in the Income tax Return Form such Interest and Remuneration received by a partner from the firm is to be shown under the head profits and gains from business or profession. Therefore, if a professional has received total interest and remuneration of Rs.25 Lakh and Rs.15 lakh as share of profit from the professional firm in which he is a partner and he has no other income under the head profits and gains from business or profession, he can offer Rs.12.5 Lakh for tax u/s 44ADA.

7.14 INCOME FROM PATENTS – SECTION 115BBF:

This is a new section which provides for taxation of Royalty from Patents at a concessional rate of 10% from A.Y. 2017-18. The new section provides as under:

(i) If the total income of the eligible assessee includes any income by way of Royalty in respect of Patent developed and registered in India, tax on such Royalty shall be payable at the Rate of 10% plus applicable surcharge and education cess.

(ii) Such tax will be payable on the gross amount of Royalty. No expenditure incurred for this purpose shall be allowed against the Royalty Income or any other income.

(iii) For this purpose the Eligible assessee is defined to mean a person resident in India who is the true and first Inventor of the invention and whose name is entered on the Patent Register as a Patentee in accordance with the Patents Act. Further, a person being the true and first Inventor of the invention will be considered as an eligible assessee, where more than one persons are registered as Patentees under the Patents Act in respect of the Patent.

(iv) Explanation to the section defines the expressions Developed, Patent, Patentee, Patented Article, Royalty etc.

(v) The eligible assessee has to exercise option, if he wants to take benefit of this section, in the prescribed manner before the due date for filing Return of Income u/s 139(1) for the relevant year.

(vi) If the eligible assessee who has opted to claim the benefit of this section does not offer for taxation such Royalty income in accordance with this section, he will not be able to take benefit of this section in subsequent 5 assessment years.

(vii) The above Royalty Income shall not be included in the “Book Profit” computation u/s 115JB. Similarly, any expenditure relatable to Royalty income will not be deductible from such “Book Profit”.

7.15 CARRY FORWARD OF LOSS – SECTIONS 73A(2) AND 80: At present Section 73A (2) provides that carry forward of Loss incurred in any business specified in section 35AD(8)(C) is allowable for set-off against income of any specified business in subsequent year. Section 80 is amended w.e.f. A.Y. 2016-17 to provide that such carry forward of Loss u/s 73A(2) will be allowed only if the Return of Income for the year in which loss is incurred is filed before the due date u/s 139(1).

8. INCOME FROM OTHER SOURCES – SECTION 56(2)(vii):
Section 56(2)(vii) provides for levy of tax an Individual or HUF in respect of any asset received without consideration or for inadequate consideration. Second Proviso to this section provides for certain exceptions whereby the said section does not apply to certain transactions. The scope of this proviso is now extended w.e.f. A.Y. 2017-18 to receipt by individual or HUF of shares of-

(i) A successor Co-op. Bank in a business reorganization in lieu of shares of a predecessor co-op. Bank (Section 47(vicb).

(ii) A resulting company pursuant to a scheme of Demerger (Section 47(vid).

(iii) An amalgamated company pursuant to a scheme of amalgamation (Section 47 (vii).

9 CAPITAL GAINS:

9.1 DEFINITIONS – SECTION 2 (14) AND 2(42A):

(i) Section 2(14) defining “Capital Asset” is amended from A.Y. 2016-17 to state that Deposit Certificates issued under Gold Monetization Scheme, 2015, will not be considered as Capital Asset for fax purposes.

(ii) Section 2(42A) defines the term “Short-term Capital Asset”. This definition is amended from A.Y. 2017-18 to provided that shares (equity or preference) of a non-listed company will be treated as short-term capital asset if they are held for less than 24 Months. It may be noted that prior to 10.7.2014, this period was 12 months. It was increased to 36 months by the Finance (No.2) Act, 2014 w.e.f. 11.7.2014. Now, this period is reduced to 24 Months from 1.4.2016.

9.2 SOVEREIGN GOLD BONDS – SECTION 47 (VIIC ):
It is now provided from A.Y. 2017-18 that any gain made by an Individual on redemption of Sovereign Gold Bonds issued by RBI shall not be chargeable as capital gains.

9.3 CONVERSION OF A COMPANY INTO LLP – SECTION 47(XIII B):
The exemption from capital gains given to a private or a public unlisted company u/s 47 (xiiib) is subject to several conditions. One of the conditions, at present, is that the total sales, turnover or gross receipts in a business of the company in any of the three preceding years does not exceed Rs. 60 Lacs.

Instead of removing this condition or increasing the limit of turnover, a new condition is now added from A.Y. 2017- 18. It is now provided that total value of the assets, as appearing in the books of account of the company, in any of the three preceding years, does not exceed `5 Crores. This will prevent many small investment or property companies from converting themselves into LLP.

9.4 UNITS OF MUTUAL FUNDS – SECTION 47(XIX): Capital Gain arising on transfer of units in a consolidated plan of a M.F. Scheme in consideration of allotment of units in consolidated plan of that scheme will not be chargeable to tax from A.Y. 2017-18.

9.5 MODE OF COMPUTATION OF CAPITAL GAIN – SECTION 48: This section which deals with computation of capital gain is amended from A-Y 2017-18 as under:

(i) For computing long term capital gain on transfer of Sovereign Gold Bonds issued by RBI it will now be possible to consider indexed cost as cost of acquisition.

(ii) In the case of a non-resident assessee, for computing capital gain on redemption of Rupee Denominated Bond of an Indian company subscribed by him, the gain arising on account of appreciation of Rupee against a Foreign Currency shall be ignored.

9.6 COST OF CERTAIN ASSETS – SECTION 49: Section 49 provides for determination of cost of acquisition of certain Assets. By amendment of this section it is provided, from A.Y. 2017-18, that in respect of any asset declared under the “Income Declaration Scheme, 2016” Under Chapter IX of the Finance Act, 2016, the fair market value of the Asset as on 1.6.2016 shall be deemed to be the cost of acquisition for the purpose of computing capital gain on transfer of that asset.

9.7 FULL VALUE OF CONSIDERATION – SECTION 50C: This section is amended from A.Y.2017-18 to bring it in line with the provisions of section 43CA. This amendment is based on the recommendation of Justice R. Easwar Committee Report (Para 6.2). At present, Stamp Duty valuation as on the date of transfer of immovable property is compared with the consideration recorded in the transfer document. It is now provided that if the date of the agreement for sale and the date of actual transfer of the property is different, the stamp duty valuation on the date of Agreement for sale will be considered for the purpose of section. This is subject to the condition that the amount of the consideration or a part there of has been received by the seller by way of an account payee cheque or draft or by use of electronic clearing system through a bank on or before the date of the Agreement for sale.

9.8 EXEMPTION ON REINVESTMENT OF CAPITAL GAIN – SECTION 54 EE AND 54 GB: As discussed in Para 4.8 above, new section 54EE and amendment in section 54GB provides for exemption upto `50 Lacs if the capital gain on transfer of specified assets are invested in startup company or LLP. These provisions come into force from A.Y. 2017-18. Broadly stated these provisions are as under:

(i) Section 54EE Provides that if whole or part of capital gain arising from transfer of a long term capital asset (original asset) is invested within 6 months, from the date of such transfer, in a longterm Specified Asset, the assessee can claim exemption in respect of such capital gain. For this purpose the “Specified Asset” is defined to mean unit or units issued before 1.4.2109 by such Fund as may be notified by the Central Government. The Explanatory Memorandum to Finance Bill, 2016, states that it is proposed to establish a Fund of Funds to finance the start-ups. The following are certain conditions for claiming this exemption.

(a) Investment in long term specified asset should not exceed `50 lakh during a financial year. In case where the investment is made in two financial years, for the capital gains of the same year, the aggregate investment which qualifies for exemption from capital gain will not exceed Rs. 50 lakh.

(b) The long term specified asset is not transferred by the assessee for a period of three years from the date of its acquisition. The assessee does not take any loan or advance against the security of such long term specified asset. In a case where the assessee takes a loan or an advance against security of long term specified asset, it shall be deemed that the assessee has transferred the long term specified asset on the date of taking the loan or an advance.

(e) If the assessee, within a period of three years from the date of its acquisition, transfers that long term specified asset or takes a loan or an advance against security of such long term specified asset, the amount of capital gain which is allowed as exempt u/s 54EE will be charged to tax under the head “Capital Gains” as gain relating to long term capital asset of the previous year in which the long term capital asset was transferred.

(ii) Section 54GB, at present, grants exemption to an Individual or HUF in respect of long term capital gain arising on transfer of a Residential property (House or a Plot of Land) if the net consideration is utilized for subscription in equity shares of an eligible company. This provision will not apply to transfer of a residential property after 31.3.2017. By amendment of this section it is now provided that this exemption will be available to an Individual or HUF if net consideration on transfer of Residential property (Land, Building or both) is invested in an “Eligible Start Up” company or LLP. The term “Eligible Start-up” has been given the same meaning as in Explanation below section 80-IAC(4). (Refer Para 4.8 above). The above investment is to be made before the due date for filing the Return of Income. The above concession is not available if the transfer of Residential property is made after 31.3.2019. It may be noted that other conditions in existing section 54GB will apply to the above Investment also.

(iii) It may be noted that an Individual or HUF who is claiming exemption u/s 54 or 54F on transfer of a long term Capital Asset (including a Residential House) can claim deduction u/s 54EC (Investment in Bonds upto Rs. 50 Lakh) as well as u/s 54EE Investment in specified units (upto Rs. 50 Lakh) and u/s 54GB (Investment in eligible start up without any limit). If we read sections 54EC, 54EE and 54GB it will be noticed that no restriction is put in any of these sections that claim for deduction on reinvestment can be made under any one section only. Therefore, if an individual / HUF sells his Residential House, he can claim deduction u/s 54EC (upto Rs. 50 Lakh), u/s 54EE (up to Rs. 50 Lakh), u/s 54GB (without limit) as well as u/s 54 for purchase of another Residential House.

9.9 TAX ON SHORT -TERM CAPITAL GAIN – SECTION 111A: At present, this section provides for levy of tax on short-term Capital Gain at 15% from transfer of equity shares where STT is paid. By amendment of this section from A.Y. 2017-18 it is provided that in respect of short-term capital gain arising from transfer of equity shares through a Recognized Stock Exchange located in International Financial Service Centre (IFSC) where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

9.10 TAX ON LONG – TERM CAPITA L GAIN – SECTION 112: At present, the tax on long – term capital gain on transfer of unlisted securities in the case of nonresident u/s 112 (1)(a) (iii) is chargeable at the rate of 10% if benefit of first and second proviso to section 48 is not taken. There was a doubt whether the word “Securities” include shares in a company. In order to clarify the position this section is amended from A.Y. 2017-18 to provide that long term Capital Gain from transfer of shares of a closely held company (whether public or private) shall be chargeable to tax at 10% if benefit of first and second proviso to section 48 is not claimed.

10. MINIMUM ALTERNATE TAX (MAT) – SECTION 115JB:

Applicability of MAT to foreign companies has been a burning issue. In line with the recommendations of the Justice A.P. Shah Committee, section 115JB is amended to provide that the provisions of section 115JB shall not be applicable to a foreign company if

(i) The assessee is a resident of a country or a specified territory with which India has an agreement referred to in section 90(1) or an agreement u/s 90A(1) and the assessee does not have a permanent establishment in India in accordance with the provisions of the relevant Agreement; or

(ii) The assessee is a resident of a country with which India does not have an agreement under the above referred sections and is not required to seek registration under any law for the time being in force relating to companies.

This amendment is made effective retrospectively from A.Y. 2001-02.

11. DIVIDEND DISTRIBUTION TAX (DDT) – SECTION 115-O:

(i) At present, under the specific taxation regime for business trusts, a tax pass through status is given to Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (INVITS). However, a Special Purpose Vehicle, being a company, which is held by these business trusts, pays normal corporate tax and also suffers dividend distribution tax (DDT) while distributing the income to the business trusts being a shareholder.

(ii) It is now provided by amendment of section 115-0 w.e.f. 1.6.2016 that no DDT will be levied in respect of distribution of dividend by an SPV to the business trust. The exemption from levy of DDT will only be in the cases where the business trust holds 100% of the share capital of the SPV excluding the share capital other than that which is required to be held by any other person as part of any direction of the Government or any regulatory authority or specific requirement of any law to this effect or which is held by Government or Government bodies. The exemption from the levy of DDT will only be in respect of dividends paid out of current income after the date when the business trust acquires the shareholding of the SPV as referred to above. Such dividend received by the business trust and its investor will not be taxable in the hands of trust or investors as provided in the amended sections 10(23FC) & 10(23FD). The dividends paid out of accumulated and current profits upto this date will be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the business trust or any other shareholder.

(iii) It is further provided in section 115-0(8) that no DDT will be levied on a company, being a unit located in an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount of dividend declared, or paid by such company on or after 1 April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

12. TAX ON BUY BACK OF SHARES:

(i) At present section 115QA of the Act provides that income distributed on account of buy back of unlisted shares by a company is subject to the levy of additional Income-tax at 20%. The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company, for issue of such shares. Buy-back has been defined to mean the purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956.

(ii) It is now provided w.e.f. 1.6.2016 that section 115QA will apply to any buy back of unlisted shares undertaken by the company in accordance with the law in force relating to companies. Accordingly, it will also cover buy-back of shares under any of the provisions of the Companies Act, 1956 and the Companies Act, 2013. It is further provided that for the purpose of computing distributed income, the amount received by a company in respect of the shares being bought back shall be determined in the prescribed manner. These Rules may provide the manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganizations and in different tranches as stated in the Explanatory Memorandum.

13. SECURITIZATION TRUSTS – CHAPTER XII EA :

(i) Chapter XII EA was added by the Finance Act, 2013, effective from A.Y. 2014-15. Under these provisions it was provided that: (a) A ny income of Securitisation Trust will be exempt u/s 10 (23DA), (b) Income received by the Investor any securitized debt instrument or securities issed by such trust will be exempt u/s 10(35A), and (c) The Trust was required to pay additional Income tax on distributed income u/s 115TA (25% in the case of Individual / HUF and 30% in case of others). There were other procedural provisions in sections 115TA to 115TC.

(ii) Section 115 TA is amended w.e.f 1.6.2016. New Section 115TCA has been inserted from A.Y. 2017-18. It is now provided that the current tax regime for Securitization Trust and its investors, will be discontinued for the distribution made by Securitisation Trust with effect from 1 June, 2016, and will be substituted by a new regime with effective from A.Y 2017-18. This effectively grants pass through status to the Securitisation Trust. The new regime will apply to a Securitisation Trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitization of standard assets issued by RBI or a trust setup by a securitization company or a reconstruction company in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or guidelines or directions issued by the RBI (SARFAE SI Act).

(iii) The income of Securitisation Trust will continue to be exempt section under 10(23DA) which is also amended to effectively define the term securitization. The income accrued or received from the Securitisation Trust will be taxable in the hands of investor in the same manner and to the same extent as it would have happened had the investor made investment directly in the underlying assets and not through the trust. Consequential amendment is made in section 10(35A). The payment made by Securitisation Trust will be subject to tax deduction at source u/s 194LBC at the rate of 25% in case of payment to resident investors who are individual or HUF and @ 30% in case of others. In case of payments to non-resident investors, the deduction of tax will be at rates in force. The facility for the investors to obtain lower or nil deduction of tax certificate will be available. The trust will also provide breakup regarding nature and proportion of its income to the investors and also to the prescribed income-tax authority.

14. TAXATION OF NON-RESIDENTS:

(i) PLACE OF EFFECTIVE MANAGEMENT (POEM) – SECTION 6:

(a) The concept of treating a foreign company as resident in India if its place of effective management is in India was introduced by the Finance Act, 2015 and was to become effective from Assessment Year 2016-17. Under this concept, foreign companies will be considered as resident in India if its POEM is in India. The Finance Minister has now recognized that before introducing this concept, its ramifications need to be analyzed in detail. Accordingly, the implementation of concept of POEM has been deferred by one year and the same will now be applicable from Assessment year 2017-18.

(b) A new section115JH is inserted to empower the Government to issue notification to provide detailed transition mechanism for companies incorporated outside India, which due to implementation of POEM, will be assessed for the first time as resident in India. The notification will be issued to bring clarity on issues relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, applicability of transfer pricing provisions, etc., applicable to such foreign companies considered to be resident in India.

(ii) INCOME DEEMED TO ACCRUE OR ARISE IN INDIA – SECTION 9(1)(I)

A new clause has been inserted in Explanation 1, providing that no income shall be deemed to accrue or arise in India to a foreign company engaged in mining of diamonds, through or from activities confined to display of uncut and unassorted diamonds in any notified special zone. This amendment is effective from Assessment Year 2016-17.

(iii) FUND MANAGER’S ACTIVITIES – SECTION 9A:

(a) This section lays down the conditions under which a fund manager based in India does not constitute a business connection of the foreign investment fund. One of the conditions is that the fund is a resident of a country or a specified territory with which India has entered into a double taxation avoidance agreement. This condition is now modified effective from A.Y. 2017-18 by extending it to funds established, incorporated or registered in a notified specified territory.

(b) Another condition is that the fund should not carry on or control and manage, directly or indirectly, any business in India or from India. This condition is now modified to apply only to a fund carrying on, or controlling and managing, any business in India.

(iv) REFERENCE TO TRANSFER PRICING OFFICER (TPO) – SECTION 92CA : At present where a reference has been made by the A.O. to a TPO, the TPO has to pass the order at least 60 days prior to the date of limitation u/s 153/153 B for passing the assessment or reassessment order. Section 92CA has been amended w.e.f. 1.6.2016 to extend this period in cases where the period of limitation available to the TPO for passing the order is less than 60 days, to a period of 60 days, if the assessment proceedings were stayed by an order or injunction of any court, or a reference was made for exchange of information by the Competent Authority under a double taxation avoidance agreement.

(v) MAINTENANCE OF RECORDS – SECTION 92D: This section requires every person who has entered into an international transaction to keep and maintain such information and documents in respect thereof as may be prescribed. A requirement is now introduced for a constituent entity of an International Group to keep and maintain such information and documents in respect of an international group as may be prescribed, and to furnish such information and documents in such a manner, on or before the date, as may be prescribed. Failure to furnish such information and documents will attract a penalty of Rs. 5,00,000 u/s 271AA unless reasonable cause is shown u/s 273B.

15. REPORT RELATING TO INTERNATIONAL GROUP :

(i) Section 286 is a new section inserted from A.Y. 2017-18. The OECD in Action Plan 13 of the BEPS Project has recommended a standardized approach to transfer pricing documentation to be adopted by various Countries. Pursuant to this recommendation, this section is inserted to provide for a specific reporting system in respect of country- by country (CbC) reporting. This system is a three-tier structure with (i) a master file containing standardized information relevant for all members of an International Group; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a CbC report containing certain information relating to the global allocation of the International Group’s income and taxes paid together with certain indicators of the location of economic activity within the group.

(ii) This section provides that every Constituent Entity, resident in India if it is constituent of an International Group and every parent entity or the alternate reporting entity, resident in India, has to furnish report in the prescribed form to the prescribed authority before the due date for filing return of Income u/s 139(1). The manner in which report is to be submitted is provided in the section.

(iii) Penalties are prescribed in section 271GB for nonfurnishing of the information by an entity which is obligated to furnish as also for knowingly providing inaccurate information in the report.

16. EQUALIZATION LEVY:

Chapter VIII (Sections 163 to 180) of the Finance Act, 2016, provides for Equalization Levy on Non-Residents. This Chapter will come into force on the date to be notified by the Central Government. In order to overcome the challenges of typical direct tax issues relating to e-commerce i.e characterization of nature of payments, establishing a nexus between a taxable transaction, activity and a taxing jurisdiction and keeping in view the recommendations of OECD in respect of Action 1 – Addressing the Tax Challenges of Digital Economy, of the BEPS Project, this new chapter is inserted. The chapter is a complete code for charge of Equalisation Levy, its collection, recovery, furnishing statements, processing Statements, Rectification of Mistakes, charge of interest for delayed payment, penalty for non-compliance with the provisions, Appeals to CIT(A) and ITA Tribunal, Prosecution, Power of Government to frame Rules etc. The provisions for Equalisation Levy can be briefly stated as under:

(i) The Equalisation Levy is at 6% of the amount of consideration for specified services received or receivable b y a non-resident (not having a PE in India) from a resident carrying on a business or profession or from a non-resident having a PE in India (Payer).

(ii) The specified services are (a) Online advertisement; (b) Any provision for digital advertising space; (c) Any other facility or service for the purpose of online advertisement; and (d) Any other services as may be notified.

(iii) Simultaneously with the introduction of this chapter for Equalisation levy, section 10(50) has been inserted to provide exemption to income arising from the above-mentioned specified services chargeable to Equalisation Levy.

(iv) The payer is obliged to deduct the Equalisation Levy from the amount paid or payable to a nonresident in respect of such specified services at 6% if the aggregate amount of consideration for the same in a previous year exceeds Rs.1 lakh.

(v) In addition, section 40(a)(ib) is inserted to provide that the expenses incurred by a payer towards specified services chargeable to Equalisation Levy shall not be allowed as deduction in case of failure to deduct and deposit the same to the credit of Central Government before the due date as explained in Para 7.9 above.

(vi) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

17. ASSESSMENTS AND REASSESSMENTS:

(i) JURISDICTION OF ASSESSING OFFICER – SECTION 124: This section is amended from 1.6.2016. It is now provided that u/s 124(3) no person will be entitled to call into question the jurisdiction of A.O. after the expiry of one month from the date on which notice u/s 153A(1) or 153C(2) is served or after completion of assessment whichever is earlier. This provision is in line with the existing provision in section 124(3) which applies to objection to jurisdiction of A.O. when return u/s 139 is filed or notice u/s 142(1) or 143(2) is issued.

(ii) POWER TO CALL FOR INFORMATION – SECTION 133C: This section is amended from 1.6.2016. It is now provided that when information or document is received in response to any notice u/s 133C(1) the prescribed authority can process the same and available outcome will be forwarded to A.O.

(iii) HEARING BY A.O. – SECTION 2 (23C): This clause is inserted from 1.6.2016 to provide that notices for hearing can be given by electronic mode and communication of data and Documents can be made by electronic mode.

(iv) FILING INCOME TAX RETURN – SECTION 139: At present an Individual, HUF, AOP and BOI is required to file return of income before the due date if the total income, without considering deductions under Chapter VI-A, exceeds the maximum amount which is not chargeable to tax. It is now provided in the sixth proviso to section 139 (1) that income from long term capital gains exempt u/s 10(38) shall also be added to the total income for determining the threshold limit for determining whether the assessee is required to file the return of income.

(v) BELATED FILING OF RETURN OF INCOME – SECTION 139(4): The existing section 139(4) is replaced by new section 139(4) from A.Y. 2017- 18. It is now provided that if an assessee has not furnished his Return of Income before due date u/s 139(1), he can file the same at any time before the end of the relevant assessment year or before completion of assessment whichever is earlier.

(vi) REVISED RETURN – SECTION 139(5): The existing Section 139(5) is replaced by new section 139(5) from A.Y. 2017-18. At present a revised return can be filed u/s 139(5), only if the return originally filed is before the due date u/s 139(1). Such a revised return can be filed before the expiry of one year from the end of the relevant assessment year or completion of assessment, whichever is earlier. It is now provided that a belated return filed pursuant to section 139(4), can also be similarly revised within the time limit given above.

(vii) DEFECTIVE RETURN – SECTION 139(9): This section is amended from A.Y. 2017 – 18. At present a return of income will be treated as defective if self-assessment tax and interest payable u/s 140A is not paid before the date of furnishing the return. Now clause (aa) of the Explanation to section 139(9) has been deleted and hence a return will now not be treated as defective merely because self-assessment tax and interest thereon is not paid before the date of furnishing the return.

(viii) ADJUSTMENT TO RETURNED INCOME – SECTION 143(1): This section is now amended from A.Y. 2017-18. The scope of adjustments that can be made at the time of processing the Return of Income u/s 143(1) has been expanded to cover the following items:

(a) Disallowance of loss claimed, if return for the year for which loss has been claimed was furnished beyond the due date specified in section 139(1).

(b) Disallowance of expenditure indicated in tax audit report but not considered in the Return of Income

(c) Disallowance of deduction claimed u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if the return has been filed beyond the due date specified in section 139(1).

(d) Addition of income due to mismatch in income as reflected in the return of income and as appearing in Form 26AS or Form 16A or Form 16.

The above adjustments will be made based on information available on the record of the tax department either physically or electronically. However, no adjustment will be made without intimating the assessee about such adjustment in writing or in electronic mode and giving him a time of 30 days to respond. The adjustment will be made only after considering the response received or after the lapse of 30 days in case no response is received.

(ix) PROCESSING OF RETURN OF INCOME – SECTION 143(ID): This section is amended w.e.f. A.Y. 2017-18. It is now provided that the processing of the Return of Income u/s 143(1) will not be necessary within one year if notice u/s 143(2) is issued. However, such Return of Income shall be processed u/s 143(1) before assessment order u/s 143(3) is passed.

(x) INCOME ESCAPING ASSESSMENT – SECTION 147: This section has been amended from 1.6.2016. New clause (ca) has been added in Explanation 2 to section 147. The amendment provides that income shall be deemed to have escaped assessment if, on the basis of the information received u/s 133C(2), it is noticed by the A.O that the income exceeds the maximum amount not chargeable to tax or where the assessee had understated the income or has claimed excessive loss, deduction, allowance or relief in the return.

(xi) LIMITATION FOR COMPLETING ASSESSMENT OR REASSESSMENT – SECTION 153
The existing section 153 has been replaced by a new section 153 from 1.6.2016. This new section provides as under:

(a) The time limit for completion of assessment has now been reduced as under:
• For order u/s 143 and section 144 – from the existing two years to twenty one months from the end of the assessment year in which the income was first assessable.
• For order u/s 147 – from the existing one year to nine months from the end of the financial year in which the notice u/s 148 was served.
• For giving effect to order passed u/s 254, 263, 264, setting aside or cancelling an assessment – from the existing one year to nine months from the end of the financial year in which the order is received or passed by the designated Commissioner.

(b) The period for completing the assessment shall be extended by one year where reference has been made to the Transfer pricing Officer u/s 92CA,

(c) At present, there is no time limit for giving effect to an order passed u/s 250 or 254 or 260 or 262 or 263 or 264. Now it is provided that action under the above section shall be completed within three months from the end of the month in which order is received or passed by the designated Commissioner. Additional time of six months may be granted to the Assessing Officer by the Principal Commissioner or the Commissioner, based on reasons submitted in writing, if the Commissioner is satisfied that the delay is for reasons beyond the control of the Assessing Officer.

(d) At present there is no time limit for completion of assessment, reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order under the above mentioned sections or in an order of any court in a proceeding otherwise than by way of appeal or reference under the Act. Now such order giving effect should be passed on or before the expiry of twelve months from the end of the month in which such order is received by the designated Commissioner.

(e) Similarly, in case of assessment made on a partner of a firm in consequence of an assessment made on the firm u/s 147, the time limit is now introduced. Accordingly, the assessment of the partner shall be completed within twelve months from the end of the month in which the assessment order in case of the firm is passed.

In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153(9) shall be excluded.

(f) For cases pending on 1st June, 2016, the time limit for taking requisite action (in case of (c), (d) and (e) above will be 31st March, 2017 or twelve months from the end of the month in which such order is received, whichever is later.

(g) The existing Section 153 shall aply to any order of assessment, reassessment or recomputation made before 1/6/2016.

(xii) LIMITATION FOR COMPLETION OF ASSESSMENT IN SEARCH CASES – SECTION 153B:

The existing Section 153B is replaced by new Section 153B w.e.f. 1.6.2016. The old section 153B shall apply in relation to any order of assessment, reassessment or re-computation is made on or before 31.5.2016. The new section 153B provides for reduction in time limit for completion of assessment, reassessment etc., in case of a search u/s 153 A or 153C as under:

(a) In each assessment year falling within the six years referred to in section 153A(1)(b) or assessment year in which search is conducted u/s 132 or requisition is made u/s 132A – from two years to twenty one months from the end of the financial year in which the last of the authorization for search or requisition was executed:

(b) In case of other persons referred to in section 153C, to twenty one months (from the existing two years) from the end of the financial year in which the last of the authorization for search or requisition was executed or nine months (from the existing one year) from the end of the financial year in which the books of account or documents or assets seized or requisitioned are handed over u/s 153C to the Assessing Office having jurisdiction over such person, whichever is later.

(c) In case where reference is made to the Transfer Pricing Officer u/s 92CA, the period of limitation as given above will be extended by a period of twelve months.

(d) In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153B(3) shall be excluded.

18. PAYMENT OF TAXES AND INTEREST:

18.1 ADVANCE TAX PAYMENT – SECTION 211: (i) The provisions of Section 211 have been amended from 1.6.2016. Now, all non-corporate assesses, who are liable to pay advance tax, will have to pay such tax in 4 installments as applicable to corporate assesses instead of 3 installments. The installments for advance tax payment are as follows:

(i) Eligible assesses referred to in section 44AD opting for computation of profits and gains of business on presumptive basis are required to pay the entire advance tax in one installment on or before 15th March of the financial year. No similar exception has been given for eligible professionals covered under presumptive taxation u/s 44ADA.

(ii) The provisions of section 234C in respect of interest payable for deferment of advance tax have been amended to bring them in line with the provisions of section 211 of the Act. Interest u/s 234C will be levied at 1% p.m. for 3 months on shortfall of advance tax paid as compared with the amount payable as per the above installments in case of all assesses (except the eligible assesses u/s 44AD). However, no interest will be levied if the advance tax paid is more than 12% (For 15th June instalment) and more than 36% (For 15th September instalment).

(iii) A new exception is now provided that interest u/s 234C will not be levied in case of assesses having income chargeable under the head ‘profits and Gains of business or Profession’ for the first time. These assesses will be required to pay the whole amount of tax payable in the remaining installments of advance tax which are due after they commence business or by 31st March of the financial year if no installments are due.

18.2 INTEREST ON REFUNDS – SECTION 244A:

(i) Section 244A granting interest on refunds to assesses has been amended w.e.f. 1.6.2016 to provide that in case where the return of income is filed after the due date as per section 139(1), then interest on refund out of TDS, TCS and advancetax will be granted only from the date of filing the return and not from 1st April of the assessment year.

(ii) It is further provided that an assessee will be entitled to interest on refund of self-assessment tax paid u/s 140A of the Act from the date of payment to tax or date of filing the return, whichever is later up to the date on which the refund is granted.

(iii) It is also provided that an assessee will be entitled to additional interest on refund arising on giving effect to an appellate / revisionary order which has been passed beyond a time limit of 3 months from the end of the month of receipt of the appellate / revisionary order by the Commissioner. It is further clarified that if an extension is granted by the Principal Commissioner / Commissioner for giving effect to the appellate/ revisionary order, then the additional interest will be granted from the expiry of the extended period. The Principal Commissioner / Commissioner may extend the period for giving effect to the appellate / revisionary order up to 6 months. The additional interest on such refunds will be calculated at the rate of 3% p.a. from the date following the date of expiry of the specified time limit upto the date of granting the refund. Effectively, the assessee will be entitled to interest in such cases at the rate of 9% p.a. against the normal rate of 6% p.a for delay in giving effect to an appellate order beyond the specified time limit.

18.3 RECOMMENDATION OF JUSTICE R. EASHWAR COMMITTEE: It may be noted that this committee had made two recommendations as under

(i) The tax payer should be allowed automatic stay on payment of 7.5% of disputed taxes till the first appeal is decided. In cases of High-Pitched assessments, it may be difficult for the assessee to pay even 7.5% of the disputed demand. In such cases he can approach the CIT(A) and request stay of the entire demand. No such amendment is made in the Act. However, CBDT has modified the Instruction No. 1914 of 21.3.1996 on 29.2.2016 directing assessing officers to grant stay till the disposed of first appeal on payment of 15% of disputed tax subject to certain conditions.

(ii) As regards interest on delayed refunds the committee has suggested that section 244A may be amended to provide that interest of 1% P.M. should be paid if the refund is delayed up to 3 months and interest at 1.5% P.M. should be paid if the delay is more than 3 months. It will be noticed that this recommendation is only partly accepted while amending section 244A.

19. APPEALS AND REVISION:

19.1 APPEAL BY DEPARTMENT – SECTION 253(2A): Section 253(2A) has been amended from 1.6.2016. Now, it will not be possible for the Department to file appeal before ITA Tribunal against the order passed pursuant to the directions of Dispute Resolution panel (DRP).

19.2 RECTIFICATION OF ORDER OF ITA TRIBUNA L – SECTION 254: At present the ITA Tribunal can rectify any mistake in its order which is apparent from the records within 4 years of the date of the order. This period is now reduced to 6 months from the end of the month in which the order is passed. This amendment is effective from 1.6.2016. Although it is not clarified in the Finance Act, 2016, it is presumed that this amendment will apply to orders passed on or after 1.6.2016.

19.3 SINGLE MEMBER CASES – SECTION 255(3): This section is amended from 1.6.2016 to provide that a Single Member Bench of ITA Tribunal may dispose of any case where assessed income does not exceed Rs. 50 Lacs. At present, this limit is Rs. 15 Lakh which has now been increased to Rs. 50 Lakh.

20. DISPUTED TAX SETTLEMENT SCHEME – SECTIONS 197 TO 208 OF THE FINANCE ACT, 2016:

20.1 The Finance Minister has, in his Budget speech on 29th February 2016, stated that the tax litigation in our country is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the tax payer and administrative cost of the Government. He has also stated that there are over 3 Lac tax cases pending with the commissioner of Income tax (Appeals) with disputed amount of tax of about 5.5 Lac Crores. In order to reduce these appeals before the first appellate authority he has announced a new scheme called “ Dispute Resolution Scheme -2016” Two separate Schemes are announced in this Budget, one for settlement of disputed taxes under Income tax and wealth tax Act and the other for disputed taxes under Indirect Tax Laws.

20.2 In chapter X of the Finance Act, 2016, (Act), Sections 201 to 211 Provide for “The Direct Tax Dispute Resolution Scheme – 2016”. Similarly, Chapter XI (Sections 212 to 218) of the Act provides for “The Indirect Tax Dispute Resolution Scheme – 2016”.

20.3 THE SCHEME:

(i) The Direct Tax Dispute Resolution Scheme 2016 (Scheme) will come into force on 1st June, 2016. This scheme will enable all assesses whose assessments under the Income tax Act or the wealth tax have been completed for any assessment year and whose appeals are pending before the Commissioners of Income tax (Appeals) as on 29.2.2016 to settle the tax dispute. The scheme also applies to those assesses in whose case any disputed additions are made as a result of retrospective amendments made in the Income tax or wealth tax Act and whose appeals are pending before the CIT(A), ITA Tribunal, High Court, Supreme Court or before any other authority.

(ii) Section 202 of the Finance Act provides that the assessee who wants to settle the tax dispute pending before the concerned appellate authority as on 29.02.2016, can make a declaration in the prescribed Form on or after 01.06.2016 but before the date to be notified by the Central Government. In the case of an assessee in whose case the assessment or reassessment is made in the normal course and not due to any retrospective amendment, and the appeal is pending before CIT (A) as on 29.02.2016, the tax dispute can be settled as under:-

(a) If the disputed tax does not exceed `10 Lacs for the relevant assessment year, the assessee can settle the same on payment of such tax and interest due upto the date of assessment or reassessment.

(b) If the disputed tax exceeds ` 10 Lacs for the relevant assessment year, the dispute can be settled on payment of such tax with 25% of minimum penalty leviable and interest upto the date of assessment or reassessment. It is difficult to understand why minimum penalty is required to be paid when the disputed addition may not be for concealment or inaccurate furnishing of particulars of income.

(c) In the case of appeal against the levy of penalty, the assessee can settle the dispute by payment of 25% of minimum penalty leviable on the income as finally determined.

(iii) In a case where the disputed tax demand relates to addition made in the assessment or reassessment order made as a result of any retrospective amendment in the Income tax or wealth tax Act, the dispute can be settled at the level of any appellate proceedings (i.e. CIT(A), ITA Tribunal, High Court etc.) by payment of disputed tax. No interest or penalty will be payable in such a case.

20.4 PROCEDURE FOR DECLARATION:

(i) The declaration for settlement of disputed tax for which appeal is pending before CIT(A) is to be filed in the prescribed form with the particulars as may be prescribed to the Designated Authority. The Principal Commissioner will notify the Designated Authority who shall not be below the rank of commissioner of Income tax. Once this declaration is filed for settlement of a tax dispute for a particular year, the appeal pending before the CIT (A) for that year will be treated as withdrawn.

(ii) In the case where the tax dispute is in respect of any addition made as a result of retrospective amendment, the assessee can file the declaration in the prescribed form with the designated authority. The assessee will have to withdraw the pending appeal for that year before CIT (A), ITA Tribunal, High Court, Supreme Court or other Authority after obtaining leave of the Court or Authority whereever required. If any proceedings for the disputed tax are initiated for arbitration, conciliation or mediation or under an agreement entered into by India with any other country for protection of Investment or otherwise, the assessee will have to withdraw the same. Proof of withdrawal of such appeal or such other proceedings will have to be furnished by the assessee with the declaration. Further, the declarant will have to furnish an undertaking in the prescribed form waiving his right to seek or pursue any remedy or any claim for the disputed tax under any agreement.

(iii) It is also provided that if (a) any material particulars furnished by the declarant are found to be false at any stage, (b) the declarant violates any of the conditions of the scheme or (c) the declarant acts in a manner which is not in accordance with the undertaking given by him as stated above, the declaration made under the scheme will be considered as void. In this event all proceedings including appeals, will be deemed to be revived.

20.5 PAYMENT OF DISPUTED TAX:

(i) On receipt of the declaration from the assessee the Designated Authority will determine the amount payable by the declarant under the scheme within 60 days. He will have to issue a certificate in the prescribed form giving particulars of tax, interest, penalty etc., payable by the Declarant.

(ii) The Declarant will have to pay the amount determined by the Designated Authority within 30 days of the receipt of the Certificate. He will have to send the intimation about the payment and produce proof of payment of the above amount. Upon receipt of this intimation and proof of payment, the Designated Authority will have to pass an order that the declarant has paid the disputed tax under the scheme. Once this order is passed it will be conclusive about the settlement of disputed tax and such matter cannot be re-opened in any proceedings under the Income tax or Wealth tax Act or under any other law or agreement.

(iii) Once this order is passed, the Designated Authority shall grant immunity to the declarant as under:

(a) Immunity from instituting any proceedings for offence under the Income tax or Wealth tax Act.

(b) Immunity from imposition or waiver of any penalty or interest under the income tax or wealth tax Act. In other words, the difference between interest or penalty chargeable under the normal provisions of the Income tax or wealth tax Act and the interest or penalty charged under the scheme cannot be recovered from the declarant.

It is also provided that any amount of tax, interest or penalty paid under the Scheme will not be refundable under any circumstances.

20.6 WHO CAN MAKE A DECLARATION:

(i) Section 208 of the Finance Act provides that in the following cases declaration under the Scheme for settlement of disputed taxes cannot be made.

(a) In relation to assessment year for which assessment or reassessment under Section 153A or 153C of the Income tax Act or Section 37A or 37B of the Wealth tax Act is made.

(b) In relation to assessment year for which assessment or reassessment has been made after a survey has been conducted under section 133A of the Income tax Act or 38A of the Wealth tax Act and the disputed tax has a bearing on findings in such survey.

(c) In relation to assessment year in respect of which prosecution has been instituted on or before the date of making the declaration under the scheme.

(d) If the disputed tax relates to undisclosed income from any source located outside India or undisclosed asset located outside India.

(e) In relation to assessment year where assessment or reassessment is made on the basis of information received by the Government under the Agreements under section 90 or 90A of the Income tax Act.

(f) Declaration cannot be made by following persons.

• If an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

• If prosecution has been initiated under the Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985. The Prevention of Corruption Act, 1988 or for purposes of enforcement of any civil liability.

(g) Declaration cannot be made by a person who is notified u/s. 3 of the Special Court (Trial or Offences Relating to Transactions in Securities) Act, 1992.

20.7 GENERAL:

(i) The Act authorizes the Central Government to issue directions or orders to the authorities for the proper administration of the scheme. The Act also provides that if any difficulty arises in giving effect to any of the provisions of the scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after expiry of 2 years i.e after 31.5.2018. Central Government is also authorized to notify the Rules for carrying out the provisions of the scheme and also prescribe the Forms for making Declaration, for certificate to be granted by the Designated Authority and for such other matters for which the rules are required to be made under the scheme.

(ii) In 1998 similar attempt was made to reduce tax litigation through “Kar Vivad Samadhan Scheme” which was introduced by the Finance (No:2) Act, 1998. This year, similar attempt is made to reduce tax litigation through this Scheme. One objection that can be raised is with regard to levy of penalty when the disputed tax is more than Rs.10 Lakh. There is no logic in levying such a penalty. Even if the assessee is not successful in the appeal before CIT(A), his liability will be for payment of disputed tax and interest. Penalty is not automatic. The disputed addition or disallowance may be due to interpretation of some provision in the tax law for which no penalty is leviable. Therefore, in case where disputed tax is more than Rs.10 Lakh, the assessee will not like to take benefit of the scheme and to that extent litigation will not be reduced.

(iii) As stated earlier, section 202 of the Finance Act provides that declaration can be filed for settlement of disputed taxes only in respect of an appeal pending before CIT (A). There is no reason for restricting this benefit to appeal pending before the first appellate authority. This scheme should have been made applicable to appeals filed by the assessee before ITA Tribunal, High Court or the Supreme Court which are pending on 29.02.2016. If this provision had been extended to all such appeals, pending litigation before all such judicial authorities would have been reduced.

(iv) The provision in section 202 of the Finance Act relating to settlement of disputed taxes levied due to retrospective amendment in the Income tax and Wealth tax Act is very fair and reasonable. In such cases only tax is payable and no interest or penalty is payable. This provision is made with a view to settle the disputed taxes levied due to retrospective amendment made in section 9 by the Finance Act, 2012. This related to taxation as a result of acquisition of interest by a Non-Resident in a company owning assets in India. (Cases like VODAFONE, CAIRN and others). However, there are some other sections such as sections 14A, 37, 40 etc., where retrospective amendments have been made. It appears that it will be possible to take advantage of the scheme if appeals on these issues are pending before any Appellate Authority or Court as on 29.2.2016.

(v) It may be noted that last year the CBDT had made one attempt to reduce the tax litigation by issue of Circular No. 21/2015 dated 10/12/2015 whereby appeals filed by the Income tax Department where disputed taxes were below certain level were withdrawn with retrospective effect. This year the Government has issued this scheme whereby assesses can settle the demand for disputed taxes and thus reduce the tax litigation.

21. PENALTIES AND PROSECUTION:

21.1 Sections 98 to 110 of the Finance Act, 2016, make major amendments in Penalty provisions under the Income tax Act. In Para 166 of his Budget Speech the Finance Minister has explained the new Scheme for levy of penalty.

21.2 EXISTING PENALTY PROVISIONS FOR CONCEALMENT .

(i) At present, Section 271 of the Income tax Act (Act) provides for levy of penalty for concealment of income or for furnishing inaccurate particulars of income at the rate of 100% of tax which may extend to 300%. The Assessing Officer (AO) has discretion in the matter of levy of penalty. There are 8 Explanations in the Section to explain the circumstances under which a particular income will be considered as concealment of income or when the assessee will be deemed to have furnished inaccurate particulars of Income. Various clauses of this section have been considered and interpreted by the various High Courts and the Supreme Court in various judgements. The law relating to levy of penalty appeared to be more or less settled by now. How far these judgements will apply to the new Scheme for levy of penalty will depend on the manner in which officers administer the new provisions.

(ii) Recently, Income tax Simplification Committee (Justice Eashwar Committee) has submitted its Report. In para 26.1 of its Report the committee has considered the provisions of sections 271 and 273B and made certain suggestions. These suggestions have been made with a view to reduce tax litigation. If we consider the amendments made by the Finance Act, 2016, it will become evident that these suggestions are only partly implemented.

21.3 NEW SECTION 270A (UNDER REPORTING OF INCOME)

(i) It is now provided that existing Section 271 shall apply upto Assessment Year 2016-17. For A.Y. 2017-18 and onwards new sections 270A and 270AA have been added. The provisions of these sections are as under.

(ii) Section 270A authorizes an Assessing Officer, CIT (A), Commissioner or Principal Commissioner to levy penalty at the rate of 50% of tax in case where the assessee has “Under Reported” his income. In cases where the assessee has “Misreported” his income the penalty of 200% of tax will be levied. It may be noted that u/s 271, although the minimum penalty was 100% of tax and maximum penalty was 300% of tax, in most of the cases only minimum penalty of 100% was levied.

(iii) Section 270A(2) provides that the assessee will be considered to have “Under Reported” his income (a) If Income assessed is greater than income determined under section 143(1) (a) i.e Income as per Return of Income, or if Income assessed is greater than the maximum amount not chargeable to tax, if Return of Income is not filed by the assessee, (b) If Income assessed or deemed book profit u/s 115JB/115JC is greater than the income assessed or reassessed immediately before such assessment, (c) If Book Profit assessed u/s 115JB / 115 JC is greater than Book Profit determined u/s 143(1)(a) or Book Profit assessed u/s 115JB/115JC, if no return of income is filed by the assessee or (d) If Income assessed or reassessed has the effect of reducing loss declared or such loss is converted into income.

(iv) In all the above cases the difference between the income assessed or reassessed and the income computed u/s 143(1)(a) will be considered as Under Reported income and penalty at 50% of tax will be levied. If the loss declared by the assessee is reduced or converted into income the difference will be liable to penalty @ 50% of tax. The concept of income concealed or furnishing of inaccurate particulars of income, which existed u/s 271, is now given up under the new section 270A.

(v) In a case where Section 115JB / 115JC is applicable the amount of Under Reported income will be worked out by applying the formula given in the section. This can be explained by the following illustration.

In the above case Under Reported Income u/s 270A will be Rs. 3,00,000/- (Rs. 2,00,000+ Rs.1,00,000/-)

(vi) Section 270A(4) provides that where any addition was made in the computation of total income in any earlier year and no penalty was levied on such addition in that year, and the assessee contends that any receipt, deposit or investment made in a subsequent year has come out of such addition made in earlier year, the assessing officer can consider such receipt, deposit or investment as under reported income. This provision is on the same lines as existing Explanation (2) of Section 271.

(vii) Section 270A (6) provides that no penalty will be levied in respect of any Under Reported Income where (a) the assessee offers an explanation and the Income tax Authority is satisfied that the explanation is bona fide and all material facts have been disclosed, (b) Such Under Reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot be properly deduced there from (c) The addition is on the basis of estimate and the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance, (d) Addition is made under Transfer pricing provisions but the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all material facts relating to the transaction or (e) The undisclosed income is on account of a search operation and penalty is leviable under section 271 AAB.

21.4 NEW SECTION 270A (MISREPORTIN G OF INCOME):

(i) A s stated earlier, the penalty on Unreported Income in consequence of Misreporting of Income will be 200% of the tax on such Misreported Income. Section 270A (9) provides that the assessee will be considered to have Misreported his income due to (a) Misrepresentation or suppression of facts (b) Failure to record investments in the books of account (c) Claim of expenditure not substantiated by any evidence (d) Recording of any false entry in the books of account, (e) Failure to record any receipt in books of account having a bearing on total income or (f) Failure to report any International transaction or any transaction deemed to be an International transaction or any specified domestic transaction, to which provisions of Chapter X apply.

(ii) It may be noted that disputes may arise due to the wording of the above clauses in Section 270A(9). Clause (b) refers to Investments not recorded in books of account. In the case of an Individual or HUF it may so happen that certain genuine Investments may have been debited to personal Capital Account and may not appear separately in the books of account. If the assessee is declaring income from such Investments regularly, there is no reason to consider cost of Investments not recorded in books as Misreporting of Income. If the income from such Investment is declared, there is no Under Reporting much less Misreporting of Income. Moreover, when the Investment is debited to Capital Account it cannot be said that the same is not recorded in the books.

(iii) Similarly, clause (c) above states that expenditure claimed for which there is no evidence will be treated as Misreporting of Income. It is not clear as to what will be considered as an adequate evidence for this purpose. Disputes will arise on the question about adequacy of the evidence for this purpose.

(iv) Section 270A (10) provides that for the purpose of levy of penalty as a result of Under Reporting or Misreporting of income amount of tax on such income will be calculated on notional basis according to the Formula given in that Section.

(v) It is pertinent to note that there is no provision similar to Section 270A(6), as discussed in Para 21.3 (vii) above, whereby the assessee can offer an explanation about his bona fides for omission to disclose any amount of income which the tax authority wants to consider as Misreporting of Income . In other words, before the A.O. comes to the conclusion that there is misreporting of income on any of the grounds stated in Para (i) above, there is no provision to give an opportunity to the assessee to offer explanation as provided in section 270A(6). The assesses will have to litigate on such matters as absence of such a provision is against principles of the natural justice.

21.5 IMMUNITY FROM PENALTY AND PROSECUTION (SECTION 270AA ):

(i) New Section 270AA has been inserted in the Income tax Act w.e.f. assessment year 2017-18 to grant immunity from imposition of penalty and initiation of prosecution in certain circumstances. Under this section an assessee can make an application to the A.O. to grant immunity from imposition of penalty under Section 270A and initiation of prosecution proceedings under Section 276C. or 276CC. For this purpose the following conditions will have to be complied with by the assessee:-

(a) Tax and Interest payable as per the assessment order u/s 143(3) or reassessment order u/s 147 should be paid before the period specified in the Notice of Demand.

(b) No Appeal against the above order should be filed before CIT(A).

(c) The application for immunity should be filed within one month of the end of the month in which the above assessment order is received. This application is to be made in the prescribed form.

(ii) It may be noted that the power to grant immunity under this section is given to the AO only with reference to penalty leviable u/s 270A (7) @ 50% of Tax for Under Reporting of Income. If the addition or disallowance is made in the assessment or reassessment order on the ground of Misreporting of Income as explained u/s 270A(9) and where penalty is @ 200% of Tax, no such immunity u/s 270AA can be granted. To this extent this provision in section 270AA is very unfair.

(iii) After the A.O. receives the application for grant of immunity, he will have to pass an order accepting or rejecting the application within one month from the end of the month when such application is received. If he accepts the application, no penalty u/s 270A will be levied and no prosecution u/s 276C or 276CC will be initiated. If the A.O. wants to reject the application he will have to give an opportunity to the assessee of being heard. If the A.O. rejects the application, the assessee can file an appeal before CIT(A) against the assessment / reassessment order. For this purpose the time taken for making the application to the AO and the time taken by A.O. in passing the order for rejection of the application will be excluded in computing the period of limitation u/s 249 for filing appeal to CIT(A).

(iv) The order passed by the A.O. accepting or rejecting the application shall be treated as final. If the A.O. has accepted the application by his order u/s 270AA(4), no appeal before CIT(A) or revision application before CIT can be filed against the assessment or reassessment order.

(v) It may be noted that the A.O. is given discretion to accept or reject the application. This appears to be an absolute power given to the same officer who has passed the assessment order. There are no guidelines as to when the application can be rejected. There is no provision for appeal against the order rejecting the application for immunity. To this extent this provision is unfair.

(vi) As stated in (ii) above the above application for immunity can be filed only in respect of additions / disallowances made due to Under Reporting of Income where penalty is of 50% of Tax. No such application can be made if the additions/ disallowances are for Misreporting of Income where penalty is of 200% of Tax. There is no clarity in Section 270AA about a situation where in any assessment / reassessment order some additions / disallowances are for Under Reporting of Income and some additions / disallowances are for Misreporting of Income. Question arises whether the application for immunity u/s 270AA can be made in such a case for getting immunity. If so, whether such application will be for items added/ disallowed for Under Reported Income only and whether the assessee can file appeal to CIT(A) only with reference to items added / disallowed on the ground of Misreporting of Income. If this is the position, then a question will arise whether the assessee will have to revise the appeal petition later on in respect of addition / disallowance made for items of Under Reported Income if the application for immunity is rejected. If the intention of the Government is to reduce litigation and grant immunity from penalty and prosecution the benefit of Section 270 AA should have been given to all assessee where additions / disallowances are made for Under Reporting or Misreporting of Income.

21.6 PENALTY FOR FAILURE TO MAINTAIN INFORMATION AND DOCUMENTS (SECTION 271 AA ): This section has been amended w.e.f. A/Y: 2017-18 to provide that if the assessee fails to furnish the information and documents as required under Section 92D(4), the prescribed authority can levy penalty of Rs.5 Lakh. It may be noted that Under Section 92D(4) a constituent entity of an International Group is required to maintain certain information and documents in the prescribed manner and furnish the same to the prescribed authority before the due date as provided in that section.

21.7 PENALTY WHERE SEARCH HAS BEEN INITIATED (SECTION 271AA B):

Section 271AAB provides for levy of penalty in which search has been conducted on or after 1.7.2012. Specific rates are provided u/s 271AAB(1) (a),(b) and (c). Amendment made in this section, effective from A.Y. 2017-18, is in clause (c). Here the rate of minimum penalty is 30% and maximum penalty is 90% of the Undisclosed Income. This will now be a flat rate of 60% of Undisclosed Income from A.Y. 2017-18. Further, it is also provided that no penalty u/s 270 A shall be levied on undisclosed income where penalty u/s 271 AAB (1) is leviable.

21.8 PENALTY FOR FAILURE TO FURNISH REPORT U/S. 286 (NEW SECTION 271 GB): A new Section 286 has been added from A.Y 2017-18 providing for furnishing of report in respect of International Group. New 271 GB has been added effective from A.Y. 2017-18 to provide for penalty for non compliance of Section 286 as under.

(i) If any Reporting Entity referred to in section 286 fails to furnish report referred to in Section 286(2) before the due date, the Prescribed Authority can levy penalty at Rs.5,000/- per day if the delay in upto one month and at Rs.15,000/- per day if the failure continues beyond one month.

(ii) If any Reporting Entity fails to produce the information or documents within the period allowed u/s 286(6), the prescribed authority can levy penalty at Rs.5,000/- per every day when the default continues. If this default continues even after the above order levying penalty is passed, the prescribed authority can levy penalty at the rate of Rs.50,000/- per day if the default continues even after service of the first penalty orders.

(iii) If any Reporting Entity Knowingly furnishes inaccurate information in the Report required to be furnished u/s 286(2) the prescribed authority can levy penalty of Rs.5 Lakh.

21.9 PENALTY FOR FAILURE TO FURNISH INFORMATION, STATEMENTS ETC (SECTION 272A): Section 272 A provides for levy of penalty of Rs. 10,000/- for each failure or default to answer the questions raised by an Income tax Authority, refusal to sign any statement or failure to attend and give evidence or produce books or documents as required u/s 131(1). The scope of this section is now extended by amendment of the section from A.Y. 2017-18. It is now provided that penalty of Rs. 10,000/- for each default or failure to comply with a notice issued u/s 142(1), 143(2) or 142(2A) can be levied by the Income tax Authority.

21.10 POWER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES (SECTION 273A):

This section empowers the Principal Commissioner or the commissioner of Income tax to reduce or waive penalty levied u/s 271 of the Income tax Act. This power is extended to penalty levied u/s 270A also w.e.f. A.Y. 2017-18. Further, new subsection (4A) has been added in this section from 1/6/2016 to provide that the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application for waiver or reduction of penalty within a period of one year from the end of the month when application is made by the assessee. As regards all applications for waiver or reduction of penalty pending as on 1.6.2016, the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application on or before 31.5.2017. The Principal Commissioner or the Commissioner shall have to give hearing to the assessee before passing the above order.

21.11 POWER TO GRANT IMMUNITY FROM PENALTY BY PRINCIPAL COMMISSIONER OR COMMISSIONER (SECTION 273 AA ): This section has been amended w.e.f. 1.6.2016. As in section 273A, the Principal Commissioner or the Commissioner is now required to pass the order accepting or rejecting the application for grant of immunity from levy of penalty within one year from the end of the month in which the assessee has made the application for such immunity. As regards pending applications as on 1.6.2016, the Principal Commissioner or the Commissioner has to pass orders accepting or rejecting the application on or before 31.5.2017.

21.12 GENERAL:
(i) From the above discussion it is evident that the existing concept of levying penalty u/s 271 for concealment of income or furnishing of inaccurate particulars of income is now given up. New Section 270A, which will replace Section 271 from 1.4.2016, introduces a new concept of “Under Reporting of Income” and “Misreporting of Income”. Considering the way these two terms are explained in the new Section 270A, it appears that there will be a thin line of distinction between the two in respect some of the items of additions and disallowances. Since the penalty with respect to Under Reporting of Income is 50% and the penalty with respect of Misreporting of income is 200%, the A.O. will try to bring as many items of additions / disallowances under the head Misreporting of Income. Questions of interpretation will arise and tax litigation on this issue may increase.

(ii) As stated earlier, the recommendation of Justice Eshwar Committee has not been fully implemented while drafting the new Section 270A. The committee has specifically stated that no penalty should be levied where the A.O. takes a view which is different from the bona fide view adopted by the assessee on any issue involving the interpretation of any provision and is supported by any judicial ruling. It is unfortunate that this concept is not introduced in the new section 270A.

22. OTHER PROVISONS :

22.1 TAX ON DEEMED INCOME U/S 68 – SEC 115 BBE

Section 115 BBE is amended w.e.f. A.Y 2017-18. At present this section provides that deemed income u/s 68, 69, 69A, 69B, 69C and 69D is taxable at the rate of 30%. Further, no deduction for any expenditure or allowance relatable to such income is allowed. It is now provided that no set off of any loss shall be allowable from such deemed income u/s 68, 69, 69A to 69D.

22.2 ASSESSEE DEEMED TO BE IN DEFAULT – SECTION 220: Section 220 provides that an assessee shall be deemed to be in default if the taxes due are not paid. Interest is payable u/s 220(2) for the delay in payment of tax. If the assessee applies for waiver or reduction of interest to the Commissioner u/s 220(2A), the same can be waived or reduced. Section 220(2A) is now amended, effective from 1.6.2016, to provide that the commissioner should pass the order accepting or rejecting such application within a period of 12 months of the end of the month when application for waiver or reduction of interest is made. In respect of all pending applications, the order will have to be passed by the commissioner on or before 31.5.2017.

22.3 PROVISION TO GIVE BANK GUARANTEE – SECTION 281B:

(i) At present, the AO may provisionally attach an assessee’s property if he considers it necessary for protecting revenue’s interest during the pendency of assessment or reassessment proceedings. Section 281B is amended w.e.f. 1.6.2016.

(ii) Based on Justice Easwar Committee’s recommendation, this amendment provides that the assessee may provide bank guarantee of sufficient amount. In such a case the AO has to revoke the provisional attachment if the guarantee is for more than the fair market value of the property attached or it is sufficient to meet the revenue’s interest. The AO may refer to the Valuation Officer for valuing the property. The AO should pass an order revoking provisional attachment within 15 days from the date of receipt of the bank guarantee or within 45 days if reference is made to Valuation Officer. The AO may invoke the bank guarantee if the assessee fails to pay tax demand or if he fails to renew or furnish new bank guarantee at least 15 days prior to the expiry of the bank guarantee.

22.4 AUTHENTICATION OF NOTICE – SECTION 282A: To facilitate e-assessment, it has now been provided from 1.6.2016 that the notice and other documents issued by the department can be either in paper form or in electronic form. The detailed procedures for this purpose will be prescribed.

22.5 SECURITIES TRANSACTION TAX (STT ): Section 98 of the Finance (No.2) Act, 2004 has been amended w.e.f. 1.6.2016. The present rate of 0.017% STT on sale of option on securities, where option is not exercised, is increased to 0.05%. It is also provided that STT will not be payable on securities transactions entered into on a recognized Stock Exchange located in International Financial Service Centre.

23. THE INCOME DECLARATION SCHEME – 2016:

23.1 As stated by the Finance Minister in Para 159 to 161 of his Budget Speech, in Chapter IX (Sections 178 to 196) of the Finance Act, 2016, “The Income Declaration Scheme, 2016”, has been announced. This scheme is akin to a Voluntary Disclosure Scheme. The scheme will come into force on 1st June, 2016. The declaration for undisclosed domestic income or assets can be made in the prescribed form within 4 months i.e on or before 30th September, 2016. The tax at the rate of 30% of the disclosed income will be payable with surcharge called Krishi Kalyan Surcharge at 7.5% and penalty at 7.5%. Hence, total amount payable will be 45% of the income declared by the assessee under the scheme. This tax, surcharge and penalty will be payable within two months (i.e. on or before 30th November, 2016)

23.2 WHO CAN MAKE DECLARATION UNDER THE SCHEME:

Any Individual, HUF, AOP, BOI, Firm, LLP or company can make a declaration of undisclosed income or assets during the specified period (1.6.2016 to 30.09.2016). However, Section 193 of the Finance Act, Provides that the provisions of the Scheme shall not apply to following persons.

(i) Any person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

(ii) Any person in respect of whom prosecution has been launched for an offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act 1967 and the Prevention of Corruption Act, 1988.

(iii) Any person who is notified u/s 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

(iv) The scheme is not applicable in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

(v) Any undisclosed income chargeable to tax under the Income tax Act for any previous year relevant to Assessment Year A. Y. 2016-17 or earlier years where (a) N otice u/s 142, 143(2), 148, 153A or 153C of the Income tax Act has been issued and the assessment for that year is pending (b) Search u/s 132 or requisition u/s 132A or survey u/s 133A of the Income tax Act has been made in the previous year and notices u/s 143(2), 153A or 153 C have not been issued and the time limit for issue of such notices has not expired and (c) Information has been received by the competent authority under an agreement entered into by the Government u/s 90 or 90A of the Income tax Act in respect of such undisclosed asset.

23.3 WHICH INCOME OR ASSETS CAN BE DECLARED:

Section 180 of the Act provides that every eligible person can make declaration under the Scheme in respect of the undisclosed income earned in any year prior to 1.4.2016. For this purpose income which can be disclosed will be as under.

(i) Income for which the person has failed to furnish return of income u/s 139 of the Income tax Act.

(ii) Income which the person has failed to disclose in the return filed before 1.6.2016.

(iii) Income which has escaped assessment by reason of the failure on the part of the person to furnish return of income or to disclose fully and truly all material facts.

(iv) Where such undisclosed income is held in the form of investment in any asset, the fair market value of such asset as at 1.6.2016 shall be deemed to be the undisclosed income. For the purpose of determination of Fair Market Value of such assets, CBDT has been authorized to prescribe the Rules.

(v) No deduction for any expenditure or allowance shall be allowed against the income which is disclosed under the Scheme.

23.4 MANNER OF DECLARATION:

(i) The declaration under the Scheme is to be made in the prescribed Form. The same is to be submitted to the Principal Commissioner of Income tax or the Commissioner of Income tax who is authorized to receive the same. The declaration is to be signed by the authorized person as provided in Section 183 of the Finance Act. A person who has made a declaration under the scheme cannot make another declaration of his income or income of any other person. If such second declaration is made it will be considered as void. It is also provided that if a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated a void.

(ii) As stated earlier, the tax (including Surcharge and penalty) of 45% of the income declared is to be paid on or before 30.11.2016. The proof of such payment will have to be filed before the due date. If this payment is not made, the declaration will be considered as void. In this case, if any tax is deposited, the same will not be refunded. If the declaration is considered as void, the amount declared by the person will be deemed to be income of the declarant and will be added to the other income of the declarant and assessed under the Income tax Act. If the declarant has paid the tax, Surcharge and penalty due as per the declaration before the due date, the income so disclosed will not be added to the income of any year. There will be no scrutiny or enquiry regarding such income under the Income tax or the Wealth tax Act.

(iii) The declarant shall not be entitled to reopen any assessment or reassessment made under the Income tax or Wealth tax Act or claim any set off or relief in any appeal, reference or other proceedings in relation to such assessment or reassessment. In other words, declaration under the scheme shall not affect the finality of completed assessments.

23.5 IMMUNITY:

(i) The scheme provides for immunity from proceedings under other Acts as under:

(a) Provisions of Benami Transactions (Prohibition) Act, 1988, shall not apply in respect of the assets declared even if such assets exist in the name of ‘Binamidar’.

(b) No Wealth tax shall be payable under the Wealth tax Act in respect of any undisclosed cash, Bank Deposits, bullion, jewellery, investments or any other asset declared under the scheme.

(c) No prosecution will be launched against the declarant under the Scheme in respect of any income/asset declared under the Income tax or Wealth tax Act.

(iii) It is also provided that nothing contained in the declaration made under the Scheme shall be admissible as evidence against the declarant under any other law for the purpose of any proceedings relating to imposition of penalty or for the purposes of prosecution under the Income tax or Wealth tax Act.

(iv) It may be noted that no immunity is provided in the scheme from proceedings under the Foreign Exchange Management Act, Money Laundering Act, Indian Penal Code or any other Act.

23.6 GENERAL:

(i) Section 195 of the Finance Act provides that if any difficulty arises in giving effect to the provisions of the Scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after the expiry of 2 years i.e. after 31.5.2018. Section 196 of the Finance Act authorizes the Government to notify the Rules for carrying out the provisions of the scheme and also prescribe the Form for making the declaration under the scheme.

(ii) Last year an Amnesty Scheme under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, was announced. Under this Scheme it is reported that 644 persons declared income of about Rs.4,164 crore, and paid tax of about Rs.2,428.40 crore.

(iii) In the Finance Act, 2016 in order to give one time opportunity to persons to declare undisclosed domestic income and assets this disclosure scheme has been announced. It appears that under this Scheme the declarant will have to disclose income and specify the year in which it was earned. Further, there is a provision in the scheme that any person in whose case notice u/s 142(1), 143(2), 148, 153A or 153C is issued for any year, and assessment is pending, such person cannot declare undisclosed income of that year. This will be a great impediment in the success of the scheme. It appears that the scheme is announced by the Government with all good intentions. It will be advisable for the persons who have not complied with the provisions of the Income tax Act or the Wealth tax Act to come forward and take advantage of the scheme and buy peace.

24. TO SUM UP:

24.1 The Finance Minister has taken some steps towards his declared objective of granting relief to small tax payers, granting incentives for promotion of affordable housing, reducing tax litigation, affording onetime opportunity to declare undisclosed domestic income and assets etc. In some of the areas the efforts are half hearted and the assessees may not get full advantage from the provisions made in the Financial Act.

24.2 Justice Easwar Committee appointed to make recommendations for simplification of Income tax provisions has submitted its report. Some of the amendments made in the Income tax Act are based on these recommendations. It is rather unfortunate that these recommendations are only partly implemented in this Budget.

24.3 Last year the Government made an attempt to address the issue relating to undisclosed income and assets in Foreign Countries. A “Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” was passed. This year the Finance Act contains “The Income Declaration Scheme, 2016”. Under this Scheme one time opportunity is given to those persons who have not declared their domestic income or assets in the past. 45% tax (including surcharge and penalty) is payable on such undisclosed income. There are some conditions in the scheme which may be difficult to comply with. CBDT has issued some clarifications on various issues. It is reported that the last year’s scheme for declaration of undisclosed Foreign Income and Assets did not get adequate response. Let us hope that the scheme announced this year for declaration of undisclosed domestic income and assets gets adequate response.

24.4 Another step taken by the Finance Minister relates to reduction in tax litigation. For this purpose “Dispute Resolution Scheme – 2016” has been announced. This scheme is similar to “Kar Vivad Samadhen Scheme”, which was introduced in 1998. This scheme is limited to settlement of tax disputes pending on 29.2.2016 before CIT (A). It does not cover tax disputes before ITA Tribunal, High Court or the Supreme Court. Here also the provision for payment of notional penalty @ 25% where disputed tax exceeds Rs. 10 Lakh will be an impediment in the success of the scheme. This Scheme covers Settlement of tax disputes due to retrospective amendments made in the Income tax Act. For such cases tax disputes pending before any appellate authority can be settled on payment of only disputed tax. Interest and penalty will be waived. It will be possible for assessees to settle tax disputes relating to retrospective amendments made in section 9, 14A, 37, 40, etc.

24.5 The introduction of a new chapter XII – EB (Section 115 TD to 115 TF) effective from 1.6.2016 to levy ‘Exit Tax’ on Charitable Trusts is a big blow on Charitable Trusts. In our country Charitable Trusts are working to supplement the work of the Government in the field of education, medical relief, eradication of poverty, relief during calamities such as drought, earthquake etc. For this reason, exemption is given to such charitable trusts: In recent years it is noticed that the provisions relating to the exemption to such trusts are being made more complicated. The attempt of the tax administration is to see how best this benefit to charitable trusts is denied. By levy of “Exit Tax” on cancellation of registration u/s 12AA is one such step. It is the general experience of such trusts that section 12AA Registration is being cancelled on some technical grounds and the trusts have to litigate on this issue. If, ‘Exit Tax’ is levied on cancellation of Registration u/s 12AA, the trustees of such trusts will be put to great hardship.

24.6 Another major amendment made this year is about change in the concept for levy of penalty. The concept of concealment of Income or furnishing of inaccurate particulars of income for levy of penalty is now given up. Now, penalty will be leviable if there is a difference between the assessed income and declared income. Such difference will be divided into two parts viz. “Under Reporting” and “Misreporting” of income. There is a thin line of distinction between the two. This new concept will invite litigation about interpretation whether there is “Under Reporting” where penalty is 50% of tax or “Misreporting” where penalty is 200% of tax. The old concept of concealment or furnishing of inaccurate particulars of income for levy of penalty has been interpreted in several judgments of the High Courts and the Supreme Court in last more than 6 decades. The law on the subject was well settled. This new concept of “Under Reporting” and “Misreporting” introduced this year will unsettle the settled law and assessees will have to face fresh litigation.

24.7 Welcome provision introduced this year on the recommendation of Justice Easwar Committee relates to extension of concept of presumptive taxation in cases of small professionals earning gross receipts not exceeding Rs. 50 Lakh. They will not be required to maintain accounts if they offer 50% of Gross Receipts as their income. Justice Easwar Committee had suggested limit of gross receipts at Rs. 1 Crore and presumptive income at 33 1/3%. This suggestion is only partly implemented. This provision will go a long way in resolving tax disputes in cases of small professionals.

24.8 Taking an overall view of the amendments made this year in the Income tax Act, one can compliment the Finance Minister for his sympathetic approach to the tax payers. Some of the amendments are really tax payer friendly as they grant relief to small tax payers. He has taken measures to promote affordable housing and to boost growth and employment generation.

24.9 While concluding his Budget Speech he has observed in Para 188 and 189 as under:

“188. This Budget is being presented amidst global and domestic headwinds. There are several challenges. We see them as opportunities. I have outlined the agenda of our Government to “Transform India” for the benefit of the farmers, the poor and the vulnerable.

“189. It is said that “Champions are made from something they have deep inside of them – a desire, a dream, a vision. We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor, and the vulnerable; we have a dream to see a more prosperous India, and vision to “Transform India”.

Let us hope he is able to achieve his goal with the cooperation of all citizens of the country.

shailesh.kwebmaker

Post Budget Memorandum 2016

1. Place Of Effective Management [Poem] – Section 6 – Clause 4
2. Deduction u/s 32AC – Clause 14
3. Maintenance of Books of Account by a person carrying on a Profession – Section 44AA – Clause 24
4. Limit for Tax Audit – Section 44AB – Clause 25
5. Presumptive Taxation – Section 44AD – Clause 26
6. Presumptive Taxation – Section 44ADA – Clause 27
7. Conversion of Company into Limited Liability Partnership [LLP] – Section 47(xiiib) – Clause 28
8. Consolidating Plans of a Mutual Fund Scheme – Section 47(Xix) – Clause 28
9. Special provision for full value of consideration – Section 50C – Clause 30
10.
Receipt by an Individual or HUF of sum of money or property without
consideration or for inadequate consideration – Section 56 (2)(Vii) –
Clause 34
11. Deduction of Interest – Section 80EE – Clause 37
12. Deduction for an eligible Start-Up – Section 80-IAC – Clause 41
13. Deduction of profits from housing projects of Affordable Residential Units – Section 80-IBA – Clause 43
14. Deduction for Additional Employee Cost – Section 80JJAA – Clause 44
15. T ax on Income of Certain Domestic Companies – Section 115BA – Clause 49
16. Additional Tax on Dividends from Companies u/s 115BBDA – Clause 50
17. Provisions relating to Minimum Alternate Tax – Section 115JB – Clause 53
18. T ax on Distribution of Income by domestic company on buy-back of shares – Section 115QA – Clause 56
19. Special provisions relating to Tax on Accreted Income
of Certain Trusts and Institutions – Chapter XII-EB – Sections 115 TD To 115 TF – Clause 60
20. Persons having income Exempt u/s. 10 (38) required to file Return u/s 139 – Clause 65
21. Adjustments to Returned Income – Section 143 – Clause 66
22. Advance-Tax – Section 211 – Clause 87
23. Penalty – Section 270A – Clause 97
24. Equalisation levy – Chapter VIII – Clauses 160 to 177
25. Income Declaration Scheme, 2016 – Clauses 178 To 196
26. Shares Of Unlisted Companies – Period Of Holding For Becoming Long-Term Asset – Para 127 Of Budget Speech

1 Place of Effective Management [POEM] – section 6 – clause 4

Section
6(3) is proposed to be amended to bring in the concept of ‘Place of
Effective Management’ (POEM) in case of companies, w.e.f. 1-4-2017.

Section
6(3), as amended by the Finance Act, 2015 provides that a company shall
be resident in India in any previous year if it is an Indian company or
its place of effective management, in that year, is in India. The term
‘Place of Effective Management’ has been defined to mean a place where
key management and commercial decisions that are necessary for the
conduct of the business of an entity as a whole are, in substance made.

It
is submitted that the concept of POEM is a subjective one, and has
different meanings from country to country, as clarified by the OECD
itself. The OECD has, in its Report on BEPS Action Plan 6 – `Preventing
the Granting of Treaty Benefits in Inappropriate Circumstances’,
recognised that the concept of POEM is not an effective test of
residence, by stating that the use of POEM as tie-breaker test was
creating difficulties, and that dual residency should be solved on case
to case basis rather than by use of POEM.

It would also hamper
the efforts of Indian companies to become multinationals, by subjecting
their overseas subsidiaries to be potentially taxed in India, merely
because the holding company is involved in approving decisions of the
overseas subsidiaries.

Further, section 2(10) of the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
defines ‘resident’ to mean a person who is resident in India within the
meaning of section 6 of the Income-tax Act. This could result into very
harsh and unintended consequences in cases where POEM of company is
subsequently held to be in India.

Suggestions:
a) The earlier provision of ‘management and control being wholly located in India’ should be restored.

b)
The CBDT had on 23rd December, 2015, issued the Draft Guiding
Principles for determination of POEM of a company, for public comments
and suggestions. The said guiding principles have not been finalised so
far.

Hence, it is alternatively suggested that the
applicability of POEM for determination of residential status of
companies should be deferred for 1 more year and should be considered
along with introduction of GAAR provisions.

c) In
the alternate, considering the object of preventing misuse, appropriate
provision should be added in the current section providing that the
criteria of POEM shall apply only in case of shell companies.

d)
Suitable amendments should be made in the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of tax Act, 2015, to obviate
any unintended consequences.

2 Deduction u/s. 32AC – clause 14

The
amendment proposed by the Finance Bill, 2016 effectively provides that
where the acquisition and installation of the plant and machinery is not
in the same year, the deduction under this section shall be allowed in
the year of installation. This amendment is proposed to become effective
from 1st April 2016.

Suggestion:

In
order to settle the controversy and avoid unnecessary litigation on the
issue, the proposed amendment be made effective from 1st April 2014 i.e.
from the date when section 32AC became effective.

3 Maintenance of books of account by a person carrying on a profession – section 44AA – clause 24

Although
it is proposed to introduce section 44ADA providing for presumptive
taxation for professionals referred in section 44AA(1), provision
contained in section 44AA regarding maintenance of books of account has
not been proposed to be amended. Consequentially, such professionals
will continue to be required to maintain books of account.

Suggestion:

Section
44AA be amended to exempt professionals covered by the presumptive
taxation scheme u/s 44ADA from mandatory requirement of maintenance of
books of account.

4 Limit for Tax Audit – section 44ab – Clause 25

(a)
It is proposed to amend section 44AD increasing the limit of being
‘eligible business’ as defined in clause (b) of the Explanation from Rs.
1 crore to Rs. 2 crore. This is welcome. However, the limit for
carrying out Tax Audit u/s. 44AB in case of business continues to be Rs.
1 crore.

Suggestion:

Simultaneously
with the amendment to increase the limit for applicability of
presumptive taxation u/s 44AD, the limit of Rs. 1 crore in clause (a) of
section 44AB be increased to Rs. 2 crore.

(b) A
professional who does not declare 50% of the gross receipts as income
from profession will be required to get his accounts audited u/s 44AB
irrespective of his gross receipts. A small professional needs to be
exempted from the requirement of Tax Audit even if he does not declare
income in accordance with the scheme of presumptive taxation u/s 44ADA.

Suggestion:

A
professional having gross receipts not exceeding Rs. 25 lakh should not
be required to get his accounts audited u/s. 44AB even if he has not
declared his professional income in accordance with the presumptive
taxation scheme u/s 44ADA. The existing limit of Rs. 25 lakh be
continued and where the gross receipts exceed Rs. 25 lakh, the higher
limit of Rs. 50 lakh should apply where the income from profession has
not been declared in accordance with the presumptive taxation scheme u/s
44ADA. Simultaneously, appropriate amendment may also be made in the
sub-section (4) of the proposed new section 44ADA.

5 Presumptive Taxation – Section 44AD – Clause 26

(a)
T he Finance Bill, 2016 proposes to delete the proviso to sub-section
(2) which provides for deduction of salary and interest paid to partners
of a partnership firm from the presumptive income computed under
sub-section (1). The reason given in the Memorandum explaining the
provisions of the Finance Bill is hyper technical. The provision has
been working well without any difficulty. A beneficial provision should
not be deleted for technical reasons.

Suggestion:

The proviso to sub-section (2) should not be deleted.

(b)
The Finance Bill, 2016 proposes to substitute subsection (4) by new
sub-section (4) which effectively provides that where an assessee does
not declare profit in accordance with the provisions of subsection (1)
in an assessment year, he shall not be eligible to claim the benefit of
section 44AD for the next five assessment years.

It is next to
impossible for a person to misuse the provisions of section 44AD by
manipulating the profits for five years. The proposed provision only
complicates the section. There is no reason to show lack of trust in
assessees.

Suggestion:

The proposed subsection (4) should not be introduced.

6 Presumptive Taxation – Section 44ada – Clause 27

(a)
The proposed new section 44ADA provides for presumptive taxation for
assessees carrying on a profession referred to in section 44(1) and
whose total gross receipts do not exceed Rs. 50 lakh. The Memorandum
explaining the provisions of the Finance Bill states that this provision
shall not apply to Limited Liability Partnership although the section
does not indicate so.

Suggestion:

There
is no reason why the presumptive taxation scheme u/s 44ADA should not
apply to a Limited Liability Partnership. The proposed section should
also apply to a Limited Liability Partnership.

In fact,
clause (a) of the Explanation to section 44AD should also be amended
making a Limited Liability Partnership an eligible assessee for the
presumptive taxation u/s 44AD.

(b) In the proposed section
44ADA, there seems to be no bar of deduction of salary and interest paid
to partner’s u/s 40(b) for firms rendering professional services. At
the same time, proviso similar to the existing proviso to sub-section
(2) of section 44AD is absent.

Suggestion:

A proviso similar to the proviso to sub-section (2) of section 44AD be introduced in the proposed new section 44ADA.

7 Conversion of company into limited liability partnership [LLP] – section 47(xiiib) – clause 28

For
conversion of a private company or an unlisted public company into an
LLP to be tax neutral the conditions mentioned in section 47(xiiib) of
the Act are to be satisfied.

The Finance Bill has proposed to
add one more condition viz., that the total value of the assets, as
appearing in the books of account of the company, in any of the three
previous years preceding the previous year in which the conversion takes
place does not exceed Rs. 5 crore.

The limit of Rs. 60 lakh on
the turnover of the company to be eligible for tax neutrality has made
the provisions of section 47(xiiib) a non-starter. Now, the insertion of
the proposed condition regarding total value of the assets, in the name
of rationalisation, will act as further dampener and would defeat the
very purpose of insertion of the section.

Suggestion:

It
is therefore suggested that in order to encourage conversion of
companies into LLPs by making the same tax neutral, the condition that
the company’s gross receipts, turnover or total sales in any of the
preceding three years did not exceed Rs. 60 lakh, should be withdrawn.

Further
the proposed amendment inserting the condition that the total value of
the assets, as appearing in the books of account of the company, in any
of the three previous years preceding the previous year in which the
conversion takes place does not exceed Rs. 5 crore, should be omitted.

8 Consolidating plans of a Mutual Fund Scheme – Section 47(xix) – Clause 28

Clause
(xix) in section 47 is proposed to be inserted to provide that capital
gain arising on transfer of a capital asset being unit or units in a
consolidating plan of a mutual fund scheme (Original Units) in
consideration of allotment of unit or units in the consolidated plan of
that scheme of the mutual fund (New Units) will not be chargeable to
tax.

Corresponding provision in section 2(42A) providing that in
the case of New Units, there shall be included the period for which the
Original Units were held by the assessee, has remained to be inserted.

Similarly,
corresponding provision in section 49 providing that in the case of New
Units, the cost of acquisition of the asset shall be deemed to be the
cost of acquisition to him of the Original Units, has remained to be
inserted.

Suggestion:

Corresponding amendments in section 2(42A) and section 49, as mentioned above, should be carried out.

9 Special provision for full value of consideration –

Section
50C – Clause 30 Section 50C is proposed to be amended to provide that
where the date of the agreement fixing the amount of consideration for
the transfer of immovable property and the date of registration are not
the same, the stamp duty value on the date of the agreement may be taken
for the purposes of computing the full value of consideration. The
proposed amendment is effective from 1-4-2017.

Suggestion:

Since
this is a clarificatory beneficial amendment, the same should be made
applicable from the date of the insertion of the section i.e. 1-4-2003.

10
Receipt by an individual or huf of sum of money or property without
consideration or for inadequate consideration – Section 56 (2) (vii) –
Clause 34

Section 56(2)(vii) charges to tax receipt by an
individual or an HUF of any sum of money or property without
consideration or for inadequate consideration. Second Proviso to section
56(2)(vii)(c) states that the clause does not apply to receipt of
property from persons mentioned therein or in circumstances mentioned
therein.

Second proviso is proposed to be amended to expand the
scope of non-applicability of the section and accordingly, this section
will also not apply to the receipt of shares of by way of transaction
not regarded as transfer under clause (vicb) or clause (vid) or clause
(vii) of section 47.

Suggestion:

Since
this is a clarificatory beneficial amendment, the same should be made
applicable from the date of the insertion of the section i.e. w.e.f.
1-10-2009.

11 Deduction of interest – section 80EE – clause 37

(a)
A new section 80-EE is proposed to be inserted providing for deduction
of Rs. 50,000 in respect of interest payable on loan borrowed from a
financial institution by an individual assessee for acquiring a
residential house.

One of the conditions for this deduction is that the value of the residential house property should not exceed Rs. 50 lakh.

Suggestion:

In
case of cities of Chennai, Delhi, Kolkata and Mumbai or within the area
of 25 km from the municipal limits of these cities, the limit on the
value of property should be Rs. 1 crore instead of Rs. 50 lakh. Further,
with a view to avoid possible dispute, in clause (iii) of sub-section
(3), instead of using the term ‘value of residential house property’ the
term ‘consideration for the residential house property’ may be used.

(b)
The proposed section provides that the amount of loan sanctioned should
not exceed Rs. 35 lakh. There is no reason for having this condition
for availing the deduction under this section. The financial
institutions have their own well set norms for sanctioning of the loans.

Suggestion:

The condition that the sanctioned loan should not exceed Rs. 35 lakh should be omitted from the proposed section.

12 Deduction for an eligible start-up – section 80-iac – Clause 41

A
new section 80-IAC is being introduced providing tax holiday to
eligible start-ups. The deduction is available only to companies. One of
the conditions for being an eligible start-up is that the total
turnover of its business does not exceed Rs. 25 crore in any of the
previous years beginning on or after 1st April 2016 and ending on the
31st March, 2021.

Suggestions:

(a) The
condition that the turnover of the assessee company should not exceed
Rs. 25 crore in any of the previous years specified in this section
should be omitted.

(b) If at all this condition is
to be retained, the assessee company should only become disentitled to
the deduction from the previous year commencing after the previous year
in which its turnover for the first time exceeds Rs. 25 crore. The
assessee company should get the deduction for all the previous years
including the previous year in which its turnover for the first time
exceeds Rs. 25 crore.

(c) The deduction should not
be restricted only to company assessees but should also be allowed to
partnership firms including a Limited Liability Partnership.

13 Deduction of profits from housing projects of affordable residential units – Section 80-iba – Clause 43

Section
80-IBA is proposed to be inserted to provide for hundred per cent
deduction of the profits of an assessee engaged in developing and
building housing projects approved by the Competent Authority after 1st
June, 2016 but on or before 31st March, 2019 subject to fulfilment of
prescribed conditions.

One of the proposed condition is that the area of the residential unit does not exceed the specified limit.

Suggestion:

a)
The desirability of the proposed deduction to the developers engaged in
building affordable residential units, should be reconsidered in the
light of the objective of the government to reduce the deductions and
exemptions, as the same will benefit the developers and the benefit may
not be passed on to the home buyers.

b) Necessary
clarificatory amendment regarding the sizes of the residential units of
30 square meters or 60 square meters, that the same are based on the
carpet area, should be made.

14 Deduction for additional employee cost – Section 80jjaa – Clause 44

(a)
Section 80JJAA is being substituted providing for deduction in respect
of additional employee cost. Second proviso to clause (i) to Explanation
in sub-section (2) provides that in the first year of a new business,
emoluments paid or payable to employees employed during the previous
year shall be deemed to be the `additional employee cost’. Accordingly,
while determining the additional employee cost total emoluments paid or
payable to all employees including those drawing more than Rs. 25,000
shall be considered.

Suggestion:

If the
above provision is unintended, then to avoid future litigation
appropriate modification may be made providing that in the first year of
a new business while computing emoluments paid or payable to employees
employed during the previous year, emoluments of employees referred to
in sub-clauses (a) to (d) of clause (ii) of the Explanation, shall not
be considered.

(b) Clause (a) of sub-section (2) provides
that no deduction shall be allowed if the business is formed by
splitting up, or the reconstruction, of an existing business or to the
business has been acquired by the assessee by way of transfer from any
other person or as a result of any business reorganisation (collectively
referred to as reorganisation or reorganised business). This indicates
that if a business has been split up or reconstructed or acquired or
reorganised in the past, (even distant past), the assessee will not be
entitled to deduction under this section. This seems to be unintended
and is unjustified.

Suggestion:

In case
of reorganisation of business, the assessee whose business comes into
existence due to the reorganisation should not be entitled to deduction
under this section for the year in which the reorganisation takes place.
In the subsequent years the assessee should be entitled to the
deduction based on additional employee cost as contemplated in the
Explanation to sub-section (2).

15 Tax on income of certain domestic companies – section 115BA – clause 49

The
proposed section 115BA provides for a concessional rate of tax of 25%,
only in case of a newly setup and registered domestic company on or
after 1st March, 2016, subject to fulfilment of prescribed conditions.

Suggestion:

a.
The concessional rate should be extended to all the companies whether
set up and registered before or after 1st March, 2016, which fulfil the
conditions laid down.

b. Further, the provision should be extended to all non-corporate entities which fulfil these conditions as well.

16 Additional tax on dividends from companies u/s 115bbda – Clause 50

New
section 115BBDA is proposed to be introduced levying 10% tax on
dividends in excess of Rs. 10 lakh received from `a domestic company’ by
certain assessees. Sub-section (1) uses the term ‘a domestic company’.

Suggestion:

If
it is intended that tax u/s 115BBDA is to be levied if the aggregate
dividends received from various domestic companies exceed Rs. 10 lakh,
then the proposed section should be appropriately modified in order to
avoid disputes and potential litigation.

17 Provisions relating to minimum alternate tax – Section 115jb – Clause 53

The Finance Bill 2016 has proposed to insert Explanation 4 to section 115JB.

As
per clause (ii) of the proposed Explanation 4, the provisions of
section 115JB would be applicable to foreign company that require to
seek registration under any law if it is resident of a non-treaty
country.

Section 386 of Companies Act, 2013 defines “place of
business” very broadly to mean a place which includes share transfer or
registration office. Therefore, as per provisions of Companies Act, 2013
any foreign company having any place of business shall have to register
with ROC. Thus, in case of non-treaty countries, any company having any
type of business presence in India would result in applicability of
provision of section 115JB.

Foreign companies now require
registration and need to comply with other requirements under the
Companies Act, 2013 even if they operate in India through agents. In
such cases, they would also get covered by clause (ii) of Explanation 4
to section 115JB above.

Suggestions:

A
clarification should be inserted that unless the assessee has a
permanent establishment in India, the provisions of section 115JB will
not be applicable. Simultaneously, `permanent establishment’ should be
exhaustively defined for this purpose.

In
addition, an exception can be made in cases of airlines, shipping
companies, etc. where even if there is a PE in India but if the income
of such assessee is exempt pursuant to the provisions of respective DTAA
, the provisions of section 115JB will not be applicable.

18 Tax on distribution of income by domestic company on buy-back of shares – Section 115qa – Clause 56

Section
115QA is proposed to be amended to provide that the provisions of this
section shall apply to any buy back of unlisted share undertaken by the
company in accordance with the provisions of the law relating to the
Companies and not necessarily restricted to section 77A of the Companies
Act, 1956. It is further proposed to provide that for the purpose of
computing distributed income, the amount received by the company in
respect of the shares being bought back shall be determined in the
prescribed manner.

Suggestion:

Suitable
amendments should be made for nonapplicability of the section in cases
where buyback of a company’s shares is financed out of share premium or
an issue of shares of a different category.

Provisions
of Chapter XII-DA should be made applicable only to non-resident
shareholders, as resident shareholders would, in any case, be subjected
to tax u/s 46A.

19 Special provisions relating to tax on
accreted income of certain trusts and institutions – chapter xii-eb –
Sections 115 td to 115 tf – Clause 60

The new Chapter XII-EB
proposed to be inserted by the Finance Bill, 2016 provides for levy of
tax on market value of assets of a charitable trust or institution under
certain circumstances.

While appreciating the need for making
provision for an `exit tax’ when a charitable entity ceases to be so,
the provisions of the new Chapter are draconian and will cause extreme
hardship in many cases, particularly those falling under the deeming
fiction of sub-section (3) of the new section 115TD. These are
enumerated below along with our suggestions.

(a) Section 2(15)
defines ‘charitable purpose’. This definition has been undergoing
changes repeatedly. There are a large number of entities which due to
the operation of the provisos to section 2(15), may not be eligible for
exemption u/s 11. These entities have not changed their activities and
they continue to be charitable under the general law. It is not fair and
justified that such entities are levied tax on the market value of
their assets.

Suggestion:

It is
therefore suggested that the deeming fictions of sub-section (3) should
be deleted. Alternatively, mere cancellation of registration u/s 12AA of
the Act should not trigger the provisions of Chapter XII-EB. If an
entity ceases to be a charitable entity for the purposes of the Act due
to the operation of proviso to section 2(15), such an entity should not
be charged tax on the market value of its assets as contemplated by
Chapter XII-EB, so long as it continues to apply its corpus and income
for charitable purposes as defined u/s. 2(15) without having regard to
the provisos to the said section.

(b) The new Chapter
XII-EB proposes that the charitable entity will have to pay tax on the
accreted income within 15 days from the date of cancellation of
registration u/s 12AA of the Act.

Cancellation of registration
u/s 12AA of the Act has become common in recent times. Invariably the
charitable entity prefers an appeal and often the order cancelling the
registration of the charitable entity is set aside and the registration
is restored. In such circumstances, the proposed provision requiring
such entity to pay tax under Chapter XII-EB within 15 days of the date
of cancellation of registration will put the entity to extreme hardship
and cause irreversible damage.

Suggestion

The
levy of tax under Chapter XII-EB should be postponed till the order
cancelling the registration becomes final, where such cancellation is
the subject matter of an appeal.

Suggestion:

A period of six months may be permitted for payment of the tax on the accreted income.

(d)
Section 115TD(3) provides that when there is modification of objects of
a charitable entity, and the modified objects do not confirm to the
conditions of registration, and the entity has not applied for fresh
registration u/s 12AA within the previous year or the application for
the registration has been rejected, the entity will be deemed to have
been converted into any form not eligible for registration u/s 12AA.

Suggestions:

A reasonable period of one year should be permitted for the entity to make an application for registration u/s 12A/12AA .

Further,
if the entity has filed an appeal against the order rejecting its
application for registration u/s 12AA , the levy of tax should be
postponed till the order rejecting the application for registration
becomes final.

Presently, there is no provision in
the Act for seeking fresh registration u/s 12A/12AA on modification of
objects of the trust. In order to bring clarity, appropriate provisions
may be made for seeking fresh registration u/s 12A/12AA on modification
of objects of the trust.

(e) The new Chapter
provides that the principal officer, the trustee and the
trust/institution shall be liable to pay the tax on the accreted income.

Suggestion:

It should be clarified that the liability is only in the representative capacity and not in the personal capacity.

(f) It is not clear how the provisions of the new Chapter will be implemented.

Suggestion

Appropriate provisions should be made for assessment, appeal and stay in the new Chapter.

20 Persons having income exempt u/s 10 (38) required to file return u/s 139 – clause 65

Sixth
proviso to section 139(1) is proposed to be amended making it mandatory
for a person to file return of income if his total income without
giving effect to the provisions of section 10(38) exceeds the maximum
amount not chargeable to income tax.

Suggestion:

In
order to avoid potential litigation and unintended default by assessees
in filing the return, appropriate explanation should be inserted under
the proviso being amended to clarify that for this purpose, the capital
gains should be computed based on indexed cost of acquisition.

21 Adjustments to returned income – section 143 – clause 66

The
proposal to increase the scope of adjustments that can be made to the
returned income while processing the same u/s 143(1) is fraught with
difficulties. The insertion of sub-clauses (iv) and (vi) in particular
are highly objectionable as these would lead to unprecedented litigation
and hardship to assessees.

In the Form No. 3CD of the tax audit
report, the assessee reports several matters where there could be a
difference of opinion between the assessee and the tax auditor. Many
times due to early completion of tax audit and payment of various
section 43B dues or TDS payable before the due date of filing the
returns u/s 139(1), may also lead to differences. In addition, in some
cases, the issues may remain debatable and the tax auditor out of
abundant caution mentions the same in the tax audit report. However,
this cannot be made a subject matter of automatic adjustment to the
income u/s 143(1). The very objective of section 143(1) is to permit the
income-tax department to make adjustments on account of prima facie
incorrect claims and of arithmetical mistakes in the return.

When
a tax payer takes a particular stand based on judicial decisions or
interpretation of law or a legal opinion, the same cannot by any stretch
of imagination be placed in the same basket as prima facie
mistakes/incorrect claims.

Similarly, the proposal to add income
appearing in Form 26AS / 16 / 16A to the returned income if that income
has not been reported in the return, is also extremely unfair and
unwarranted. The issue of comparing the returned figures with the Form
26AS has already resulted in massive problems across the country for a
large number of tax payers. Now, if the income is also sought to be
adjusted in line with the Form 26AS then it will create unprecedented
chaos.

At present, once the CPC processes the returns, if there
is an issue of granting credit for TDS and such issue arises on account
of differences in the method of accounting followed by the deductor and
the deductee, the CPC transfers the file to the jurisdictional assessing
officer. In such cases, the tax payer is caught between the CPC and the
jurisdictional assessing officer. Despite running from pillar to post,
rectification of wrong demands takes months to get rectified and that
too after a lot of stress and tension for the concerned tax payer.

In
this back ground, adding to the tax payer’s problems would not be the
right thing to do and would create mistrust in the whole system.

Suggestion:

The proposed sub clauses (iv) and (vi) be deleted.

22 Advance-tax – Section 211 – clause 87

The
due dates of payment of advance tax by a noncorporate assessee are
proposed to be brought in alignment with the due dates applicable to
corporate tax assessees i.e. non-corporate assessees are also required
to pay advance tax, 4 times in a year.

Suggestion:

The due dates for advance tax payments should be kept as per the original provisions for the noncorporate assessees.

23 Penalty – Section 270A – clause 97

Section
270A is proposed to be inserted w.e.f. A.Y. 2017-18 in order to
rationalise and bring objectivity, certainty and clarity in the penalty
provisions.

It is submitted that the present penalty provisions
u/s. 271 have been on the statute book for a fairly long time and the
law on penalty has by and large been settled with significant certainty.

The new concepts of “under-reporting” and “misreporting” for
levy of penalty are going to be matters of serious debate and
litigation.

Suggestions:

Instead of changing the
entire scheme of levy of penalty, suitable amendments could be made to
existing provisions, retaining the concepts of “furnishing of inaccurate
particulars of income” and “concealment of income”.

Alternatively, if the proposed provisions of section 270A are retained, the following points may be noted:

i.
There is no specific amendment in section 246A of the Act, providing
for right of appeal against any penalty order u/s 270A. In all fairness
and in the interest of justice, penalty order should be appealable.

ii.
Section 270A(3)(i)(b) provides that in a case where no return is
furnished, the amount of under reported income shall be (a) in case of a
company, firm or local authority, the entire amount of income assessed
and (b) in other cases, the difference between amount of income assessed
and the maximum amount not chargeable to tax. The provisions are too
harsh and drastic.

Suggestions:

a) Specific right of appeal in section 246A of the Act should be provided by suitable amendment; and

b)
necessary amendments should be made in section 270A(3)(i)(b) to provide
for relief in cases having bonafide reasons for non-filing of returns
of income, where full / substantial portion of the taxes have been
deducted / paid.

c) For the sake of clarity, an Explanation may
be added to define, as to what would constitute a bona fide explanation
for the purposes of clause (b) of sub-section (6) of section 270A.

For
this purpose, ‘bona fide explanation’ should include claim under wrong
section(s), facts disclosed prior to issue of notice u/s. 143(2), agreed
addition to buy peace and / or end litigation and reliance on judicial
decisions/interpretation in case of conflicting decisions.

24 Equalisation Levy – Chapter viii – Clauses 160 to 177

Based
on the reading of Chapter VIII, it is understood that the Equalisation
levy is not a “tax” on income but a “levy”, therefore all other normal
provision of the Act will not apply, unless specifically mentioned in
Chapter VIII.

It is necessary to have specific mechanism for the purpose of collection of the Equalisation levy.

Further,
it also needs to be clarified whether section 147/ 263 can be invoked
for purpose of levy, as the provisions of clause 175 of the Finance
Bill, 2016, do not mention anything in this regard.

Suggestions:

A
clarification needs to be issued as to whether the Equalisation levy is
to be paid on the payments made for advertisement at combined cost in
both electronic media and print media, and on what amount.

Further,
clarification needs to be issued that levy is not applicable to
payments made for advertisement on international radio and television
networks.

An appeal also needs to be provided for, where an
Assessing officer takes a view that equalisation levy is chargeable,
while the assessee is of the view that he is not liable for such levy.

25 Income Declaration Scheme, 2016 – Clauses 178 to 196

The
Finance Bill, 2016 proposes to introduce The Income Declaration Scheme,
2016 (Declaration Scheme). We believe that notwithstanding the name,
the Declaration Scheme, in substance, is an Amnesty Scheme. One may
recall that the previous government had given assurances in the Supreme
Court of India that in future no scheme providing amnesty to tax evaders
shall be introduced.

Various provisions make the Declaration Scheme an Amnesty Scheme.

Therefore, in principle, we oppose the Income Declaration Scheme.

Presuming that the Declaration Scheme will be enacted along with the Finance Bill, 2016 our suggestions are as under:

(a)
Clause 194(c) provides for taxation of any income or an asset acquired
prior to the commencement of the Declaration Scheme (and in respect of
which no declaration has been made under the Declaration Scheme) in the
year in which a notice u/s 142 or 143(2) or 148 or 152A or 153C is
issued. By deeming provision, time of accrual of such income is
modified.

In effect, any undisclosed income of any past year
will be chargeable to tax in future year without any limitation as to
the time. Such a provision completely overrides the time-limit specified
in section 149.

Suggestion:

Clause 194(c) should be omitted.

(b)
Appropriate clarifications by way of circulars and instructions be
issued well in time so that there is clarity about its implementation.

26 Shares of unlisted companies – period of holding for becoming long-term asset – para 127 of budget speech

The
Finance Minister in paragraph 127 of the Budget Speech had stated that
the period for getting an effect of long-term capital gain regime in
case of unlisted companies is proposed to be reduced from three years to
two years. However, the necessary amendment to this effect does not
appear in the Finance Bill, 2016.

Suggestion:

Section 2(42A) be amended to give effect to the proposal in the speech of the Honourable Finance Minister

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Oxford Softech P. Ltd. vs. ITO ITAT Delhi `E’ Bench Before J. Sudhakar Reddy (AM) and Beena A. Pillai (JM) ITA No. 5100/Del/2011 A.Y.: 2004-05. Date of Order: 7th April, 2016. Counsel for assessee / revenue: Salil Kapoor, Vinay Chawla & Ananya Kapoor / P. Damkanunjna

Section 271(1)(c) – Making a claim for deduction under the provisions of section 80 IA of the Act which has numerous conditions attached, is a complicated affair. Since the assessee claimed deduction u/s. 80IA, based on legal advice, and filed the report of Chartered Accountant in Form No. 10CCB along with return of income and all details were also filed along with the return of income, it cannot be said that this is a case of furnishing of inaccurate particulars of income.

Facts
The assessee company, engaged in providing certain services including air conditioning, generator backup, interiors, electric, wooden fixtures and fittings etc., claimed deduction of 100% of its gross total income of Rs. 36,80,723 u/s. 80IA of the Act. The report of the Chartered Accountant in Form No. 10CCB was filed along with return of income.

The Assessing Officer denied claim of deduction u/s. 80IA of the Act. on the ground that the assessee was merely providing certain interiors, furniture, fixtures and generator back up power services etc., for BPO/Software companies which were lessees of the building owned by its director and that the assessee was not engaged in business of developing, operating and maintaining the infrastructure facilities as was specified in section 80IA of the Act.

Aggrieved by the denial of deduction u/s. 80IA of the Act, the assessee preferred an appeal to CIT(A) but when the appeal came up for hearing it withdrew the appeal filed.

The AO levied penalty u/s 271(1)(c) on the ground that the assessee had furnished inaccurate particulars.

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

Aggrieved by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that a perusal of audit report filed by the assessee along with his return of income, to support the claim of deduction u/s. 80IA(7), demonstrates that the auditors of the assessee also believed that the assessee was eligible for deduction u/s. 80 IA of the Act. It was a conscious claim made by the assessee supported by an audit report. It also noted that the assessee had also made an application to STPI for setting up the infrastructure facilities under the STPI Scheme. All details of the claim made u/s. 80 IA were filed by the assessee, along with the return of income. The Tribunal held the assessee was under a bonafide belief that it is entitled to the claim for deduction under provisions of section80 IA of the Act.

The provisions under the Income-tax Act are highly complicated and its different (sic, it is difficult) for a layman to understand the same. Even seasoned tax professionals have difficulty in comprehending these provisions. Making a claim for deduction under the provisions of section 80 IA of the Act which has numerous conditions attached, is a complicated affair. It is another matter that the assessing authorities have found that the claim is not admissible. Under these circumstances, the Tribunal held that it cannot be said that this is a case of furnishing of inaccurate particulars of income.

Applying the propositions laid down by the Delhi High Court in the case of CIT vs. Shyama A. Bijapurkar (ITA No. 842/2010; order dated 13.7.2010) and CIT vs. Smt. Rita Malhotra 154 ITR 550 (Del), the Tribunal cancelled the penalty levied u/s 271(1)(c) of the Act.

The Tribunal allowed the appeal filed by the assessee

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Capital gain vs. Business income – A. Y. 2006-07 – Profit from purchase and sale of shares – Assessee not registered with any authority or body to trade in shares – Entire investment made out of assessee’s own funds – Purchase and sale of shares were for investment accepted by Department for earlier years – Gain from purchase and sale of shares cannot be taxed as business income

CIT vs. SMAA Enterprises P. Ltd.; 382 ITR 175 (J&K):

The
assessee company was incorporated in the year 1996 and the assessments
for the A. Ys. 2001-02 to 2005-06 had attained finality with the
Department, accepting the declaration made by the assessee, that it was
engaged in purchase and sale of shares as an investment. For the A. Y.
2006-07, the assessing Authority treated the short term capital gains
from purchase and sale of shares as income from business, and levied tax
at 30% instead of 10%, on the ground that the assessee was engaged in
the business of general trading in shares. The Tribunal allowed the
assessee’s claim that it is short term capital gain.

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

“i)
The assessee was not registered with any authority or body, such as
the Securities and Exchange Board of India to carry on trading in
shares. The entire investments were made out of the assessee’s own funds
and no material was placed on record by the Department to come to a
different conclusion.

ii) The factual finding by the Tribunal
was on a proper appreciation of facts. The Department could not change
its stand in subsequent years without change in material. The order was
passed by the Tribunal based on appreciation of documents and recording
reasons, which were not considered by the Assessing Authority as well as
the first Appellate Authority. The contention of the Department that
the assessee was dealing in stockin- trade and not investment, could not
be accepted and no substantial question of law arose for
consideration.”

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Business expenditure – Section 37(1) – A. Y. 2001- 02 – Payment to Port Trust by way of compensation for encroachment of land by assessee – Is business expenditure allowable u/s. 37(1)

Mundial Export Import Finance (P) Ltd. vs. CIT; 284 CTR 87(Cal):

The assessee had acquired a plot of land by way of lease from CPT. By a letter dated 28/06/2000, CPT informed the assessee that about 855.7 sq. mtrs. of land belonging to the trust adjacent to the demised plot had been encroached by the assessee, in violation of the terms and conditions of the lease agreement. The assessee paid an amount of Rs. 6,67,266/- by way of damages to the CPT, in respect of such additional land. The assessee claimed this amount as business expenditure. The Assessing Officer disallowed the claim relying on Explanation to section 37(1). The Tribunal upheld the disallowance.

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

“i) Payment was made by assessee, to compensate the loss suffered by port trust due to occupation of land in excess of what was demised to the assessee. Therefore, the payment did not partake the character of penalty.

ii) The payment could not partake the character of a capital expenditure, because the contention of the port trust was that the prayer for lease of the land unauthorisedly occupied could not be examined before payment of the compensation. Therefore, the payment was altogether compensatory for the benefit already received by the assessee by user of the land.

iii) Payment was an expenditure incurred wholly and exclusively for the purposes of the business and therefore, allowable as deduction u/s. 37(1). Explanation to section 37(1) was not applicable.”

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Additional depreciation – Section 32(1)(iia) – A. Y. 2008-09 – Manufacture – Broadcasting amounts to manufacture of things – Plant and machinery used in broadcasting entitled to additional depreciation

CIT vs. Radio Today Broadcasting Ltd.; 382 ITR 42 (Del):

The assessee was engaged in the business of FM radio broadcasting. In the A. Y. 2008-09, the assessee claimed additional depreciation on the plant and machinery used for broadcasting, claiming that broadcasting of radio programmes amounted to manufacture or production of articles or things. The Assessing Officer rejected the claim. The Tribunal allowed the assessee’s claim.

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

“i) “Manufacture” could include a combination of processes and broadcasting amounts to manufacture. In the context of “broadcasting”, manufacture could encompass the process of producing, recording, editing and making copies of the radio programme followed by its broadcasting. The activity of broadcasting, in this context, would necessarily envisage all these incidental activities, which are nevertheless integral to the business of broadcasting.

ii) The assessee was entitled to additional depreciation for the machinery used by it to broadcast radio programmes in the FM channel.”

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Business expenditure – Disallowance u/s. 40A(3) – A. Y. 2008-09 – Payments in cash – Agents appointed by assessee for locations to enable dealers of petrol pumps to buy diesel and petrol – No cash payment made directly to agents but cash deposited in respective bank accounts of agents – Rule 6DD(k) applicable – Amount not disallowable u/s. 40A(3)

CIT vs. The Solution; 382 ITR 337 (Raj);
The assessee was engaged in supplying diesel at various sites. The Assessing Officer noticed that the assesee had debited huge expenses on account of purchase of diesel and had made payment in cash exceeding Rs.20,000. The Assessing Officer disallowed the expenditure relying on section 40A(3). The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i) The findings of the Commissioner (Appeals) and the Tribunal are findings of fact. The assessee had appointed various representatives and agents for 110 locations, wherein diesel and petrol were purchased by dealers of the petrol pumps. No cash payment was made directly to the agents, but was deposited in their respective bank accounts. The case of the assessee fell under exception clause of Rule 6DD(k), as the assessee had made payment to the bank account of the agents, who were required to make payment in cash for buying petrol and diesel at different location.

ii) The assessing Officer did not find any discrepancy in copies of the ledger accounts produced, and no unaccounted transaction had been reported or noticed by him.

iii) The finding arrived at by the Tribunal based on the material, was essentially a finding of fact. No substantial question of law arose for consideration. Appeal is dismissed.”

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Income – Sums collected towards contingent sales tax liability not income especially when it was demonstrated that the same were refunded to the persons from whom the same was collected

CIT vs. Khoday Breweries Ltd. (2016) 382 ITR 1 (SC)

Agreement – The fact that the agreement is with a retrospective effect, would not make it a sham transaction

The assessee, a manufacturer of liquor, in course of business used to sell liquor to dealers in sealed bottles with proper packing. The question whether the assessee was liable to pay sales tax towards bottles and packing material supplied to the dealers was a debatable question. Therefore, in order to safeguard the business interest, the assessee had collected certain amounts towards the doubtful tax liability. The assessing authority for the assessment years 1988-89 and 1989-90 had found that the amounts received from the dealers towards doubtful liability was a disguised collection of additional sale price and that the books of account of the dealers showed that payment of this additional amount was a part of the sales price. Therefore, the assessing authority held that the amount received towards anticipated tax liability was subject to assessment for tax.

The assessee had taken the premises of its sister concern along with machinery, i.e., the boiler (furnace) for manufacture of liquor. The warranty of life span of the boiler was said to be 6 to 7 years. In the term of lease, the rent was agreed at Rs.52,50,000 per annum for the above assessment year. The boiler went out of order. The lessor revamped the equipment and machinery. Accordingly, the assessee entered into a fresh agreement with lessor to enhance the rental to Rs.90,00,000 per annum. The assessing authority found that the enhanced agreement was a sham agreement and rejected the claim for deductions.

In appeal, the Commissioner of Income-tax (Appeals) upheld the order of the assessing authority and held that the amount received towards doubtful tax liability were liable for assessment of tax. With regard to enhancement of lease rent, the Commissioner of Income-tax held that towards part of cost of revamp of equipment, the assessee was entitled for deduction of Rs.12,50,000. The balance of enhanced amount of lease was held as sham and was liable for tax.

The Tribunal in appeal held that on both the questions, the assessee was not liable to tax since the amount received towards doubtful tax liability was refundable to the dealers. Therefore, it was not in the nature of income for tax. So also in respect of enhanced rent, it was found that in view of revamp of the machinery, fresh rent agreement was entered into warranting the payment of higher rent and the said agreement is not a sham transaction. The appeal filed by the assessee was allowed accordingly. The appeal filed by the Revenue before the Tribunal regarding grant of partial deduction in the rental amount was dismissed.

At the hearing of the reference/appeal filed by the Revenue before the High Court, it was a categorical contention of the assessee that the amount in dispute was received from the dealers towards the doubtful tax liability. The asessee had also let in evidence of the dealers before the assessing authority that the advance amounts received had been refunded to them.

The High Court held that the liability to pay sales tax towards bottle and packing material was a doubtful question open for debate. Later on the assessee had refunded the amount to the dealers. In that view, the findings of the Tribunal that the said amount did not attract tax liability was sound and proper. Further, the documentary evidence disclosed that during the assessment year in question, the machinery was revamped. In that view, a fresh agreement was entered into to pay higher rent of Rs.90,00,000 instead of Rs.52,50,000. The fact that the agreement was with retrospective effect, would not make it a sham transaction. The lessor was also an assessee. The amount paid has been accounted by the lessor in installments. Therefore, the assessee was entitled to legitimate deduction towards the enhanced rent.

On a SLP being filed by the Revenue, the Supreme Court held that in view of the factual determination made by the High Court that the amounts realised to meet the contingent sales tax liability of the assessee had since been refunded to the persons from whom the same was collected and also a finding had been reached that the agreement enhancing the lease rent was not a sham document, it found no ground to continue to entertain the present special leave petition

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Deduction of tax at source – Interest paid to the owners of the land acquired – Whether deduction to be made u/s. 194A – Matter remitted to the High Court as no reasons had been given by the High Court in the impugned order

Commissioner, Development Belgaum Urban Authority vs. CIT (2016) 382 ITR 8 (SC)

On gathering information about the payment of interest by the assessee to the owners of the land for delayed payment of compensation consequent upon the acquisition of land, enquiry was conducted and information was obtained by the Income Tax Department and it was found that no deduction has been made u/s. 194A of the Act in respect of the interest paid to the owners of the land acquired and accordingly, after due procedure order was passed by the Tax Recovery Officer, Belgaum u/s. 201(1) and 201(1A) of the Act, holding that the assessee had contravened the provisions of section 194A in not deduction the tax at source in respect of payment of interest for belated payment of compensation for the land acquired. Tax was levied amounting to Rs.1,96,780 and interest of Rs.59,260 was demanded and total demand of Rs.2,56,040 was made. Being aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Belgaum and the appellate authority, allowed the appeal. Being aggrieved by the same, the Revenue preferred appeal before the Tribunal. The Tribunal confirmed the order passed by the appellate authority holding that there was no liability and that section 194A was not applicable in respect of payment of interest for belated payment of compensation for the land acquired and accordingly dismissed the appeal of the Revenue.

On further appeal by the Revenue, the High Court reframed the following substantial question of law:

“Whether the finding of the Tribunal confirming the order of the appellate authority holding that there was no liability on the respondent to deduct tax on the interest payable for belated payment of compensation for the land acquired and in holding that section 194A was not applicable for such payment is perverse and arbitrary and contrary to law?”

The High Court allowed the appeal of the Revenue by following the judgment of the Hon’ble Supreme Court in Bikram Singh v Land Acquisition Collector (1997) 224 ITR 551 (SC).

The said judgment read as follows (page 557 of 224 ITR):

“But the question is: whether the interest on delayed payment on the acquisition of the immovable property under the Acquisition Act would not be exigible to income-tax? It is seen that this court has consistently taken the view that it is a revenue receipt. The amended definition of “interest” was not intended to exclude the revenue receipt of interest on delayed payment of compensation from taxability. Once it is construed to be a revenue receipt, necessarily, unless there is an exemption under the appropriate provisions of the Act, the revenue receipt is exigible to tax. The amendment is only to bring within its tax net, income received from the transaction covered under the definition of interest. It would mean that the interest received as income on the delayed payment of the compensation determined u/s. 28 or 31 of the Acquisition Act is a taxable event. Therefore, we hold that it is a revenue receipt exigible to tax under section 4 of the Income-tax Act. Section 194A of the Act has no application for the purpose of this case as it encompasses deduction of the incometax at source. However, the appellants are entitled to spread over the income for the period for which payment came to be made so as to compute the income for assessing tax for the relevant accounting year.”

Being aggrieved, the assessee approached the Supreme Court.

The Supreme Court while issuing notice in these appeals passed the following order:

“Issue notice as to why the matters should not be remitted. In the Impugned order, no reasons have been given by the High Court. Hence, matters need to be sent back. This is prima facie opinion.”

The learned Counsel for the Revenue when confronted with the said position reflected in the order submitted that he had no objection if the matter was remitted to the High Court for fresh consideration.

The impugned order passed by the High Court was, accordingly, set aside and the case are remitted back to the High Court for deciding the issue afresh by giving detailed reasons after hearing the counsel for the parties.

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Charitable Trust – Registration of Trust – Once an application is made u/s. 12A and in case the same is not responded to within six months, it would be taken that the application is registered on the expiry of the period of six months from the date of the application

CIT vs. Society for the Promotion of Education, Adventure Sport and Conversation of Environment (2016) 382 ITR 6 (SC)

The assessee, a society running a school, claimed that up to the assessment years 1998-99, it was exempted u/s. 10(22) of the Income-tax Act, 1961, therefore, it did not seek separate registration u/s. 12A of the Act so as to claim exemption u/s. 11.

Section 10(22), being omitted by the Finance Act, 1998, the assessee applied for registration u/s. 12A of the Act with retrospective effect, that is, since the inception of the assessee-society, i.e., January 11, 1993. An application for the purpose was duly made on February 24, 2003. Inasmuch as u/s. 12A(1)(a) (as it stood at the time of making the application), the application was required to be made within one year from the date of creation of establishment of the trust or institution, therefore, condonation of delay was sought in terms of section 12A(1)(a), proviso (i).

Section 12AA(2) provides that every order granting or refusing registration under clause (b) of s/s. (1) shall be passed before the expiry of six months from the end of the month in which the application was received u/s. 12A(1) (a) or 12A(1)(aa).

No decision was taken on the assessee’s application within the time of six months fixed by the aforesaid provision.

For want of a decision by the Commissioner, the Assessing Officer continued to make assessment denying the benefit u/s. 11.

On a writ being filed to the High Court, the High Court examined the consequence of such a long delay of almost five years on the part of the income-tax authorities in not deciding the assessee’s application dated February 24, 2003.

According to the High Court, after the statutory limitation the Commissioner would become functuous officio and could not therafter pass any order either allowing or rejecting the registration.

The High Court took the view that once an application is made under the said provision and in case the same is not responded to within six months, it would be taken that the application is registered under the provision.

The Revenue appealed to the Supreme Court against the aforesaid order of the high Court. However, when the matter came up for hearing, the learned Additional Solicitor General appearing for the Revenue, raised an apprehension that in the case of the assessee, since the date of application was of February, 24, 2003, at the worst, the same would operate only after six months from the date of the application.

According to the Supreme Court there was no basis for such an apprehension since that was the only logical sense in which the judgment could be understood. Therefore, in order to disabuse any apprehension, it was made clear that the registration of the application u/s. 12AA of the Income-tax Act in the case of the assessee would take effect from August 24, 2003.

shailesh.kwebmaker

Purchase of immovable property by Central Government – Development Agreement/ Collaboration Agreement and in any case an arrangement which has the effect of transferring or enabling the enjoyment of property falls within the definition of “Transfer” in section 269UA – Order of pre-emptive purchase gets vitiated where the authority fails to record a finding on the relevance of comparable sale instance

Unitech Ltd. vs. Union of India (2016) 381 ITR 456 (SC)

Vidarbha Engineering Industries – appellant No.2 held on lease, three plots of land admeasuring 2595.152 sq. mtrs., i.e., 27934 sq. ft. at Dahipura and Untkhana, Nagpur. This land was comprised of three plots of land, i.e., Plot Nos. 34, 35 and 36 obtained by Vidarbha Engineering from the Nagpur Improvement Trust. Vidarbha Engineering decided to develop the subject land and entered into an agreement for the purpose with Unitech Ltd. The memorandum of understanding between them was formalised into a collaboration agreement dated March 17, 1994. Under this agreement the land holder agreed to allow Unitech to develop and construct a commercial project on subject land admeasuring 2595.152 sq. mtrs. at the technical and financial cost of the latter. The parties to the agreement agreed, upon construction of the multi storied shopping cum commercial complex, that Unitech will retain 78% of the total constructed area and transfer 22% to the share of Vidarbha Engineering Unitech agreed to create an interest-free security deposit of Rs.10 lakhs. 50% of the deposit was made refundable on completion of the RCC structure and the other 50 per cent. on completion of the project. The parties were entitled to dispose of the saleable area of their share. It was specifically agreed that this agreement was not to be construed as a partnership between the parties. In particular, this agreement was not to be construed as a demise or assignment or conveyance of the subject land.

The appellant submitted a statement in form 37-I u/s. 269UC of the Act annexing the agreement dated March 17, 1994.

This form contained only the nomenclatures of the transferor and transferee and contemplated only the transaction of a transfer and not an arrangement of collaboration. Therefore, the appellants were to described themselves as transferor and a transferee. Accordingly, they mentioned that the consideration for the transfer of the subject property was Rs. 100.40 lakhs towards the cost of share of 22% of Vidarbha Engineering, which was to be constructed by Unitech-builder at its own cost.

Upon the submission of the statement under section 269UA of the Act, the Appropriate authority issued a showcause dated July 8, 1994, stating that the consideration for the transaction appeared to be too low and appeared to be understated be more than 15%, having regard to the sale instance of a land in Hanuman Nagar, an adjoining locality, the rates per sq. ft. of FSI of which worked out to Rs 283, whereas the such a rate in case of the appellants worked out to Rs. 184 (1,00,40,000 – 56,473).

In reply to the show-cause notice the appellants raised several objections to the alleged undervaluation including the existence of encumbrances and other aspects. In particular, the appellants pointed out a sale instance of a comparable case approved by the authorities where the FSI cost on the basis of apparent consideration came to Rs. 90 per sq. ft. This was in respect of a property in the very same locality in which the subject land is located.

The appropriate authority considered the objections filed by the appellants and rejected them by an order dated July 29, 1994, passed u/s. 269UD of the Income-tax Act. The authority rejected all the objections taken by the appellants. The authority validated the sale instance relied on in the show-cause notice without giving any finding on the specific objections raised. It rejected the sale instance relied on by the appellants of a property in the same locality on the ground that that property does not have road on the three sides like the property under consideration there is a nallah carrying waste water near that property and it has a frontage of only 12.5 mtrs. It took into account the consideration of Rs.1,00,40,000 and deducted from it an amount of Rs. 24,09,600 being discount calculated at the rate of 8% per annum since the consideration had been deferred for a period of three years. It, therefore, determined the consideration for purchase of the subject property at Rs.76,30,400.

By a writ petition before the High Court challenging the compulsory pre-emptive purchase, the appellants raised several contentions. They maintained that the impugned order did not contain any finding that the consideration for the transaction was undervalued by the parties in order to evade taxes, which is the mischief sought to be prevented. The High Court, however, dismissed the petition of the appellants. Being aggrieved, the appellants approached the Supreme Court.

The Supreme Court noted that Vidarbha Engineering itself is a lessee holding the land on lease of 30 years from Nagpur Improvement Trust. It has no authority to transfer the land. Further, no clause in the agreement purported to transfer the subject land to Unitech. On the other hand, clause 4.6 specifically provided that nothing in the agreement shall be construed to be a demise, assignment or a conveyance. The agreement thus created a licence in favour of Unitech under which the latter may enter upon the land and at its own cost build on it and thereupon handover 22% of the built-up area to the share of Vidarbha Engineering as consideration and retain 78% of the built up area. The Supreme Court observed that it may appear at first blush that the collaboration agreement involved an exchange of property in the sense that the land holder transferred his property to the developer and the developer transferred 22% of the constructed area to the land holder but on a closer look this impression was quickly dispelled.

The Supreme Court noted that the word “Exchange” was defined vide section 118 of the Transfer of Property Act, 1882 as a mutual transfer of the ownership of one thing for the ownership of another. But it was not possible to construe the license created by Vidarbha Engineering in favour of Unitech as a transfer or acquisition of 22% share of the constructed building as a transfer in exchange. Vidarbha Engineering was not an owner but only a lessee of the land. As such, it could not convey a title which it did not possess itself. In fact, no clause in the agreement purported to effect a transfer. Also in consideration of the license Unitech had agreed that the Vidarbha Engineering will have a share of 22% in the constructed area. Thus it appeared that what was contemplated was that upon construction Unitech would retain 78% and the share of Vidarbha Engineering would be 22% of the built-up area vide clause 4.6 of the agreement . Thus the transaction could not be construed as a sale, lease or a licence.

The Supreme Court noted that in terms of section 269UA(d) of the Act “Immovable property” consisted of : (a) not only land or building vide sub-clause (i) but also (b) any rights in or with respect to any land or building Including building which is to be constructed.

“Transfer” of such right in or with respect to any land or building was defined in clause (f) of section 269UA of Act as the doing of anything which had the effect of transferring, or enabling the enjoyment of, such property. According to the Supreme Court, the question whether the collaboration agreement constituted transfer of property, therefore, should be answered with reference to clauses (d) and (f) which defined immovable property and transfer. The Supreme Court held that it was clear from the agreement that the transfer of rights of Vidarbha Engineering in its land did not amount to any sale, exchange or lease of such land, since only possessory rights had been granted to Unitech to construct the building on the land. Nor was there any clause in the agreement expressly transferring 22 per cent. of the building to Vidarbha after it is constructed by Unitech. Clause 4.6 only mentioned that as a consideration for Unitech agreeing to develop the property it shall retain 78 per cent. and the share of Vidarbha Engineering would be 22 per cent .

The Supreme Court observed that in fact Parliament had defined “transfer” deliberately wide enough to include within its scope such agreements or arrangement which have the effect of transferring all the important rights in land for future considerations such as part acquisition of shares in buildings to be constructed, vide sub-clause (ii) of clause (f) of section 269UA. There was no doubt that the collaboration agreement could be construed as an agreement and in any case an arrangement which has the effect of transferring and in any case enabling the enjoyment, of such property. Undoubtedly, the collaboration agreement enabled United to enjoy the property of Vidarbha Engineering for the purpose of construction. There was also no doubt that an agreement was an arrangement. The Supreme Court therefore held that the collaboration agreement effectuated a transfer of the subject land from Vidarbha Engineering to Unitech within the meaning of the term in section 269UA of the Act. It appeared tocover all such transactions by which valuable rights in property are in fact transferred by one party to another for consideration, under the word “transfer”, for fulfilling the purpose of pre-emptive purchase, i.e. prevention of tax evasion. The supreme Court approved the judgment of the Patna High Court in Ashis Mukerji vs. Union of India (1996) 222 ITR 168 (Pat) which took the view that a development agreement was covered by the definition of transfer in section 269UA.

The Supreme Court however further noted that the authority took the consideration for the land to be Rs. 1,00,40,000 which was the consideration stated by the appellant in the statement as a consideration for the transfer of subject property, i.e. plot Nos. 34, 35 and 36 admeasuring 2595.152 sq. mtrs. = 27,934 sq ft. According to the Supreme Court, it was however, difficult to imagine how or why the authority had considered the consideration to be for 56,473 sq. ft. (of available FSI). This had obviously resulted in showing a lower price of Rs. 184 per sq. ft. of FSI and enabling the authority to draw a prima facie conclusion that the consideration was understated by more than 15% in comparison to the sale instance for which the price appears to be Rs.283 per sq. ft. of FSI. If the authority had to take into a account the consideration of Rs.1,00,40,000 for 27,934 sq.ft. to a piece of land as stated by the appellants the rate would have been Rs. 359.41 per sq. and the rate of the sale instance would have been Rs. 246.14 per. sq. ft. According to the Supreme Court, the authorities had thus committed a serious error in taking the consideration quoted by the appellants for the entire subject land, i.e. 27,934 sq. ft. as consideration for the transfer of the available FSI i.e., 56,473 sq ft. thus showing an unwarranted undervaluation. The Supreme Court further noted that the authorities had treated the consideration for subject land, which was an industrial plot, as understated by more than 15% on the basis of a sale instance of a land which is in a residential locality and also that the area of the sale instance was of much smaller plot of 736 sq mtrs whereas the subject land was 2,024 sq. mtrs.

According to the Supreme Court, the authority fell into a gross and an obvious error while conducting this entire exercise of holding that the consideration for the subject property was understated in holding that Vidabha Engineering had transferred property to the extent of 78% to Unitech. There was no warrant for this finding since Vidabha Engineering was never to be the owner of the entire built-up area. It only had a share of 22% in it. Unitech., which had built from its own funds, was to retain 78% share in the built-up area. And in any case the appellants had never stated that the consideration for Rs. 1,00,40,000 was in respect of the built-up area but on the other hand had clearly stated that it was for transfer of the subject land.

The Supreme Court held that the High Court had failed to render a finding on the relevance of comparable sale instances, particularly, why a sale instance in an adjoining locality had been considered to be valid instead of a sale instance in the same locality. Also, it had missed the other aspects referred hereinbefore.

The Supreme Court therefore, allowed the appeal of the appellants and set aside the orders of the High Court and that of the appropriate authority.

shailesh.kwebmaker

Date & Cost of Acquisition of Capital Asset Converted from Stock in Trade

For the purpose of computation of capital gains under the Income-tax Act, 1961, the period of holding of a capital asset is important. The manner of computation of long term capital gains and the rate at which it is taxed differs from that of short term capital gains, and it is the period of holding of the capital assets which determines whether the capital gains is long term or short term. For determination of the period of holding, the date of acquisition of a capital asset and the date of transfer thereof are relevant.

Explanation 1 to section 2(42A), vide its various clauses, provides for inclusion and exclusion of certain period, in determining the period for which any capital asset is held, under the specified circumstances. There is however, in the Explanation 1, no specific provision to determine the period of holding of the capital asset in a case where the asset is first held as stock in trade, and is subsequently converted into a capital asset.

Similarly, qua cost of acquisition, section 55(2)(b) permits substitution of the fair market value as on 1 April 1981 for the cost of acquisition, where the capital asset became the property of the assessee before 1st April, 1981. Where an asset is held as stock in trade as on 1st April, 1981 and subsequently converted into a capital asset before its transfer, is substitution of the fair market value as on 1st April, 1981 permissible? In cases where the asset in question is acquired on or after 01.04.1981, difficulties arise for determining the cost thereof. Should it be the cost on the date of acquiring the stock or should it be the market value prevailing on the date of conversion?

There have been differing views of the tribunal on the subject. While the Calcutta, Delhi and Chennai benches of the tribunal have taken the view that only the period of holding of an asset held as a capital asset has to be considered for the purposes of determination of the period of holding and that the asset has to have been held as a capital asset as on 1st April, 1981 in order to get the benefit of substitution of fair market value as on that date, the Pune bench of the tribunal has taken the view that the period of holding commences from the date of acquisition of the asset as stock in trade, and that even if the asset is held as stock in trade as on 1st April, 1981, the benefit of substitution of fair market value as on the date is available. Yet again, the Mumbai bench has held that the adoption of the suitable cost is at the option of the assessee.

B. K. A. V. Birla’s case
The issue first came up before the Calcutta bench of the tribunal in the case of ACIT vs. B K A V Birla (1990) 35 ITD 136.

In this case, the assessee was an HUF, which acquired certain shares of a company, Zenith Steel, in 1961, and held them as investments till 1972, when the shares were converted into stock in trade. While the shares were held as stock in trade, the assessee received further bonus shares on these shares. The shares were again converted into investments on 9th September 1982, and all the shares were sold in August 1984.

The assessee claimed that the capital gains on sale of the shares was long term capital gains, and claimed deductions u/ss. 80T and 54E. The assessing officer treated the shares as short term capital assets, since they were sold within 2 years of conversion into capital assets, and therefore denied the benefit of deductions u/ss. 80T and 54E. The Commissioner (Appeals) held that since the shares were held since 1961, they were long-term capital assets.

On behalf of the revenue, it was argued that the definition of “capital asset” in section 2(14) excluded any stock in trade, held for the purposes of business or profession. It was claimed that to qualify as a long-term capital asset, the asset must be held as a capital asset for a period of more than 36 months. In calculating that period, the period during which the asset was held as stock in trade could not be considered, since the asset was not held as a capital asset during that period.

On behalf of the assessee, while it was agreed that so long as the shares were held as stock in trade, they were not capital assets, it was argued that while it was necessary as per section 2(42A) that the asset should be held as capital asset at the time of sale, it was not necessary that it should be held as a capital asset for a period exceeding 36 months to qualify as a long-term capital asset. According to the assessee, the only thing necessary was that the assessee should hold the assets for a period exceeding 36 months. Therefore, according to the assessee, the period for which the assets were held as stock in trade was also to be taken into account for determining whether the assets sold were short term or long term capital assets.

The Tribunal was of the view that the definition of the term “short term capital asset” as per section 2(42A) made it clear that it was a capital asset, which be held for a period of less than 36 months, and not any asset. The use the words “capital asset”, in the definition, and the word “capital” in it could not be ignored. According to the tribunal, the scale of time for determining the period of holding was to be applied to a capital asset, and not to an ordinary asset. The Tribunal noted that the word ”asset” was not defined, and the term “short term capital asset” was defined only for computing income relating to capital gains. Capital gains arose on transfer of a capital asset, and therefore, according to the tribunal, period during which an asset was held as a stock was not relevant for the purposes of computation of capital gains. For the Tribunal, the clear scheme of the Act required moving backward in time from the date of transfer of the “capital asset” to the date when it was first held as a capital asset, to determine whether the gain or loss arising was long term or short term.

If the capital asset was held for less than 36 months, it was short term, otherwise it was long term. The Tribunal therefore did not see any justification for including the period for which the shares were held as stock in trade for determining whether those were held as long term capital assets or not. The Tribunal therefore held that the shares had been held for a period of less than 36 months as capital assets, and were therefore short term capital assets.

Recently, the Delhi bench of the tribunal in the case of Splendour Constructions, 122 TTJ 34 held, on similar lines, that the period of holding of a capital asset, converted from stock-in-trade, should be reckoned from the date when the asset was converted into a capital asset and not from the date of acquisition of the asset. The Chennai bench of the tribunal in the case of Lohia Metals (P) Ltd., 131 TTJ 472 held on similar lines that the period of holding would be reckoned from the date of conversion of stock-in-trade into a capital asset.

Kalyani Exports & Investments (P) Ltd .’s case
The issue again came up before the Pune bench of the Tribunal in the case of Kalyani Exports & Investments (P) Ltd/Jannhavi Investments (P) Ltd/Raigad Trading (P) Ltd vs. DCIT 78 ITD 95 (Pune)(TM).

In this case, the assessee acquired certain shares of Bharat Forge Ltd. in March 1977, in respect of which it received bonus shares in June 1981 and October 1989. The shares were initially held by it as stock in trade. On 1st July 1988, the shares were converted into capital assets at the rate of Rs.17 per share, which was the original purchase price in 1977. The assessee sold the shares in the previous year relevant to assessment year 1995- 96. It showed the gains as long term capital gains, taking the fair market value of the shares as at 1st April, 1981 in substitution of the cost of acquisition u/s 55(2)(b)(i).

The assessing officer took the view that the asset should have been a capital asset within the meaning of section 2(14), both at the point of purchase and at the point of sale. Though the assessee had sold a capital asset, when it was purchased it was stock in trade, and since it was converted into a capital asset only in 1988, the assessing officer was of the view that the option of substituting the fair market value of the shares as on 1st April, 1981 was not available to the assessee. According to the assessing officer, since the shares had been converted into capital assets at the rate of Rs. 17 per share, the cost of acquisition would be Rs. 17 per share, with the date of acquisition being 1988. So far as the bonus shares were concerned, according to the assessing officer, the cost (and not the indexed cost) of the original shares was to be spread over both the original and the bonus shares. The Commissioner (Appeals) upheld the view taken by the assessing officer.

Before the tribunal, it was argued on behalf of the assessee that what was deductible from the consideration for computation of the capital gain was the cost of acquisition of the capital asset. It was submitted that an assessee could acquire an asset only once; it could not acquire an asset as a non-capital asset at one time, and later on acquire the same as a capital asset. As per section 55(2)(b), the option for adopting the fair market value as on 1st April, 1981 was available if the capital asset in question became the property of the assessee before 1st April, 1981. It was claimed that since the assessee held the shares as stock in trade before that date, they did constitute the property of the assessee before 1st April 1981.

It was pointed out that even under section 49, when the capital asset became the property of the assessee through any of the mode specified therein such as gift, will, inheritance, etc, the cost of acquisition was deemed to be the cost for which the previous owner acquired it. Even if the previous owner held it as stock in trade, it would amount to a capital asset in the case of the recipient, and the cost to the previous owner would have to be taken as the cost of acquisition. Reliance was placed on the decisions of the Gujarat High Court in the case of Ranchhodbhai Bahijibhai Patel vs. CIT 81 ITR 446 and of the Bombay High Court in the case of Keshavji Karsondas vs. CIT 207 ITR 737. It was further argued that the benefit of indexation was to account for inflation over a period of years. That being so, there was no reason as to why the assessee should be denied that benefit from 1st April, 1981, because whether he held it as stock in trade or as a capital asset, the rise in price because of inflation was the same. It was therefore argued that indexation should be allowed from 1st April, 1981 onwards and not from July 1988.

As regards the bonus shares, on behalf of the assessee, it was argued that the cost of acquisition, being the fair market value as on 1st April, 1981, did not undergo any change on account of subsequent issue of bonus shares. Therefore, the cost of acquisition could not be spread over the original and the bonus shares.

On behalf of the revenue, it was argued that the term “for the first year in which the asset was held by the assessee” found in explanation (iii) to section 48, which defined index cost of acquisition, referred to asset, which meant capital asset. It was argued that the assessee itself had taken the cost of shares at the time of conversion at Rs. 17 in its books of accounts. In fact, the market value of shares on the date of conversion was about Rs. 50 per share, and if the conversion had been at market price, the difference of Rs. 33 on account of appreciation in the value of the shares would have been taxable as business income. However, since the assessee chose to convert the stock in trade into capital asset at the price of Rs. 17, this was the cost of acquisition to the assessee.

There was a conflict of views between the Accountant Member and the Judicial Member. While the Accountant Member agreed with the view taken by the assessing officer, the Judicial Member was of the view that the decisions cited by the assessee applied to the facts of the case before the tribunal, and that the assessee was entitled to substitute the fair market value of the shares as on 1st April, 1981 for the cost of acquisition, since the shares were acquired by the assessee (though as stock in trade) prior to 1st April, 1981.

On a reference to the Third Member, the Third Member was of the view that the issue was covered by the decision of the Bombay High Court in the case of Keshavji Karsondas (supra) in which case, it was held that an asset could not be acquired first as a non-capital asset at one point of time and again as a capital asset at a different point of time. In the said case, according to the Bombay High Court, there could be only one acquisition of an asset, and that was when the assessee acquired it for the first time, irrespective of its character at that point of time and therefore, what was relevant for the purposes of capital gains was the date of acquisition and not the date on which the asset became a capital asset. The Bombay High Court in that case, had followed the decision of the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel (supra), where the Gujarat High Court had held that the only condition to be satisfied for attracting section 45 was that the property transferred must be a capital asset on the date of transfer, and it was not necessary that it should also have been a capital asset on the date of acquisition. According to the Bombay High Court, in the said case, the words “the capital asset” in section 48(ii) were identificatory and demonstrative of the asset, and intended only to refer to the property that was the subject of capital gains levy, and not indicative of the character of the property at the time of acquisition.

The Third Member therefore held in favour of the assessee, holding that the option of substituting the fair market value as on 1st April 1981 was available to the assessee, since the shares had been acquired in March 1977. The Third Member agreed with the Judicial Member that explanation (iii) to section 48 came into play only after the cost of acquisition has been ascertained. Once the cost of acquisition in 1977 was allowed to be substituted by the fair market value as on 1st April, 1981, it followed that the statutory cost had to be increased in the same proportion in which cost inflation index had increased up to the year in which the shares were sold.

The Third Member also agreed with the view of the Judicial Member that there was no double benefit to the assessee if it was permitted the option of adopting the fair market value of the shares as on 1st April, 1981. According to him, the difference between the market value and the conversion price could not have been brought to tax in any case, in view of the law laid down by the Supreme Court in the case of Sir Kikabhai Premchand vs. CIT 24 ITR 506, to the effect that no man could make a profit out of himself. If the assessee was not liable to be taxed in respect of such amount according to the law of the land as declared by the Supreme Court, no benefit or concession could be said to have been extended to him. If he could not have been taxed at the point of conversion, tax authorities could not claim that he got another benefit when he was given the option to substitute the market value as on 1st April, 1981, amounting to a double benefit. The right to claim the fair market value as on 1st April 1981, was a statutory right which could be exercised when the prescribed conditions were fulfilled.

The Tribunal therefore held that the shares would be regarded as having been acquired on the date when they were purchased as stock in trade, and that the assessee therefore had the right to substitute the fair market value as on 1st April, 1981 for the cost of acquisition.

A similar, though slightly different, view was taken by the Mumbai bench of the Tribunal in another case, ACIT vs. Bright Star Investment (P) Ltd 120 TTJ 498, in the context of the cost of acquisition. In that case, the assessing officer sought to bifurcate the gains into 2 parts – business income till the date of conversion of shares from stock in trade to investment, by taking the fair market value of the shares as on the date of conversion, and capital gains from the date of conversion till the date of sale. The assessee claimed the difference between the sale price of the shares and the book value of shares on the date of conversion, with indexation from the date of conversion, as capital gains. The Tribunal took the view that where 2 formulae were possible, the formula favourable to the assessee should be accepted, and accepted the assessee’s claim that the entire income was capital gains, with indexation of cost from the date of conversion.

Observations
The important parameters in computing capital gains are the cost of acquisition and the date of acquisition besides the date of transfer and the value of consideration. They together decide the nature of capital gains; long term or short term vide section 2(42A), the benefit of indexation u/s 48, the benefit of exemption u/s 10 or 54,etc. and the benefit of concessional rate of tax u/s 112,etc.

Whether a capital gains on transfer of a capital asset is a short term gain or a long term gain is determined w.r.t its period of holding. Usually, this period is identified w.r.t the actual date of acquisition of an asset and the date of its transfer. This simple calculation gets twisted in cases where the asset under transfer is acquired in lieu of or on the strength of another asset. For example, liquidation, merger, demerger, bonus, rights, etc. These situations are taken care of by fictions introduced through various clauses of Explanation 1 to section 2(42A). Similar difficulties arising in the context of cost of acquisition are taken care of either by section 49 or 55 of the Act by providing for the substitution of the cost of acquisition in such cases.

The provisions of section 2(42A) and of section 55 or 49 do not however help in directly addressing the situation that arise in computation of capital gains on transfer of a capital asset that had been originally acquired as a stockin- trade but has later been converted in to a capital asset. All the above referred issues pose serious questions, in computation of capital gains of a converted capital asset.

It is logical to concede that an asset in whatever form acquired can have only one cost of acquisition and one date of acquisition. This date and cost cannot change on account of conversion or otherwise, unless otherwise provided for in the Act. No specific provisions are found in the Act to deem it otherwise to disturb this sound logic. This simple derivation however is disturbed due to the language of section 2(42A), which had in turn helped some of the benches of tribunal to hold that the period should be reckoned from the date of conversion and not the date of acquisition.

An asset cannot be acquired at two different points of time and that too for one cost alone. A change in its character, at any point of time, thereafter cannot change its date and cost of acquisition. Again, for the purposes of computation of capital gains it is this date and cost that are relevant, not the date of conversion. For attracting the charge of capital gains tax, what is essential is that the asset under transfer should have been a capital asset on the date of transfer; that is the only condition to be satisfied for attracting section 45 and whether the property transferred had been a capital asset on the date of acquisition or not is not material at all as has been held by the Gujarat high court in Ranchhodbhai Bhaijibhai Patel (supra)’s case.

It is true that a lot of confusion could have been avoided had the legislature, in section 2(42A), used the words “ ‘short term capital asset’ means an asset held by an assessee……” instead of “ ‘short term capital asset’ means a capital asset held by an assessee……” . While it could have avoided serious differences, in our considered opinion, the only way of reconciling the difference is to read the wordings in harmony with the overall scheme of taxation of capital gains which envisages one and only one date of acquisition and one cost of acquisition. Reading it differently will not only be unjust but will give absurd results in computation of gains. Any different interpretation might lead to situations wherein a part of the gains arising on conversion of stock would go untaxed. If the idea is to tax the whole of the surplus i.e the difference between the sale consideration and the cost, the only way of reading the provisions is to read them harmoniously in a manner that a meaning which is just, is given to them.

The view taken by the Pune bench of the tribunal in Kalyani Exports case (supra) is supported by the view taken by the Gujarat and Bombay High Courts, in cases of Ranchhodbhai Bhaijibhai Patel (supra) and Keshavji Karsondas (supra) as to when a capital asset can be held to have been acquired, when it was not a capital asset at the time of acquisition. As observed by the Third Member, those decisions cannot be distinguished on the grounds that they related to agricultural land, which was not a capital asset at the time of its acquisition, but became a capital asset subsequently, on account of a statutory amendment. The ratio of the said decisions apply even to the case of conversion of stock in trade into capital asset though it is on account of an act of volition on the part of the assessee. The issue is the same, that the asset was not a capital asset on the date of acquisition, but becomes a capital asset subsequently before its transfer.

The Mumbai bench of the Tribunal in Bright Star Investments case proceeded on the fact that the assessee itself did not claim indexation from the date of acquisition of the asset as stock in trade, but claimed it only from the date of conversion into capital asset. Therefore, the issue of claiming indexation from the earlier date of acquisition as stock in trade was not really the subject matter of the dispute before the tribunal.

Section 55(2)(b), uses both the terms “capital asset” and “property”. Section 55(2)(b) does not require that the capital asset should have been held as the capital asset of the assessee as at 1st April. 1981; it simply requires that the capital asset should have become the property of the assessee prior to that date. This conscious use of different words indicates that so long as the asset was acquired before that date, the benefit of substitution of fair market value for cost is available.

The decision of the Pune bench of the Tribunal in Kalyani Exports’ case has also subsequently been approved of by the Bombay High Court, reported as CIT vs. Jannhavi Investments (P) Ltd 304 ITR 276. In that case, the Bombay High Court reaffirmed its finding in Keshavji Karsondas’ case that cost of acquisition could only be the cost on the date of the actual acquisition, and that there was no acquisition of the shares when they were converted from stock in trade to capital assets and clarified that the amendment in section 48 for introducing the benefit of indexation did not in any way nullify or dilute the ratio laid down in Keshavji Karsondas’ case.

Therefore, clearly, the view taken by the Pune and Mumbai benches of the Tribunal and approved by the Bombay high court seems to be the correct view of the matter, and the date of conversion is irrelevant for the purpose of computing the period of holding, or substitution of the fair market value as on 1st April 1981 for the cost of acquisition.

shailesh.kwebmaker

RULES FOR INTERPRETATION OF TAX STATUTES – PART – II

Introduction
In the April issue of the BCAJ, I had discussed the basic rules of interpretation of tax statutes.This article continues to explain each rule extensively and elaborately, supported by binding precedents.

1. Interpretation of Double Taxation Avoidance Agreements :

The principles set out in Vienna Convention as agreed on 23rd May, 1969 are recognised as applicable to tax treaties. Rules embodied in Articles 31, 32 and 33 of the Convention are often referred to in interpretation of tax treaties.S Some aspects of those Articles are good faith; objects and purpose and intent to enter into the treaty. Discussion papers are referred to resolve ambiguity or obscurity. These basic principles need to be kept in mind while construing DTAA .

1.1. Maxwell on the Interpretation of Statutes mentions the following rule, under the title ‘presumption against violation of international law’: “Under the general presumption that the legislature does not intend to exceed its jurisdiction, every statute is interpreted, so far as its language permits, so as not to be inconsistent with the comity of nations or the established rules of international law, and the court will avoid a construction which would give rise to such inconsistency, unless compelled to adopt it by plain and unambiguous language. But if the language of the statute is clear, it must be followed notwithstanding the conflict between municipal and international law which results”.

2.2. In John N. Gladden vs. Her Majesty the Queen, the Federal Court observed:”Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.” The Federal Court in N. Gladden vs. Her Majesty the Queen 85 D.T.C. 5188 said : “”The non-resident can benefit from the exemption regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the U.S. were to abolish capital gains completely, while the other country did not, a resident of the country which had abolished capital gains would still be exempt from capital gains in the other country.”

1.3. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions.

1.4. The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.” And, finally, “Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally.

1.5. The Supreme Court in Vodafone International Holdings B.V. vs. Union of India (2012) 341-ITR-1 (SC) observed: “The court has to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope and cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability. It also reiterated and declared “All tax planning is not illegal or illegitimate or impermissible”. McDowell ‘s case has been explained and watered down.

1.6. Tax treaties are intended to grant tax relief and not to put residents of a contracting country at a disadvantage vis-a-vis other taxpayers. Section 90(2) of the Income-tax Act lays down that in relation to the assessee to whom an agreement u/s. 90(1) applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee. Circular No. 789 dated April 13, 2000 (2000) 243-ITR-(St.) 57 has been declared as valid in Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 ) SC) at 101. The Supreme Court in C.I.T. vs. P.V.A.L. Lulandagan Chettiar (2004) 267-ITR-657 (SC) has held : “In the case of a conflict between the provisions of this Act and an Agreement for Avoidance of Double Taxation between the Government and a foreign State, the provisions of the Agreement would prevail over those of the Act.

1.7. The Jaipur Bench of I.T.A.T. (TM) in Modern Threads Case 69-ITD-115 (TM) relying on the Circular dated 2.4.1982 held that the terms of DTAA prevail. It also observed: “The tax benefits are provided in the DTAA as an incentive for mutual benefits. The provisions of the DTAA are, therefore, required to be construed so as to advance its objectives and not to frustrate them. This view finds ample support from the decision of the Hon’ble Supreme Court in the case Bajaj Tempo Ltd. vs. CIT 196-ITR-188 and CIT vs. Shan Finance Pvt. Ltd. 231-ITR-308”. The Bangalore Bench in IBM World Trade Corp. vs. DIT (2012) 148 TTJ 496 held that the provisions of the Act or treaty whichever is beneficial are applicable to the assessee.

2. Explanation :

The normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added The Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause. If the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along. If there is conflict in opinion on the construction of a provision, the Legislature steps in by inserting the Explanation, to clarify its intent. Explanation is normally clarificatory and retrospective in operation. However, the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal liability against the subject, such provision should ordinarily be interpreted strictly.

2.1. The orthodox function of an Explanation is to explain the meaning and effect of the main provision. It is different in nature from a proviso, as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision. An Explanation is also different from rules framed under an Act. Rules are for effective implementation of the Act whereas an Explanation only explains the provisions of the section. Rules cannot go beyond or against the provisions of the Act as they are framed under the Act and if there is any contradiction, the Act will prevail over the Rules. This is not the position vis-à-vis the section and its Explanation. The latter, by its very name, is intended to explain the provisions of the section, hence, there can be no contradiction. A section has to be understood and read hand in hand with the Explanation, which is only to support the main provision, like an example does not explain any situation, held in N. Govindaraju vs. I.T.O. (2015) 377-ITR-243 (Karnataka).

2.2. Ordinarily, an Explanation is introduced by the Legislature for clarifying some doubts or removing confusion which may possibly arise from the existing provisions. Normally, therefore, an Explanation would not expand the scope of the main provision and the purpose of the Explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit as held in Katira Construction Ltd. vs. Union of India (2013) 352-ITR-513 (Gujarat).

3. Proviso :

A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be part of the main provision. A proviso, must, therefore, be considered in relation to the principal matter to which it stands as a proviso. A proviso should not be read as if providing by way of an addition to the main provision which is foreign to the principal provision itself. Indeed, in some cases, a proviso may be an exception to the main provision though it cannot be inconsistent with what is expressed thereinand, if it is, it would be ultra vires the main provision and liable to be struck down. As a general rule, in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justifying its necessity.

3.1. A proviso to a provision in a statute has several functions and while interpreting a provision of the statue, the court is required to carefully scrutinise and find out the real object of the proviso appended to that provision. It is not a proper rule of interpretation of a proviso that the enacting part or the main part of the section be construed first without the proviso and if the same is found to be ambiguous only then recourse maybe had to examine the proviso. On the other hand, an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially.

3.2. A proviso must be limited to the subject-matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. “Words are dependent on the principal enacting words to which they are tacked as a proviso. They cannot be read as divorced from their context” (Thompson vs. Dibdin, 1912 AC 533). The rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause. To expand the enacting clause, inflated by the proviso, is a sin against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction” as observed in: Union of India & Others vs. Dileep Kumar Singh (2015) AIR 1421 at 1426-27.

4. Retrospective or Prospective or Retroactive :
It is a well-settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute, so as to take away or impair an existing right, or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in volume 36 of the Laws of England (third edition) and reiterated in several decisions of the Supreme Court as well as English courts is that “all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective” and retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.

4.1. In Hitendra Vishnu Thakur vs. State of Maharashtra, AIR 1994 S.C. 2623, the Supreme Court held: (i) A statute which affects substantive rights is presumed to be prospective in operation, unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its clearly defined limits. (ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal, even though remedial, is substantive in nature; (iii) Every litigant has a vested right in substantive law, but no such right exists in procedural law. (iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished. (v) A statute which not only changes the procedure but also creates new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication. This principle stands approved by the Constitution Bench in the case of Shyam Sunder vs. Ram Kumar AIR 2001 S.C. 2472.

4.2. It has been consistently held by the Supreme Court in CIT vs. Varas International P. Ltd. (2006) 283-ITR-484 (SC) and recently, that for an amendment of a statute to be construed as being retrospective, the amended provision itself should indicate either in terms or by necessary implication that it is to operate retrospectively. Of the various rules providing guidance as to how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock, that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips vs. Eyre3, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated, when introduced for the first time to deal with future acts, ought not to change the character of past transactions carried on upon the faith of the then existing laws as observed in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 486.

4.3. If a legislation confers a benefit on some persons, but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators’ object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In the Government of India & Ors. vs. Indian Tobacco Association, (2005) 7-SCC-396, the doctrine of fairness was held to be a relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay vs. State of Maharashtra (2006) 6-SCC-289. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. Refer CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 487. In my view, in such circumstances, it would have a retroactive effect.

4.4. In the case of CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42-ITR-589 (SC), the court held that as the liability to pay tax is computed according to the law in force at the beginning of the assessment year, i.e., the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless specifically made retrospective, does not apply to the assessment for that year. Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax.

4.5. There are three concepts: (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; (iii) clarificatory amendments which are retrospective in nature; and (iv) an amendment made to a taxing statute can be said to be intended to remove “hardships” only of the assessee, not of the Department. In ultimate analysis in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 496-497 (SC), surcharge was held to be prospective and not retrospective.

4.6. The presumption against retrospective operation is not applicable to declaratory statutes. In determining, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubt as the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended. An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act, which was already implicit. A clarificatory amendment of this nature will have retrospective effect. It is called as retroactive.

5 May or Shall :
The use of the word “shall” in a statutory provision, though generally taken in a mandsssatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid. The user of the word “may” by the legislature may be out of reverence. The setting in which the word “may” has been used needs consideration, and has to be given due weightage.

5.1. When a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case, when a party interested and having a right to apply moves in that behalf and circumstances for exercise of authority are shown to exist. Even if the words used in the Statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right – public or private – of a citizen. When a duty is cast on the authority, that power to ensure that injustice to the assessee or to the revenue may be avoided must be exercised. It is implicit in the nature of the power and its entrustment to the authority invested with quasi-judicial functions. That power is not discretionary and the Officer cannot, if the conditions for its exercise were shown to exist, decline to exercise power conferred as held by the Supreme Court in L. Hirday Narain vs. I.T.O. (1970) 78 I.T.R. 26.

5.2. Use of the word “shall” in a statute ordinarily speaking means that the statutory provision is mandatory. It is construed as such, unless there is something in the context in which the word is used which would justify a departure from this meaning. Where an assessee seeks to claim the benefit under a statutory scheme, he is bound to comply strictly with the conditions under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions are stated in plain language. The courts have no power to act beyond the terms of the statutory provision under which benefits have been granted to a tax payer. The provisions contained in an Act are required to be interpreted, keeping in view the well recognised rule of construction that procedural prescriptions are meant for doing substantial justice. If violation of the procedural provision does not result in denial of fair hearing or causes prejudice to the parties, the same has to be treated as directory notwithstanding the use of word ‘shall’, as observed in Shivjee Singh vs. Nagendra Tiwary AIR 2010 S.C. 2261 at 2263.

5.3. In certain circumstances, the word ‘may’ has to be read as ‘shall’ because an authority charged with the task of enforcing the statute needs to decide the consequences that the Legislature intended to follow from failure to implement the requirement. Hence, the interpretation of the two words would always depend on the context and setting in which they are used.

6. Mandatory or Directory :

It is beyond any cavil that the question as to whether the provision is directory or mandatory would depend upon the language employed therein. (See Union of India and others vs. Filip Tiago De Gama of Vedem Vasco De Gama, (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336). In a case where the statutory provision is plain and unambiguous, the Court shall not interpret the same in a different manner, only because of harsh consequences arising therefrom. In E. Palanisamy vs. Palanisamy (Dead) by Lrs. And others, (2003) 1 SCC 122), a Division Bench of the Supreme Court observed: “The rent legislation is normally intended for the benefit of the tenants. At the same time, it is well settled that the benefits conferred on the tenants through the relevant statutes can be enjoyed only on the basis of strict compliance with the statutory provisions. Equitable consideration has no place in such matter.”

6.1. The Court’s jurisdiction to interpret a statute can be invoked when the same is ambiguous. It is well known that in a given case, the Court can iron out the fabric but it cannot change the texture of the fabric. It cannot enlarge the scope of legislation or intention when the language of provision is plain and unambiguous. It cannot add or subtract words to a statue or read something into it which is not there. It cannot rewrite or recast legislation. It is also necessary to determine that there exists a presumption that the Legislature has not used any superfluous words. It is well settled that the real intention of the legislation must be gathered from the language used. It may be true that use of the expression ‘shall or may’ is not decisive for arriving at a finding as to whether statute is directory or mandatory. But the intention of the Legislature must be found out from the scheme of the Act. It is also equally well settled that when negative words are used, the courts will presume that the intention of the Legislature was that the provisions are mandatory in character.

7. Stare Decisis :

To give law a finality and to maintain consistency, the principle of stare decisis is applied. It is a sound principle of law to follow a view which is operating for a long time. Interpretation of a provision rendered years back and accepted and acted upon should not be easily departed from. While reconsidering decisions rendered a long time back, the courts cannot ignore the harm that is likely to happen by unsettling the law that has been settled. Interpretation given to a provision by several High Courts without dissent and uniformly followed; several transactions entered into based upon the said exposition of the law; the doctrine of stare decisis should apply or else it will result in chaos and open up a Pandora’s box of uncertainty.

7.1. The Supreme Court referring to Muktul vs. Manbhari, AIR 1958 SC 918; and relying upon the observations of the Apex Court in Mishri Lal vs. Dhirendra Nath (1999) 4 SCC 11, observed in Union of India vs. Azadi Bachao Andolan (2003) 263 ITR at 726: “A decision which has been followed for a long period of time, and has been acted upon by persons in the formation of contracts or in the disposition of their property, or in the general conduct of affairs, or in legal procedure or in other ways, will generally be followed by courts of higher authority other than the court establishing the rule, even though the court before whom the matter arises afterwards might be of a different view.”

8. Subject to and Non-obstante :
It is fairly common in tax laws to use the expression ‘Notwithstanding anything contained in this Act or Other Acts” or “Subject to other provisions of this Act or Other Acts”. The principles governing any non obstante clause are well established. Ordinarily, it is a legislative device to give such a clause an overriding effect over the law or provision that qualifies such clause. When a clause begins with “Notwithstanding anything contained in the Act or in some particular provision/provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause. It conveys that in spite of the provisions or the Act mentioned in the non-obstante clause, the enactment following such expression shall have full operation. It is used to override the mentioned law/provision in specified circumstances.

8.1 The Apex court in Union of India vs. Kokil (G.M.) AIR 1984 SC 1022 stated : “It is well known that a non -obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.” In Chandavarkar Sita Ratna Rao vs. Ashalata S. Guram, AIR 1987 SC 117, it observed : “A clause beginning with the expression ‘notwithstanding anything contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force, or in any contract’ is more often than not appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non obstante clause. It is equivalent to saying that in spite of the provision of the Act or any other Act mentioned in the non-obstante clause or any contract or document mentioned in the enactment following it will have its full operation, or that the provisions embraced in the non-obstante clause would not be an impediment for an operation of the enactment. The above principles were again reiterated in Parayankandiyal Eravath Kanapravan Kalliani amma vs. K. Devi AIR 1996 SC 1963 and are well settled.

8.2 The distinction between the expression “subject to other provisions’ and the expression “notwithstanding anything contained in other provisions of the Act” was explained by a Constitution Bench of the Supreme Court in South India Corporation (P.) Ltd. vs. Secretary, Board of Revenue (1964) 15 STC 74. About the former expression, the court said while considering article 372: “The expression ‘subject to’ conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject.” About the non obstante clause with which article 278 began, the court said : “The phrase ‘notwithstanding anything in the Constitution’ is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of article 278.”

To be continued in the next issue.

shailesh.kwebmaker

Interest-tax Act – Reassessment – Where there is no assessment order passed; there cannot be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

Standard Chartered Finance Ltd. vs. CIT [2016] 381 ITR 453 (SC)

On the return of chargeable interest filed by the appellant/assessee under the Interest-tax Act, 1974 for the assessment year 1997-98, no assessment order was passed. However, much after the last date of the assessment year was over, the Assessing Officer sought to reopen the assessment by issuing notice u/s. 10 of the Act and thereafter proceeded to reassess the interest chargeable under the aforesaid Act. The matter was carried in appeal by the assessee. The main contention of the assessee was that when there was no assessment order passed in the original proceedings there was no question of reopening the so-called assessment and make the reassessment. The Commissioner of Incometax (Appeals) accepted the aforesaid contention and set aside the reassessment order. This order was upheld by the Income-tax Appellate Tribunal (“the Tribunal”) as well. However, in further appeal by the Revenue before the High Court, the High Court reversed the view taken by the Tribunal holding that even if there was no original assessment order passed u/s.10 of the Act, there could be a reassessment. The assessee had relied upon various judgments in support including the judgment of the Supreme Court in Trustees of H.E.H. the Nizam’s Supplemental Family Trust vs. CIT [2000] 242 ITR 381 (SC). The High Court held that the said judgment would not govern the case at hand.

The Supreme Court after hearing the learned counsel for the parties, was of the opinion that the High Court had wrongly ignored upon the ratio laid down in Trustees of H. E. H. the Nizam’s Supplemental Family Trust’s case which squarely applied in the instant case in favour of the assessee. The ratio of the said judgment was that in those situations where there is no assessment order passed, there could not be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

The Supreme Court allowed the appeal and set aside the order passed by the High Court.

shailesh.kwebmaker

Receipt of Interest and Full Value of Consideration

Issue for consideration
In recent times, many cases have surfaced involving the receipt of interest by a shareholder for delay in making a public offer for sale. The magnitude becomes considerably higher where the transfer of shares is by a Foreign Institutional Investor. In many cases, the interest is paid under an order of the regulator or a court.

The issue under taxation that arises for consideration, in the hands of the recipient, is about the treatment of such interest, received by him for the delayed offer for sale.

Whether such a receipt would lead to increase the value of consideration and would enter into computation of the capital gains or would it be separately taxable as income from other sources. Conflicting decisions are available on the subject that requires consideration, due to sheer magnitude of the receipt.

Morgan Stanley Mauritius Co.’s case
The issue recently arose before the Mumbai bench of the Tribunal in the case of Morgan Stanley Mauritius Co. Ltd., ITA No.1625/Mum/2014 adjudicated under an order dated 29.01.2016.

The assessee company, incorporated in Mauritius, was registered with SEBI as a sub-account of Morgan Stanley and Company International Ltd. (MSCIL). It had transferred 13,79,979 shares of I-flex Solution Ltd. held by it, to Oracle Global (Mauritius) Ltd.(Oracle) under the open offer for sale made by Oracle for an agreed consideration. In addition to the said consideration, it had received an additional consideration of Rs.2.20 crore from Oracle over and above the sales consideration. The assessee had treated the said additional consideration as the part of the full value of consideration and had accordingly computed the capital gains for which it had claimed exemption from Indian taxation as per the DTAA with Mauritius. The AO held that;

the additional consideration was not linked to original consideration and hence it was to be treated and taxed separately,

the amount received by the assessee was penal in nature,

while making the payment of additional consideration the deductor i.e., Oracle had deducted TDS,

the deduction of tax proved that it was not part of sales consideration, and

the ‘penal interest’ had to be taxed @ 41.82 %.

The Commissioner (Appeals) confirmed the action of the AO.

In the appeal by the company to the Tribunal, it was contended that that the original and revised schedule to the offer proved that the additional compensation @ Rs.16 per share was paid by Oracle for a period up to January 2007 and that the compensation paid was for the delay in making the offer and not for delay in making payment and was not interest. In addition, it was contended that the additional consideration was not received in respect of any monies borrowed or debt incurred or for use of money by Oracle; that the additional consideration was also not a service fee/charge in respect of money borrowed/credit facility which was not utilised by Oracle; that the amount in question would not fall within the definition of ‘interest’ as per section 2(28A) of the Act; that for a receipt to be taxed as interest, existence of a debtor/creditor relationship was a must as per Article-11 of the DTAA ; that there was no Debtor/Creditor relationship between the assessee and Oracle; that the assessee had not made available any capital/funds to Oracle; that the money received by it constituted an integral part of the sales receipts of the shares; that the consideration and sale price arose from the same source i.e., the shares transferred to Oracle under the open offer. In the alternative, it was contended that the additional consideration could not be taxed as capital gains under Article-13 of the Treaty; that it was also not covered under any of the specific Articles of the Treaty; that it would fall under the head ‘income from other sources’ under Article-22 of the Treaty; that the assessee had no Permanent Establishment (PE) in India; that the income from other sources would not be taxable in India as per the provisions of the Act. In a further alternative, with regard to rate of tax to be levied, it was contended that AO had erred in not taxing the additional consideration in accordance with the provisions of section 115AD of the Act; that he should have applied the rate of 20.91% as against the rate of 41.82%. The assessee relied upon the order of the Tribunal dated 14.8.2013 in the case of Genesis Indian Investment Company Ltd. (ITA/2878/Mum/2006) in support of its main contention and also referred to the decisions in the cases of Sainiram Doongarmal, 42 ITR392, (SC) ; Sahani Steel Works & Press Works Ltd. 152 ITR 39(AP); K.G. Subramaniam, 195 ITR 199 (Karn.) and Hindustan Conductors P. Ltd., 240 ITR 762 (Bom).

In reply, the Department contended that the additional consideration was received for delay in making the payment of sales consideration; that it could not be taken as part of total sale value; that Oracle had deducted TDS while making payment to the assessee; that deduction of tax at source indicated that the amount was not part of sale consideration but represented the interest portion for delayed payments; that same had to be treated as income from other sources; that the letter of offer made by Oracle talked about interest payment of Rs.11.35 per share; that the assessee had accepted the open offer; that there was debtor/creditor relationship between the assessee and Oracle; that the buyer of the share should have paid the whole amount as per the scheduled dates of payments; that the nature of all consideration received by assessee was in the nature of interest; that it was governed by Article-11 of the India Mauritius DTAA ; that it could not be taxed under Article-22 of the treaty under the head “other income’; that the additional consideration was interest for late payment of the sale proceeds; that the interest income taxable in the hands of the assessee could not be treated as income from securities; and that the provisions of section 115AD were not applicable in the case under consideration.

The Tribunal found that an open offer was made by Oracle to the share holders of I-flex at the price of Rs.1,475/- per share; that the open offer indicated that additional offer of Rs.11.35 per share was to be payable to the share holders; that as per the letter of open offer the additional consideration per share was to be paid due to delay in making the open offer and in dispatching the letter of the offer based on the time line prescribed by SEBI; that later on, the consideration of open offer was revised to Rs.2,084/- per share; that the additional consideration for delay was revised to Rs.16/- per share; that the open offer letter and public announcement indicated that a revised offer of Rs.2,100/- per share (including additional consideration of Rs.16/-) was to be payable for the shares tendered by the share holders under the open offer; that in response to the open offer, the assessee tendered its holding of 13,97,879 shares of I-flex and received Rs.2,89,77,45,900/- which sum included additional consideration of Rs.2.20 crore.

The Tribunal found that the offer letter contained two schedules, original and revised, and the revised schedule contained the details of additional consideration to be paid by Oracle, which in the opinion of the Tribunal could not be treated as penal interest or interest for late payment of consideration by Oracle. It found that initially the additional consideration was fixed at Rs.11.35 per share, but, because of the delay in making the open offer and dispatching the letter of the offer, was later enhanced to Rs.16.00 per share and thus, there was increase in the offer price of the shares; it was a fact that the regulatory authority i.e. SEBI had approved the transaction; that the transaction could not be completed in due time because of certain reasons; that Oracle had revised the offer price. Considering all the factors, the Tribunal held that the additional consideration received by the assessee was part and parcel of the total consideration that could not be segregated under the heads ‘original sale consideration’ and ‘penal interest received from Oracle’. It observed that the business world was governed by its own rules and conventions and on due consideration of the time factor, if Oracle decided to increase the share price in the offer letter, it had to be taken as a part of original transaction. The Tribunal appreciated that in the original offer interest @ Rs.11.35 per share was offered by Oracle and after considering the delay in dispatch letter and other relevant factors, it decided to increase the interest @ of Rs.16 per share which was a business decision and the assessee had no control over the decision making process of Oracle. Importantly, it noted that the transaction did not have any debtor/creditor relationship between the assesse and Oracle and the sale of shares of I-flex in response to the open offer by Oracle was a pure and simple case of selling of shares; that the assessee had not entered into any negotiations with Oracle and transferred the shares as per a scheme that was approved by SEBI; that the assessee had not advanced any sum to Oracle and had not received any interest from it for delayed repayment of principal amount and in short, the additional consideration received by the assesse from Oracle was not penal interest and was part of the original consideration and was not taxable. The Tribunal noted with approval that in the decision in the case of Genesis Indian Investment Company Ltd.(ITA/2878/Mum /2006 / dated 14.08.2013) a similar issue had been decided by the Tribunal in favour of the assessee.

Dai Ichi Karkaria Ltd .’s case
The issue in the past had arisen in the case of Dai Ichi Karkaria Ltd, ITA No. 5584/Mum/2010 for A.Y. 2006- 07 decided on 28th December 2011. In that case, the assessee had raised the following issues in the appeal ;

“On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in confirming the amount of Rs. 1,00,57,681/- as interest income and not allowing it as part of full value of consideration in computing long term capital gains in respect of buy back of shares and consequently erred in confirming long term capital gains at Rs.2,16,52,094/- as against Rs. 3,16,12,208 as claimed by the appellant.”

“On the facts and circumstances of the case, it is contended that the amount of interest of Rs. 1,00,57,681/- assessed by the Assessing Officer is not chargeable to tax under any provision of the I T Act.”

In that case, the assessee had computed the long term capital gains of Rs. 3,16,12,208 on transfer of shares under a scheme of buy back of shares of Colour Chem Ltd. The assessee had sold 71,233 shares @ Rs. 318 per share and had also received interest @ Rs.149.62 per share. In computing the capital gains, the assessee had added interest received as a part of sale consideration. The AO asked the assessee to explain as to why the interest of Rs. 1,06,57881, received on the investment, should not be treated as Income from other sources and taxed as such. In response, the assessee submitted that the said interest was paid by the company to eligible shareholders, including the assessee, pursuant to the order of the Supreme Court. It was explained that Colour Chem Ltd. had not deducted tax while making payment of the same, u/s. 194A of the Act, for the reason that the said payment was considered as part of sale consideration for calculating the Long Term Capital Gains.

The AO held as under: “The assessee has received interest in terms of the Supreme Court Order mentioned in the para 4.1 of the Letter of Offer to buy the shares of Colour Chem Ltd by EBITO Chemiebetelligungen AG, Claraint International Ltd and Clariant AG. The Supreme Court in its order has worked out interest at Rs. 149.62 per share. Assessee’s case falls under income by way of interest on securities which is specifically covered u/s 56(2)(id) of Income Tax Act. In fact the matter has been discussed in detail by the Hon’ble Madras High Court in the case of South India Shipping Corporation Ltd. (240 ITR 24), wherein, it has been held that the ratio of the decision of Supreme Court is applicable for existing Company also.” On appeal, the CIT(A) concurred with the view of the AO.

In an appeal to the Tribunal, it was contended by the assesseee company that the assessee had no statutory right to receive the interest or any compensation; the amount of interest received by the assessee was for the period prior to the time of the payments as well as actual transfer of the shares; the amount therefore was a part of the sale consideration and not a separate income of the assessee; there was no agreement or statutory rights to receive such interest; there was no mercantile practice to receive the interest and the amount was only compensatory in nature and could not be treated as a separate income.

It was contended that the interest paid by the acquirer of the shares was treated as the part of purchase consideration in the case of Burmah Castrol Plc., 307 ITR 324 (AAR) wherein interest paid by the acquirer was held as cost of acquisition of shares and on similar analogy, the interest received by the assessee on buyback of share, should be part of the sale consideration.

Highlighting the decision of the Supreme Court in the case of CIT vs. Ghanshyam (HUF), 315 ITR 001(SC), it was submitted that the court in that case held that the interest payable prior to the possession taken over shall be part of the compensation. Reliance was placed on the decision in the case of Manubhai Bhikhabhai vs. CIT, 205 ITR 505(Guj).

Narrating the litigation history of the case of acquiring the shares, it was explained that the purpose of the Supreme Court in awarding interest of Rs. 149.62 per share (net of dividends) was to compensate the shareholders of the target company for the loss of time or delay in making the offer and hence, such interest could under no stretch of imagination be construed to be interest income accruing in the hands of the assessee. Attention was drawn to the provisions of section 2(28A) of the Act, defining the term ‘interest’ to contend that for a receipt to be considered as interest the amount should arise from money borrowed or debt incurred and that in the given case, the assessee had invested in shares of the target company i.e. CCL and had not given any loans and that the scope of definition could not be expanded to include in itself something which by its very basic nature, did not amount to interest.

The facts of the case, it was explained, confirmed that the compensation was not on the grounds that the acquirer delayed the payment of the consideration to the shareholders but was awarded for making good the loss caused to the shareholders of CCL, due to the delay in making the offer of buy back by the acquirer.

It was pointed out that while deciding the issue of interest, the Supreme Court had clearly held that the shareholder did not have any right to get interest and the shareholders were only to be compensated for the loss of interest and nothing more ; therefore, when there was no right or any agreement to receive the interest then, the amount received by the assessee was only a part of the sale consideration.

Lastly, it was submitted that when there was no right to receive the interest and there was no source of income then, there was no provision to tax the same, as there was no source. CIT vs. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd.,179 ITR 157(P&H).

On the other hand, the Department submitted that interest was received by the assessee for delay in payment of offer price; that ‘income’ included any amount received by the assessee and would fall u/s. 56 of the I. T. Act, since the money was lying with the acquirer and the interest was a compensation for such loss; that as per the provision of section 46A, only the consideration received by the shareholder, after adjustment of the cost of the acquisition of shares was deemed as capital gains arising to such shareholder.

The Tribunal considered the rival contentions and perused the relevant material on record. It examined in detail the factual background giving rise to the dispute of interest payment and transfer of the shares under buy-back scheme. It noted that the Supreme Court while deciding the issue of rate of interest, observed that “by reason of Regulation 44, as substituted in 2002, the discretionary jurisdiction of the Board is curtailed. In terms of Regulations 1997 could award interest by way of damages but by reason of Regulation 2002, its power is limited to grant interest to compensate the shareholders for the loss suffered by them arising out of the delay in making the public offer.” The tribunal noted that it was clear from the observations of the court that interest payable as per Regulations 44 was to compensate the shareholders for loss suffered by them for delay in making the public offer and that it was not penal in nature and was not towards a statutory right or a right arising from contract but the nature of payment of interest was to compensate the loss due to the delay in the payment by the acquirer and thus, the interest was paid to compensate the shareholder who were deprived of interest payable on difference of offer price and market price.

Importantly, the tribunal extensively quoted from the decision in the case of CIT vs. Ghanshyam (HUF) (supra) wherein the court after analysing the provisions of Land Acquisition Act, 1894 had given a detailed finding on the issue of interest payable u/s. 23, 28 as well as section 34 of the Land Acquisition Act. The Supreme Court in that case had addressed the issue whether the interest paid on enhanced compensation u/s. 23,28 and section 34 would be treated as part of compensation u/s. 45(5) of the I. T. Act 1961. The Tribunal quoted the following paragraph form the said decision;

“It is to answer the above questions that we have analysed the provisions of sections 23, 23(1A), 23(2), 28 and 34 of the 1894 Act. As discussed hereinabove, section 23(1A) provides for additional amount. It takes care of increase in the value at the rate of 12 per cent. per annum. Similarly, under section 23(2) of the 1894 Act, there is a provision for solatium which also represents part of enhanced compensation. Similarly, section 28 empowers the court in its discretion to award interest on the excess amount of compensation over and above what is awarded by the Collector. It includes additional amount under section 23(1A) and solatium under section 23(2) of the said Act. Section 28 of the 1894 Act applies only in respect of the excess amount determined by the court after reference under section 18 of the 1894 Act. It depends upon the claim, unlike interest under section 34 which depends on undue delay in making the award. It is true that “interest” is not compensation. It is equally true that section 45(5) of the 1961 Act refers to compensation. But, as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards ” interest” both as an accretion in the value of the lands acquired and interest for undue delay. Interest under section 28 unlike interest under section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. So also additional amount under section 23(1A) and solatium under section 23(2) of the 1894 Act forms part of enhanced compensation under section 45(5)(b) of the 1961 Act. ”

In the opinion of the Tribunal, there was a fine distinction between the additional amount payable u/s. 23, award of interest u/s. 28 and interest payable u/s. 34 of the Land Acquisition Act which had led the court to hold that the additional amount u/s. 23 (1A) and solatium u/s. 23(2) of Land Acquisition Act formed a part of enhanced compensation u/s. 45(5)(b) of the I. T. Act, 1961 and when the amount was paid as a compensation for enhancement in the value of the asset transferred, the same would be part of full consideration; but when the interest was paid as a compensation to loss of interest, then it could not be treated as a part of sale consideration.

The Tribunal held that the interest received by the assessee, as was held by the court, while deciding the dispute of rate of interest was only a compensation for loss of interest, which was akin to payments made due to delay in public offer and delayed payments and was not the compensation for enhancement in the value of the asset. The fact that the offer price was more than the value of the share from 24.2.1998 till 7.4.2003 weighed heavily with the Tribunal. The Tribunal accordingly held that the interest received by the assessee as per the directions of the SEBI and in pursuance of the decision of the Supreme Court could not be treated as part of sale consideration of shares and accordingly, the lower authorities had rightly treated the same as taxable under the head ‘income from other sources’.

The Tribunal noted that merely by reason that the interest paid by the acquirer would be a part of acquisition of shares would not ipso facto conclude that the said interest in the hands of the shareholder would be part of sale consideration.

Observations
The issue though moving in a narrow circle has multiple dimensions;

Does the amount go to increase the ‘full value of consideration’ for the purposes of the Income-tax Act?

Does the additional amount, received in addition to the sale consideration, represent interest or can be classified as in the nature of interest?

Can such amount be treated as ‘interest’ within the meaning of the term as defined in section 2(28A) of the Act?

Do the provisions of section 46A alter the treatment of receipt? and

Can such an amount be classified as a capital receipt not liable to tax?

The issue on hand becomes more twisted when it is examined in the context of the provisions of Double Taxation Avoidance Agreements and in particular w.r.t. certain Articles that deal with the ‘capital gains’, ‘interest’ and ‘other income’. Issue also arises as to the applicability of rate of tax and the liability to deduct tax at source under the domestic laws. But then, these are the issues that are not intended to be discussed here for the sake of focusing on the issue under debate.

There is no dispute that the amount in question in both the cases, that has been received by the shareholder, is for compensating him for the delay made by the acquirer company in making a public offer for sale. The payment is made as per the SEBI regulations to compensate the shareholder for the delay in making the offer and is calculated as per the rules of SEBI. In the matters of dispute as to the quantification and the period, the courts have the jurisdiction to intervene and provide the finality to the dispute. There is also not a dispute that the shareholders have not lent any money to the acquirer company nor is there a debtor-creditor relationship between the company and the shareholder. It is also not anyone’s case that the company had delayed the payment of the offer price or even the additional payment ordered by the SEBI.

In computing the income under the head ‘capital gains’, an assessee, to begin with, is required to reduce the cost of acquisition from the full value of consideration. The term ‘full value of consideration’ is not defined under the Income-tax Act, but is largely held to represent the sale consideration or the consideration for transfer of a capital asset. It is immaterial whether the said consideration is received in part or in full at the time of transfer, and it is also not relevant whether such consideration is received from the transferee or not.

Obviously,the compensation paid, in our respectful opinion cannot be a part of the sale consideration simply, because it is not an ‘interest’ or that it is paid for the delay in making an offer. On a first blush, the consideration moving from the company to a shareholder can be taken to be the offer price, i.e. the price at which the company has agreed to purchase or buy the shares. However, when one takes in to account the event that has preceded the actual offer, on account of which event the company has been made to offer and pay an additional amount for delaying the offer, it is appropriate to say that the shareholder in question has accepted the said offer with full knowledge of the total receipt which he is likely to receive at the time of accepting the offer and in that view of the matter, it is apt to hold that the ‘full value of consideration’ in his case represents the acceptance price, i.e the total price. It is a settled position in law that the full value of consideration referred to in section 48 does not necessarily mean the apparent consideration. It rather is the price bargained for by the parties to the transaction. ‘Full value’ is the whole price and in its whole should be capable of including the additional amount agreed to be paid before the offer is accepted.

We do not think the receipt in any manner could ever be held to be representing interest. Interest is a compensation for delay in tendering the payment of the consideration. In the case under consideration, no consideration ever became payable before the offer for sale was made and was accepted. Importantly, once it was accepted, there was no delay in the payment thereof. These aspects of the facts are even confirmed by the Tribunal in the case of Dai Ich Karkaria Ltd.(supra). It is true that the compensation for the delay is measured in terms of the period of delay and is linked to the rate of interest but the methodology adopted for quantifying the damages can not be held to change the character of the payment which remains to be compensation, and not interest.

A bare reading of section 2(28A) confirms that the receipt inn question cannot be termed as ‘interest’. Not much will turn on section2(28A) in support of the case that it represents interest. None of the parameters help the case in favour of treating the receipt as interest.

Before we deal with the last part, it is relevant to examine whether provisions of section 46A of the I. T. Act, have any implication in deciding the issue. Apparently, the scope of section 46A is restricted to the buy back of shares by the issuing company and it’s scope cannot be extended to the case of public offer by a raiding company or any person other than the issuing company. Secondly, the provision requires the difference between the cost of acquisition and the value of consideration to be taxed under the head ‘capital gains’. The ‘value of consideration’ cannot be largely different than the ‘full value of consideration’ and as such the discussion in the earlier paragraphs will largely apply to section 46A with the same force.

Lastly, whether the receipt in question could be held to be a capital receipt, not liable to taxation, is an issue that was not before the Tribunal in any of the cases, but in our opinion is a possibility worth considering, in view of the fact that the receipt is in the nature of damages and represent compensation for an injury, which can be presented to represent a capital receipt not liable to taxation.

shailesh.kwebmaker

RULES FOR INTERPRETATION OF TAX LAWS – PAR T 1

1.Introduction:
No enactment has been enacted by the Legislature for Interpretation of Statues including on Tax Laws. However, in many an acts, definition clause is inserted to mean a ‘word’ or ‘expression’. Explanations and Provisos are inserted to expand or curtail. No codified rules have been made by the rule making authority or the Legislature. Rules are judge made, keeping due regard of the objects, intent and purpose of the enacted provision. Interpretation is the primary function of a court of law. The Court interprets the provision whenever a challenge is thrown before it. Interpretation would not be arbitrary or fanciful but an honest continuous exercise by the Courts.

1.1. The expression “interpretation” and “construction” are generally understood as synonymous even though jurisprudentially both are distinct and different. “Interpretation” means the art of finding out of true sense of the enactment whereas “Construction” means drawing conclusions on the documents based on its language, phraseology clauses, terms and conditions. Rules for Interpretation of “Tax Laws” are to some extent different than the General Principles of Interpretation of Common Law. Rules of Interpretation which govern the tax laws are being dealt in this series of articles.

2. Particulars in a Statute:
Every enactment normally contains Short title; Long title; Preamble; Marginal notes; Headings of a group of sections or of individual sections; Definition of interpretation clauses; Provisos; Illustrations; Exceptions and saving clauses; Explanations; Schedules; Punctuations; etc. Title may be short or long. Preamble contains the main object. Marginal notes are given. Chapters and Headings are group of sections. In the Finance Bill, Memorandum containing explanation on every clause, intent and purpose for the proposal is given. Central Board of Direct Taxes issues Circulars explaining each clause. Finance Minister in his speech refers to the proposed insertions, amendments, alterations, modifications etc. It is highly desirable to go through such material apart from unmodified provision for proper understanding, pleadings and arguments.

3. Classification of the Statute:
Statute can be of various classifications. Providing date of commencement, territorial jurisdiction, mandatory or directory, object, whether codifying or consolidating or declaratory or remedial or enabling or disabling, penal, explanatory, amending retrospective or retroactive or repeal with savings or curative, corrective or validating. Applicability can be on all the subjects or class of persons or specified territorial area or specified industries etc. Assent of the President is a requisite condition. Rules have to be framed by the rule making authority and to be operative from specified date or notified date.

4. The General Principles of Interpretation:
Broadly, the general principles, as applied from time to time by the Courts are : The literal or grammatical interpretation; The mischief rule; The golden rule; Harmonious construction; The statute should be read as a whole; Construction ut res magis valeat quam pereat; Identical expressions to have same meaning; Construction noscitur a sociis; Construction ejusdem generis; Construction expression unius est exclusion alterius; Construction contemporanea exposition est fortissimo in lege; etc. Taxation statutes collecting taxes, duty, cess, levies, etc. from the subjects, have to be beneficially and liberally construed in favour of the tax payers. Penal statutes have to be construed strictly and the benefit of doubt to go to the culprit. Penalty provisions are a civil liability, but have to be construed reasonably. Penalty is corrective and not revenue earner. Levy of interest is compensatory and is treated as mandatory. Charge should be specific and there must be satisfaction of the authority issuing show-cause and levying penalty.

4.1. Other statutes in pari-materia have to be cautiously applied and if phraseology and intent is identical, may apply. Ratio decendai may also apply. Amending statutes are normally prospective unless specifically stated as retrospective. There are mandatory and directory or conjunctive and disjunctive enactments. There exist internal or external aids to interpretation. There can be retrospective, prospective or retroactive operation of a provision. Many maxims are used for interpretation. While interpreting tax laws ‘Double Taxation Avoidance Agreements’ have to be considered as supreme and would prevail even if meaning and language in the statute is different and there exists a confrontation. No provision should be in infringement of the Constitution and it should not be violative or unconstitutional but intravires – not ultravires. Certain issues may be resintegra or nonintegra.

4.2. There are binding precedents under articles 141 and 226 – 227 of the Constitution of India. Even order of the Income Tax Appellate Tribunal and High Court, other than the jurisdictional High Court, have to be respected. Judgment of larger bench as well as co-ordinate bench has to be followed unless and until raised issue is referred to the President of the Income Tax Appellate Tribunal or the Chief Justice, as the case may be, for constituting a larger bench. Judgment of the Constitutional Bench prevails over judgments of lower authorities and single benches. However recently it has been noticed that even orders of the Income Tax Appellate Tribunal or Single or Division Bench of High Courts have been referred and considered, if no appeal has been filed by the Revenue and their ratio has been accepted impliedly or explicitly.

4.3. The General Clauses Act, 1897, contains definitions, which are applicable to all common laws including tax laws, unless and until any repugnant or different definition is contained in the definition section of the tax laws. It also contains general rules of construction, which are applied on common law as well as tax laws. Provisions of Civil Law, Criminal Law, Hindu Law, Evidence Act, Transfer of Property Act, Partnership Act, Companies Act and other specific, relevant and ancillary laws equally apply unless until a different provision is enacted in tax statute and such laws expressly excluded. As analysed, about 108 Acts other than tax statutes need be read, referred and relied upon to make an effective representation, knowledge whereof is imperative.

4.4. Ordinances are also issued, which have limited life, till the statute is enacted or for the specified period. Its purpose is to be operative during the intervening period, where after it automatically lapses. Circulars, instructions, directions are issued statutorily as well as internally, which are binding on tax administration, but not on a tax payer. By such circulars, scope of exemption, deduction or allowance can be expanded, even though literal meaning of the relevant provision may be to the contrary; being beneficial to the tax payer.

5. The Tax and Litigation:
Return is filed. Assessment is framed by the assessing authority. First appeal lies with the Commissioner of Income-tax (Appeals), a superior assessing authority. Second appeal lies, and lis commences, on appeal to the Income Tax Appellate Tribunal. Income Tax Appellate Tribunal is final fact finding body. Third appeal lies with the Division Bench of the jurisdictional High Court, on substantial question of law and finality is given by the Supreme Court, where an appeal as well as a Special leave Petition can be filed. Appeal is statutory and S.L.P. is discretionary. Scope is larger on SLP. Revisional power is with the Commissioner of Income-tax u/s. 263 as well as 264. Writ remedy can be availed before the jurisdictional High Court, if there is no alternative, effective, efficacious remedy of appeal or if there is lack of jurisdiction or violation of principles of natural justice or perversity or arbitrariness, disturbing conscious of the Court. The Hon’ble High Courts are slow in permitting writ jurisdiction. Even notice u/s.148 can be challenged by writ, on lack of jurisdictional requirements. Substantial disputes can be settled through the medium of Income Tax Settlement Commission and Dispute Resolution mechanism. Interpretation of documents is a substantial question of law as held by the Apex Court in Unitech Ltd. vs. Union of India (2016) 381-ITR-456 (S.C.).

5.1. Eminent Jurist Cardozo states, “You may say that there is no assurance that judges will interpret the mores of their day more wisely and truly than other men. I am not disposed to deny this, but in my view it is quite beside the point. The point is rather that this power of interpretation must be lodged somewhere, and the custom of the Constitution has lodged it in the Judges. If they are to fulfill their function as Judges, it could hardly be lodged elsewhere. Their conclusions must, indeed, be subject to constant testing and retesting, revision and readjustment; but if they act with conscience and intelligence, they ought to attain in their conclusions a fair average of truth and wisdom.”

5.2. Article 265 of the constitution mandates that no tax shall be levied or collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law. The tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The validity of the tax is to be determined with reference to the competence of the Legislature at the time when the taxing law was enacted. The law must be validly enacted i.e. by the proper body which has the legislative authority and in the manner required to give its Acts, the force of law. The law must not be a colourable use of or a fraud upon the legislative power to tax. The tax must not violate the conditions laid down in the constitution and must not also contravene the specific provisions of the constitution.

5.3. No tax can be imposed by any bye-law, rule or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorises the imposition and the authorisation must be express not implied. The procedure prescribed by the statute must be followed. Tax is a compulsory exaction made under an enactment. The word tax, in its wider sense includes all money raised by taxation including taxes levied by the Union and State Legislatures; rates and other charges levied by local authorities under statutory powers. Tax includes any ‘impost’ general, special or local. It would thus include duties, cesses or fees, surcharge, administrative charges etc. A broad meaning has to be given to the word “tax.”

5.4. Taxes are levied and collected to meet the cost of governance, safety, security and for welfare of the economically weaker sections of the Society. It is well established that the Legislature enjoys wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are less rigorous. It is well established that the Legislature is promulgated to exercise an extremely wide discretion in classifying for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. In Jaipur Hosiery Mills (P.) Ltd. vs. State of Rajasthan (1970) 26-STC-341; the apex court while upholding the classification made on the basis of the value of sold garments, held that the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. The same view has been taken in State of Gujarat vs. Shri Ambica Mills Ltd., (1974) 4-SCC-916. In ITO vs. N. Takin Roy Rymbai (1976) 103-ITR-82 (SC); (1976) 1 SCC 916, the apex court held that the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax.

5.5. With National litigation policy of the Government of India, the Central Board of Direct Taxes issued Instruction No. 5 dated July 10, 2014 and lately in exercise of powers conferred u/s. 268(A) of the Income-tax Act issued Circular dated December 10, 2015 bearing No. 21 of 2015, enhancing monetary limits for an appeal before the Tribunal exceeding tax Rs. 10 lakh, before the High Court exceeding tax Rs. 20 lakh and before the Hon’ble Supreme Court exceeding tax Rs. 25 lakh with specified exceptions. Tax would not include interest. Same limit for penalty appeals. It applies to pending appeals and references. Writs have been excluded. The instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/Tribunals. Pending appeals below the specified tax limits may be withdrawn or not pressed. Appeals before the Supreme Court will be governed by the instructions on this subject, operative at the time when such appeal was filed.

5.6. The Hon’ble Bombay High Court in C.I.T. vs. Sunny Sounds Pvt. Ltd. (2016) 281-ITR-443 (Bom.) at 452 observed: “The need for the Central Board of Direct Taxes to issue the December 15, 2015, Circular and to clarify that it would apply retrospectively to govern even pending appeals arose on account of the enormous increase in the number of appeals being filed by the Revenue over the years”. It also observed: “This policy of non-filing and of not pressing and/or withdrawing admitted appeals having tax effect of less than Rs. 20 lakh has been specifically declared to be retrospective by the Circular dated December 10, 2015. There is no reason why the circular4 should not apply to pending references where the tax effect is less than Rs. 20 lakh as the objective of the Circular would stand fulfilled on its application even to pending references”. Ultimately reference application of the Revenue was returned unanswered. The Ahmedabad Bench of I.T.A.T. in Dy. Commissioner vs. Some Textiles & Industries Ltd. and Others (2016) 175-TTJ (Ahd.) 1 by Order dated 15.12.2015 have also held so for pending appeals. Thus cost of the Government has been saved. Fairly large number of pending appeals have been / are being withdrawn. Appeals / References which fall under the Circular as interpreted by the Courts and Tribunals need be brought to the notice of the relevant forum or the concerned Commissioner for its expeditious withdrawal. It is ‘Professional Social Responsibility’ of each one of us. I have noticed department is slack and is not filing withdrawal applications or providing lists to the I.T.A.T./ High Courts. It is improper.

5.7. Regularly at short intervals, Voluntary Disclose or Declaration Schemes and Schemes to reduce / waive outstanding demands like Kar Vivad Samadhan Scheme etc. are introduced. The Finance Bill, 2016 also introduces (1) The Income Declaration Scheme, 2016; (2) The Direct Tax Dispute Resolutions Scheme, 2016, benefit whereof deserves to be availed of by the eligible persons. It is advisable to cut down tax disputes, purchase peace and concentrate on earning income after developing tax culture. Our duty is to guide clients for payment of due and legitimate taxes.

5.8. In tax administration, accountability is absent, work culture is missing and slackness is apparent. High pitched additions are made, arbitrarily, capriciously, with perversity and malafides. Corruption is flagrant. The Raja Chelliah report suggested that black marks be given to such officers, whose additions do not stand test of appeal. But the same was not accepted. However, by the Finance Bill, 2016 some steps towards accountability and expeditious are proposed. Such steps need to be implemented vigorously to usher in discipline. Many more measures are necessary and expedient in the interest of just collection.

6. Charging and Machinery Provision :

The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. The Supreme Court in CWT vs. Ellis Bridge Gymkhana and Others (1998) 229 ITR 1 held: “The Legislature deliberately excluded a firm or an association of persons from the charge of wealth-tax and the word “individual” in the charging section cannot be stretched to include entities which had been deliberately left out of the charge.

6.1. The charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same. (See Whitney vs. Commissioner of Inland Revenue (1926) AC 37, Commissioner of Income-tax vs. Mahaliram Ramjidas (1940) 8-ITR-442 (PC), India United Mills Ltd. vs. Commissioner of Excess Profits Tax, Bombay (1955) 27-ITR-20 (SC); and Gursahai Saigal vs. Commissioner of Income-tax, Punjab (1963) 48-ITR-1 (SC).

6.2. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the Legislature, manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only when the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. Liberal and strict construction of an exemption provision are, as stated in Union of India vs. Wood Papers Ltd. (1991) 83-STC-251 (SC) “to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject. But once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction.”

6.3. The Apex Court in C.I.T. vs. Calcutta Knitwears (2014) 362-ITR-673 (S.C.) stated: “The courts, while interpreting the provisions of a fiscal legislation, should neither add nor subtract a word from the provisions. The foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule”. It also observed: “Hardship or inconvenience cannot alter the meaning of the language employed by the Legislature if such meaning is clear and apparent. Hence, departure from the literal rule should only be in very rare cases, and ordinarily there should be judicial restraint to do so” and : It is the duty of the court while interpreting machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the courts ought not to be hesitant in espousing a common sense interpretation of the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat it”.

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Depreciation – Carry forward and set off – Amendment to section 32(2) by the Finance (No.2) Act, 1996 – Effect – Unabsorbed Depreciation as on 1-4-1997 can be set off against income from any head for assessment year immediately following 1-4-1997 and thereafter unabsorbed depreciation if any to be set off only against business income for a period of eight assessment years.

Peerless General Finance and Investment Co. Ltd. vs. CIT [2016] 380 ITR 165 (SC)

The Tribunal had held that under the provisions of section 32(2)(iii)(a) and (b) the amount of unabsorbed depreciation allowance shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; if not wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed.

The Tribunal further held that since in this case, business income after adjusting brought forward business loss had been determined at nil, therefore, in the absence of any other business income, the amount of brought forward unabsorbed depreciation allowance shall not be set off from the other income, i.e., income from “house property” and “Other Sources” and shall be carried forward to the following assessment year(s) as per the provisions of section 32(2)(iii)(a) and (b) of the Income-tax Act, 1961.

The High Court admitted the appeal on the following questions:

(i) Whether, on the facts and in the circumstances of the case, the Tribunal erred in construing the amendment of section 32(2) by the Finance (No.2) Act, 1996, as retrospective in effect so as to preclude the assessee’s claim for adjustment of accumulated unabsorbed depreciation allowance brought forward as on the 1st April, 1997, from earlier years against income from house property and income from other sources for the assessment year 1998-99 ?

(ii) Whether the assurance of the Finance Minister in Parliament that set off of the cumulative unabsorbed depreciation brought forward from earlier years as on April 1st, 1997, can be set off against the profits and gains of a business or profession or any other income of the taxpayer for the assessment year 1997-98 and subsequent year forms part of the legislative intent and any construction contrary thereto is erroneous?

The High Court held that the provisions introduced suggest that where the unabsorbed depreciation allowance could not be wholly set off against the profits and gains, if any, of any business or profession carried on by the assessee, the unabsorbed depreciation allowance could be set off from the income under any other head during the assessment year 1997-98. If the unabsorbed depreciation allowance could only be wholly set off during the assessment year 1997-98, the left over could only be set off against the profits and gains, if any, of the business or profession in the assessment year 1998-99.

The High Court therefore answered both the question in the negative and in favour of the Revenue.

On further appeal, the Supreme Court dismissed the SLP subject to the observation that the unabsorbed depreciation as on April 1, 1997, can be set off against the income from any head for the immediate assessment year following April 1, 1997 and thereafter if there still is any unabsorbed depreciation the same can be set off only against the business income for a period of eight assessment years.

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ACIT vs. Rupam Impex ITAT, Rajkot bench, Rajkot Before Pramod Kumar (A.M.) and S S Godara (J.M.) I.T.A. No.: 472/RJT/2014 A.Y.: 2008-09 Date of Order: 21st January, 2016 Counsel for Assessee / Revenue : Vimal Desai / Yogesh Pandey and C S Anjaria

Section 154 – Who is responsible for the mistake is not material for the purpose of proceedings u/s. 154; what is material is that there is a mistake – AO directed to rectify the mistake even though it was alleged to have been made by the assessee.

Facts
In the assessment order passed by the AO u/s. 143(3) of the Act, the assessee noted that the AO had erred in computing its assessed income on account of the following discrepancies in the order passed:

The AO was, accordingly, urged to rectify the mistake which was apparent on record. However, the AO rejected this request primarily on the ground that the assessee himself had computed the income on the basis of these figures. On appeal, the CIT(A) held the action of the AO as incorrect and directed the AO to rectify the mistakes u/s. 154.

Before the Tribunal, the revenue justified the stand of the AO and submitted that since the claim of the assessee, as made in the income tax return, was accepted, the assessee could not make a fresh claim without a revised return.

Held
According to the Tribunal, a lot of emphasis was placed by the AO on the fact that the mistake was committed by the assessee ignoring the fact of the complete non-application of mind by him to the facts of the case and making a mockery of the scrutiny assessment proceedings. According to the Tribunal who is responsible for the mistake was not material for the purpose of proceedings u/s. 154; what is material is that there is a mistake – a mistake which is clear, glaring and which is incapable of two views being taken. According to the Tribunal, the fact that mistake has occurred was beyond doubt. It is attributed to the error of the assessee does not obliterate the fact of mistake or legal remedies for a mistake having crept in. According to it, the income liable to be taxed has to be worked out in accordance with the law as in force. In this process, it is not open to the Revenue authorities to take advantage of mistakes committed by the assessee. Tax cannot be levied on an assessee at a higher amount or at a higher rate merely because the assessee, under a mistaken belief or due to an error, offered the income for taxation at that amount or that rate. It can only be levied when it is authorised by the law, as is the mandate of Article 265 of the Constitution of India. According to it, a sense of fair play by the field officers towards the taxpayers is not an act of benevolence by the field officers but it is call of duty in a socially accountable governance.

Dismissing the appeal of the revenue the Tribunal made it clear that it was not awarding any costs but put in a word of caution. It pointed out that there has to be proper mechanism to ensure that such frivolous appeals are not filed. And if that does not happen and the frivolous appeals continue to clog the system, it is only a matter of time that the Tribunal would start awarding costs, as a measure to deterrence to the officers concerned.

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[2016] 67 taxmann.com 65 (Hyderabad ) Virtusa (India)(P.) Ltd. vs. DCIT A.Y.: 2012-13 Date of Order: 4th March, 2016

Section 115JAA – Reliance by the assessee on ITR-6 format to arrive at the total liability as well as MAT credit calculations, for payment of tax, is proper. Addition made by the AO by making calculations applying his own interpretation which is not in line with ITR 6 needs to be deleted.

Facts
The assessee company filed its return of income for assessment year 2012-13 on 30.11.2012 admitting a total income of Rs. 42,87,89,690. The return of income was processed by CPC, Bangalore u/s. 143(1) raising a demand of Rs. 32,06,700. The difference in computation of tax by the assessee and the AO was on account of the Assessing Officer (AO) computing MAT credit without including surcharge and education cess while arriving at the amount of tax payable under normal provisions of the Act and u/s. 115JB of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who relying on the decision of the Tribunal in the case of Richa Global Exports Pvt. Ltd. confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal held that as per section 115JAA(2A), tax credit to be allowed shall be the difference of tax paid for any assessment year under sub-section (1) of section 115JB and the amount of tax payable on his total income computed in accordance with the other provisions of the Act. The important word used is tax paid and as per the Hon’ble Apex Court decision in the case of K. Srinivasan vs. CIT [1972] 83 ITR 346 (SC), the term `tax’ includes surcharge.

The Tribunal observed that sub-section (5) of section 115JAA grants set off in respect of brought forward tax credit to the extent of the difference between tax on his total income and the tax which would have been payable u/s 115JB, as the case may be for that assessment year. It noted that the term used is `tax’ and not `income-tax’ or any other term. It held that the term `tax’ includes surcharge.

The Tribunal noted that the provisions of sub-section (5) of section 115JAA are applied in ITR-6. It observed that ITR-6 form is designed and approved by the apex body CBDT and this form is universally used by all the company assessees. It observed that these are standard forms which are expected to be followed by all the assessees. It noted that the format of ITR-6 was amended w.e.f. AY 2012-13 by CBDT. It held that the AO cannot overlook these formats and (interpret in his own method of calculating tax credit while making assessment u/s. 143(1) of the Act) proceed to calculate the MAT credit to compute assessment u/s. 143(1) applying different methods when the proper and correct method is proposed by CBDT in ITR-6. The AO is expected to follow ITR-6 format to complete the assessment u/s. 143(1) or 143(3) of the Act.

As regards the decision of the Delhi Bench of ITAT in the case of Richa Global Exports Pvt. Ltd., the Tribunal held that the decision of Apex Court in the case of K. Srinivasan may not have been brought to the knowledge of the Delhi Bench.

It noted that earlier judgments in the cases of Universal Medicare, Valmet India and Wyeth Limited were decided relying on ITR-6 as applicable in those assessment years. Applying the ITR-6 format, which was applied by the assessee as well, the Tribunal deleted the addition made.

This ground of appeal filed by the assessee was allowed.

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(2016) 156 ITD 524 (Delhi ) ITO (Exemption) v. Satyug Darshan Trust A.Y.: 2009-10. Date of Order: 4th November, 2015

Section 115BBC – Where assessee established for charitable and religious purposes receives anonymous donation without any specific direction that such donation is for any university or other educational institutions or any hospital or other medical institutions run by the assessee, then such donation cannot be taxed by invoking provisions of section 115BBC(1).

Facts
The assessee was a religious and charitable trust registered u/s. 12AA and its income was exempt u/s.11. The assessee was running Satyug Darshan Sangeet Kala Kendra and also running a school under the name and style of Satyug Darshan Vidhyalaya.

The AO noticed certain sum under the head ‘Donation Golak’. The explanation of the assessee that the said amount was less than 5 per cent of the total receipt was not accepted by the AO and the AO invoking the provisions of section 115BBC(1) taxed the said sum as the income of the assessee.

On appeal, the CIT(A) deleted the addition holding that the assessee was a charitable and religious trust and provisions of section 115BC would not be applicable to it. Aggrieved, the revenue preferred an appeal before the Tribunal.

Held
The AO while framing the original assessment had categorically stated that the activities of the assessee are charitable within the meaning of section 2(15) and there was no change in the aims and objects of the assessee as compared to the earlier years.

The provisions of section 115BBC(1) are applicable for the anonymous donations received by any university or other educational institution or any hospital or any trust or institution referred to in sub-clauses (iiiad) or (vi) or (iiiae) or (via) or (iv) or (v) of clause (23C) of section 10. However, sub-section (2) of section 115BBC carves out exceptions to provisions of section 115BBC(1).

In the present case, the assessee is established for religious and charitable purposes and the anonymous donation was received without any specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by the assessee trust and therefore, the ld. CIT(A) had rightly deleted the said addition in view of the provisions of section 115BBC(2)(b) of the Act.

In the result, the appeal filed by the department is dismissed.

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Salary – Section 17(3) – A. Y. 1994-95 – Premature termination of service in terms of service rules – Payment of sum by employer to employee voluntarily with a view to bring an end to litigation – No obligation on employer to make such payment – Payment not compensation – Not profits in lieu of salary – Not liable to tax

Arunbhai R. Naik vs. ITO; 379 ITR 511 (Guj):

The assessee was discharged from his services. Against the order of termination, he preferred an appeal to the higher authority in the company but did not succeed. In writ petition filed by the assessee the Single Judge directed reinstatement of his services. During the pendency of the appeal preferred by the employer against the order of the single judge, the assessee and the employer arrived at a settlement, in terms whereof, the amount was to be computed in the manner stated therein and was to be paid to the assessee. The assessee claimed that the amount of Rs. 3,51,308/- so received was capital receipt and was not liable to tax. The Assessing Officer did not accept the claim and the amount was added to the total income. The Tribunal held that the amount was taxable u/s. 17(3) of the Income-tax Act, 1961.

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

“i) The services of the assessee were terminated in terms of the service rules and the amount was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee with a view to bring an end to the litigation.

ii) There was obligation upon the employer to make such payment and, therefore, the amount would not take the character of compensation as envisaged u/s. 17(3)(i). The amount would, therefore, not fall within the ambit of the expression “profits in lieu of salary” as contemplated u/s. 17(3)(i). The Tribunal was, therefore, not justified in holding that the amount of Rs. 3,51,308 received by the appellant pursuant to the judgment of the High Court was income liable to tax u/s. 17(3) of the Act.”

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References and appeals to High Court – Sections 256 and 260A – Revised monetary limit of tax effect of Rs.20 lakh in CBDT’s Circular No. 21/2015 shall apply to pending references in High Courts u/s. 256 as they apply to pending appeals u/s. 260A as the objective of the Circular would stand fulfilled on application to references u/s. 256 pending in HCs where tax effect is less than Rs.20 lakh

CIT vs. Sunny Sounds (P.) Ltd.; [2016] 65 taxmann.com 162 (Bom):

By a Circular No. 21/2015, CBDT prescribed tax limit of Rs.20 lakh for filing appeals before the High Court and the said limit is applicable for pending appeals also. The Bombay High Court has clarified that the circular is equally applicable to the pending references. The High Court held as under:

“Revised monetary limit of tax effect of Rs.20 lakh in CBDT’s Circular No. 21/2015 shall apply to pending references in High Courts u/s. 256 as they apply to pending appeals u/s. 260A as the objective of the Circular would stand fulfilled on application to references u/s. 256 pending in HCs where tax effect is less than Rs.20 lakh. Accordingly, since tax effect less than Rs.20 lakh, instant reference application returned unanswered and question of law raised left open to be considered in an appropriate case.”

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Appeal – A. Y. 2006-07 – CIT(A) can consider the claim though not made in the return or the revised return

Principal CIT vs. Western India Shipyard Ltd.; 379 ITR 289 (Del):

For the A. Y. 2006-07, the Assessing Officer rejected the assessee’s claim made by way of a letter, during the assessment proceedings, for deduction of the bad debts written off by it on the ground that it could have only been made by way of revised return u/s. 139(5). CIT(A) accepted the claim and granted the deduction. The Tribunal held that the CIT(A) could have considered such claim even during the course of appellate proceedings otherwise than by way of a revised return, he did not examine whether, in fact, the assessee had taken such debts into consideration while computing its total income. For that purpose, the Tribunal remanded the matter to the Assessing Officer for a decision afresh.

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

“i) The Tribunal was right in holding that while there was a bar on the Assessing Officer entertaining such claim without a revised return being filed by the assessee, there was no such restraint on the CIT(A) during the appellate proceedings. However, while permitting such a claim he ought to have examined whether in fact the bad debts were written off by the assessee in the first instance in the accounts and then taken into consideration while computing the income.

ii) Remand of the matter to the Assessing Officer for that purpose was, therefore, justified.”

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Charitable purpose – Exemption – Sections 2(15), proviso, 11 – A. Y. 2009-10 – Object of trust to provide training to needy women in order to equip or train them in skills and make them self reliant – Nursing training provided at centre of Trust free of cost – Occasional sales or generation of funds for furthering objects but not indicative of trade, commerce or business – Proviso to section 2(15) not applicable – Trust entitled to exemption

DIT vs. Women’s India Trust; 379 ITR 506 (Bom):

The assessee-trust formed to carry out the object of education and development of natural talents of people having special skill, more particularly women. It trained them to earn while learning. It educated them in the field of catering, stitching, toy making, etc. While giving them training, it used material brought from the open market. In the process some finished product such as pickles, jam, etc., were produced and which the assessee sold through shops, exhibitions and personal contacts. The Director of Income-tax held that the assessee has shown sales to the tune of 69,72,052/-. He accordingly held that the proviso to section 2(15) is applicable and hence the assessee was not entitled to exemption. The Tribunal found that the motive of the assessee was not the generation of profit but to provide training to needy women in order to equip or train them in these fields and make them self confident and self reliant. The Tribunal took the view that occasional sales or the trusts own fund generation were for furthering the objects but not indicative of trade, commerce or business. The proviso did not apply. The Tribunal held that the assessee is entitled to exemption.

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

“i) Considering the fact that the trust had been set up and was functional for the past several decades and it had not deviated or departed from any of its stated objects and purpose, utilisation of the income, if at all generated, did not indicate the carrying on of any trade, commerce or business.

ii) The Tribunal’s view was to be upheld. The view was taken on an overall consideration and bearing in mind the functions and activities of the trust. In such circumstances it was not vitiated by any error of law apparent on the face of the record.”

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Depreciation – Plant – Pond specifically designed for rearing/breeding of the prawns had to be treated as tools of business of the assessee and the depreciation was admissible on these ponds. Judicial Discipline – Division Bench bound by a decision of a co-ordinate Bench – In case of different view, must refer the matter to a larger Bench

ACIT vs. Victory Aqua Farm Ltd. (2015) 379 ITR 335 (SC)

The
question of law that fell for consideration before the Supreme Court
was as to whether ‘natural pond’ which as per the assessee was specially
designed for rearing prawns would be treated as ‘plant’ within section
32 of the Act for the purposes of allowing depreciation thereon. The
Supreme Court, at the outset, noted that one Division Bench of the High
Court of Kerala in the case of the same assessee (271 ITR 528) had on
earlier occasion decided the aforesaid question in the negative holding
that it is not a ‘plant’. However, another Division Bench by the
impugned judgment dated 14.10.2014, (271 ITR 530) even after noticing
the earlier judgment, had not agreed with the earlier opinion and has
rendered contrary decision.

The Supreme Court, therefore, was
constrained to remark that the Division Bench which has given the
impugned judgment dated 14.10.2004 should have referred the matter to a
larger Bench as otherwise it was bound by the earlier judgment of the
coordinate Bench.

However, since appeals were filed against both
the judgments and the validity of the judgment rendered in the first
case was also questioned by the assessee, the Supreme Court was of the
view that it was necessary to decide these appeals on merits, rather
than remanding the case back to the High Court to be considered by a
larger Bench.

The Supreme Court noted that the assessee was a
company doing business of ‘Aqua Culture’. It grew prawns in specially
designed ponds. In the income tax returns filed by the assessee, the
assessee had claimed depreciation in respect of these ponds by raising a
plea that these prawn ponds were tools to the business of the assessee
and, therefore, they constituted ‘plant’ within the meaning of section
32 of the Act. The Assessing Officer disallowed the claim of the
assessee. The two Benches of the High Court took contrary views. The
Supreme Court observed that it was not in dispute that if these ponds
were ‘plants’, then they were eligible for depreciation at the rates
applicable to plant and machinery and case would be covered by the
provisions of section 32 of the Act.

According to the Supreme
Court, it was not even necessary to deal with this aspect in detail with
reference to the various judgments, inasmuch as the Supreme Court in
Commissioner of Income Tax, Karnataka vs. Karnataka Power Corporation
[247 ITR 268] had held that the building which could not be separated
from the machinery and the machinery could not work, without such
special construction had to be treated as plant.

The Supreme
Court recorded that an attempt was made by the learned counsel for the
Revenue to the effect that the pond in question was natural and not
constructed/ specially designed by the assessee. According to the
Supreme Court, it was not so. In the judgment dated 14.10.2004 of the
High Court, which had decided in favour of the assessee, the High Court
had specifically mentioned that the prawns were grown in specially
designed ponds. Further, this very contention that these were natural
ponds had been specifically rejected as not correct. Moreover, from the
order passed by the Assessing Officer, the Supreme Court found that this
was not the reason given by the Assessing Officer to reject the claim.
Therefore, finding of fact on this aspect could not be gone into at this
stage. According to the Supreme Court, the judgment dated 14.10.2004
rightly rested this case on ‘functional test’ and since the ponds were
specially designed for rearing/breeding of the prawns, they had to be
treated as tools of the business of the assessee and the depreciation
was admissible on these ponds. The Supreme Court, therefore, decided the
question in favour of the assessee and as a consequence, appeals of the
Revenue were dismissed and that of the assessee are allowed.

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Income – Accrual – As the amounts of interest earned on the share application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company, only when the trust (in favour of the general body of the applicants) terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income.

CIT vs. Henkel Spic India Ltd. (2015) 379 ITR 322(SC)

The assessee, a public limited company, came out with a public issue of shares on January 29, 1992, and the issue was closed on February 3, 1992. The application money received by the company was deposited with collecting banks or the bankers of the company, to which the amounts were transferred for 46 days. The interest earned on such deposits was sought to be taxed by the Assessing Officer as income for the assessment year 1992-93. The assessee’s contention was that the application money which had been received from the applicants for the allotment of shares was required to be and was kept in a separate bank account as required by section 73(3) of the Companies Act and that the interest earned on those moneys could not have been treated as income accrued to the company even before the allotment process was completed. The allotment process was completed only in the following assessment year after receipt of approval for listing the company’s share in Madras, Delhi, Ahmedabad and Bombay Stock Exchanges such approvals having been received on April 27, 1992, May 8, 1992 and July 6, 1992 respectively.

The Assessing Officer, though he had some doubt as to when the interest was credited to the account whether before or after March 31, 1992, counted the period of 46 days from the date of deposit and on that basis, held that the amount of interest accrued for the period prior to March 31, 1992, was liable to be taxed under the head, “Income from other sources” as the assessee had not commenced business in that year.

On appeal, the Commissioner of Income-tax (Appeals) concurred with the view of the Assessing Officer and held that the interest that had accrued on the application money which had been kept in short-term deposits belonged to the assessee and was liable to be taxed in the hands of the assessee on the basis of accrual. The Tribunal, on further appeal by the assessee, upheld the assessee’s view and set aside the orders of the Commissioner as also the Assessing Officer.

On appeal by the Revenue, the High Court held that the company is not, u/s. 73, required to keep the money in a bank account which yields interest. There is, however, no prohibition in sub-section (3) or sub-section (3A) of section 73 against the money being kept in a bank account which yields interest. The interest so earned, however, cannot be regarded as an amount which is fully available to the company for its own use from the time the interest accrued, as that interest is an amount which accrues on a fund which itself is held in trust until the allotment is completed and moneys are returned to those to whom shares are not allotted. No part of this fund, either principal or interest accrued thereon, can be utilised by the company until the allotment process is completed and money repayable to those entitled to repayment has been repaid in full together with such interest as may be prescribed having regard to the length of period of delay in the return of money to them. It is only after the allotment process is completed and all moneys payable to those to whom moneys are refundable are refunded together with interest wherever interest becomes payable, the balance remaining from and out of the interest earned on the application money can be regarded as belonging to the company. The application money as also interest earned thereon will remain within a trust in favour of the general body of the applicants until the process outlined above is completed in all respects. The prohibition contained in sub-section (3A) of section 73 against the moneys standing to the credit in a separate bank account being utilised for purposes other than those mentioned in that sub-section, is absolute and the interest earned on the amounts in such separate bank account will remain a part of that separate bank account and cannot be transferred to any other account. As the amounts of interest earned on the application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company only when the trust terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income.

On further appeal, the Supreme Court noted that it was not in dispute that in the year 1993-94, the assessee had shown the income on account of interest received in the income tax returns and paid the tax thereon. The Supreme Court held that there was no error in the order passed by the High Court holding that the interest income accrued only in the assessment year 1993-94 and was taxable in that year only and not in the assessment year 1992-93. The Supreme Court accordingly dismissed the appeal.

shailesh.kwebmaker

Business Income- Remission or Cessation of Trading Liability – Settlement of deferred Salestax liability by an immediate one-time payment to SICOM – Sales-tax Authorities declining to grant credit of payment made to SICOM – No remission or cessation of liability – Section 41(1) (a) not attracted.

CIT vs. S.I. Group India Ltd. (2015) 379 ITR 326 (SC)

The assessee had an industrial unit in the district of Raigad which was a notified backward area. The Government of Maharashtra issued a package scheme of incentives in 1993 by which a scheme for the deferral of sales tax dues was announced. The assessee had during the period May 1, 1999 and March 31, 2000 collected an amount of Rs.1,79,68,846 towards sales tax. Under the scheme, the amount was payable in five annual installments commencing from April 2010 and the liability was treated as an unsecured loan in the books of account of the assessee. The State Industrial and Investment Corporation of Maharashtra Limited (SICOM) offered to the assessee an option for the settlement of the deferred sales tax liability by an immediate one-time payment. The assessee paid an amount of Rs.50,44,280 to SICOM which, according to the assessee, represented by net present value as determined by SICOM. Payment was made by the assessee to SICOM on June 26, 2000. The difference between the deferred sales tax and its present value amounting to Rs.1.29 crore was treated as a capital receipt and was credited in the books of the assessee to the capital reserve account.

The Assessing Officer in the assessment order for the assessment year 2000-01 brought the aforesaid difference of Rs.1.29 crore to tax u/s. 41(1) of the Incometax Act 1961. The appeal filed by the assessee before the Commissioner (Appeals) for 2000-01 as well as the appeal for 2001-02 came to be dismissed by the appellate authority. The Tribunal dismissed the appeals filed by the assessee for these two assessment years by a common order. The assessee then moved the Tribunal in a miscellaneous application u/s. 254 which was dismissed.

The main contention of the assessee before the High Court was that the principal requirement for the applicability of section 41 of the Act is that the assessee must obtain a benefit in respect of a trading liability by way of a remission or cessation thereof. He argued that in the present case, there was no cessation of the liability of the assessee in respect of the payment of the sales tax dues and even if there was such a cessatioin, no benefit was obtained by the assessee. This contention was supported by the fact that the issue pertaining to the sales tax liability was decided by the Sales Tax Tribunal by its judgment dated February 8, 2008, and the Tribunal had specifically upheld the decision of the assessing authorities declining to grant credit to the assessee of payment which was made to State Industrial and Investment Corporation of Maharashtra Limited (SICOM) of Maharashtra. This contention is accepted by the High Court holding that the net result of the order of the Sales Tax Tribunal dated February 8, 2008, was to uphold the decision of the assessing authority declining to grant credit of the payment made by the assessee to SICOM towards discharge of the deferred sales tax liability. As a matter of fact, on July 22, 2008, a notice of demand was issued under section 38 of the Bombay Sales Tax Act of 1959 to the assessee by the Deputy Commissioner of Sales Tax, Navi Mumbai in the total amount of Rs.1,33,13,555. Having regard both to the order passed by the Sales Tax Tribunal on February 8, 2008, and the notice of demand issued on July 22, 2008, it was not possible for the court to accept the contention that there was a remission or cessation of liability. Since the record before the court did not disclose that there was a remission or cessation of liability, one of the requirements spelt out for the applicability of section 41(1)(a) had not been fulfilled in the facts of the present case.

According to the Supreme Court, the aforesaid facts, clearly demonstrated that the assessee had not been granted the benefit of the said cession for the assessment years in question. According to the Supreme Court, the High Court had rightly held that one of the requirements for the applicability of section 41(1)(a) of the Act had not been fulfilled in the present case.

The Supreme Court did not find any error in the order of the High Court and the appeals were accordingly dismissed.

shailesh.kwebmaker

Carry Forward of Loss and SECTION 79

Issue for Consideration
Any loss incurred in the case of a company in which the public are not substantially interested (“closely held company”), in any year prior to the previous year shall not be carried forward and set-off, if there is change in the persons beneficially holding shares of such company with 51% voting power. In other words, the persons holding such voting power as on the last day of the previous year in which such set off is claimed are the same as the persons in the year or years prior to the previous year in which the loss was incurred.

The limitation contained in section 79 is relaxed in cases of change in the voting power in the following cases – (a) death of the shareholder, (b) gift to any relative of the shareholder, or (c) amalgamation or demerger of a foreign holding company, subject to prescribed conditions.

The relevant part of section 79 reads as “Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set-off against the income of the previous year unless- (a) on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.”

It is common to come across cases wherein shares of a closely held company carrying 51% of voting power or more are held by another company (‘immediate holding company’), which company in turn is the subsidiary of yet another company (‘ the ultimate holding company’). An interesting controversy has recently arisen as regards application of section 79 in cases where shares with such voting power held by the immediate holding company are transferred to yet another immediate holding company of the same ultimate holding company.

Can such a change of shareholding from one subsidiary to another subsidiary company of the same holding company disentitle the closely held company from setting-off the carried forward loss, is a question that the courts have been asked to examine. While the Karnataka High Court has held that the closely held company shall be entitled to set-off the carried forward losses, the Delhi High Court has recently prohibited such set-off, ignoring its own decision in an earlier case.

AMCO Power Systems Ltd .’s case
The issue arose before the Karnataka High Court in the case of CIT vs. AMCO Power Systems Ltd. 379 ITR 375, wherein the court was asked to consider the question: “Whether the Tribunal was correct in holding that the assessee would be entitled to carry forward and setoff of business loss despite the assessee not owning 51% voting power in the company as per Section 79 of the Act by taking the beneficial share holding of M/s. Amco Properties & Investments Ltd.?”

Admittedly, up to the assessment year 2000-01, all the shares of the company Amco Power Systems Ltd. were held by AMCO Batteries Ltd.(‘ABL’). In the assessment year 2001-02, the holding of ABL was reduced to 55% and the remaining 45% shares were transferred to its subsidiary, namely AMCO Properties and Investments Limited (‘APIL’). In the assessment year 2002-03, ABL further transferred 49% of its remaining 55% shares to Tractors and Farm Equipments Limited (‘TAFE ‘) and consequently ABL retained only 6% shares, its subsidiary APIL held 45% shares and the remaining 49% shares were with TAFE . Similar shareholding continued for the assessment year 2003-04. For easy understanding, shareholdings of the company for the relevant assessment years is given in the chart below:

For the assessment year 2003-04, the company filed its return of income on 28.11.2003, wherein NIL income was shown, after setting off losses brought forward from earlier years. The return of income was processed u/s. 143(1) of the Income-tax Act, 1961, and the returned income was accepted on 6.2.2004. Subsequently, the case was taken up for scrutiny, and assessment u/s. 143(3) of the Act was completed. The income of the company for the year was determined at Rs.1,34,03,589/. The assessment order did not allow the set off of losses of the earlier years, by invoking section 79 of the Act.

Aggrieved by the order of assessment passed u/s. 143(3) of the Act, the company preferred an appeal before the Commissioner (Appeals), inter alia, for denial of set-off of brought forward business loss, on the ground that the provisions of section 79(a) of the Act were not complied with. The Commissioner (Appeals) order confirmed that the company was not found to be entitled to set-off of the brought forward losses, considering the change in beneficial holding of 51% or more, as provided u/s. 79 of the Act.

Being aggrieved by the order of the Commissioner (Appeals), the company filed an appeal before the Income Tax Appellate Tribunal, challenging the denial of the benefit of set-off of brought forward losses. The Tribunal allowed the appeal of the company, by allowing the benefit of set-off of brought forward losses. The Tribunal, in accepting the submission of the company, held that 51% of the voting power was beneficially held by ABL during the assessment years 2002-03 and 2003-04 also, and the company was thus entitled to carry forward and set-off the business losses of the previous years.

In appeal to the Karnataka High Court, the Revenue urged that, up to the assessment year 2001-02, there was no dispute that ABL continued to have 51% or more shares as its shareholding, as in that assessment year, ABL was holding 55% shares, and its subsidiary APIL was holding 45% shares. For the assessment year 2002-03, when ABL transferred 49% shares (out of its 55%) to TAFE , ABL was left with only 6% shares, meaning thereby, it was left with less than 51% shares. It was contended that, consequently, its voting power was also reduced from 55% to 6%, and the remaining 94% was divided between TAFE and APIL at 49% and 45% respectively. As a result the company was disentitled to claim carry forward and set-off of business losses in the assessment years 2002-03 and 2003-04. It was further submitted that even though APIL was a wholly owned subsidiary of ABL, both companies were separate entities, and could not be clubbed together for ascertaining the voting power. By transfer of its 49% shares to TAFE , the shareholding of ABL was reduced to 6% only. Thus, the provisions of section 79 of the Act were attracted for denial of the benefit of carry forward of losses to the company.

On behalf of the company, it was submitted that it was not the shareholding that was to be taken into consideration for application of section 79, but it was the voting power which was held by a person or persons who beneficially held shares of the company, that was material for carry forward of the losses. It was thus contended that as ABL was holding 100% shares of APIL, which was a wholly owned subsidiary of ABL, and fully controlled by ABL, even though the shareholding of ABL had been reduced to 6%, yet the voting power of ABL remained more than 51%. As such, the provisions of section 79 of the Act would not be attracted in the present case.

The Karnataka High Court noted the fact that ABL was the holding Company of APIL, which was a wholly owned subsidiary of ABL. The Board of Directors of APIL were controlled by ABL, a fact that was not disputed. The submission of the company that the shareholding pattern was distinct from voting power of a company, had force, in as much as, what was relevant for attracting section 79 was the voting power.

The High Court further noted that the purpose of section 79 of the Act was that the benefit of carry forward and setoff of business losses for previous years of a company should not be misused by any new owner, who might purchase the shares of the company, only to get the benefit of set-off of business losses of the previous years against the profits of the subsequent years after the take over. It was for such purpose, that it was provided that 51% of the voting power, which was beneficially held by a person or persons, should continue to be held for enjoyment of such benefit by the company. The court observed that though ABL might not have continued to hold 51% shares, it continued to control the voting power of APIL, and together, ABL had 51% voting power. Thereby, the control of the company remained with ABL as the change in shareholding did not result in reduction of its voting power to less than 51%. Section 79 dealt with 51% voting power, which ABL continued to have even after transfer of 49% shares to TAFE .

The Karnataka High Court noted that the Apex court, while dealing with a case u/s. 79(a) in CIT vs. Italindia Cotton Private Limited, 174 ITR 160 (SC), held that the section would be applicable only when there was a change in shareholding in the previous year, which might result in change in control of the company, and that every such change of shareholding need not fall within the prohibition against the carry forward and set-off of business losses. In the present case, the Karnataka High Court observed that though there might have been change in the shareholding in the assessment year 2002-03, yet, there was no change in control of the company, as the control remained with ABL, in view of the fact that the voting power of ABL, along with its subsidiary company APIL, remained at 51%.

The court also relied on the observation of the apex court in that case to the effect that the object of enacting section 79 appeared to be to discourage persons claiming a reduction of their tax liability on the profits earned in companies which had sustained losses in earlier years. The Karnataka High Court held that, in the case before them, the control over the company, with 51% voting power, remained with ABL. As such, the provisions of section 79 of the Act were not attracted. The court accordingly confirmed the finding of the Tribunal in this regard.

Yum Restaurants (India) Private Limited’s case
The issue came up again recently before the Delhi High Court in the case of Yum Restaurants (India) Private Limited vs. ITO in ITA No. 349 of 2015 dated 13th January, 2016 for the Assessment Year 2009-10.

The assessee, Yum Restaurants (India) Private Limited (‘Yum India’), was a part of the Yum Restaurants Group, whose 99.99% shares were held by its immediate holding company Yum Restaurants Asia Private Ltd.(‘Yum Asia’), with its ultimate holding company being Yum! Brands Inc. USA (Yum USA). 99.99% of shares of Yum India, initially held by ‘Yum Asia’, were transferred, pursuant to restructuring within the group, after 28th November 2008, to Yum Asia Franchise Pte. Ltd. Singapore (‘Yum Singapore’). The group decided to hold shares in Yum India through Yum Singapore and, therefore, the entire share holding in Yum India, was transferred from one immediate holding company, viz., Yum Asia, to another immediate holding company, Yum Singapore, although the ultimate beneficial owner of the share holding in Yum India remained the ultimate holding company viz., Yum USA.

The total income of Yum India was proposed to be assessed at Rs.40,65,40,535 in the draft order framed by the AO. In doing so, the AO, inter alia, disallowed the set off and carry forward of business losses incurred till AY 2008-09. By its order, the DRP upheld the conclusions reached by the AO and rejected Yum India’s submission as regards set off and carry forward of business losses. On the basis of the DRP’s order, the AO completed the assessment and assessed the income of Yum India.

In appeal to the ITAT , Yum India challenged the disallowance of the carry forward of business losses. By its order, the ITAT upheld the disallowances of the carry forward of business losses of earlier years. The ITAT referred to the change in immediate share holding of Yum India from Yum Asia to Yum Singapore and held that, by virtue of section 79 of the Act, since there had been a change of more than 51% of the share holding pattern of the voting powers of shares beneficially held in AY 2008- 09 of Yum India, the carry forward and set off of business losses could not be allowed.

In the appeal filed by Yum India to the Delhi High Court, the company challenged the order of the ITAT , questioning the denial of the carry forward of accumulated business losses for the past years and set off u/s. 79 of the Act.

The Delhi high court noted that the AO did not accept the contention of Yum India, that since the ultimate holding company remained Yum USA, it was the beneficial owner of the shares, notwithstanding that the shares in Yum India were held through a series of intermediary companies.; In his view, section 79 required that the shares should be beneficially held by the company carrying 51% of voting power at the close of the financial year in which the loss was suffered; the parent company of Yum India on 31st March 2008 was the equitable owner of the shares but it was not so as on 31st March 2009; accordingly, Yum India was not permitted to set off the carried forward business losses incurred till 31st March 2008.

The court also noted that, in dealing with the issue, the ITAT had in its order analysed section 79 of the Act and noted that the set off and carry forward of loss, which was otherwise available under the provisions of Chapter VI, was denied if the extent of a change in shareholding taking place in a previous year was more than 51% of the voting power of shares beneficially held on the last day of the year in which the loss was incurred. The ITAT had noted that, in the present case, there was a change of 100% of the shareholding of Yum India. Consequently, there was a change of the beneficial ownership of shares, since the predecessor company (Yum Asia) and the successor company (Yum Singapore) were distinct entities.The fact that they were subsidiaries of the ultimate holding company, Yum USA, did not mean that there was no change in the beneficial ownership. Unless the assessee was able to show that notwithstanding shares having been registered in the name of Yum Asia or Yum Singapore, the beneficial owner was Yum USA, there could not be a presumption in that behalf.

Having examined the facts as well as the concurrent orders of the AO and the ITAT , the Delhi high court found that there was indeed a change of ownership of 100% shares of Yum India from Yum Asia to Yum Singapore, both of which were distinct entities. Although they might be Associated Enterprises of Yum USA, there was nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of ‘piercing the veil’ at the instance of Yum India did not arise. In the circumstances, it was rightly concluded by the ITAT that in terms of section 79 of the Act, Yum India could not be permitted to set off the carried forward accumulated business losses of the earlier years.

Consequently, the Court declined to frame a question at the instance of Yum India on the issue of carry forward and set off of the business losses u/s. 79 of the Act.

Observations:
A company is required to show that there was no change in persons beneficially holding the shares with the prescribed voting power on the last day of the previous year in which the set off is desired. The key terms are; ‘beneficial holding’ and ‘ holding voting power’, none of which are defined in the Act nor in the Companies Act. The cases of fiduciary holding are the usual cases which could be safely held to be cases of beneficial holding. The scope thereof however should be extended to cases of holding through intermediaries, where the ultimate beneficiary is the final holder, who enjoys the fruits of the investment.

This principle can be applied with greater force in cases where the control and management rests with the ultimate holding company. Again ‘holding of voting power’ is a term that should permit inclusion of cases where the shares are held through intermediaries, and the final holder has the exclusive power to decide the manner of voting. If this is not holding voting power, what else could be?

Both the terms collectively indicate the significance of the control and management of the company. In a case where it is possible to establish that there has not been any change in the control and management of the company, that the control and management has remained in the same hands, the provisions of section 79 should not be applied.

The Apex court, in Italindia Cotton Private Limited’s case (supra), held that section 79 would be applicable only when there was a change in shareholding in the previous year which might result in change of control of the company, and that every change of shareholding need not fall within the prohibition against the carry forward and set-off of business losses. The findings of the Apex court have been applied favourably by the Karnataka High Court in AMCO’s case (supra) to hold that, though there might have been a change in the shareholding in the assessment year 2002-03, yet, there was no change of control of the company., The control remained with ABL in view of the fact that the voting power of ABL, along with its subsidiary company APIL, remained at 51%. It is this reasoning that was perhaps missed in the case of Yum India (supra).

In another similar case, Indrama (Investments) Pvt. Ltd., (‘IIPL’) a company held 98% of the shares of one Select Holiday Resorts Private Ltd.(‘SHRPL’) and the balance shares of SHRPL were held by four individuals, who inter alia held 100% shares of IIPL. On merger of IIPL into SHRPL, the shares held by IIPL stood cancelled and the four individuals became 100% shareholders of SHRPL. The claim of the set off of carried forward of loss of prior years by SHRPL was rejected by the AO for assessment years 2004-05 and 2005-06, by application of section 79, holding that there was a change of shareholders holding 51% voting power.

The appeal of SHRPL was allowed by the Commissioner(Appeals) and his order was upheld by the ITAT in ITA No. 1184&2460?Del./2008 dt. 23.12.2010 in the case of DCIT vs. Select Holiday Resorts Private Ltd. The appeal of the Income tax Department to the Delhi High Court was dismissed by the court, reported in 217 Taxman 110. The Special Leave Petition of the Income tax Department was rejected by the Supreme Court. The high court, in this case, equated the case of transfer of shares on a merger, with that of the transmission of shares to the legal heir on death, to hold that there was no change of voting power for attracting provisions of section 79 to enable the AO to deny the set off of the carried forward losses.

The ratio of the decision of the court in SHRPL was not brought to the attention of the ITAT as also of the high court in Yum Restaurant’s case. Also the findings of the Karnataka high court in AMCO’s case(supra) were not brought on record. We are sure that had the judicial development on the subject been brought to the attention of the Delhi High Court in the case of Yum Restaurants (supra), the outcome would have been different.

Section 79 has been amended by the Finance Act, 1988 by the insertion of the first Proviso, that excludes cases of change in shareholding consequent to death or gift. The scope of the amendment has been explained by Cir. No. 528 dated 16.12.1988 and in particular by paragraph 26.3. The CBDT clarifies that the objective behind the amendment is to save the genuine cases of change from the hardships of section 79 of the Act. Kindly see Circular No. 576 dated 31.08.1990. The section has been further amended by the Finance Act, 1999, by insertion of the second Proviso to provide for exclusion of cases involving change in shareholding of an Indian subsidiary on account of amalgamation or demerger of a foreign company – again to save genuine cases of change from hardship of section 79 of the Act.

Clause(b) of section 79(now deleted) provided for nonapplication of section 79 in cases where the change was not effected to avoid payment of taxes or for reduction of taxes. The objectives behind introduction of section 79 and the development in law thereon, as also the amendments made therein from time to time, clearly show that the right to set off of carried forward losses of prior years should not be denied in genuine cases. Kindly see CIT vs. Italindia Cotton Private Limited, 174 ITR 160 (SC), where the court observed to the effect that, the object of enacting section 79 appeared to be to discourage persons claiming a reduction of their tax liability, on the profits earned in companies after take over, which had sustained losses in earlier years.

The Delhi High Court, in Yum India’s case(supra), importantly observed that the company had failed to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. In our opinion, the situation otherwise could have been salvaged, had the company produced evidence to demonstrate that the beneficial owner of shares was Yum USA.

It may not be proper, in our considered opinion, to be swayed by the status of the subsidiaries for taxation of the dividend or other income. It would well be perfectly harmonious to hold the immediate holding company liable for taxation and, at the same time, to look through it for the purposes of section 79, right up to the ultimate holding company. Such an approach would not defeat the purposes of the Act but would serve the cause of the scheme of taxation.

shailesh.kwebmaker

Income characterisation on sale of tax-free bonds

Taxation in India existed since ancient times. It was a ‘duty’ paid to
the rulers. The incidence and rules of tax have changed. A peep into the
Indian history reveals that income was formally made a subject matter
of tax by Sir James Wilson in 1860. Over these years, the legislation
has been grappling with the ever-evolving concept of income. One of the
biggest ironies of income-tax statute today is its inability to define
‘income’. The reason is its dynamic characterisation.Levy and quantum of
tax in India depends on the genre of income. It is thus critical to
reckon the characterisation of income to impose the appropriate levy.
This exercise of characterising has only become complex with the
evolution of business. A recent addition to this complexity has been
introduction of Income Computation and Disclosure Standards (“ICDS”).

The
objective of introducing ICDS (previously styled as Tax Accounting
Standards) was (i) reduction of litigation; minimization of alternatives
and giving certainty to issues. The prescribed standards (in the form
they are currently) could have far reaching ramifications. It needs to
be closely examined if they have achieved the core objectives with which
they were introduced or are in the process of drifting away into a new
quagmire of controversies. A discussion is inevitable important to have a
firm ground to pitch in the newness that ICDS seeks to inject. This
write-up initiates a discussion on one such instance which interalia
finds no clarity or certainty under the ICDS regime:

An
assessee holds certain tax free bonds. These bonds are sold before the
record date for payment of interest. The question is whether the
difference between the sale price and the purchase price is to be
treated as capital gain or to be segregated into capital gain and
interest accrued till the date of sale? In other words, whether interest
accrues only on the record date or accrues throughout the year?

The
question under consideration is the ‘characterisation of receipt’ on
sale of the bonds before the record date. Whether such receipts in
excess of the purchase price is wholly chargeable to tax as ‘capital
gains’ or should it be apportioned between ‘capital gains’ and ‘tax free
interest income’? A corollary question which crops up is whether such
tax-free interest accrues only on the record date or throughout the year
on a de die in diem basis?

Section 4 of the Income-tax Act,
1961 (“the Act”) imposes a general charge. The ambit of the charge is
outlined in section 5. Section 5 encompasses not only income actually
accruing in India, but also income deemed to accrue in India. ‘Accrual’
as a legal concept refers to the right to receive. It represents a
situation where the relationship of a debtor and creditor emerges.
Section 5 focuses on ‘accrual of income’, but does not outline the
timing of such accrual. Initially, accrual of interest income chargeable
to tax under the head ‘Income from other sources’ is being examined.

Time of accrual of interest income:
Section 56 of the Act mandates that interest on securities is
chargeable to tax under the head ‘Income from other sources’ if not
chargeable as ‘Profits and gains from business or profession’. The term
‘securities’ is not defined in the section. One may possibly borrow the
meaning of ‘securities’ from The Securities Contracts (Regulation) Act,
1956 (“SCRA”). SCRA defines securities to include bonds. Accordingly,
interest on tax free bonds is enveloped within the provisions of section
56. Section 56 (although a charging section) does not provide for time
of accrual of interest income.

Section 145 of the Act requires
that income ‘chargeable’ under the head “Profits and gains from business
or profession” and “Income from other sources” be computed as per the
cash or mercantile system of accounting regularly employed by the
assessee. Section 145(2) empowers the Central Government to notify
Income Computation and Disclosure Standards (“ICDS” for brevity) to be
followed by any class of assessees or in respect of any class of income.
The Central Government has currently notified 10 ICDS(s) vide
Notification No. 32/2015 dated 31.3.2015. These standards are to be
followed in computing the income where the ‘mercantile system’ of
accounting is adopted.

On traversing through the various
ICDS(s), two standards may be relevant in the present context – namely,
ICDS I & IV. The following paragraphs discuss the impact of these
standards on the issue under consideration:

ICDS I [Accounting policies] deals
with three accounting assumptions. The third accounting assumption is
that revenues and costs accrue as they are earned or incurred and
recorded in the previous year to which they relate. Incomes are said to
accrue under the ICDS when they are ‘earned’ and ‘recorded’ in the
previous year to which they relate. The cumulation of ‘earning’ and
‘recording’ of income connote accrual under ICDS.

Accrual as
understood u/s. 5 means a “right to receive” in favour of the assessee.
It is indicative of payer’s acknowledgement of a debt in favour of the
assessee. The question is whether ‘accrual’ u/s. 5 as hitherto
understood, is now to undergo changes in the light of the definition of
the said term under ICDS.

Lack of clarity in ICDS I:
Applying the ICDS definition, interest income accrues when it is earned
and recorded in the previous year. The Standard neither clarifies the
connotation of the term ‘earn’ nor does it specify the time and place of
recording the interest. “Earn” as per the Shorter Oxford English
Dictionary means – “Receive or be entitled to in return for work done or
services rendered, obtain or deserve in return for efforts or merit”.
Earning is a phenomenon of the commercial world. It is depictive of an
event warranting a reflection in the financial statements. Accrual in a
legal sense traverses a little further. The earning of an income has to
translate/transform into a right to receive. An earning of income is the
cause of its accrual. Earning therefore precedes accrual. A lag is thus
conceivable between the two caused by time or other factors. ICDS in
attempting to equate the two is trying to blur the difference. The
attempt may not achieve its purpose as the definition (of accrual) is in
the realm of accounting and not in the sphere of section 5.

Even
otherwise, earning of income can be said to occur – (i) at the time of
investment; (ii) on a de die diem basis; or (iii) specific record dates
given in the instruments. As regards recording, a further question could
be, should the recording be done in – books of accounts or return of
income. Recording is generally referred to in relation to books of
account. If this were to be the inference, what about those assessees
who do not maintain books of account but earn interest? Throughout the
notification [notification no. 32/2015], it is clarified that ICDS does
not apply for the purposes of maintenance of books of accounts, although
the standard applies only to those who adopt the mercantile basis of
accounting. Interestingly therefore, it is arguable that ICDS would not
apply unless the mercantile basis of accounting is adopted. If no
accounting is employed, as books are not maintained, ICDS may not apply.
Although income is offered for tax on accrual basis, being one of the
parameters of section 5.

Ambiguity in ICDS I enhanced by the
language in ICDS IV: ICDS IV [on revenue recognition] provides revenue
recognition mechanism for sale of goods; provision of services and use
of resources by others yielding interest, royalty or dividends. Para 7
of the Standard deals with interest income. It reads as under:

“7.
Interest shall accrue on the time basis determined by the amount
outstanding and the rate applicable. Discount or premium on debt
securities held is treated as though it were accruing over the period to
maturity.”

The Standard specifies that interest shall accrue on
‘time basis’. Accrual of income under ICDS I refers to culmination of
earning and recording. Under ICDS IV, interest as one of the streams of
income, accrues on ‘time basis’. Time basis under ICDS IV is said to
satisfy the criteria of ‘earning’ and ‘recording’. The import of the
expression ‘time basis’ is however not clarified. Interest is inherently
a product of ‘time’. There cannot be any dispute about the involvement
of ‘time factor’ in quantification and claim to receive interest. The
Standard merely states that accrual of interest happens on time basis.
It is not clarified whether time based accrual means (i) an
‘on-going/real time’ accrual or (ii) an accrual based on the ‘specific
timing’ prescribed by the concerned instrument. Both these are offshoots
of time basis. The Standard does not pinpoint the mechanism of
determining the time of accrual. The latter portion of paragraph (7)
explicitly mentions that discount or premium on debt securities accrue
over the period of maturity. It is not a single point accrual. Such
clarity is conspicuously missing in the first portion of the para
dealing with interest income.

Role of Accounting Standards in ICDS interpretation: One
may observe that the language employed in all the notified ICDS is
largely influenced by the Accounting Standards. ICDS IV owes its genesis
to AS 9 [Revenue recognition]. Para 8.2 of the AS 9 mirrors para 7 of
ICDS IV. Para 13 of AS 9 reads as follows:
“13. Revenue arising from
the use of others of enterprise resources yielding interest, royalties
and dividends should only be recognised when no significant uncertainty
as to measurability or collectability exists. These revenues are
recognised on the following bases:
(i) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable.”

The
aforesaid AS deals with recognition on ‘time proportion basis’. The use
of the term ‘proportion’ in this expression is indicative of the
concept of recognising ‘part or share’ of income or part of a year.
Interest under the AS has thus been viewed to be a time based
phenomenon. The interest is thus mandated to be recognised on a spread
out basis. It is not on one specific date. However, ICDS IV does not
employ the term ‘proportion’. One could therefore believe that the
understanding in AS 9 cannot be imported into ICDS. The conspicuous
absence of ‘proportion’ in ICDS paves way for an interpretation which is
different from that of AS 9. The expression ‘time basis’ employed in
ICDS IV definitely appears to deviate from AS 9 theory of
proportionality. Thus, if interest is to be paid on specific dates,
‘time basis’ could mean accrued on those specific dates. Whereas ‘time
proportion basis’ would have meant accrual upto the year end at least,
if such date happens to be an intervening event between the specified
dates.

“Tax accounting” should not essentially be different from
commercial accounting. Tax accounting recognises and accepts commercial
accounting if it is consistent and statute compliant. Income recognised
as per such commercial accounting is the base from which the taxable
income is determined. Tax laws incorporate specific rules that cause a
sway from commercial accounting in determining the taxable income. This
disparity is caused by the different purposes of commercial accounting
and taxation; difficulties in precise incorporating economic concepts in
tax laws, etc. To reiterate, one of the issues where commercial
accounting may not synchronise with tax principles is “accrual of
income”.

The Guidance Note issued by ICAI on ‘Terms Used in
Financial Statements’ defines accrual and accrual basis of accounting as
under:

“1.05 Accrual
Recognition of revenues and
costs as they are earned or incurred (and not as money is received or
paid). It includes recognition of transactions relating to assets and
liabilities as they occur irrespective of the actual receipts or
payments.

1.06 Accrual Basis of Accounting
The method
of recording transactions by which revenues, costs, assets and
liabilities are reflected in the accounts in the period in which they
accrue. The ‘accrual basis of accounting’ includes considerations
relating to deferrals, allocations, depreciation and amortisation. This
basis is also referred to as mercantile basis of accounting.”

The
accounting definition of accrual and the definition provided by the
ICDS I is similar. The Guidance note on the “Terms used in financial
statements” explains that accrual basis of accounting may involve
deferral, allocation or non-cash deductions (such as depreciation/
amortisation).

For the reasons already detailed earlier, accrual
for tax purposes is different. This could be better appreciated on a
consideration of ICDS III which deals with Percentage of Completion
Method. Under this method, revenue is matched with the contract costs
incurred in reaching the stage of completion. This results in
recognising income attributable to the proportion of work completed
having satisfied the test of ‘earning’ and hence accrual from an
accounting perspective. Such accounting accrual may not satisfy the tax
concept of accrual which connotes a right to receive. Accounting accrual
is driven more by matching principles. Such a method cannot however
alter the meaning of accrual as understood in the context of section 5.
Judiciary, at various fora, has explained the meaning of the term
‘accrual’ in context of section 5. It may be relevant to quote two among
those several judgments on this matter:

(a) The Apex Court in
the case of E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27 (SC)
discussed the concepts of ‘accrual’, ‘arisal’ and ‘receipt’. The
relevant observations are as under:

“’Accrues’, ‘arises’ and
‘is received’ are three distinct terms. So far as receiving of income is
concerned there can be no difficulty; it conveys a clear and definite
meaning, and I can think of no expression which makes its meaning
plainer than the word ‘receiving’ itself. The words ‘accrue’ and ‘arise’
also are not defined in the Act. The ordinary dictionary meanings of
these words have got to be taken as the meanings attaching to them.
‘Accruing’ is synonymous with ‘arising’ in the sense of springing as a
natural growth or result. The three expressions ‘accrues’, ‘arises’ and
‘is received’ having been used in the section, strictly speaking
accrues’ should not be taken as synonymous with ‘arises’ but in the
distinct sense of growing up by way of addition or increase or as an
accession or advantage; while the word ‘arises’ means comes into
existence or notice or presents itself. The former connotes the idea
of a growth or accumulation and the latter of the growth or accumulation
with a tangible shape so as to be receivable. It is difficult to
say that this distinction has been throughout maintained in the Act and
perhaps the two words seem to denote the same idea or ideas very
similar, and the difference only lies in this that one is more
appropriate than the other when applied to particular cases. It is
clear, however, as pointed out by Fry, L.J., in Colquhoun vs. Brooks
[1888] 21 Q.B.D. 52 at 59 [this part of the decision not having been
affected by the reversal of the decision by the Houses of Lords [1889]
14 App. Cas. 493] that both the words are used in contradistinction to
the word ‘receive’ and indicate a right to receive. They represent a
state anterior to the point of time when the income becomes receivable
and connote a character of the income which is more or less inchoate”

(b) The Apex Court in CIT vs. Excel Industries Limited (2013) 358 ITR 295 (SC) observed:

“19.
This Court further held, and in our opinion more importantly, that
income accrues when there “arises a corresponding liability of the other
party from whom the income becomes due to pay that amount.”

Thus,
judicially ‘accrual’ has been defined to mean enforcement of a right to
receive (from recipient standpoint) with a corresponding obligation to
pay (from payer’s perspective). It has the attribute of accumulation
inherent in it and a growth sufficient to assume a taxable form. It
denotes that the payer of the sums is a debtor. Interestingly, the
position in a construction contract is just the reverse, with the
contractor denoting the sums received as a liability in his books and
hence acknowledging himself to be debtor – a position contrary to what
the tax law demands for accrual.

Supremacy of section 5:
Section 5 outlines the scope of total income. It encompasses income
within its fold on the basis of accrual, arisal or receipt subject to
the residential status of the assessee and locale of income. Thus,
accrual, arisal and receipt form the basis for taxing incomes. This
canon of taxation is sacrosanct and has to be strictly adhered to. ICDS
owes its genesis from a notification which springs out of section 145.
It does not in any manner trespass the supremacy of section 5. It is
pellucid that the scope of the term ‘accrual’ in the context of section 5
remains sacrosanct and immune to ICDS. The definition of ‘accrual’ in
ICDS is the same as the definition housed in Accounting Standard I
issued u/s. 145(2).

This definition of AS 1 u/s. 145(2) has been
in existence from 1996. The presence of such definition, was not
understood to alter the understanding of section 5. The section should
not be different under the ICDS regime. The definition at best has a say
in accounting.

In such setting, ICDS should not in any manner
influence or affect the point of accrual in case of interest income. The
existing understanding of the term ‘accrual’ in the context of section 5
should hold good. The contours of our existing understanding of the
expression ‘accrual’ should be held as steadfast.

Point of accrual of interest income: The
point of accrual of interest income has been addressed by judicial
precedents. The dictum of the Courts does not appear to be unanimous.
The variety in the judgments is captured below:

(a) Interest on securities would be taxable on specified dates when it becomes due and not on accrual basis

In DIT vs. Credit Suisse First Boston (Cyprus) Ltd. 351 ITR 323 (Bombay), the Mumbai High Court observed as under:

“When
an instrument or an agreement stipulates interest to be payable at a
specified date, interest does not accrue to the holder thereof on any
date prior thereto. Interest would accrue or arise only on the date
specified in the instrument. A creditor has a vested right to receive
interest on a stated date in future does not constitute an accrual of
the interest to him on any prior date. Where an instrument provides for
the payment of interest only on a particular date, an action filed prior
to such date would be dismissed as premature and not disclosing a cause
of action. Subject to a contract to the contrary, a debtor is not bound
to pay interest on a date earlier to the one stipulated in the
agreement / instrument. In the present case, it is admitted that
interest was not payable on any date other than that mentioned in the
security.”

(b) Interest gets accrued normally on a day to
day basis, but when there is no due date fixed for payment of interest,
it accrues on the last day of the previous year.

In CIT vs.
Hindustan Motors Ltd. (1993) 202 ITR 839 (Calcutta), the
assessee-company did not charge interest for the relevant previous year
on the amount due to it by its 100% subsidiary. It was explained that
owing to difficult financial position of the subsidiary company, the
board of directors decided not to charge interest in order to enable the
subsidiary to tide over the financial crisis. The Revenue authorities
held that interest accrued on day to day basis whereas the decision not
to charge interest was taken by the assessee-company after the end of
the relevant accounting year, i.e., long after the accrual of interest.
In this context, the Calcutta High Court observed as under:

“In
our view, the income by way of interest on the facts and circumstances
of this case had already accrued from day to day and, in any event, on
31-3-1971, being the last day of the previous year relevant to the
assessment year 1971-72. Therefore, the passing of resolutions
subsequently on 10-5-1971, and/ or on 21-8-1971, in the meeting of board
of directors of the assessee- company is of no effect.”

(c) Interest accrues de die in diem [daily]

The Apex Court in the case of Rama Bai vs. CIT (1990) 181 ITR 400 (SC)

“…we
may clarify, is that the interest cannot be taken to have accrued on
the date of the order of the Court granting enhanced compensation but
has to be taken as having accrued year after year from the date of
delivery of possession of the lands till the date of such order.”

The
accrual of interest on de die in diem basis has been approved by CIT
vs. MKKR Muthukaruppan Chettiar (1984) 145 ITR 175 (Mad).

Apart
from these schools of thought, various circulars have propounded the
proposition that interest income must be offered to tax on an annual
basis. Some of such circulars are as under (although not in the context
of tax free bonds):

(a) Circular no. 243 dated 22.6.1978

Whether
interest earned on principal amount of deposits under reinvestment
deposit/recurring deposit schemes, can be said to have accrued annually
and, if so, whether depositor is entitled to claim benefit of deduction
in respect of interest which has accrued

1…..

2..

3.
The question for consideration is whether the interest at the
stipulated rate earned on the principal amount, can be said to have
accrued annually and if so whether a depositor is entitled to claim the
benefit of deduction, u/s. 80L, in respect of such interest which has
accrued.

4. Government has decided that interest for each
year calculated at the stipulated rate will be taxed as income accrued
in that year. The benefit of deduction u/s. 80L will be available on
such interest.

This was a concessional circular to help
assessees avail the benefit of section 80L over the years. The circular
does not provide any definitive timing of accrual. As evident in para 4,
the timing of taxation was a ‘decision’ of the Government and not the
enunciation of any principle.

(b) Circular no. 371 dated 21.11.1983

Interest on cumulative deposit scheme of Government undertakings – Whether should be taxed on accrual basis annually
1.
The issue regarding taxability of interest on cumulative deposit scheme
announced by Government undertakings has been considered by the Board.
The point for consideration is whether interest on cumulative deposit
scheme would be taxable on accrual basis for each year during which the
deposit is made or on receipt basis in the year of receiving the total
interest.

2. The Central Government has decided that the
interest on cumulative deposit schemes of Government undertakings should
be taxed on accrual basis annually.

3. The Government
undertakings will intimate the accrued interest to the depositors so as
to enable them to disclose it in their returns of income filed before
the income-tax authorities.

This circular also provides for
annual accretion of interest. Accrual does not await the due or maturity
date. The above convey a ‘decision’ of the Government. It does not
enunciate a principle of law.

(c) Circular no. 409 dated 12.2.1985

Interest on cumulative deposit schemes of private sector undertakings – Whether should be taxed on accrual basis annually

1.
The issue regarding taxability of interest on cumulative deposit
schemes of the private sector undertakings has been considered by the
Board. The point for consideration is whether interest on cumulative
deposit schemes would be taxable on accrual basis for each year during
which the deposit is made or on receipt basis in the year of receiving
the total interest.

2. The Central Government has decided that
interest on cumulative deposit schemes of private sector undertakings
should be taxed on accrual basis annually.

3. The private sector
undertakings will intimate the individual depositors about the accrued
interest so as to enable them to disclose it in their returns of income
filed before the income-tax authorities.

(d) Circular 3 dated 2.3.2010 [relevant extracts]

“In
case of banks using CBS software, interest payable on time deposits is
calculated generally on daily basis or monthly basis and is swept &
parked accordingly in the provisioning account for the purposes of
macro-monitoring only. However, constructive credit is given to the
depositor’s/ payee’s account either at the end of the financial year or
at periodic intervals as per practice of the bank or as per the
depositor’s/payee’s requirement or on maturity or on encashment of time
deposits; whichever is earlier.

4. In view of the above
position, it is clarified that since no constructive credit to the
depositor’s/ payee’s account takes place while calculating interest on
time deposits on daily or monthly basis in the CBS software used by
banks, tax need not be deducted at source on such provisioning of
interest by banks for the purposes of macro monitoring only. In such
cases, tax shall be deducted at source on accrual of interest at the
end of financial year or at periodic intervals as per practice of the
bank or as per the depositor’s/payee’s requirement or on maturity or on
encashment of time deposits; whichever event takes place earlier;
whenever the aggregate of amounts of interest income credited or paid or
likely to be credited or paid during the financial year by the banks
exceeds the limits specified in section 194A.

The circular
states that there could be multiple point of accrual for interest
incomes. It seeks to fasten tax withholding at the earliest point in
time.

Thus, the issue of time of accrual has received varied
interpretation on the basis of source of interest (vide a decree,
compensation, investment, etc.), terms of interest (whether payable on a
specific due date or otherwise), legal obligation and surrounding
circumstances. The alternatives discussed above can be captured in the
flowchart below:

Based on the alternatives outlined above, it is
to be examined whether interest accrues on the date of sale of bonds.
The question is whether timing of accrual (of interest) has a bearing on
the characterisation of receipts from sale of bonds. The impact can be
understood under the twin possibilities envisaged in the above diagram
as discussed below:

*
This principle may not apply in the present context since generally
interest is payable either on the stipulated dates or on withdrawal/
maturity. The case on hand contemplates a sale of instrument. The terms
of the bond may not permit interest receipt upto the date of transfer of
bonds

(a) If interest is payable on specific dates:

When
interest payable on specific due dates, the accrual of income concurs
with such dates (for the reasons already detailed earlier). If the due
date falls prior to the sale, the interest accrues in the hands of the
seller. If it is subsequent to the date of sale, the interest accrues in
the hands of buyer. The accrual of interest is distinct from sale of
bonds and the consideration involved therein.

Tax free bonds are
‘capital assets’ for the investor (assuming that the concerned assessee
is not in the business of investment in bonds). Sale of such capital
asset should culminate in capital gains or loss. There is no interest
receipt from the third party buyer as there is no debt due by the buyer
to the seller. The third party buyer of bonds is under no obligation to
pay ‘interest’. The liability to pay interest lies with the company
issuing the bonds. The diagram below explains the flow of transaction.

(b) If the interest is not payable on specific dates:

As
mentioned earlier, interest may not be received upto the date of
transfer of bonds. The receipt in such situations could be on maturity
if not on specific dates. The receipt of interest would be by the buyer
(on maturity) or specific dates. Interest accumulates, but does not
become ‘due’ and ‘payable/receiveable’ till the appointed date. The
seller thus parts away with the bonds and the legal right to receive
interest. Correspondingly, the payment made by the buyer is towards the
principal and interest element inbuilt in the bond. The question in such
an eventuality is whether the consideration receivable by the seller on
sale of bonds:

(a) Should be wholly considered as full value of consideration for sale of bonds [taxable as capital gains]; or

(b)
Should the consideration be split into consideration for sale [as
capital gains] and interest income [as other sources income].

As
mentioned earlier, tax free bonds are capital assets. Consideration on
transfer of bonds would ordinarily result in capital gains. Even if the
sale is made on ‘cum interest’ basis, one could still argue that the
amount received would constitute full value of consideration towards
transfer. Although the price paid by the third party may factor in the
interest component, the amount paid is towards ‘value’ of the bond. It
is not interest payment.

Accumulation of interest would step-up
the sale consideration. It does not alter the characterization of income
from capital gains to interest. At best, one could split the
consideration between ‘purchase price’ (of the bond) and ‘right to
receive interest’ (assuming interest component is factored in the
price). In which case, it would be sale of two separate capital assets
or an asset (tax bonds) along with congeries of rights associated
therewith.

It may be relevant to quote the observation of the
Mumbai High Court in the case of DIT vs. Credit Suisse First Boston
(Cyprus) Ltd. (referred above) wherein the Court observed:

“12.
The appellant’s submission ignores the fact that such securities or
agreements do not regulate the price at which the holder is to sell the
same to a third party. The holder is at liberty to sell the same at any
price. The interest component for the broken period i.e. the period
prior to the due date for interest is only one of the factors that may
determine the sale price of the security. There are a myriad other
factors, both personal as well as market driven, that can be and, in
fact, are bound to be taken into consideration in such transactions. For
instance, a person may well sell the securities at a reduced price in
the event of a liquidity crisis or a slow down in the market and/or if
he is in dire need of funds for any reason whatsoever. Market forces
also play a significant part.

For instance, if the rate of
interest is expected to rise, the securities may well be sold at a
discount and conversely if the interest rates are expected to fall, the
securities may well earn a premium. This, in turn, would also depend
upon the period of validity of the security and various other factors
such as the financial position and commercial reputation of the debtor.

13.
The appellant’s contention is also based on the erroneous presumption
that what is paid for is the face value of the security and the interest
to be paid for the broken period from the last date of payment of
interest till the date of purchase. What, in fact, is purchased is the
possibility of recovering interest on the date stipulated in the
security. It is not unknown for issuers of securities, debentures and
bonds, to default in payment of interest as well as the principal. The
purchaser therefore hopes that on the due date he will receive the
interest and the principal. The purchaser therefore, purchases merely
the possibility of recovery of such interest and not the interest per
se. It would be pointless to even suggest that in the case of Government
securities, the possibility of a default cannot arise. The
interpretation of law does not depend upon the solvency of the debtor or
the degree of probability of the debts being discharged. Indeed the
solvency, reputation and the degree of probability of recovering the
interest are also factors which would go into determining the price at
which such securities are bought and sold. There is nothing in the Act
or in the DTAA, to which we will shortly refer that warrants the
position in law being determined on the basis of such factors viz. the
degree of probability of the particular issuer of the security, bond or
debenture or such instruments, honouring the same.”

Based on
the above, one can conclude that excess of receipt on sale of bonds
over their costs should be categorised as ‘capital gains or loss’. The
splitting of consideration into two heads of income (with interest
falling under Income from other sources) is not a natural phenomenon. It
should be done when statutorily provided for. The law has specifically
provided for such split mechanism wherever deemed necessary. For
instance, circular 2 of 2002 explains tax treatment of deep discount
bonds. It provides that such bonds should be valued as on the 31st March
of each Financial Year (as per RBI guidelines).

The difference
between the market valuations as on two successive valuation dates will
represent the accretion to the value of the bond during the relevant
financial year and will be taxable as interest income (where the bonds
are held as investments) or business income (where the bonds are held as
trading assets). Where the bond is transferred at any time before the
maturity date, the difference between the sale price and the cost of the
bond will be taxable as capital gains in the hands of an investor or as
business income in the hands of a trader. For computing such gains, the
cost of the bond will be taken to be the aggregate of the cost for
which the bond was acquired by the transferor and the income, if any,
already offered to tax by such transferor (in earlier years) upto the
date of transfer. Thus, gains from such bonds, is specifically split
into interest and capital gains by a specific mechanism provided by the
circular.

Similarly, section 45(2A) [conversion of capital
assets into stock-in-trade] splits consideration into business income
and capital gains income. The statute may also provide for the reverse.
If the consideration includes more than one form of income, the statute
could conclude the whole of such consideration to be one form of income.
Further, section 56(2)(iii) [composite rent] concludes the whole of
consideration to be income from other sources although it contains
portion of rental incomes. Such ‘dissecting’ or ‘unified’ approach is
not prescribed for sale of bonds (whether sold cum-interest or
ex-interest).

The term ‘accrual’ connotes legal right to
receive. It is the enforcement of right to receive (from a recipient’s
standpoint) with a corresponding obligation to pay (from payer’s
perspective) [Refer CIT vs. Excel Industries Ltd (2013) 358 ITR 295
(SC)]. Thus, for an income to accrue, the right (of the income
recipient) and obligation (of the payer) must co-exist. Applying this
theorem in the present context, the question is whether the company
issuing bonds is under an obligation to pay interest when such bonds are
sold on ‘cum interest’ basis. Generally, interest on bonds would be
payable either on a periodic basis or on maturity. Bonds which are
issued without any terms on interest payouts are seldom in vogue. If
this proposition is accepted, then interest can be said to accrue only
on specific dates (being on periodic payout dates or maturity date). In
which case, interest always accrues to the buyer if the bonds are sold
on cum-interest basis. Consequently, consideration received on sale of
bonds would wholly constitute full value of consideration on transfer.
There is no interest element therein.

It may also be relevant to note that the definition of interest provided in the Act. Section 2(28A) defines interest as under:

“(28A)
“interest” means interest payable in any manner in respect of any
moneys borrowed or debt incurred (including a deposit, claim or other
similar right or obligation) and includes any service fee or other
charge in respect of the moneys borrowed or debt incurred or in respect
of any credit facility which has not been utilised”

The definition can be bisected as under –

(a)
interest payable in any manner in respect of any moneys borrowed or
debt incurred (including a deposit, claim or other similar right or
obligation); or

(b) any service fee or other charge in respect
of the moneys borrowed or debt incurred or in respect of any credit
facility which has not been utilised.

In the present context,
the payment is not towards moneys borrowed or debt or any service fee or
other charge in this regard. It is for purchase of assets. One cannot
therefore ascribe the color of interest to a consideration paid for
purchase of assets. The receipt of consideration cannot partake the
character of interest as there is no debt owed by the buyer to the
seller. There is a ‘seller-purchaser’ relationship. Thus, unless there
is a ‘lender-borrower’ relationship, the liability to pay or right to
receive interest does not arise.

The discussion would be
incomplete without a reference to the Apex Court verdict in the case of
Vijaya Bank Limited vs. CIT (1991) 187 ITR 541 (SC). In this case, the
assessee (bank) received interest on securities purchased from another
bank (as well as in the open market). The assessee claimed that
consideration paid towards acquisition of these securities was
determined with reference to their actual value and interest which
accrued to it till the date of sale. Accordingly, such outflow should be
allowed as a claim against interest income earned by the assessee
subsequent to purchase. In this context, the Apex Court observed as
under:

“In the instant case, the assessee purchased
securities. It is contended that the price paid for the securities was
determined with reference to their actual value as well as the interest
which had accrued on them till the date of purchase. But the fact is,
whatever was the consideration which prompted the assessee to purchase
the securities, the price paid for them was in the nature of a capital
outlay and no part of it can be set off as expenditure against income
accruing on those securities. Subsequently when these securities yielded
income by was of interest, such income attracted section 18.”

The
Apex Court adjudged that consideration paid for purchase of securities
is in the nature of ‘capital outlay’. It is not expenditure on revenue
account having nexus to interest income which it earned subsequently.
The entire consideration was thus concluded to be towards purchase of
bonds. When this dictum is viewed from seller’s standpoint, the entire
consideration received should constitute capital gains. There is no
interest element therein.

The possible counter to the aforesaid
discussion is that interest accrues on a de die diem basis.
Consideration received from the buyer which factors the interest element
has to be split between capital receipt and interest income. If such
split is not carried out, there may be a dual taxation. This could be
better explained through an illustration:

Mr X purchased a bond
for Rs.100. He wishes to sell this bond to Mr Y on a cum interest basis
at Rs.110. Interest accrued till the date of sale is Rs.10. In such an
eventuality, Mr X would have to bear capital gains tax on Rs.10 [being
110 (sale consideration) – 100(cost)]. Mr Y would have to discharge tax
on interest income (of Rs.10). Therefore, on an interest income of Rs.10
paid by the company, there is a taxable income of Rs.20 (being Rs.10
factored in capital gains computation of Mr X and Rs.10 as interest
income in the hands of Mr Y). One may argue that such absurd result is
unintended and cannot be an appropriate view.

However, this line
of argument can be answered by stating that there is no equity in tax.
This is an undisputed principle. The parties to the transaction being
taxed on Rs.20 (although being economically benefited by Rs.10) would
only reflect a bad bargain. Further, Mr Y would have to shoulder tax on
interest income (Rs.10) but would avail a deduction or a loss
subsequently of Rs.10 (being part of the purchase consideration of
bonds).

The learned author Sampath Iyengar in his treatise Law
of Income tax (11th edition at page 2661 – Volume II) has made a
reference on this matter (although in the context of section 18 of the
Act):

“15. Charge of interest on sale or transfer of
securities – (1) No splitting of interest as between seller and
purchaser – When an interest bearing security is sold during the
currency of an interest period, the question arises as to how far the
purchaser is liable in respect of interest accrued due before the date
of his purchase. It frequently happens that the purchaser pays to the
seller the value for interest accrued till the date of the sale, and
that the seller receives the equivalent of interest up to the date of
the sale from the purchaser. Nevertheless, for the purposes of revenue
law, the only person liable to pay tax is the person who is the owner of
the securities at the date when the interest falls to be paid. Such
owner is the person liable in respect of the entire amount of interest.
Though as between the transferor and the transferee, interest may be
computed de die in diem, it does not really accrue from day to day, as
it cannot be received until the due date. This section makes it clear
that the assessment is upon the person entitled to receive, viz, the
holder of the security on the date of maturity of interest. Further, the
machinery sections of the Act do not provide for taking separately the
vendor and the purchaser or to keep track of interest adjustments
between the transferor and transferees. Tax is exigible when the income
due is received and is on the person who receives. The principle is that
the seller does not receive interest; he receives the price of
expectancy of interest, and expectancy of interest is not a
subject-matter of taxation. The only person who receives interest is the
purchaser. Where an interest bearing security is sold and part of the
sale price represents accrued but hitherto unpaid interest that accrued
interest is not chargeable to tax, unless it can be treated as accruing
from day to day.”

To conclude, accrual is an intersection of
legal right to receive and a corresponding obligation to pay. Accrual
of interest on bonds is influenced by the contractual terms. A holder of
bond contractually holds the right to receive the interest. The
transfer of bonds results in passing on the interest (receivable from
the bond-issuing company) from the seller to the buyer. This benefit of
accumulated interest is discharged by the buyer in form of
consideration. The payment made by the buyer is for acquisition of bonds
which factors the interest element. The buyer however does not pay
‘interest’ to the seller. It is only the purchase consideration. It is
inconceivable that the purchaser would step into the shoes of the bond
issuing company and pay interest along with consideration for purchase
of bonds. Payment receivable by the seller of bonds would wholly be
included in the capital gains computation. There is no interest element
contained therein.

Financial statements form the substratum for
income-tax laws. They are two sides of the same coin, yet they operate
in their individual domains. There are inherent variations in commercial
and tax profits. Today’s accounting norms are distilled, refined and
robust. With an ‘ever evolving’ story of tax and accounting world, the
relationship remains complementary but not interchangeable. In any departure, commercial accounting norms would be subservient to tax principles.
Therefore, the attempt by ICDS to elevate the accounting principles to
match with the concept of accrual under the tax principles may not have
achieved its avowed objective.

shailesh.kwebmaker

(2016) 156 ITD 528 (Delhi .) A.K. Capital Markets Ltd. vs. Deputy CIT A.Y.: 2006-07. Date of Order: 4th December, 2015.

Section 73 read with Sections 56 and 72 – Where assessee earns positive income, falling under head ‘Income From Other Sources’, in form of dividend income and interest income, assessee would fall within purview of exception carved out in Explanation to section 73 and therefore would be entitled to claim set-off of loss arising out of trading in Futures and Options/derivatives against such other income.

Facts
During the year under consideration, the assessee had earned dividend income of Rs. 14.64 lakh and interest income amounting to Rs. 39,236. In the return so filed it had also declared loss of Rs. 3.93 crore arising out of trading in Futures and Options/derivatives and had claimed set-off of the same against such other income.

The AO disallowed the set-off claimed by the assessee on the grounds that the case of the assessee was covered by Explanation to section 73. The CIT (A) upheld the order of the AO.

Aggrieved, the assessee preferred an appeal before the Tribunal.

Held
A bare reading of the Explanation to section 73 clarifies that where any part of the business of a company other than the investment company or banking company or finance company relates to the purchase and sale of shares, such company shall for the purpose of this section be deemed to be carrying on a speculative business to the extent the business consists of purchase and sale of shares. However, the Explanation also states that if the gross income of the company consists mainly of income which is chargeable under the heads – interest on securities, income from house property, capital gains and income from other sources then this Explanation is not applicable.

In the instant case, the AO himself had admitted in the assessment order that the only positive income earned by the assessee was Rs. 14.64 lakh on account of the dividend which was claimed as exempt. It is also noticed that an interest income of Rs. 39,236 was received by the assessee.

The dividend income and interest income come under the definition of ‘income from other sources’ as per the provisions of section 56. The assessee is having the income only under the head ‘income from other sources’. Profit or loss on account of share trading is not to be considered as income of the assessee while computing the gross total income. If the said loss is to be considered as income of the assessee, then it will be adjustable u/s. 72 which is exactly prohibited by the provisions of section 73. Moreover, section 72(1) prohibits inclusion of the speculation loss for computing the income. In the instant case, for computing the gross total income, the only positive income is under the head ‘income from other sources’. Therefore, the assessee would not be deemed to be carrying on speculative business for the purpose of section 73(1).

In view of the aforesaid, the assessee was entitled to claim set-off of loss in question against other income.

shailesh.kwebmaker

Advance Tax – Interest – Under the provisions of section 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by such an assessee is less than 90 per cent of the assessed tax, the assessee becomes liable to pay simple interest at the rate of one per cent for every month or part of the month – Form No.ITNS150 which is a form for determination of tax payable including interest is to be treated as a part of the assessment order.

CIT vs. Bhagat Construction Co. Pvt. Ltd.. [2016] 383 ITR 9 (SC)

The
Supreme Court noted that on the facts of the case, it was an admitted
position that the assessment order dated March 29, 1995 of the Assistant
Commissioner of Income –Tax , New Delhi, did not not contain any
direction for the payment of interest. The appellate order merely stated
that interest was payable u/s. 234B of the Income-tax Act, 1961. In the
first round, before the Income-tax Appellate Tribunal, the Income-tax
Appellate Tribunal’s attention was not drawn to the payment of interest
at all.

On an application made, the Income-tax Appellate
Tribunal by its order dated November 12, 2002, specifically held that
since no direction had actually been given in the assessment order for
payment of interest, the assessee’s case would be covered by the
decision of the Supreme Court reported in CIT vs. Ranchi Club Ltd.
[2001] 247 ITR 209 (SC).

In an appeal to the High Court of Delhi
u/s. 260A of the Act, the impugned judgment dated July 23, 2003 merely
reiterated that the issue involved in the appeal had been decided by the
judgment in CIT vs. Ranchi Club Ltd. [2001] 247 ITR 209 (SC) referred
to above.

Before the Supreme Court the Revenue relied upon the
decision in Kalyankumar Ray vs. CIT (1991) 191 ITR 634 (SC) to contend
that the interest u/s. 234B is, in any case, part of Form I.T.N.S. 150
which is not only signed by the Assessing Officer but is really part of
the assessment order itself. It was submitted that the judgment in
Ranchi Club Ltd.’s case (supra) was distinguishable inasmuch as it arose
only in a writ petition and arose in the context of best judgment
assessment whereas on the facts of the present case, there was a
shortfall of advance tax that was paid, which, therefore, led to the
automatic levy of interest u/s. 234B. In addition, it was argued that
not only was section 234B a provision which was parasitic in nature, in
that, it applied the moment there was shortfall of advance tax or income
tax payable under the Act but that it was compensatory in nature.
Countering this submission, the counsel appearing for the respondent
assessee, supported the judgment of the Income-tax Appellate Tribunal
and the High Court by stating that the judgment in Ranchi Club Ltd.’s
case (supra) squarely covered the facts of this case.

According
to the Supreme Court, there was no need to go into the various
submissions made by Revenue as the appeal could be disposed of on a
short ground. The Supreme Court noted that In a three-judges Bench
decision, viz., Kalyankumar Ray v. CIT (supra) it took note of a similar
submission made by the assessee in that case and repelled it as
follows:

“In this context, one may take notice of the fact that
initially, rule 15(2) of the Income-tax Rules prescribed Form 8, a sheet
containing the computation of the tax, though there was no form
prescribed for the assessment of the income. This sub-rule was dropped
in 1964. Thereafter, the matter had been governed by Departmental
instructions. Under these, two forms are in vogue. One is the form of,
what is described as, the ‘assessment order’, (I.T. 30 or I.T. N.S. 65).
The other is what is described the ‘Income Tax Computation Form’ or
‘Form for Assessment or Tax/Refund’ (I.T.N.S. 150). The practice is that
after the ‘assessment order’ is made by the Income-tax Officer, the tax
is calculated and the necessary columns of I.T.N.S. 150 are filled up
showing the net amount payable in respect of the assessment year. This
form is generally prepared by the staff but is checked and signed or
initialed by the Income-tax Officer and the notice of demand follows
thereafter. The statute does not in terms require the service of the
assessment order or the other form on the assessee and contemplates only
the service of a notice of demand. It seems that while the ‘assessment
order’ used to be generally sent to the assessee, the other form was
retained on file and a copy occasionally sent to the assessee. I.T.N.S.
150 is also a form for determination of tax payable and when it is
signed or initialed by the Income-tax Officer it is certainly an order
in writing by the Income-tax Officer determining the tax payable within
the meaning of section 143(3). It may be, as stated in CIT vs. Himalaya
Drug Co. [1982] 135 ITR 368 (All), is only a tax calculation form for
Departmental purposes as it also contains columns and code numbers to
facilitate computerization of the particulars contained therein for
statistical purposes but this does not detract from its being considered
as an order in writing determining the sum payable by the assessee. We
are unable to see why this document, which is also in writing and which
has received the imprimatur of the Income-tax Officer should not be
treated as part of the assessment order in the wider sense in which the
expression has to be understood in the context of section 143(3). There
is no dispute in the present case that the Income-tax Officer has signed
the form I.T.N.S. 150. We therefore, think that the statutory provision
has been duly complied with and that the assessment order was not in
any manner vitiated.”

The Supreme Court also noted that its judgment in the Ranchi Club Ltd.’s case (supra) was a one line order which merely stated:

“We
have heard learned counsel for the appellant. We find no merit in the
appeals. The civil appeals are dismissed. No order as to costs”.

The
Supreme Court observed that the High Court judgment which was affirmed
by it as aforesaid arose in the context of a challenge to the vires of
sections 234A and 234B of the Act. After repelling the challenge to the
vires of the two sections, the High Court found that interest had been
levied on tax payable after assessment and not on the tax as per the
return. Following this court’s judgment in J.K. Synthetics Ltd. vs.
Commercial Taxes Officer [1994] 94 STC 422 (SC), the High Court had held
that the assessee was not supposed to pay interest on the amount of tax
which may be assessed in a regular assessment u/s. 143(3) or best
judgment under section 144 as he was not supposed to know or anticipate
that his return of income would not be accepted. The High Court further
held that interest was payable in future only after the dues were
finally determined.

The Supreme Court further observed that
under the provisions of section 234B, the moment an assessee who is
liable to pay advance tax has failed to pay such tax or where the
advance tax paid by such an assessee is less than 90 per cent of the
assessed tax, the assessee becomes liable to pay simple interest at the
rate of one per cent for every month or part of the month.

The
Supreme Court therefore held that the counsel for the Revenue was right
in stating that levy of such interest was automatic when the conditions
of section 234B were met.

According to the Supreme Court, the
facts of the present case were squarely covered by the decision
contained in Kalyankumar Ray’s case (supra) inasmuch as it was
undisputed that Form I.T.N.S. 150 contained a calculation of interest
payable on the tax assessed. This being the case, it was clear that as
per the said judgment this Form must be treated as part of the
assessment order in the wider sense in which the expression had to be
understood in the context of section 143, which was referred to in
Explanation 1 to section 234B.

This being the case, the Supreme Court set aside the judgment of the High Court and allowed the appeal of the Revenue.

shailesh.kwebmaker

Whether payment of transaction charges to stock exchange amounts TO FTS – SecTION 194J – Part – I

INTRODUCTION

1. Section 194J, in substance, requires every
person [with some exceptions] responsible for paying [Payer] to a resident
[Payee] to deduct tax at source [TDS] from payment of any sum by way of `fees
for professional services’, `fees for technical services’, etc,. at the time of
payment or credit of such sum to the account of the Payee as provided in Sec.
194 J (1) at the specified rate. There are some exceptions/ relaxations from
this requirement with which we are not concerned in this write-up. For the sake
of convenience, reference to TDS requirement at the time of credit is ignored.

1.1 For the above purpose, ‘fees for technical services’ [FTS], has the same
meaning as given in Explanation 2 to section 9 (1)(vii) [said Explanation].
This Explanation effectively defines FTS as consideration paid for rendering of
any managerial, technical or consultancy service. This definition has some
further inclusions and exclusions with which we are not concerned in this
write-up. As such, TDS requirement is required to be complied with while making
payment of FTS by the Payer as provided in section 194J (1). There is also
corresponding provision contained in section 40 (a)(ia), which provides for
disallowance of expenditure incurred by way of FTS in the event of TDS default
u/s. 194J, wherein also some relaxations are provided with which we are not
concerned in this write-up. Section 194J is also amended to cover payments of
`royalty’ within it’s scope by the Taxation Laws (Amendment) Act, 2006 [w.e.f. 13/07/2006]
with which also we are not concerned in this write-up.

1.2 For the above purpose, in the context of payments for different types of
expenses , meaning of the expression FTS under the said Explanation has come-up
for interpretation before the courts/tribunal from time to time.

1.3 The Madras High Court, in the case of Skycell Communications Ltd.
(Skycell’s case) reported in 251 ITR 53 had an occasion to consider meaning of
the expression FTS in the context of payment for availing cellular telephone
services wherein, the Court has taken a view that such payment is made in order
to have the facility of communication with others and in such cases, the Payer
does not contract to receive the technical services [TS]. He agrees to pay for
the use of air time. This judgment also supports the view that mere collection
of a fee for the use of standard facility available for all those willing to
pay for it does not amount to FTS. The fact that the service provider has
installed sophisticated technical equipment in the exchange to ensure
connectivity to its subscriber, does not on that score, make it a provision for
TS. Whatever applies to cellular mobile phone services, also applies to fixed
line telephone services. Neither service can be regarded as TS for the purpose
of Sec. 194J. Similarly, the internet is very much a product of technology
which cannot be provided without installation of sophisticated equipments and
cannot be used by the subscribers without the use of telephone mobile or fixed
lines. On that score, every subscriber of internet service provider cannot be
regarded as having entered into contract for availing TS . According to the
High Court, the provisions of the Act must be construed in the background of
the realities of day to day life in which the products of technology play an
important role in making life smoother and more convenient. In fact, the Court
also found the view of the Revenue applying TDS requirement to subscribers of
telephone as grossly unreasonable. This view of the Madras High Court has been
followed in other cases by the courts/ benches of tribunal. As such, the
general view which emerged was that if a standard facility is provided through
usage of machine or technology, it should not be termed as rendering of TS and
the payments for the same should not be regarded as FTS for the purpose of TDS
u/s. 194 J .

1.4 Further, in the context of payments made to MTNL/BSNL by the companies
engaged in the business of providing cellular telephone services to their
subscribers for providing use of facilities for interconnection between the two
networks at inter connection points known as ports, the Delhi High Court in the
case of Bharti Cellular Ltd and connected appeals [319 ITR 139] took the view
that, the expression TS used in the definition of FTS was not be construed in
the abstract and general sense but in the narrower sense as it is circumscribed
by the expressions ‘managerial service’ and ‘consultancy service’ in the
definition of FTS which have a definite human element attached to them. As
such, according to the Court, the expression TS would have reference to only
technical service rendered by human, it would not include any service provided
by machines or robots. Therefore, according to the Court, payment of
interconnection charges/port access charges could not be regarded as FTS. With
this judgment, in this context, the view started getting acceptance that for
the purpose of rendering TS, the presence of human intervention is crucial and
therefore, as long as there is no human intervention in a service, it cannot be
treated as TS as contemplated in the definition of FTS given in the said
Explanation. This view is also followed in other cases. The issue with regard
to this requirement of presence of human intervention in the provision of TS
got largely settled with the judgment of the Apex Court in the case of Bharti
Cellular Ltd. and other cases [390 ITR 239]. In this case, the Court dealt with
the judgment of the Delhi High Court in the case of Bharti Cellular Ltd
[supra]. In these cases, the Apex Court remitted back the matters to the
Assessing Officers [AO] with the direction that in each case, the AO should
examine a technical expert from the side of the department and to decide,
whether any human intervention was involved in the provision of interconnection
services. In this judgment, the Apex Court also gave certain directions to CBDT
to issue directions to the AOs to examine and bring necessary technical
evidences on record in such cases before deciding the issue and not to proceed
only on the basis of contracts placed before them. From this judgment of the
Apex Court, it would appear that the principle laid down by the Delhi High
Court, in restricting the scope of the expression TS that it should necessarily
involve human intervention, got effectively approved. This view is also
followed in other cases by the Tribunal. Accordingly, the view emerged is that
the element of human intervention, interface or application of human mind or
direct or indirect involvement of human endeavor is necessary for any service
to be regarded as the provision of TS within the definition of the FTS. As
such, what constitutes technical service essentially becomes a question of fact
to be examined in each case. Therefore, to an extent, uncertainty remains in
dealing with this issue.

1.4.1 Subsequently, the CBDT issued Instruction No. 5/2011 dtd 30th March, 2011
in which, by referring to the judgment of the Apex Court in the case of Bharti
Cellular Ltd [supra], directing the AOs. / Transfer Pricing Officers that they
should frame assessments only after bringing on record appropriate technical
evidence that may be required in a case for this purpose and should not proceed
only by the contracts between the parties.

1.4.2 With the above position, with regard to the requirement of human
intervention for providing TS as contemplated in the definition of FTS, further
issue with regard to degree of human involvement became relevant for
consideration. In this context, the issue really faced is whether presence of
incidental/ insignificant human involvement or interface could make an
arrangement provision of TS.As such, in this context, a debate started that is
it a question of more or less of human involvement or is it a question of
presence or absence of human involvement. Generally, in this context, it was
believed that the incidental / insignificant human involvement should not make
the service as TS within the definition of FTS. This view gets support from the
decisions of the Tribunal. However, the Agra bench of the Tribunal in the case
of Metro and Metro [(2014) 29 ITR (trib) 772] took a different view that the
question is not of extent of human involvement but it is the question of either
presence or absence of human involvement. The correctness of this view is
seriously doubted in the profession. But this decision kept this further issue
alive.

1.5 In the context of the meaning of the expression TS in the definition of
expression FTS, the issue was also under debate as to whether the transaction charges
paid to Stock Exchange by its members to transact the business of trading in
securities could be regarded as FTS. This issue was decided by the Bombay High
Court against the assessee in the case of Kotak Securities Ltd [340 ITR 333].
However, the action of the AO in disallowing this expenditure u/s. 40(a)(ia)
was not upheld by the High Court for the reasons stated in the judgment.

1.6 The issue referred to in para 1.5 as to whether payment of such transaction
charges would constitute FTS for the purpose of TDS u/s. 194J and consequent
effect of section 40(a)(ia) for the assessment year in question, dealt with by
the Bombay High Court in the case referred to in the para 1.5 above, recently
came-up for consideration before the Apex Court and has now got resolved.
Considering the importance of this judgment and the other implications thereof,
it is thought fit to analyse the same in this column.

CIT vs. Kotak Securities
Ltd .- 340 ITR 333 (Bom)

2. In the above case, the relevant brief facts were: The assessee company was
engaged in the business of share broking, depositories, etc. The trading in
securities were carried out through recognized Stock Exchanges such as Bombay
Stock Exchange (BSE), National Stock Exchange of India (NSE), etc. The Stock Exchanges
regulate members’ activities like entering into, making, performance and
termination of contracts including contracts between members or between a
member and its constituents or between a member and a person, who is not a
member and the consequences of default, etc. For the purpose of facilitating
such trading activities, the BSE had devised the BSE On-Line Trading (BOLT )
system. Similar system is also devised by the NSE. For the purpose of
convenience, the Court decided to deal with BOLT system devised by the BSE.
This system provides for totally automated screen- based trading in securities
and facilitates the member- brokers to trade in securities from the trade
workstation installed in their offices which has replaced the earlier system of
assembling in the trading ring for carrying out this activity. The BOLT system
provides all the data that is necessary to the intending buyer and intending
seller of the securities and when the best buy order is matched with the best
sell order, the transaction is concluded which is followed by necessary
documentation. Under this system, the trading in securities is conducted in an
anonymous enviornment in such a manner that the buyers and sellers of the
securities do not know the names of each other and the same is revealed only
after the deal is finally settled. Settlement of transactions in securities
entered into by the members is done as per the procedure adopted by the stock
exchange which is continuously updated from time to time. The trading and
settlement activities are closely monitored in BSE by a system known as BSE
online surveillance system [BOSS]. As such, for the purpose of settling the
transactions entered in to by the members, delivery of securities and connected
matters, appropriate mechanism is provided by the Stock Exchange which is
governed by the relevant rules and regulations provided under the bye-laws of
the BSE. For the purpose of providing this facility of entering into trading in
securities, etc. through the BOLT system, the transaction charges are levied by
the BSE on the members, who enter into such transaction.

2.1 T he assessee company had furnished Return of Income for the Asst. Year.
2005-06 and during the relevant previous year, the assessee had paid to the BSE
an amount of Rs. 5,17,65,182 towards the transaction charges without deducting
any tax. During the assessment proceeding, the AO took the view that the
transaction charges paid by the assessee were in the nature of FTS covered u/s.
194J and therefore, the assessee was liable to deduct tax and the tax having
not being deducted, the AO disallowed the entire expenditure of transaction
charges u/s. 40(a)(ia). The first appellant authority took the view that the
Stock Exchange is not merely a mute spectator providing only physical
infrastructure to the members but it was a supervisor, overseer, manager,
controller, settlor and arbitrator over the security trading done through it
which necessarily had vital inputs and ingredients of rendering managerial
services and accordingly, confirmed the action of the AO However, the tribunal
took the view that the Stock Exchange does not render any managerial, technical
or consultancy service and the assessee was not required to deduct any tax u/s.
194J from the payment of transaction charges and consequently, provisions of
section 40(a)(ia) are not attracted. Accordingly, the disallowance made by the
AO was deleted. On these facts, the issue as to applicability of Sec. 194J to
the payment of transaction charges and consequent applicability of Sec.
40(a)(ia) came up before the Bombay High Court at the instance of Revenue. In
substance, the issue before the Court was whether the transaction charges paid
by the assessee company could be regarded as FTS covered u/s. 194J for the
purpose of making TDS and consequent disallowance u/s. 40(a)(ia).

2.2 Before the Court, on behalf of the Revenue, it was, interalia, contented
that the Stock Exchange through the BOLT system provides a trading platform
which is highly sophisticated and constantly monitored and managed by the
managerial staff of the Stock Exchange and hence, the services rendered by the
Exchange are TS covered u/s. 194J and since the assessee has failed to make
TDS, the AO was justified in disallowing the expenditure under Sec. 40(a)(ia).
On the other hand, on behalf of the assessee, it was, interalia, contented that
transaction charges paid by the assessee for the use of a system provided by
the Stock Exchange. The BOLT system, like the ATM system provided by the banks,
does neither envisage a contract for rendering technical services nor a
contract for rendering managerial services, but merely a contract for usage of
BOLT system. Mere fact that the BOLT system itself is a device set-up by using
high technology, in the absence of a contract for rendering technical services,
cannot be a ground to hold that payments of transaction charges are FTS u/s.
194J. As such, provisions of section 40 (a)(ia) are not applicable, there being
no liability to deduct tax u/s. 194J.

2.3 For the purpose of deciding the issue, the Court referred to the relevant
part of the provisions of section 194J(1) and the said Explanation as it stood
at the relevant time and noted that the plain reading of the provision shows
that the expression FTS includes rendering of any managerial services and the
question is, by providing the BOLT system for trading in securities whether the
Stock Exchange renders managerial services to its members. The Court also noted
that, the Tribunal as well as the counsel for the assessee strongly relied on
the judgment in Skycell’s case (supra), wherein it was held that the cellular
mobile service provider does not render any technical service though high
technology is involved in the cellular mobile phone and therefore, section 194J
is not attracted.

2.4 The Court then stated that the judgment of Madras High Court in Skycell’s
case is distinguishable on facts. In that case, the subscriber who had
subscribed to the network was required to pay for the air time used by the
subscriber at the rates fixed by the service provider. In the facts of that
case, the High Court took the view that the contract between the subscriber and
the service provider was to provide mobile communication network and the
subscriber was neither concerned with the technology involved in this process
nor was he concerned with the services rendered by the managerial staff in
keeping the cellular mobile phone activated. As such, the contract between the
customer and the service provider was not to receive any technical or managerial
service and the customer was only concerned with the facility of being able to
communicate with others on payment of charges. Accordingly, in that case, there
was no linkage between the contract for providing a medium of communication
through the cellular mobile phone and the technical and managerial service
rendered by the service provider in keeping the cellular mobile phone
activated.

2.4.1 The Court then proceeded to distinguish the facts of the case of the
assessee as compared to the facts before the Madras High Court in Skycell’s
case and for that purpose stated as under [pages 340-341]:

“. . … in the
present case, there is direct linkage between the managerial services rendered
and the transaction charges levied by the stock exchange. The BOLT system
provided by the Bombay Stock Exchange is a complete platform containing the
entire spectrum of trading in securities. The BOLT system not merely provides
the live connection between prospective purchasers and prospective sellers of
the respective securities / derivatives together with the rates at which they
are willing to buy or sell the securities, but also provides a mechanism for
concluding the transaction between the two parties. The BOLT system withholds
the identity of the two contracting parties, namely, the buyer and the seller
of the respective securities/ derivatives. Under the screen-based BOLT system,
the entire trading system is managed and monitored right from the stage of
providing the platform for the prospective buyers/sellers of the securities /
derivatives till the date the deal struck between the two parties are finally
settled in all respects. The very object of establishing the stock exchanges is
to regulate the transactions in securities and to prevent undesirable
speculation in the transactions. To achieve this goal, the stock exchange
continuously upgrades its BOLT system so that the transactions carried on
through that system inspire confidence in the general public and that the
transactions are settled smoothly and expeditiously. Thus, the entire trading
in securities is managed by the Bombay Stock Exchange through the BOLT system
provided by the stock exchange.

Unlike in the case of cellular mobile phones
where the user of the cellular telephone is at the discretion of the subscriber
and the service provider is not regulating user of the cellular mobile phone by
the subscriber, in the case of the BOLT system, the user of the system is
restricted to the trading in securities and the same is completely regulated by
the stock exchange. If during the course of trading, it is found that a member
is indulging in malpractices the stock exchange is empowered to suspend the
member broker apart from making him liable for various other consequences.
Thus, the decision of the Madras High Court in the case of Skycell [2001] 251
ITR 53(Mad) is totally distinguishable on facts and the Income-tax Appellate
Tribunal was in error in applying the ratio laid down therein to the facts of
the present case.”

2.5 Further, the Court rejected the contention raised on behalf of the assessee
that there was no contract to render technical/ managerial services in the
present case and stated that the very object of providing BOLT system is to
provide complete platform for carrying out these activities. It is only if a
member trades through the BOLT system, it is required to pay transaction
charges depending upon the volume of trading. Once the trading through BOLT
system takes place, the member is assured that the contracting party is a
genuine buyer or seller, as the case may be, and that the price offered by the
opposite party would be in consonance with the norms laid down by the Stock
Exchange and the transaction would be settled effectively and expeditiously.
According to the Court, the measure of levying the transaction charges is not
relevant and the fact that transaction charge is based on the value of the
transaction and not on the volume is not determinative of the fact as to
whether managerial services are rendered or not.

2.6 Proceeding further, in support of the view that the case is covered u/s.
194 J, the Court further observed as under [page 342]: “Unless the stock
exchange constantly monitors the transactions relating to the sale or purchase
of the securities right from the stage when the two contracting parties
interact through the BOLT system, it would be impossible to ensure safety of
the market. When there is considerable variation in the price of the securities
offered to be sold or purchased the in-built system alerts and remedial measures
are taken immediately so that no panic situation arises in the stock market.
With a view to regulate the trading in securities, the stock exchange provides
risk management and surveillance to the stock brokers to ensure the safety of
the market. The surveillance function involves price monitoring, exposure of
the members, rumour verification on a daily basis and take remedial actions
like reduction of filters, imposition of special margin, transferring scrips on
a trade to trade settlement basis, suspension of scrips/members, etc. These are
some of the identified managerial services rendered by the stock exchange for
which transaction charges are levied. ”

2.6.1 In support of the above, the Court further pointed out as under [page
342]: “The fact that the BOLT system provided by the stock exchange has
in-built automatic safeguards which automatically gives alert signal if the
fluctuation in the prices of the securities exceed a particular limit
prescribed by the stock exchange does not mean that the managerial services are
not rendered, because , firstly, the in-built mechanism in the BOLT system
itself is a part of the managerial service rendered by the stock exchange and,
secondly, even the in-built mechanism provided in the system is varied or
altered by the stock exchange depending upon the circumstances encountered
during the course of rendering managerial services.”

2.7 Rejecting the argument that the BOLT system is like the ATM system provided
by the banks, the Court stated that no trading activity is carried on at the
ATM like under the BOLT system under which the activity is
monitored/regulated/managed by the Stock Exchange.

2.8 Considering the above, on the issue of applicability of section 194J, the
Court finally held as under [pages 342-343]: “In the result, we hold that
when the stock exchanges are established under the Securities Contracts
(Regulation) Act, 1956, with a view to prevent undesirable transactions in
securities by regulating the business of dealing in shares, it is obvious that the
stock exchanges have to manage the entire trading activity carried on by its
members and accordingly managerial services are rendered by the stock
exchanges. Therefore, in the fact of the present case, the transaction charges
were paid by the assessee to the stock exchange for rendering the managerial
services which constitutes fees for technical services u/s. 194J read with
Explanation 2 to section 9(1)(vii) of the Act and hence the assessee was liable
to deduct tax at source before crediting the transaction charges to the account
of the stock exchange. ”

2.8.1 From the above, it would appear that the Court took the view that, the
Stock Exchange is rendering managerial services. According to the Court, the
in-built mechanism in the BOLT system is itself a part of managerial services
rendered by the Stock Exchange and even such in-built mechanism provided, is
varied or altered as per the need during the course of rendering managerial
service. As such, the payment of transaction charges is FTS, as the definition
of FTS includes consideration for managerial services and accordingly, the same
is covered by section 194J.

2.9 The Court then dealt with the issue of disallowance u/s. 40(a)(ia). After
considering the object of the introduction of section 40(a)(ia) as explained in
CBDT circular No/ 5 dtd 15th July, 2005, the Court noted that during the period
1995-2005, neither the assessee made TDS from the payment of transaction
charges nor the Revenue raised any objection or initiated any proceedings for
default in making TDS. The Court, under the circumstances, felt that nearly for
a decade both the parties proceeded on the footing that section 194J is not
attracted. Under the circumstances, according to the Court, no fault can be
found with the assessee for not making TDS u/s. 194J for the assessment year in
question [Asst Year 2005-06].The Court also noted that from the Asst Year
2006-07, the assessee has started deducting tax from such payments, though not
as FTS but as royalty. The Court also noted that, presumably, the Revenue has
not suffered any loss for non- deduction of tax as the Stock Exchange has
discharged its tax liability for that year. On these facts, the Court took the
view that no action can be taken u/s. 40(a)(ia) and held as under [page 343]:

” In any event, in the facts of the present case, in view of the
undisputed decade old practice, the assessee had bona fide reason to believe
that the tax was not deductible at source u/s. 194J of the Act and, therefore,
the Assessing Officer was not justified in invoking section 40(a)(ia) of the
Act and disallowing the business expenditure by way of transaction charges
incurred by the assessee.”

2.10 From the above, it is worth noting that though the Court held that the
payment of transaction charges constitutes FTS covered u/s. 194J, under
peculiar circumstances, the Court also took a fair view that disallowance u/s.
40(a)(ia) cannot be made as both the Revenue and the assessee were under the
bona fide belief for nearly a decade that the tax was not required to be
deducted.

shailesh.kwebmaker

COPY OF MINUTES OF INTERACTIVE SESSION WITH THE OFFICIALS AS A PART OF VIGILANCE AWARENESS WEEK

OFFICE OF THE
PR. CHIEF COMMISSIONER OF INCOME TA X, MUMBAI
ADDL.COMMISSIONER OF INCOME TA X (HQ) (VIGILANCE)
ROOM N0.361, AAYA KAR BHAVAN, M.K. MARG, MUMBAI- 20

TEL- (022) 22011594
PABX- 22039131 EXTN. 2361

No. Addi.CIT(Vig.)/VAW/2015-16 / 392 December 07 , 2015

The Chief CIT- 1 to 11 & Central I & II, (IT) & (TDS)
The Director General of Income Tax (lnv.),
The CIT (Exemp), DTRTI, (I&CI) & (LTU)
The Addl. Director Generai(Vig.)(West)CBDT
The CIT Judicial, (Admn. & CO), (Audit)- I & II,
The CIT (DR) ITAT & ITSC
Mumbai.

Sir/Madam,

SUB : Observance of Vigilance Awareness Week- 2015 From 26.10.2015 to 31.10.2015-

Kindly refer to the above.

As a part of observance of Vigilance Awareness Week, an Interactive Session was held on 30.10.2015 at 11 .30 a.m. at Conference Hall, Aayakar Bhavan, Mumbai, with members of the BCAS, CTC, FICCI, WIRC(ICAI) etc. and Sr. Officers of the Department which was chaired by Pr. CCIT, Mumbai.

In this connection, I am directed to enclose a copy of minutes of the said Interactive Session for information & appropriate action.

Yours faithfully,
[ R. K. SINGH ]
Dy. Commissioner of Income Tax (HQ)
(Vigilance), Mumbai.

Encl.: as above.
Copy to (alongwith minutes of Interactive Session) :
(i) CTC, (ii) BCAS, (iii) FICCI, (iv) WIRC & (v) IMC
DCIT(HQ)(Vig.), Mumbai.

Minutes of the Interactive Session held on 30/10/2015 at 11.30 A.M. at the Conference Room, Aayakar Bhavan, Mumbai

An interactive session was held by the Income Tax Department, Mumbai in the Conference Room, Aayakar Bhavan, 3rd floor at 11 . 30 A.M. on 30.10.2015 as part of the endeavour to sensitize its officials to the need for lmproving quality of public service rendered and mitigating the potential areas of corruption during the Vigilance Awareness Week. The interactive session was chaired by Shri D. S. Saksena, Pr .CCIT, Mumbai. The following officers also participated in the Interactive Session:

2. The following members of Federation of Indian Chambers of Commerce and Industry (FICCI), Bombay Chartered Accountants ‘ Society (BCAS) , Indian Merchants’ Chamber (IMC) , Western India Regional Council of the Institute of Chartered Accountants of India (WIRC of ICAI) and Chamber of Tax Consultants (CTC) were present:

Federation of Indian Chambers of Commerce and Industry

• Mr. Deepak Mukhi, Head of FICCI – MSC

Bombay Chartered Accountants’ Society

• Mr. Raman Jokhakar, President, BCAS

• Mr. Ameet Patel, Co Chairman, Taxation Committee, BCAS

• Mr. Jagdish Punjabi, Convenor, Taxation Committee, BCAS

Indian Merchants’ Chamber

• Mr. Ketan Dalal, Chairman, Direct Tax Committee
• Mr. Gautam Nayak, Co-Chairman, Direct Tax Committee
• Mr. Sushil Lakhani, Member, Direct Tax Committee

Western India Regional Council of ICAI

• Mr. Shardul Shah, Regional Council Member

Chamber of Tax Consultants

• Mr. Avinash Lalwani, President

• Mr. Mahendra Sanghvi, Co-Chairman, Law & Representation Committee

• Mr. Krish Desai, Vice- Chairman, Law & Representation Committee

• Mr. Amrit Porwal- Convenor, Law & Representation Committee

• Ms. Nishta Pandya – Convenor, Law & Representation Committee

3. The Pr. CCIT(CCA) welcomed the participants and expressed his happiness on meeting the members from esteemed associations such as FICCI, BCAS, IMC, WIRC of ICAI and CTC. The Pr. CCIT remarked that each department has its own vigilance setup and in that process we have Addl. Director General (Vig.), West Zone. This is the formal structure in the department. The Pr. CCIT further informed that the refunds are being issued directly in the bank accounts of the assessee by CPC. However, we should have the system to safeguard the rights of the taxpayers to receive the refunds without coming numerous rounds to the income tax office. Therefore, the department wants to act positively and proactively by having interaction with the associations so that ideas can be shared and improvement in the systems and processes can be made.

4. Shri Deepak Mukhi of FICCI – MSC initiated the discussion by expressing his compliments for organising the meeting. He also thanked for circulating the minutes of the last years meetings and sorting out the grievances using the technology. He also suggested that whatever decision would be taken in deliberation should be followed up. Further, following issues/ suggestions were also made by FICCI –

(a) Proper monitoring and action by CCsIT is essential to ensure that Office Memorandum dated 7th November 2014 issued by CBDT regarding a non adversarial tax regime and other instructions are actually implemented at the ground level.

(b) There has to be adequate monitoring and supervision in relation to passing of assessment orders, so that the corruption possibilities could be significantly mitigated.

(c) In the assessment proceedings, Questionnaire should not be roving but shiould be ringfenced and specific. Also, the number of hearings should be restricted to a maximum of 5 hearing, which will compel tax officers to be specific and focused and will reduce the possibility to harass assesses. Further, notices for hearings must at least be delivered 20 days in advance and subsequent hearings should have minimum 3 weeks gap and each hearing not being more than 2-3 hours. In this regard internal guidelines may be issued.

(d) There have been a ‘large number of CBDT circulars, but several of them are not followed. In this regard internal guidelines may be issued. Issues such as non disposal of rectification orders, not giving effect to CIT(A) orders and non issue of appellate orders, for which CBDT has issued instructions, should be monitored strictly.

4.1 Shri Ameet Patel of BCAS appreciated the efforts made by the Department regarding issue of refunds, but added that the grievances relating to refund/ rectification are mainly due to the TDS-mismatch and lack of coordination between CPC and jurisdictional officer and that most of the problems are on account of nonmigration of PAN due to internal re-structuring of the Department. He also said that there was a lot of problems in giving the appeal effects in so many cases. Further, following suggestions were also made by BCAS –

(a) Wide publicity should be given to the Vigilance mechanism of the department. It is suggested that the same may be published in the journal of BCAS as well as having prominent notices within the premises of Income-tax offices at different places and not just at the main entrance, so that professionals as well as assesses are adequately aware of the vigilance mechanism of the department and they may approach the appropriate authority to redress their grievances.

(b) The process of rectifications, appeal effects, etc can be streamlined by giving acknowledgement numbers to applications and displaying on Notice Boards or on a website, the details of their disposal in timely manner. Likewise, the total number of assessments completed, demand raised and amount recovered, refunds issued, etc. in each Charge/Range may also be displayed or published on notice boards/ websites.

(c) Though corruption initiated by the officer gets often noticed and addressed through vigilance mechanism, the corruption initiated by an assessee does not get noticed. The officers should also be made aware of their duty to report such incidences for curbing corruption.

(d) In order to bring transparency in the process of delivery of notices to the assesses, the notices should also be sent in parallel by email.

(e) The Transfer & Posting policy needs to be adhered to by ensuring that officers with an adverse track record should not be posted in the charges having public contact and also no supervisory officer should be allowed to remain in one position beyond two years.

4.2 Shri Ketan Dalal of IMC made suggestion for issuing clarification/ guidelines regarding pre-assessment/ post-assessment proceeding like – directing AO’s not to issue142(1) mechanically but with application of mind and also to avoid passing high pitch assessment-order.

4.3 Shri Sushil Lakhani of IMC has conveyed that foreign companies have wrong perception about taxation departments in India and because of that they prefer to shift all the responsilities I liabilities pertaining to taxation matters to theirs Indian counterparts. Further, he also suggested that Income-tax Department of Mumbai, being major contributor to the exchequer, should show the way in this regard.

5. Shri B. K. Mishra, CCIT suggested that it is duty of the tax practitioners also to educate their clients and change their mindset to pay their legitimate taxes honestly in India, as lot of good things are happening in the Department which are not properly propagated.

5.1 Shri Abhay Charan Naik, CCIT suggested to provide specific case with PAN pertaining to Internationaltaxation regarding incidence of harassment, if any.

5.2 The Pr. CCIT informed the members present there about the vigilance set-up of the department. There is an established complaint handling mechanism in place in the Department in the form of vigilance set-up under Director General of Income-tax (Vigilance). The official website of the Department also provides detailed information about the vigilance set-up and complaint handling mechanism. He also informed about the display of notice boards in all the buildings of the department regarding the same.

6. Shri Raman Jokhakar of BCAS requested to put up the Charter of Demand on the website and also display at jurisdictional level.

6.1 Shri Shradul Shah of WIRC of ICAI suggested to call feedback from tax-payers and tax practitioners regarding functioning of the Department vis-a-vis assessments, refunds, rectifications and appeal effects etc.

6.2 Shri Ameet Patel of BCAS suggested to conduct awareness programme about the various initiatives taken by the Department for the benefit of the assesses in coordination with institutes/ associations like WIRC of ICAI/ BCAS/ IMC etc.

6.3. Shri Avinash Lalwani of CTC expressed that AOs are not properly maintaining the record of proceeding of assessment and suggested to maintain digital proceeding sheet. He also suggested that scanned copy of proceeding sheet should be uploaded in respective assessee’s account, to be accessible by the officers as well as assesses. Further, he pointed out that the ASK-Centres were not properly performing. Proper monitoring and reviews should be done by the Department in this regard. He also said that the certification of lowerI nil deduction of tax at source u/s 195 & 197 and disposal of rectification applications are not being done properly and that unnecessary and irrelevant information were asked for in this regard without first verifying the data available on the website of the Department. Regarding search and seizure proceedings, he said that the department insist the tax-payers to switch off the close circuit cameras while the proceeding were going on. He suggested that the CCTV should be remain on during the search action. He insisted that the department should video graphed the entire proceeding in order to ensure the transparency in the proceedings and avoid any sort of corruption. It was also suggested that due publicity should be given about the role of vigilance wing so that assesses are aware of such wing and approach the wing without fear.

7. The Pr. CCIT has informed the members to communicate such incidence, where malpractices are noticed, to the Department so the department could take necessary action against those officers/ officials.

7.1 Shri A. C. Naik CCIT-4 said that the Department is under the process of paperless office by using etechnology. There are lot of suggestions received in this respect which will be considered in on going project.

7.2 Shri Rakesh Mishra, Pr.CIT – 31, Mumbai has given the trail to take out light of E-Sehyog Project started on Pilot Project basis in the office of Pr. CIT 31, Mumbai. For that, he said that that notices from the Department would be sent to the assessee through mail and immediately after sending the mail, it would be deemed to be treated as served to the assessee. He suggested that the submissions made by the assessee through mail must be digitally signed so the evidentiary value & genuineness of the same can be ensured. He also suggested that the tax-payers and tax practitioners can meet higher authorities any time if they are having any genuine grievances with lower functionaries. He pointed out that every Wednesday forenoon has already been declared as a time for public meeting by the Central Government Department.

8. Shri Ketan Dalal of IMC – had said that the technology (E – SEHYOG) of Department by sending their e-mails etc should be implemented not only in assessment proceedings but in appellate proceedings also. He also insisted that the assessment, especially where substantial addition/ disallowances are made, should be finalized only after proper show-cause and after providing reasonable time to reply that show-cause.

8.1 Mr. Amrit Porwal of CTC has insisted that while proceeding with grievances, rectification applications, giving effect to the order of various appellate orders and issuing refunds, first the due procedure should be strictly followed in order to avoid any sort of corruption.

8.2 Shri Sushil Lakhani of IMC pointed out that proceeding under the section 148 initiated on the basis of information received from Sales Tax Department in the past two years has given wrong image to the Department because in such cases assessment has been completed mechanically and without application of mind.

9. Shri D. S. Saksena, Pr. CCIT, Mumbai said that the Department has no option but to initiate proceddings under Section 148, once such information is received, to verify the correctness of the information and assessments are being completed after doing proper verification from various agencies and documentary evidences brought on record.

9.1 Mr. Rakesh Mishra Pr. CIT- 31 provided his office email id and personal email id (Mumbai.cit31@incometax. gov.in & rakesh.mishra@incometax.gov.in respectvely) with a request to mail all the grievances/ suggestions etc related to his jurisdiction that is Goregaon and Jogeshwari. Accordingly the AO having jurisdiction over the case will look into the matter.

9.2 Shri S. S. Rana, Addl. Director General(Vig), West Zone informed that the grievances filed by the assessee or tax practitioners are dealt with by the Department in effective manner especially those which is filed through ASK or CPGRAMS. Problems arise with those grievances only which the assesssee file directly with AO’s. He suggested that the assessee and tax practitioners should file all the grievances through ASK or CPGRAMS only and also they should inform higher authorities from time to time regarding pendency of grievances. Regarding high pitch assessment, they should meet higher authorities or may seek direction u/s 144A from the range head the moment show – cause is issued to the assessee by the AO. He suggested that the tax practitioners as well as assessee should avoid to follow any grievance I obligation directly with the staff members and call the AO’s and instead of that it should be rooted through ASK. He also said that the tax practitioners should also follow the rules and explain true facts and legal position to the tax-payers instead of misguiding and frightening them.

9.3 The Pr. CCIT responded to the participants by informing the members present there that the guidelines have been laid down in the Charter of Demand to tackle all the issues within the time limit as prescribed therein. He pointed out that many of the complaints are anonymous or pseudonymous and there is general reluctance of complainants revealing their identity. Unless there is a specific information that can be acted upon, anonymous and pseudonymous complaints do not help in mitigating the menace of corruption. Issue regarding further publicity about the vigilance set-up and complaint handling mechanism would be considered.

He further informed the Members that necessary guidelines were already issued in respect of issuing questionnaire for scrutiny assessment cases. If the assessing officer issues questionnaire in routine manner, the same should be brought into the notice of higher authorities. In response to the dissatisfaction expressed by members of various CA Associations in respect of functioning of Aayakar Seva Kendra, the Pr. CCIT has stated that the Department will look Into the various aspects as suggested by members of CA Associations.

As regards the display of information or publicity in respect of additions made in income tax assessment, he remarked that secrecy of the assessee’s information is important and cannot be violated. Being policy matter and also for the sake of uniformity, issue relating to publicity of addition/ disallowances made while finalizing the assessment could be addressed by the CBDT only.

10. It was requested by the members of the Associations to send Minutes of the Meetings to all the associations so that common thread is maintained for future purpose.

11. The participants agreed on the need for greater co-ordination between the department and the professional bodies to improve the quality of tax administration and to help each other to ensure that the officers of the Department and the tax practitioners would work towards creating a transparent and vigilant environment. The group deliberated on the challenges and opportunities present before the Income Tax Department and agreed that the education of the tax payers on their rights and duties require immediate attention. The Pr.CCIT assured the group that they would continue to meet and discuss areas of concern and consider the suggestions made to ensure transparency and accountability. The interactive session was concluded on the positive note that the Department and all the stake holders would co-operate to ensure that the tax administration is fair and just.

(AJAI PRATA P SINGH)
Addl. Commissioner of Income Tax(HQ)
(Vigilance), Mumbai.

shailesh.kwebmaker

Section 271(1)(c) – Where assessee’s claim for deduction under section 80-IB was rejected for not satisfying conditions u/s. 80-IB(7A), penalty u/s. 271(1)(c) was not leviable

CIT vs. Rave Entertainment (P.) Ltd. SLP No 16002/2015 dated
07/09/2015 (Afirmed Rave Entertainment (P.) Ltd. vs. CIT (2015) 2015 376
ITR 544 (All.)(HC)

The assessee claimed deduction u/s.
80-IB. The claim was rejected by the Assessing Officer. At the same
time, the Assessing Officer had opined that the assessee had wrongly
made the above claim which amounted to concealment of income, so he
levied the penalty u/s. 271(1)(c). It was held by the Hon. High Court that in the audit report in Form 10CCBA relevant to the assessment year 2006-07 also the date of completion of construction has been mentioned as 1-5-2002, falling in the assessment year 2003-04. On the basis of these facts, there was a strong justification for the assessee to claim exemption u/s. 80-IB(7A) in the assessment year 2006-07, as it was the fourth year and the benefit is available for five consecutive years beginning from the initial assessment year. The fact about the completion of construction as noted by the Commissioner (Appeals), supported by the audit report, remained undisputed at the stage of the Tribunal. Therefore, the assessee cannot be visited with the charge of filing inaccurate particulars, on the basis of which penalty u/s. 271(1)(c) has been levied by the Assessing Officer.

The Assessing Officer has only stated that such claim was not allowable as the conditions envisaged u/s. 80-IB(7A) were not fulfilled. Thus, the claim was found to be legally unacceptable but it does not amount to furnishing of the inaccurate particulars/concealment of income. It is a simple case of non-allowance of the legal claim for which the penalty is not desirable. Hence, penalty order was set aside by the Hon’ble High Court .

Revenue filed an SLP against the Order of Hon’ble Allahabad High court, which was dismissed.

shailesh.kwebmaker

Section 80IB Deduction – 100% export oriented undertaking – Duty drawback receipt, duty drawback receipt not derived from industrial undertaking –

Arvind Footwear (P.) Ltd. vs. CIT, SLP NO. (CC) 10365/2014 dated 4/8/2014: (Allahabad High court order dated 17/1/2014 100 DTR 425) (Reversed : Arvind Footwear (P.) Ltd. vs. Dy.CIT, Range -6, Kanpur [2013] 153 ITD 264 (Luck))

The assessee claimed that the “duty drawback” receipt of Rs.1.53 crore was eligible for deduction u/s 80-IB on the ground that the said duty drawback refund was a refund of customs and central excise duty on inputs used in manufacturing of its products. The AO & CIT(A) rejected the claim by relying on Liberty India 317 ITR 218 (SC) where it was held that duty drawback was not “derived” from the industrial undertaking.

The Tribunal observed that though in Liberty India it was held that duty drawback and DEPB arises from an independent source and is not “derived” from the industrial undertaking, in Dharam Pal Premchand 317 ITR 353 (Del) (SLP dismissed) it was held that refund of excise duty had a direct nexus with the manufacturing activity & was eligible for section 80-IB deduction. Accordingly, though duty drawback & DEPB were held in Liberty India to be an independent source of income and to not have a “first degree” nexus with the undertaking, this was in the context of a fact-situation where the duty drawback & DEPB did not arise from core activities of the undertaking and was an additional, ancillary or supplemental profit. There can be situations in which duty drawback itself could be more than the overall profits and in such situations, the duty drawback may not be seen on standalone basis or as an independent source of income because the overall profit is only a part of the duty drawback receipt, and the commercial motivation of running the industrial undertaking is earning only that part of duty drawback receipts. On the present facts, the duty drawback was more than the entire operational profit and so there cannot be an open and shut inference that the duty drawback receipts are an independent source of income and have no first degree nexus with the business activity of the industrial undertaking. There is still room for consideration of the plea that but for the duty drawback the assessee would not have carried out the business activity in the industrial undertaking, because, that would have meant carrying out business for incurring losses. If that be so, the duty drawback receipts can be said to derived from the undertaking and to be eligible for section 80-IB deduction. The Tribunal therefore remitted the matter for fact finding.

The Hon’ble Allahabad High Court reversed the decision of the Tribunal, holding that the issue stood concluded by a decision of the Supreme court and therefore the remand was not proper. On SLP being filed by the assessee, the same was rejected.

shailesh.kwebmaker

Section 68 – Share Application Money & Unsecured loan from family members of directors – Unexplained cash credits

Earthmetal Electrical Pvt. Ltd. SLP allowed by Supreme Court Civil Appeal No. 618 of 2010 dt. 30/7/2010 (Bombay High court order Appeal No 590 0f 2005 dt 15/10/2008 and Mumbai Tribunal order (2005) 4 SOT 484 (Mum.) reversed)

The Assessing Officer, having found certain share capital money and unsecured loan in the books of account of the assessee-company directed the assessee to explain the share capital money as well as unsecured loan. In response to the Assessing Officer’s query, the assessee submitted confirmation and disclosed that share capital and unsecured loan had been taken from the family members of the directors. The Assessing Officer, having noted that the alleged confirmation did not contain the necessary details, issued notice u/s. 133(6) to all those persons who had allegedly contributed to the share capital of the assesseecompany as well as given unsecured loan. In response to the notice, no one gave any reply. The Assessing Officer also procured information u/s. 131 from the bankers and compared the transaction from information gathered from bank but could not co-relate them. He then issued notice to the assessee, but the assessee never appeared before the Assessing Officer. The Assessing Officer, therefore, treated the share capital money and unsecured loan as unexplained cash credit falling u/s. 68 and, accordingly, made addition to the income of the assessee. The ITAT Mumbai and Hon’ble Bombay High Court confirmed the order of A.O.

The Hon’ble Supreme Court allowed the SLP filed by the assessee following the Supreme Court in case of CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR 195 / (2008) 6 DTR 308 held that, if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the A.O., then the department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of the assessee company.

shailesh.kwebmaker

Section 2(47) r.w.s. 48 – Redemption of preference shares amounts to transfer within meaning of section 2(47) – Held Yes – Assessee would be entitled to benefit of indexation

CIT vs. Enam Securities P Ltd SLP no (CC) 38542/2012 dated 1/9/2014. (Affirmed CIT-4 vs. Enam Securities (P.) Ltd. [2012] 345 ITR 64 (Bom.))

The assessee was engaged in business of share broking and also dealing in shares. It had purchased 4 lakh preference shares of Rs. 100 each from a company ‘E’. The preference shares were to carry a dividend of four per cent per annum and were redeemable after the expiry of ten years from the date of allotment. During the course of assessment year 2001-02, the assessee redeemed three lakh shares at par and claimed a long-term loss after availing of benefit of indexation. The Assessing Officer disallowed the claim of set off of long-term capital loss that arose on redemption against long-term capital gain on the sale of other shares on the grounds that – (i) both the assessee and the company in which the assessee held the preference shares, were managed by the same group of persons; (ii) that there was no transfer; and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. On appeal, the Commissioner (Appeals) allowed the claim of the assessee. On further appeal, the Tribunal affirmed the view of the Commissioner (Appeals) holding that the genuineness and credibility of the capital transaction was not disputed for the previous ten years. It was further held that both the companies were juridical entities; that the fact that the companies were under common management would not indicate that the transfer was sham. It was also held that since redeemable preference shares were not bonds or debentures, the assessee would not be deprived of the benefit of indexation u/s. 48. The Hon’ble Bombay High Court Upheld the Order of Tribunal. On SLP being filed by Revenue, the same was dismissed.

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Mangal Keshav Securities Limited vs. ACIT ITAT “B” Bench, Mumbai Before Joginder Singh (J. M.) and Ashwani Taneja (A. M.) ITA No.: 8047/Mum/2010 A.Y.:2006-07, Date of Order:29th September, 2015 Counsel for Assessee / Revenue: Nishan Thakkar & Prasant J. Thacker / J. K. Garg

Explanation to Section 37(1) – Fines, penalties paid for procedural non-compliances to regulatory authorities are compensatory in nature hence allowable as business expenditure.

Facts
The assessee is a closely held company engaged in the business of share/stock broking and is a member of BSE, NSE and is a DP for CDSL & NSDL and Mutual Fund Distribution.

During the course of assessment proceedings, it was noted by the AO from the Tax Audit Report that the assessee had paid penalty/fine levied by the Stock Exchange amounting to Rs.9.08 lakh. According to the assessee the fines, penalty etc. were paid for some procedural non-compliances, inadvertently done by the assessee and it had neither undertaken any activities which were in ‘violation’ or ‘offence’ of any law, nor has conducted any activities which were prohibited by law. But the AO was not satisfied and he disallowed the said amount by invoking Explanation to section 37. On appeal the CIT(A) confirmed the order of the AO.

Held
The Tribunal noted that the impugned amount was paid on account of minor procedural irregularities, in day- today working of the assessee. The assessee’s business involved substantial compliance requirements with various regulatory authorities e.g. BSE, NSE, CDSL, NSDL, & SEBI etc. According to it, in the regular course of the assessee’s business certain procedural non-compliances were not unusual, for which the assessee is required to pay some fines or penalties.

It further observed that these routine fines or penalties were “compensatory” in nature; these were not punitive. These fines were generally levied to ensure procedural compliances by the concerned authorities. Their levy depended upon the facts and circumstances of the case, and peculiarities or complexities of the situations involved. It further observed that under the income tax law, one is required to go into the real nature of the transactions and not to the nomenclature that may have been assigned by the parties. Further, relying upon the judgment of the Tribunal in assessee’s own case for A.Y. 2007-08 in ITA No.121/Mum/2010 dated 04.11.2010, the Tribunal allowed the appeal of the assessee.

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Neela S. Karyakarte vs. ITO ITAT “B” Bench, Mumbai Before Joginder Singh (J. M.) and Ashwani Taneja (A. M.) ITA No.: 7548/Mum/2012 A.Y.: 2005-06, Date of Order:28th August, 2015 Counsel for Assessee / Revenue: Dr. K. Shivaram / Vijay Kumar Soni

Section 54EC: The period of six months available for making investment means six calendar months and not 180 days. Payment by cheque dates back to date of presentation & not date of encashment

Facts
The assessee sold a row house on 27.04.2004 for Rs.18,50,000/-. After indexation, the assessee earned long term capital gain of Rs.10,90,176/-. The assessee invested this capital gain in NHB Capital Gain Bonds 2006 on 31st December, 2004 and claimed exemption u/s 54EC. However, the AO found that the assessee was not eligible for exemption u/s 54EC, since the investment was not made by the assessee within six months from the date of transfer of original asset, as per requirement of section 54EC. The AO observed that the sale of row house was executed on 27.04.2004, as per the registered sale agreement, whereas the assessee has invested the amount in NHB Bonds on 31.12.2004. Thus, as per AO, it was beyond the period of six months as stipulated in section 54EC. Accordingly, it was held by the AO that benefit of deduction u/s. 54EC was not allowable to the assessee.

Being aggrieved, the assessee filed appeal before the CIT(A) who after considering all the submissions and evidences placed by the assessee held that going by the date of full and final settlement, the date of transfer would be 29th June, 2004. However, according to him, since the assessee made investment in the bonds on 31.12.2004, it fell beyond the period of six months from the date of transfer and therefore, the assessee was not eligible for deduction u/s. 54EC.

Held
The Tribunal noted that the CIT(A) has held that the date of transfer of the original asset was 29th June, 2004 and the same is not disputed by the revenue. The Tribunal further took note of the decisions of the Special Bench of Ahmedabad in the case of Alkaben B. Patel (2014) (148 ITD 31) and the Mumbai Bench of Income Tax Tribunal in the case of M/s. Crucible Trading Co. Pvt. Ltd. (ITA No. 5994/Mum/2013 dated 25.02.2015) where the term “6 months” have been interpreted to mean 6 calendar months and not 180 days. Further, it also took note of the decision of the Supreme Court in the case of Ogale Glass Works Ltd. (1954) 25 ITR 529, where it was held that the cheques not having been dishonoured but having been cashed, the payment relates back to the dates of the receipt of the cheques and as per the law the dates of payments would be the date of delivery of the cheques. As per the facts, the assessee had filed an application with National Housing Bank on 23.12.2004 along with the cheque of even date. Thus, it was held that the assessee had clearly made investment within the period of 180 days also. Thus, the Tribunal held that viewed from any angle it can be safely said that the assessee has made investment within the period of six months. In the result, the appeal of the assessee was allowed.

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2016-TIOL-303-ITAT-KOL Apeejay Shipping Ltd. vs. ACIT ITA No. 761/Kol/2013 A.Y.: 2004-05, Date of Order: 20th January, 2016

Sections 153(2A), 153(3), 254 – If the Tribunal has set aside or cancelled the assessment, then the fresh order of assessment by the AO shall be passed within the period as prescribed u/s. 153(2A). The provisions of section 153(2A) are absolute and they impose a fetter on income-tax authorities to make a set-aside assessment after the expiry of periods mentioned in this sub-section. This is a statutory fetter which is not for the assessee to relax or waive or vice-versa. The power to make assessment lapses complete upon the expiry of the periods mentioned in the section.

Facts
The assessee company filed its return of income for assessment year 2004-05 on 29.10.2004. The original assessment u/s. 143(3) of the Act was completed by the AO on 15.12.2006 rejecting the claim of the assessee u/s 33AC of the Act on the ground that the assessee had not specified the amount transferred to reserve in the P & L Account for the relevant year.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the claim of the assessee vide his order dated 29.8.2007.

Aggrieved, the revenue preferred an appeal to the Tribunal. The Tribunal vide its order dated 25.7.2008 set aside the issue and restored the matter back to the file of the AO to decide the same afresh.

The AO while giving appeal effect, framed assessment u/s. 254/143(3) and also u/s. 263/143(3) vide order dated 8.12.2011 and disallowed the deduction u/s. 33AC of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it contended that the order dated 8.12.2011, passed by the AO, was beyond the period of limitation. The CIT(A) dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal noted that it had vide its order dated 25.7.2008 set aside the appeal and restored the matter back to the file of the AO to decide the matter afresh. It also noted that the order dated 8.12.2011 passed to give effect to the order of the Tribunal read as under:

“In pursuance of the Hon’ble ITAT, `A’ bench, Kolkata’s order in ITA No. 98/Kol/2008 dated 28.7.2008, a notice u/s. 142(1) was issued to the assessee on 16.11.2010, requiring clarification on the details of Reserves & Surplus as on 31.3.2004 …..”

The Tribunal noted the decision of the co-ordinate bench of the Tribunal in the case of McNally Bharat Engineering Co. Ltd. vs. DCIT in CO No. 12/Kol/2011, arising out of ITA No. 98/Kol/2011 for AY 2002-03 dated 9.10.2015 on identical proposition of law.

Following the ratio of the decision of the Kolkata Bench of the Tribunal in the case of McNally Bharat Engineering Co. Ltd. vs. DCIT (supra), the Tribunal held that no assessment is possible after the expiry of period of limitation, the provisions of section 153(2A) are absolute and they impose a fetter on income-tax authorities to make a set-aside assessment after the expiry of the periods mentioned in this sub-section. This is a statutory fetter which is not for the assessee to relax or waive or vice-versa. The power to make assessment lapses completely upon the expiry of the periods mentioned in the section. It observed that in the present case, the Tribunal had completely set aside the assessment on the abovementioned issue and directed the AO to reframe the assessment afresh. It held that the assessee’s case fell in 2nd proviso to section 153(2A) of the Act.

The Tribunal set aside the assessment and held that the assessment made after expiry of limitation in terms of section 153(2A) of the Act is invalid.

This ground of appeal filed by the assessee was allowed.

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2016-TIOL-306-ITAT-MAD ACIT vs. Encore Coke Ltd. ITA No. 1921/Mds/2015 A. Y.:2010-11.Date of Order: 22nd January, 2016

Sections 28, 40(a)(ia) – Prior period expenses can be allowed as a deduction in the previous year in which tax is actually deducted and remitted to the Government.

Facts
The assessee company had incurred certain expenditure in earlier years but the actual payments were made to the parties in the financial year relevant to the assessment year under consideration after deducting and remitting necessary TDS. The assessee had, in its accounts, reflected this expenditure as prior period expenditure since it had not claimed this expenditure in the earlier years when it was incurred.

In the course of assessment proceedings, the Assessing Officer (AO) disallowed this expenditure on the ground that it was prior period expenditure.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
The Tribunal observed that in the present case though the expenditure related to earlier period, actually TDS was paid in the assessment year under consideration and therefore, in view of the second limb of section 40(a) (ia), since the tax was deducted and paid during the previous year relevant to the assessment year under consideration, the same is allowable in the assessment year under consideration.

The Tribunal noted that the same view has been taken by the Cochin Bench in ITA No. 410/Coch/2014 dated 12.12.2014 in the case of M/s. Thermo Penpol Ltd. vs. ACIT.

Following the decision of the Cochin Bench of the Tribunal as well as considering the provisions of the Act, the Tribunal dismissed the ground of appeal filed by the Revenue.
The appeal filed by the Revenue was dismissed.

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TDS – Sections 194C and 194J

i) Supply of material under turn key project – Section 194C would not apply in respect of payment made against the supply of materials included in composite contracts for executing turn key projects
ii) Bill management services are not professional or technical services – It is a service contract – Section 194C will apply and not 194J

CIT vs. Executive Engineer, O&M Division(GESCOM); 282 CTR 138 (Karn):

The following two questions were raised by the Revenue in the appeal filed before the Karnataka High Court:

“i) Whether the provisions of section 194C would be attracted on the payments made against the supply of materials included in composite contracts for executing turn key projects?

ii) Whether bill management services are professional or technical services? Whether section 194J would apply or section 194C?”

The High Court held as under:

“i) In respect of payments made in respect of supply of materials included in composite contracts for executing turn key projects, provisions of section 194C would not apply.
ii) Services rendered by the agencies towards bill management services are not professional services and section 194J is not attracted. The contract was rightly held to be service contract by the Tribunal. Section 194C is attracted.”

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Reassessment – Sections 147 & 148 – A.Y. 2002- 03 – Information received from ED – AO set out information received from ED – He failed to examine if that information provided the vital link to form the ‘reason to believe’ that income of the assessee has escaped the assessment for the A.Y. in question – Reopening of the assessment is not valid

CIT vs. Indo Arab Air Services: 283 CTR 92 (Del):

The assessment for the A. Y. 2002-03 was reopened on the basis of the information received from the enforcement directorate. The Tribunal held that the reopening is not valid.

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

“i) The Assessing Officer set out the information received from the Enforcement Directorate but he failed to examine if the information provided the vital link to form the ‘reason to believe’ that the of the income of the assessee had escaped assessment for the assessment year in question.

ii) While the Assessing Officer had referred to the fact that the Enforcement Directorate gave the information regarding cash deposits being found in the books of the assessee, the Assessing Officer did not state that he examined the returns filed by the assessee for the said assessment year and detected that the said cash deposits were not reflected in the returns.

iii) Further, information concerning payments made to third parties, which were unable to be verified by the Enforcement Directorate, also required to be assessed by the Assessing Officer by examining the returns filed to discern whether the said transaction was duly disclosed by the assessee.
iv) Consequently, no error was committed by the Tribunal in the impugned orders in coming to the conclusion that the reopening of the assessment was bad in law.”

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Presumptive tax – Section 44BB – A. Y. 2008- 09 – Assessee non-resident – Prospecting for or production of mineral oils – Service tax collected by the assessee is not includible in gross receipts for the purposes of computation of presumptive income

DIT vs. Mitchell Drilling International Pvt. Ltd.; 380 ITR 130 (Del):

Assessee is a non resident. For the A. Y. 2008-09, the income of the assessee was assessable u/s. 44BB. For computing the income the assessee did not include the service tax received by it. The Assessing Officer included the service tax. 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) For the purpose of computing the presumptive income of the assessee for the purpose of section 44BB the service tax collected by the assessee on the amount paid to it for rendering services was not to be included in the gross receipts in terms of section 44BB(2) r.w.s. 44BB(1).

ii) The service tax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee only collected the service tax for passing it on to the Government.”

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Manufacture – Exemption u/s. 10B – A. Ys. 2003- 04 and 2004-05 – Assembling of instruments and apparatus for measuring and detecting ionizing radiators amounts to manufacture – Assessee entitled to exemption u/s. 10B –

CIT vs. Saint Gobain Crystals and Detectors India P. Ltd.; 380 ITR 226 (Karn):

The assessee was in the business of assembling instruments and apparatus for measuring and detecting ionizing radiators. The assessee claimed deduction u/s. 10B. For the relevant years, the Assessing Officer disallowed the claim on the ground that the assessee had not manufactured or produced articles or things as required u/s. 10B(1). The Tribunal allowed the assessee’s claim and held that the process carried out by the assessee in getting the final product, showed that the assessee was engaged in manufacture or production of an article or thing.

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

“The finished product which was sold by the assessee, was different from the materials which were procured for making such a finished product. A series of processes were carried out and a new product emerged. The assessee was entitled to exemption u/s. 10B.”

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Limitation – Amendment – Increased limitation period of 7 years u/s 201(3) as amended by Finance (No.2) Act, 2014 w.e.f.1.10.2014 shall not apply retrospectively to orders which had become timebarred under the old time-limit (2 years/6 years) set by the unamended section 201(3). Hence, no order u/s. 201(i) deeming deductor to be assessee in default can be passed if limitation had already expired as on 1-10-2014 –

Tata Teleservices vs. UOI; [2016] 66 taxmann.com 157 (Guj)

Pursuant to the amendment of section 201(3) by the Finance (No.2) Act, 2014 w.e.f.1.10.2014, extending the period of limitation to 7 years the Assessing Officer issued notices u/s. 201(1) for the A. Ys. 2007-08 and 2008-09. The notices were challenged by the assessee by filing writ petitions. The Gujarat High Court allowed the writ petitions, considered the retrospectivity and the applicability of the amendment of section 201(3) and held as under:

“i) Considering the law laid down by the Hon’ble Supreme Court, to the facts of the case on hand and more particularly considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable w.e.f. 1/10/2014 and even considering the fact that proceedings for F.Y. 2007-08 and 2008- 09 had become time barred and/or for the aforesaid financial years, limitation u/s. 201(3)(i) of the Act had already expired on 31/3/2011 and 31/3/2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee and considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) as was amended by Finance Act, 2012 with retrospective effect from 1/4/2010, it is to be held that section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(i) of the Act can be passed for which limitation had already expired prior to amended section 201(3) as amended by Finance Act No.2 of 2014.

ii) Under the circumstances, the impugned notices / summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.”

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Depreciation – Additional depreciation – Section 32(1)(iia) – A. Ys. 2007-08 and 2008-09 – Plant and machinery set up after 1st October 2006 but before 31st March 2007 – Half of additional depreciation of 20% is allowable in A. Y. 2007-08 and the balance half allowable in A. Y. 2008-09

CIT vs. Rittal India Pvt Ltd.; 380 ITR 423 (Karn): 282 CTR 431 (Karn):

The assessee acquired and installed new plant and machinery in the F. Y. 2006-07 after 1st October 2006. The assessee therefore claimed additional depreciation of 10%, in the A. Y. 2007-08, being half of the 20% allowable u/s. 32(2)(iia) and the same was allowed. The balance half was claimed in the A. Y. 2008-09 which was disallowed by the Assessing Officer. The Tribunal allowed the assessee’s claim.

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

“i) The beneficial legislation should be given liberal interpretation so as to benefit the assessee. The intention of the legislature is absolutely clear that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to half being granted in one assessment year, if certain condition was not fulfilled. But that would not restrain the assesee from claiming the balance of the benefit in the subsequent assessment year.
ii) The Tribunal had rightly held that the additional depreciation allowed u/s. 32(1)(iia) is a onetime benefit to encourage industrialisation and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. Appeal is accordingly dismissed.”

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Hiralal Chunilal Jain vs. Income tax Officer ITAT Mumbai “H” bench ITA No. 4547, 2545 & 1275/Mum/2014 A. Ys. 2009-10 & 2010-11. Date of Order: 01.01.2016

Section 69C – Addition made only on the basis of bogus parties identified by the Sales tax department deleted.

Facts
The assessee, an individual, runs a proprietary business of trading in ferrous and non-ferrous metals. During the assessment proceedings, the AO found that the assessee had purchased goods worth Rs.7.21 lakh from Shiv Sagar Steel whose name was appearing in the list of bogus parties forwarded by the sales tax authorities and the name of the assessee was appearing as a beneficiary in the list. The AO directed the assessee to produce the party. However, the supplier was not produced by the assessee. Summons issued to the party could not be served on the given address. The AO held the purchase transaction as bogus and treated the entire purchase of Rs.7.21 lakh as unexplained expenditure u/s.69C.

Aggrieved by the order of the AO, the assessee appealed before the CIT(A) and submitted that the AO had relied upon the information supplied by the investigation wing of the Sales Tax Department (STD) but he had not supplied the copy of the statement of the party recorded by the STD. Further, the assessee was also not allowed to cross examine the party. According to the assessee, he had discharged his obligation by submitting details of purchases, sales and bank transactions. He had also produced stock register before the AO. There was no evidence that payments for the so called bogus purchases had come back to the assessee. All purchases and sales were recorded in the books of accounts, quantitative details were also maintained and the AO had also accepted the sales.

The CIT(A) noted that the STD had treated the suppliers of goods as suspicious dealer since during the investigation, the supplier had admitted that they had issued accommodation bills. Further, he also noted that the assessee was not able to produce the party. According to the CIT(A),it was quite possible that the assessee purchased the goods from the grey market and took accommodation bills from the said party. Therefore, he held that an addition of 20% of the purchase would be justified in order to fulfil the gap difference of Gross Profit (GP) for the alleged purchase as well to plug any leakage of revenue.

Before the Tribunal, in addition to what was submitted before the CIT(A), the assessee pointed out that the CIT(A) had ignored the vital fact that the Net Profit ratio was 1.7% and the GP ratio was about 7%. He also relied upon the decisions of the Mumbai Tribunal in the cases of Deputy Commissioner of Income Tax vs. Rajeev G. Kalathil (67 SOT 52) and Asstt. Commissioner of Income Tax vs. Tristar Jewellery Exports Private Limited (ITA 8292/Mum/2011 dated 31.07.2015) and the Bombay High Court in the case of CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. (372 ITR 619).

Held
The Tribunal noted that the AO had not rejected the sales made by the assessee and had made the addition only on the basis of the information received from the STD. The assessee was also maintaining the quantitative details and stock register. According to the Tribunal, the AO should have made an independent inquiry. He also did not follow the principles of natural justice before making the addition. It also noted that the CIT(A) had reduced the addition to 20%, but he had not given any justification, except stating that the same was done to plug the probable leakage of revenue. Considering the peculiar facts and circumstances of the case, the Tribunal reversed the order of the CIT(A) and allowed the appeal of the assessee.

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C.R. Developments Pvt. Ltd. vs. JCIT ITAT `C’ Bench, Mumbai Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 4277/Mum/2012 A. Y.: 2009-10. Dateof Order: 13th May, 2015. Counsel for assessee / revenue : S. M. Bandi / Asghar Zain

Sections 22, 28 – Notional income in respect of three unsold shops cannot be charged to tax under the head `Income from House Property’.

Facts
The assessee company, engaged in the business of construction and development, held 3 unsold shops as stock-in-trade. In the return of income, the assessee had not offered any notional income in respect of these shops on the ground that three shops held at the end of the year were its trading assets and therefore their annual value is not chargeable under the head `income from house property’ as profit on sale thereof shall be chargeable to tax under the head of income from business. The AO did not agree with the assessee’s contention and brought the notional rental income in assessee’s hands u/s.23.

Aggrieved, the assessee preferred an appeal to CIT(A) who restored the matter back to the file of the AO with the direction to make an enquiry as to what would be the possible rent that the property might fetch.

Aggrieved, the assessee preferred an appeal to the Tribunal where, on behalf of the assessee reliance was placed on the decision of the Mumbai Bench of ITAT in the case of M/s Perfect Scale Company Pvt. Ltd., [ITA Nos.3228 to 3234/Mum/2013, order dated 6-9-2013], wherein it was held that in respect of assets held as business, income from the same is not assessable u/s.23(1) of the Act whereas on behalf of the Revenue, reliance was placed on the order of Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180 (Delhi) in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property.

Held
The Tribunal noted that the Hon’ble Supreme Court in the case of M/s Chennai Properties & Investments Ltd. vs. CIT, reported in (2015) 56 taxmann.com 456 (SC), vide judgment dated 9-4-2015 has held that the action of the AO in charging rental income received by an assessee engaged in the activity of letting out properties under the head Income from House Property was not justified. The Hon’ble Supreme Court held that since the assessee company’s main object, is to acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as income from business.

On the very same analogy in the instant case, the assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year were shown as stock-in-trade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold were its stock-intrade and income arising on its sale is liable to be taxed as business income. The Tribunal held that it did not find any justification in the order of AO for estimating rental income from these vacant flats u/s.23 which is assessee’s stock in trade as at the end of the year. Accordingly, the Tribunal directed the AO to delete the addition made by estimating letting value of the flats u/s.23 of the Act.

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[2015] 173 TTJ 507 (Mum) Hasmukh N. Gala vs. ITO A. Y.: 2010-11. Date of Order: 19.8.2015

Section 54 – Conditions of section 54 stand complied when the assessee pays booking advance to a builder and the builder issues him a letter of allotment specifying the flat number and the specific details of the property. Deduction u/s. 54 cannot be denied on the ground that the new property was still under construction or that the legal title in the new residential house has not passed to the assessee within the specified period.

Facts
The assessee, an individual, was carrying on business of trading in glass. During the previous year relevant to the assessment year under consideration, the assessee had vide sale agreement dated 8th December, 2009 sold a residential house for a consideration of Rs. 1,02,55,000. Long term capital gain computed on sale of this residential house, amounting to Rs. 88,37,096, was claimed to be exempt u/s. 54 of the Act on the ground that the assessee had on 6th February, 2010 issued a cheque of Rs. 1 crore to a builder for purchase of Flat Nos. 1 and 2 in a building known as Ramniwas at Malad(E). The assessee produced a copy of receipt of payment made by him and also an allotment letter dated 15th October, 2010 from the builder.

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the construction of the new house was not completed even after two years from the date of transfer of old house. He held that giving of an advance could not be treated as a `purchase’ for the purposes of section 54 of the Act. The AO, denied the claim made u/s. 54 of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO on the ground that the assessee, though, has parted with money but has not acquired possession or domain over the new residential house.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that the legal title has not passed or transferred to the assessee within the specified period and that the new property was still under construction. However, it also noted that the allotment letter by the builder does mention the flat number and has other specific details of the property. It noted the observations of the Delhi High Court in the case of CIT vs. Kuldeep Singh (2014) 270 CTR 561 (Del.) where the Delhi High Court having noted the ratio of the decision of the Supreme Court in the case of Sanjeev Lal vs. CIT (2014) 269 CTR 1 (SC) and also having referred to the decisions of the Madhya Pradesh High Court in the case of Smt. Shashi Varma vs. CIT (1999) 152 CTR 227 (MP) and of the Calcutta High Court in the case of CIT vs. Smt. Bharati C. Kothari (2000) 244 ITR 106 (MP) opined that when substantial investment was made in the new property, it should be deemed that sufficient steps had been taken and it would satisfy the requirements of section 54 of the Act.

It observed that the parity of reasoning explained by the Delhi High Court squarely applied to the case being decided. It also noted that the co-ordinate Bench in the case of Shri Khemchand Fagwani vs. ITO (ITA No. 7876/Mum/2010, order dated 10th September, 2014), has allowed the claim of exemption under similar circumstances.

Following the precedents, the Tribunal allowed the claim made u/s. 54 of the Act.

The appeal filed by the assessee was allowed.

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2016-TIOL-54-ITAT-AHM Ishwarcharan Builders Pvt. Ltd. vs. DCIT – CPC TDS, Ghaziabad A. Ys.: 2013-14 and 2014-15. Date of Order: 23.12.2015

Sections 200A and 234E – Adjustment in respect of levy of fees u/s. 234E is beyond the scope of permissible adjustments contemplated u/s. 200A. In the absence of enabling provision, such levy could not be effected in the course of intimation u/s. 200A.

Facts
The assessee company received intimations issued u/s. 200A wherein while processing TDS statements, fee u/s. 234E was levied for assessment years 2013-14 and 2014-15.

Aggrieved by the levy of fees u/s. 234E in an intimation issued u/s. 200A, the assessee preferred an appeal to the CIT(A) who upheld the levy.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that the issue in all the appeals was squarely covered in favor of the assessee by the decision of ITAT Amritsar Bench in the case of Sibia Healthcare Private Ltd. vs. DCIT 2015-TIOL-798-ITATAMRITSAR vide order dated 9th June, 2015, wherein the Division bench interalia observed that post 1st June, 2015, in the course of processing of TDS statement and issuance of intimation u/s. 200A in respect thereof, an adjustment could also be made in respect of “fee, if any, shall be computed in accordance with the provisions of section 234E.”

The Tribunal further held that as the law stood, prior to 1st June, 2015, there was no enabling provision for raising a demand in respect of levy of fees u/s 234E. It held that section 200A, at the relevant point of time, permitted computation of amount recoverable from, or payable to, the tax deductor after making adjustment on account of “arithmetical errors” and “incorrect claims apparent from any information in the statement, after making adjustment for `interest, if any, computed on the basis of sums deductible as computed in the statement. No other adjustments in the amount refundable to, or recoverable from, the tax deductor, were permissible in accordance with the law as it existed at that point of time.

The Tribunal deleted the levy of late filing fees u/s. 234E, in all the eleven appeals, by way of impugned intimations issued.

The appeals filed by the assessee were allowed.

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[2015] 155 ITD 167/61 (Chandigarh) Harpreet Singh vs. ITO A.Y. 2010-11. Date of Order – 31st July, 2015

Section 271(1)(c), read with section 22, of the Income-tax Act, 1961- No penalty can be imposed in a case where assesse suo motu revises his return declaring additional income and has paid taxes thereon before any detection of concealment by revenue authorities.

FACTS
The assessee filed his return declaring certain rental income. Subsequently, the assessee suo moto revised its return wherein he included certain additional amount of rental income.

Since original return was not filed u/s. 139(1) within prescribed time, the Assessing Officer opined that return filed subsequently could not be treated as revised return. The Assessing officer thus completed assessment u/s. 143(3). He also passed a penalty order u/s. 271(1)(c) for concealment of particulars relating to rental income.

The Commissioner (Appeals) confirmed penalty order.

On second appeal:

HELD
The Tribunal observed that in the instant case the assessee had offered additional rental income and paid the taxes thereon before any detection of concealment by the revenue authorities. No notice or query was raised regarding the rental income offered by the assessee for taxation. Therefore, it cannot be said that the assessee either concealed the income or furnished the inaccurate particulars of income. In this case, the rental income inadvertently omitted in the original return was voluntarily offered for taxation during the course of assessment proceedings. The assessee submitted that during the course of assessment proceedings, the assessee realized its mistake and pointed out the same to the Assessing Officer.

There was no detection of concealed income by the revenue authorities. The assessee voluntarily offered the rental income for taxation and the same was accepted by the Assessing Officer in the assessment order passed u/s. 143(3) of the Act. Considering the entire facts and circumstances of the present case, it was held that no penalty u/s. 271(1)(c) can be validly levied. Therefore, the penalty levied by the Assessing Officer and confirmed by the Commissioner (Appeals) is cancelled.

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[2015] 155 ITD 140/61 taxmann.com 178 (Chandigarh) DCIT vs. Gulshan Verma A.Y. 2005-06. Date of Order : 14th July, 2015

Section 68 – Where assessee received certain unsecured loan from a non resident, in view of fact that the said amount was advanced through an account payee cheque from NRE account of lender, no addition can be made u/s. 68 in respect of the said loan.

FACTS
The asseessee had taken an unsecured loan from one party ‘S’ residing in USA. The amount was obtained from an NRE account maintained by the lender with ‘C’ bank.

According to the Assessing Officer, the assessee failed to submit any evidence, viz. a copy of bank account of the lender in the country of his residence from where the funds were transferred to his NRE account maintained with ‘C’ bank. The Assessee also failed to submit any evidence regarding the remittance into the NRE account.

In the absence of the above-mentioned documents, the Assessing Officer held that the creditworthiness of the lender was not established and added the loan amount to the total income of the assessee u/s. 68.

The Commissioner (Appeals) confirmed the above treatment.

On Second appeal:

HELD
The Tribunal observed that in order to discharge the onus u/s. 68, the assessee must prove the following ingredients:-

1. The identity of the creditor
2. The capacity of the creditor to advance the money.
3. The genuineness of the transaction

There was no dispute regarding the identity of the creditor. The assessee had submitted a certificate from the manager of ‘C’ bank stating that ‘S’ holder of NRE account had transferred Rs. 4,25,000/- through a cheque on the account of the assessee.

The assessee had also produced the bank statement of ‘C’ bank before the authorities to demonstrate that ‘S’ had transferred the said amount to him. The assessee had also produced confirmation letter in the form of an affidavit of ‘S’ duly attested by ‘T’, Notary Public State of Meryland wherein ‘S’ had stated that he is a resident of USA. He had also confirmed giving of interest free unsecured loan from ‘C’ bank by way of cheque. The lower authorities were not in question about the authenticity of the affidavit. The only doubt was that the lender had not disclosed his source of income. The lower authorities also verified the passport of the lender.

There is no dispute that ‘S’ was maintaining an NRE account which was opened with an initial deposit of $10,000, i.e., Rs. 4,48,829/-. The ‘C’ bank had issued a certificate to this effect. The Assessing Officer raised an objection that the assessee failed to file a copy of the bank account of the lender in the country of his residence. The assessee had also submitted a copy of ITR filed in USA by ‘S’ for the period 01.01.04 to 31.12.04, wherein the annual income of $22,201 had been declared. There is no dispute about the financial capacity of the lender as well.

Considering the entire facts and circumstances of the case and the income which the lender had reported in ITR, there was no reason to doubt the creditworthiness or the financial capacity of the lender and thus there can be no addition u/s. 68.

Therefore, the impugned addition was deleted.

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Search and seizure – Retention of seized articles – Section 132A – A. Y. 2012-13 – IT authorities requisitioning silver articles of assessee from railway police for purpose of investigation – Assessment order taking note of such seizure but no addition on account of seized articles – IT authorities to hand over seized articles to assessee

K. S. Jewellers Pvt. Ltd. vs. DIT; 379 ITR 526 (Guj):

The railway police seized silver ornaments from the authorised person of the assessee and registered a case u/s. 124 of the Bombay Police Act. The Railway police informed the Income-tax Department about seizure of the silver ornaments pursuant to which the Income-tax Department requisitioned the ornaments for the purpose of investigation under the provisions of the Income-tax Act, 1961. Assessment order took note of the seizure but no addition was made on that count. Assessee’s applications for release of the articles were ignored.

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

“i) The silver ornaments weighing 219.841 kgs. were requisitioned by the Income-tax Authorities in exercise of the powers of section 132A in the F. Y. 2011- 12. Thereafter the assessment was framed by the Assessing Officer of the assessee for the A. Y. 2012-13, whereby after taking note of such requisition made by the authorities, the return as filed by the assessee was accepted without making any addition on account of such seizure.

ii) Under the circumstances, without entering into the merits of the validity of the authorisation issued u/s. 132A and in view of the assessment order made in the case of the assessee, the Income-tax Authorities could no longer continue with the seizure of the ornaments and the seized ornaments were required to be returned to the assessee.

iii) The respondent authorities are directed to forthwith hand over the seized silver ornaments to the petitioner within a period of four weeks from today.”

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Penalty – Concealment – Section 271(1)(c) – A. Y. 2008-09 – Capital gains – Exemption – Whether assesee entitled to exemption u/s. 54 or section 54F or neither pending before High Court – Addition itself debatable – Penalty u/s. 271(1)(c) not justified

CIT vs. Dr. Harsha N. Biliangudy; 379 ITR 529 (Karn):

For the A. Y. 2008-09, the assessee’s claim for deduction u/s. 54/54F was pending before High Court for consideration. The Tribunal deleted the penalty imposed by the Assessing Officer u/s. 271(1)(c).

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

“i) The imposition of penalty u/s. 271(1)(c) was for concealment of material particulars of income by the assessee or furnishing inaccurate particulars of such income. It was not the case of the Revenue that the assessee had furnished details with regard to the income derived from the sale and purchase of the properties. The question as to whether the assessee was to be given the benefit u/s. 54 or section 54F or was not to be given the benefit, was yet to be finalized by the High Court, where the appeal against the assessment proceedings was still pending.

ii) The assessee had given full description of the property which was sold by him and of the property purchased by him. Merely because the assessee was not to be given the benefit u/s. 54 as the property sold by the assessee was not a residential property it could not be said that there was concealment of material information by the assessee because complete details of the property sold by the assessee were given by him in the returns filed by him.

iii) Where penalty was imposed in respect of any addition where the High Court has admitted the appeal on substantial question of law, then the sustainability of the addition itself becomes debatable, and in such circumstances penalty could not be levied u/s. 271(1)(c).”

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Exemption u/s. 10A – A. Y. 2000-01 – Relevance of date of notification of STPI – Assessee having been notified by STPI on 04/03/2000 is eligible for exemption u/s. 10A for entire A. Y. 2000-01 – AO was not justified in restricting the benefit for the period after 04/03/2000

CIT vs. Soffia Software Ltd.; 281 CTR 594 (Mad):

The assessee was notified by the STPI on 04/03/2000 as eligible for exemption u/s. 10A of the Income-tax Act, 1961. For the A. Y. 2000-01, the assessee claimed exemption u/s. 10A of the Act. The Assessing Officer restricted the exemption to the period after 04/03/2000/-. The Tribunal allowed the assessee’s claim.

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

“i) The CIT(A) as well as the assessing authority fell into error by holding that registration as an STPI is a requirement for the assessee to claim the benefit u/s. 10A. Section 10A applies if an industrial undertaking has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year.

ii) In this case, the date of STPI notification is 04/03/2000. Therefore the assessee has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year in the STPI unit and it will be entitled to deduction u/s. 10A in respect of profit attributed to export turnover. The Circular issued u/s. 10B cannot be made applicable to a case falling u/s. 10A.

iii) Furthermore, the circular which has been relied upon by the CIT(A) dated 06/01/2005, has no relevance to the A. Y. 2000-01. The assessee is eligible for exemption u/s. 10A for the entire A. Y. 2000-01.”

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Business expenditure – Disallowance u/s. 40(a)(ia) – A. Y. 2008-09 – Reimbursment of service charges is not taxable – Tax not deductible at source from such amount – Expenditure cannot be disallowed u/s 40(a)(ia) of the Act

CIT vs. DLF Commercial Project Corporation; 379 ITR 538 (Del):

For the A. Y. 2008-09, the Assessing Officer made an addition of Rs. 19,09,83,236/- u/s. 40(a)(ia), for non deduction of tax at source on reimbursement of expenditure paid to DLF though the latter entity had deducted tax at source on the payments made by it as a facilitator on behalf of the assessee. The Tribunal deleted the addition.

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

“It is undisputed that DLF deducted tax at source on payments made by it under various heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charges paid by it to DLF on reimbursement expenses. In such circumstances this Court holds that the entire amount paid by the assessee to DLF is entitled to deduction as expenditure.”

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Business expenditure – Disallowance u/s. 14A – Variable ‘A’ prescribed in the formula in Rule 8D(2)(ii) (to make disallowance in case of common interest expenditure) would exclude both interest attributable to tax exempt income as well as taxable income

Principal CIT vs. Bharti Overseas (P.) Ltd.; [2015] 64 taxmann.com 340 (Delhi):

Considering the scope of Rule 8D(2)(ii) for computing disallowance u/s. 14A of the Income-tax Act, 1961, the Delhi High Court held as under:

“i) The object behind section 14A (1) is to disallow only such expense which is relatable to tax exempt income and not expenditure in relation to any taxable income. This object behind section 14A has to be kept in view while examining Rule 8D (2) (ii). In any event a rule can neither go beyond or restrict the scope of the statutory provision to which it relates.

ii) Rule 8D (2) states that the expenditure in relation to income which is exempt shall be the aggregate of (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to “allocate” some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets. It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8D(2)(ii) is concerned with only ‘common interest expenditure’ i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income.”

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Suvaprasanna Bhatacharya vs. ACIT ITAT Bench “B” Kolkata Before N. V. Vasudevan, (J. M.) and Waseem Ahmed (A. M.) ITA No.1303/Kol /2010 A. Y. : 2006-07. Date of Order: 06-11-2015 Counsel for Assessee / Revenue: A.K. Tibrewal and Amit Agarwal / Sanjit Kr. Das

Section 271(1)(c) r.w 274 – For valid initiation of penalty proceedings it is essential that (i) Prima facie, the case may deserve the imposition of penalty should be discernible from the Order passed; and (ii) Notice must specify as to whether the Assessee was guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”.

Facts
The assessee is a professional artist having created many paintings. For AY 2006-07, the Assessee filed return of income declaring income of Rs.6.73 lakh. During the course of assessment proceeding, the AO found that the assessee had invested the sum of Rs. 68.79 lakh in units of mutual fund out of income from sale of paintings which was not disclosed in his return of income. The AO assessed the income of the assessee at Rs. 80.89 lakh and issued a show cause notice u/s.274. The assessee accepted the order of the AO and paid taxes due thereon. In his reply to Notice u/s. 274, the assessee submitted that the additional income assessed was out of the sale of art which was in the nature of personal effects and hence not a capital asset within the meaning of the definition of the said term u/s.2 (14) (ii). He explained that the paintings were kept for years over because of his aesthetic sense and also it gave him tremendous pleasure and pride of possession. Thus, the paintings were his “personal effects”. The assessee further explained that the sale of paintings was for the purpose of making investments in the units of mutual funds and to earn income from such investments for his livelihood. Therefore, it was contended by him that the incidence of sale cannot be construed as the adventure in the nature of trade. Thus, according to him, income earned out of the sales of paintings, which were nothing but the personal effects, was not taxable and the very basis of addition by the AO was not correct. It was pointed out that in the course of assessment proceedings, the facts were placed before the AO. However, to avoid litigation, the taxes were paid. It was contended that sine the assessment and penalty proceedings are two different proceedings, the Assessee is not precluded from urging the correct position in law during the penalty proceedings. The assessee thus submitted that imposition of penalty was unsustainable.

The above submissions did not find favour with the AO. The AO held that the assessee had deliberately tried to conceal his professional receipt by depositing it in the bank account not disclosed to the department. Such information was found out by the department. He had no option but to disclose it fully as the bank details were already with the department. The mistake was neither due to ignorance nor bona fide. The AO referred to the decision of the Supreme Court in the case of Dharmendra Textile Processors and others 306 ITR 277 and held that mens rea is not essential for attracting civil liabilities. Accordingly, he levied a penalty of Rs. 71.88 lakh u/s. 271(1)(c). On appeal by the Assessee, the CIT(A) confirmed the order of the AO.

Before the Tribunal, the assessee further submitted that the AO had not recorded his satisfaction in the order of assessment that the assessee is liable to be proceeded against u/s.271(1)(c). Further, the show cause notice issued u/s.274 did not specify as to whether the Assessee was guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”.

Held:
The Tribunal noted that the source of funds for making investments in units of mutual funds was the starting point of enquiry by the AO. It was not in dispute that the source of funds for making such investments was the sale of assessee’s own paintings. Thus, if the painting are considered as “personal effects” then they cannot be regarded as “capital assets” within the meaning of section 2(14)(ii). Consequently, the receipts on sale of paintings would not be chargeable to tax.

Referring to the meaning of the term “personal effects” as per section 2(14)(ii), it noted that by the Finance Act, 2007, the definition of the term “personal effects” was substituted w.e.f. the 1st day of April, 2008 to exclude from its meaning the items of amongst others, drawings and paintings. Thus, till 31st March, 2008, drawing and paintings were considered as “personal effects” and hence, not as capital assets till then.

The Tribunal further noted that the sale of paintings was not done by the assessee as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of possession. This aspect had not been disputed by the AO. Therefore, according to the tribunal, the paintings were his “personal effects”. Further, in the statement recorded u/s.131, the assessee had stated that the paintings were made as per creation desire of the assessee. Therefore, it accepted the contention of the assessee that the paintings were his “personal effects” and held that the penalty imposed qua the income from the sale of painting was not sustainable.

As regards the alternate contention of the assessee, the Tribunal agreed with the assessee that the order of assessment nowhere spells out or indicates that the AO was of the view that the assessee was guilty of either concealing particulars of income or furnishing inaccurate particulars of income. The offer to tax of income by the assessee has just been accepted. Relying on the Delhi High Court decision in the case of Ms. Madhushree Gupta vs. Union of India 317 ITR 107, the Tribunal observed that the position of law, both pre and post introduction of section 271(1B) is similar, inasmuch, the AO has to arrive at a prima facie satisfaction during the course of assessment proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings. Prima facie, the case may deserve the imposition of penalty should be discernible from the Order passed.

As regards the contention of the assessee that the show cause notice u/s.274 which is in a printed form does not strike out as to whether the penalty is sought to be levied for “furnishing inaccurate particulars of income” or “concealing particulars of such income”, the tribunal, relying on the Karnataka High Court decision in the case of CIT & Anr. vs. Manjunatha Cotton and Ginning Factory, 359 ITR 565 agreed that the Notice did not satisfy the requirement of law in as much as that it had not struck out the irrelevant part. Thus the show cause notice u/s. 274 was defective hence, the order imposing penalty was invalid and therefore, the penalty imposed was cancelled.

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ITO vs. Superline Construction Pvt. Ltd. ITAT “A” Bench, Mumbai Before Shailendra Kumar Yadav (J. M.) and Rajesh Kumar (A. M.) ITA No. 3645/Mum/2014 A. Y. : 2007-08. Date of Order: 30.11.2015 Counsel for Assessee / Revenue: A. Ramachandran / P. Danial

Section 68 – In case of receipt of share application money from the alleged bogus shareholders, addition can only be made in the hands of the alleged bogus shareholders and not in the income of the company recipient.

Facts
This appeal, along with six others, by the Revenue is directed against respective orders of the CIT(A) in respect of seven different assessees. Since the appeals involve common issues, the same were heard together and disposed of by the Tribunal, by a consolidated order.

The assessee was a builder and a developer. The assessment was completed u/s. 143(3) r.w.s. 147. During the year, the assessee had received share application money to the tune of Rs.85 lakh from eight companies. After completing the assessment, the Assessing Officer received detailed report from the investigation wing alongwith copies of statement recorded from the concerned officials of the company. Based thereon, the assessment was re-opened and an addition of Rs.40 lakh was made on account of bogus share application money received from three different corporate entities, u/s. 68. On appeal, the CIT(A) deleted the addition.

Before the Tribunal, the revenue contended that the CIT(A) erred in deleting the addition without appreciating the fact that addition was made based on specific information provided by Investigation Wing of Income Tax Department. According to it, the investors had issued cheques towards alleged share application money in return of cash. It was submitted that the assessee had failed to discharge the onus cast upon it to prove the credit entries of share application money as required under the statute.

In reply, the assessee contended that it had fully discharged the burden of proof by establishing the identity, creditworthiness and genuineness of the transactions. It produced banking instruments as the documentary evidence and further substantiated the details regarding the investors with the documentary evidences as extracted from the website of the Ministry of Corporate Affairs. Further, the assessee relied on the Supreme court decision in the case of CIT vs. Lovely Exports (Pvt) Ltd., reported in [2008] 216 CTR 195 (SC) and few other tribunal decisions.

Held
The Tribunal noted that on similar issue of receipt of share application money, the Supreme Court had in the case relied on by the assessee, held that such receipt cannot be regarded as the undisclosed income of the assessee company and in case the department has information about the alleged bogus shareholders, then the department should proceed to reopen the individual assessments of the investors. Further, taking into account the facts and circumstances of the case and other decisions of the tribunals on a similar issue, the Tribunal upheld the order of the CIT(A) and the appeal filed by the Revenue was dismissed.

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Transfer pricing – S. 92C r.w.s. 144C – Where petitioner is not a foreign company and Transfer Pricing Officer has not proposed any variation to return filed by petitioner, neither of two conditions of section 144C being satisfied, petitioner is not an ‘eligible assessee’ and, consequently, Assessing Officer is not competent to pass draft assessment order u/s. 144C(1)

Honda Cars India Ltd. vs. Dy. CIT; [2016] 67 taxmann. com 29 (Delhi)

The petitioner, an Indian company, was engaged in the business of manufacture and sale of passenger cars. It was a subsidiary company of Japanese company. It purchased raw material, spare parts, capital goods etc. from Honda Japan and cars were manufactured in India under the technical collaboration agreements and paid royalty. On reference, the TPO passed an order u/s. 92CA(3), but no variation was proposed to the returned income of the petitioner. However, the Assessing Officer passed the impugned draft assessment order u/s. 144C and made disallowance u/s. 40(a)(i) in respect of payments made by the petitioner to non-resident associated enterprise for non-deduction of TDS u/s. 195.

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

“i) A reading of section 144C(1) shows that the Assessing Officer, in the first instance, is to forward a draft of the proposed order of assessment to the ‘eligible assessee’, if he proposes to make any variation in the income or loss return which is prejudicial to the interest of such assessee. The draft assessment order is to be forwarded to an ‘eligible assessee’ which means that for the section to apply a person has to be an ‘eligible assessee’.

ii) Section 144C(15)(b) defines an ‘eligible assessee’ to mean (i) any person in whose case the variation referred to in s/s. (1) arises as a consequence of the order of the Transfer Pricing Officer passed u/s. 92CA(3); and (ii) any foreign company.

iii) In section 144C(15)(b), the term ‘eligible assessee’ is followed by an expression ‘means’ only and there are two categories referred therein. The use of the word ‘means’ indicates that the definition of ‘eligible assessee’ for the purposes of section 144C(15)(b) is a hard and fast definition and can only be applicable in the above two categories.

iv) First of all, the petitioner is not a foreign company and the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner. The Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petitioner. Neither of the two conditions being satisfied in the case of the petitioner, the petitioner for the purposes of section 144C(15) (b) is not an eligible assessee. Since the petitioner is not an eligible assessee in terms of section 144C(15) (b), no draft order can be passed in the case of the petitioner u/s. 144C(1).

v) In view of the above, it is clear that the petitioner, not being an ‘eligible assessee’ in terms of section 144C(15)(b), the Assessing Officer was not competent to pass the draft assessment order u/s. 144C(1). The draft assessment order dated 31-3-2015 is accordingly quashed.”

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TDS – Consequence of failure to deduct or pay (Time Limit for passing order) – Section 201(3) – A. Ys. 2008-09 and 2009-10 – Section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(1) could be passed for which limitation had already expired prior to amended section 201(3) as amended by the Finance Act No. 2 of 2014 came into force:

Tata Teleservices vs. UOI; [2016] 66 taxmann.com 157 (Guj)

The assessee was engaged in the business of providing telecommunication services and selling service products across the country. The assessee was served notices/summons u/s. 201(1)/(1A) in December, 2014 in connection with TDS proceedings concerning assessment years 2008-09 and 2009-10. The assessee contended that section 201(3) inserted vide Finance (No. 2) Act, 2009 with effect from 1-4-2010 provided period of limitation of two years from the end of financial year in which TDS statement is filed and four years from the end of financial year where the statement had not been filed. Since the assessee regularly filed TDS statements, period for passing order u/s. 201(3) for relevant assessment years expired on 31-3-2011/2012. Hence the assessee submitted that the notices issued in December, 2014 were time-barred. However, the Assessing Officer rejected the arguments of the assessee and held that the notices were valid and within the time-period relying upon the amended section 201(3) vide the Finance Act, 2014 which prescribed a common period of limitation i.e. seven years from the end of financial year in which payment was made.

The assessee filed a writ petition before the Gujarat High Court and contended that amendment to section 201(3) by Finance Act, 2014 was expressly made prospective with effect from 1-10-2014 and therefore the impugned notices/summons for financial years 2007-08 and 2008- 09 were erroneously issued by revenue. The assessee submitted that the proceedings had already become time barred in view of the provisions of section 201(3) prior to amendment in section 201(3) by the Finance Act 2014.

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

“i) It is required to be noted that in the instant cases, limitation for passing orders as per the provisions prevailing at the relevant time and even as provided u/s. 201(3)(i) as amended by Finance Act of 2012 had already expired on 31-3-2011 and 31-3-2012, respectively.

ii) Considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable with effect from 1-10- 2014 and even considering the fact that proceedings for financial years 2007-08 and 2008-09 had become time barred and/or for the aforesaid financial years, limitation u/s. 201(3)(i) had already expired on 31-3- 2011 and 31-3-2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee.

iii) Considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) as was amended by Finance Act, 2012 with retrospective effect from 1-4-2010, it is to be held that section 201(3), as amended by Finance Act No. 2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(1) can be passed for which limitation had already expired prior to amended section 201(3) as amended by the Finance Act No. 2 of 2014.

iv) Under the circumstances, the impugned notices/ summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.”

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Reassessment in case of dead person – Sections 147, 148 and 159 – A. Y. 2008-09 – Where department intended to proceed u/s. 147 against assessee when he was already dead, it could have been done so by issuing a notice to legal representative of assessee within period of limitation for issuance of notice

Vipin Walia vs. ITO; [2016] 67 taxmann.com 56 (Delhi)

A notice u/s. 148 dated 27th March 2015 was addressed by the ITO to one Mr. Inder Pal Singh Walia, seeking to reopen the assessment for A. Y. 2008-09. The notice was returned unserved to the Department with the postal authorities endorsing on it the remarks “Addressee expired”. Mr. Inder Pal Singh Walia had expired on 14th March 2015. In other words, the notice dated 27th March 2015 had been addressed to a dead person. The ITO then wrote letter to the petitioner the legal representative on 15/06/2015 proposing to continue the reassessment proceedings. On 6th July 2015, the Petitioner wrote to the ITO pointing out that his father Shri Inder Pal Singh Walia had expired on 14th March 2015 and that the proceedings initiated u/s. 148 of the Act were barred by limitation. Additionally, it was stated that he was unaware of the financial affairs or transactions carried on by his late father. On 18th July 2015, the ITO took the stand that since the intimation of the death of Shri Inder Pal Singh Walia on 14th March 2015 was not received by her office “therefore the notice was not issued on a dead person”.

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

“If department intended to proceed u/s. 147, it could have been done so prior to period of limitation by issuing a notice to legal representative of deceased assessee and beyond that date it could not have proceeded in matter even by issuing notice to Legal Representatives of assessee. Therefore, subsequent proceedings u/s. 147 against petitioner were wholly misconceived and were to be quashed.”

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Loss – Set-off – Section 74 r.w.s. 50 – A. Y. 2005- 06 – Where deemed short-term capital gain arose on account of sale of depreciable assets that was held for a period to which long-term capital gain would apply, said gain would be set-off against brought forward long-term capital losses and unabsorbed depreciation

CIT vs. Parrys (Eastern) (P.) Ltd.; [2016] 66 taxmann.com 330 (Bom)

The respondent-assessee had for the subject assessment year inter alia disclosed an amount of Rs.7.12 crore as deemed short-term capital gain u/s. 50. 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 held that in view of section 74, such set-off on short-term capital gain against the longterm capital gain was not permitted. Thus, disallowed the set-off of brought forward long-term capital losses and unabsorbed depreciation against the deemed shortterm capital gain of Rs.7.12 crore. 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 deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. 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. Thus, the respondentassessee was entitled to claim set-off as the amount of Rs. 7.12 crores 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, the deemed short-term capital gain continues to be long-term capital gain.

ii) Moreover, it appears that the revenue has accepted the decision of the Tribunal in Komac Investments & Finance (P.) Ltd. vs. ITO [2011] 132 ITD 290/13 taxmann.com. 185 (Mum.) as no appeal was apparently being filed from that order.”

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Charitable or religious trust – Sections 11 and 32 – A. Y. 2009-10 – Section 11(6) inserted by the Finance (No. 2) Act, 2014 denying depreciation while computing income of charitable trust, is prospective in nature and operates with effect from 1-4-2015 – For the relevant year the depreciation is allowable

DIT (Exemp) vs. Al- Ameen Charitable Fund Trust; [2016] 67 taxmann.com 160 (Karn);

The assessee was a charitable institution registered u/s. 12AA. In the course of assessment, the Assessing Officer denied exemption u/s. 11, read with section 10(23C) and also made an addition of income on account of disallowance of depreciation. The Commissioner (Appeals) as well as the Tribunal allowed assessee’s claim for depreciation.

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

“i) It is to be noticed that while in the year of acquiring the capital asset, what is allowed as exemption is the income out of which such acquisition of asset is made and when depreciation deduction is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital asset incurred if, not allowed then there is no way to preserve the corpus of the trust for deriving its income. As such, the arguments advanced by the revenue apprehending double deduction is totally misconceived.

ii) Section 11(6) was inserted with effect from 1-4-2015 by Finance Act No. 2/2014. The plain language of the amendment establishes the intent of the legislature in denying the depreciation deduction in computing the income of charitable trust is to be effective from 1-4- 2015. This view is further supported by the Notes on Clauses in Finance [No. 2] Bill 2014, memo explaining provisions and circulars issued by the Central Board of Direct Taxes in this regard. “The said amendment shall take effect from 1-4-2015 and will accordingly apply in relation to the assessment year 2015-16 and subsequent assessment years”.

iii) In view of above, it is held that the Tribunal is correct in holding that depreciation is allowable u/s. 11 and there is no double claim of capital expenditure as held by the Assessing Officer.”

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Capital gains – Section 45(4) – A. Y. 1991-92 – Where natural partners of a firm transferred their rights in firm to artificial partner, being a company for its equity shares, such transfer would not amount to distribution or transfer of capital assets chargeable to capital gain

Pipelines India vs. ACIT; [2016] 67 taxmann.com 112 (Mad)

The partners of assessee-firm, constituted a private limited company. The company was admitted as partner in the assessee-firm. Later on, the natural partners executed a release deed giving up all their rights in assesseefirm, in favour of the company. As a consequence, the company became absolute owner of the assessee-firm. The natural partners were allotted shares in the company for relinquishing their rights in the assessee-firm. The Assessing Officer held that there was a transfer of assets by way of distribution of capital assets on dissolution of the assessee-firm. He accordingly computed capital gain and made a demand. The Tribunal upheld order of the Assessing Officer holding that it was a dissolution of the firm and not conversion of the firm into a company since the relationship inter se between the partners had come to an end, the moment they released their shares in favour of the company.

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

“i) F or attracting section 45(4), the following conditions are to be satisfied:

(a) profits and gains should arise;
(b) from the transfer of a capital asset;
(c) by way of distribution of capital assets;
(d) on the dissolution of a firm or other association of persons or body of individuals not being a company or a co-operative society and
(e) or otherwise.

ii) Unless these conditions are satisfied, section 45(4) would not get attracted. Every distribution of capital assets may not lead to the attraction of section 45(4) unless it happens on the dissolution of a firm or other entity. Similarly, every distribution of capital assets on the dissolution of a firm may not attract section 45(4) unless it was a case of transfer of a capital asset by way of such distribution.

iii) The expression ‘transfer’ is defined in section 2(47) to mean several things. A sale, exchange or relinquishment of the asset or the extinguishment of any rights therein are all covered by the expression ‘transfer’.

iv) In the case on hand, the partners have taken equity shares in the private limited company that was inducted as the partner. Therefore, whatever rights that they had in the capital assets of the firm by way of being its partners, continue to exist in the form of equity shares that they held in the private limited company. In other words, one form of ownership that they had as partners of the partnership firm, got converted into another form. Hence, this is not a case where there was either a transfer of a capital asset or the distribution of a capital asset. This aspect has been completely lost sight of by all the authorities.

v) Therefore, the questions of law are answered in favour of the assessee/appellant. The tax case appeal is allowed.”

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Capital or revenue receipt – Section 17(3)(iii) – A. Y. 2008-09 – Amount received by way of compensation against employment contract as goodwill and one time settlement of proposed employment – Capital receipt and not “profit in lieu of salary” – Assessee entitled to refund of tax deducted at source

CIT vs. Pritam Das Narang; 381 ITR 416 (Del):

Under an employment agreement with a company ACEE, the assessee was to be employed as the chief executive officer of the company from July 1, 2007. The company later informed the assessee that there had been a sudden change of business plan and it would not be able to take him on board as promised under the employment contract. The assessee proposed that he be paid compensation upon which the company made a payment of Rs. 1,95,00,000/- to the assessee as “a one time payment for non-commencement of employment as proposed”. The company deducted tax of Rs. 22,09,350/- on this payment and paid him a sum of Rs. 1,70,90,650/-. The assessee did not offer this sum to tax claiming it to be capital receipt. The Assessing Officer assessed the sum as salary u/s. 17(3)(iii). The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i) Section 17(3)(iii)(A) presupposes the existence of an employment, i.e., a relationship of employee and employer between the assessee and the person who makes the payment of “any amount” in terms of s. 17(3)(iii) of the Act. Therefore, the words in section 17(3)(iii) cannot be read disjunctively to overlook the essential facet of the provision, the existence of “employment” i.e. a relationship of employer and employee between the person who makes the payment of the amount and the assessee.

ii) It was a case where there was no commencement of employment and that the offer by the company to the assessee was withdrawn even prior to the commencement of such employment. The amount received by the assessee was a capital receipt and could not be taxed as “profit in lieu of salary”.

iii) The assessee was entitled to the refund of the tax deducted at source on Rs. 1,95,00,000/-.”

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Business expenditure – Interest on borrowed funds – Section 36(1)(iii) – A. Y. 2005-06 – Assessee advancing money to its sister concern owning 89% of share capital free of interest – Holding company investing money for purpose of business in its subsidiary company amounts to expense on account of commercial expediency – Assessee entitled to deduction u/s. 36(1)(iii)

Bright Enterprises Pvt. Ltd. vs. CIT; 381 ITR 107 (P&H):

In the A. Y. 2005-06, the assesee had advanced moneys to its sister concern of which the assessee was owning 89% of equity capital. The Assessing Officer disallowed the interest paid by the assessee on the loans taken from banks observing that if the assessee did not advance money to its sister concern without charging interest, it would be left with sufficient funds to return the bank loan and the assessee would not have to pay interest to the bank. The Assessing Officer further held that the advance made to the assessee’s sister concern was not for business purposes, since the assessee had no business dealings with the sister concern. The Tribunal upheld the disallowance on the ground that the assessee failed to establish that the money advanced by the assessee to the sister concern was used as a measure of commercial expediency.

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

“i) Whether the amount was debited to the account of the sister concern in respect of the payment made or the amount was actually paid to the sister concern and used by it for the purpose of business, was immaterial. Either way, the amount was used for the business of the sister concern. It was not even suggested that the advance was used by the sister concern for the purpose other than for the purpose of its business.

ii) In the memorandum of appeal, the assessee expressly stated that it had advanced the amount to its sister concern as a measure of commercial expediency for the purpose of business. This assertion was never denied. The assessee owned 89% of the equity capital of the sister concern. When a holding company invested money for the purpose of the business of its subsidiary, it must necessarily be held to be an expense on account of commercial expediency. A financial benefit of any nature derived by the subsidiary on account of the amount advanced to it by the holding company would not merely indirectly but directly benefit its holding company.

iii) There would be direct benefit on account of the advance made by the assessee to its sister company, if it improved the financial health of the sister company and made it a viable enterprise. But it was not necessary that the advance results in a positive tangible benefit. Thus the assesee was entitled to the deduction u/s. 36(1)(iii) of the Act.”

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Business expenditure – TDS – Disallowance u/s. 40(a)(i), (ia) – A. Y. 2008-09 – Payment made for purchase of software as product and for resale in Indian market – Not royalty – Assessee not liable to deduct tax at source – Payment not to be disallowed

Prin. CIT vs. M. Tech India P. Ltd.; 381 ITR 31 (Del):

For the A. Y. 2008-09, The Assessing Officer disallowed payment made in respect of software without deduction of tax at source u/s. 40(a)(i) and (ia), holding that the payments were in the nature of royalty. The Commissioner (Appeals) accepted the assessee’s contention that it was a value added reseller and the payments made by it for the purchase of software were not royalty but on account of purchases and that the assessee was not obliged to deduct tax at source on such payments. The addition/ disallowance was deleted. The Tribunal concurred with the decision of the CIT(A).

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

“i) The agreement indicated that the assessee was appointed for the purposes of reselling the software and payments made were on account of purchases made by the assessee. Payments made by a reseller for the purchase of software for sale in the Indian market could not be considered royalty.

ii) It was not disputed that in the preceding year, the Assessing Officer had accepted the transaction to be of purchase of software. The assessee was not liable to deduct tax at source. Deletion of addition was proper.”

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Appellate Tribunal – Additional ground – Admissibility – Section 143(2) and 147 – A. Ys. 2005-06 to 2008-09 – The requirement of issuance of the notice u/s. 143(2) is a jurisdictional one – It does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147 is concerned – There being no fresh evidence or disputed facts sought to be brought on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise the addi

Prin. CIT vs. Silver Line; 283 CTR 148 (Del):

In an appeal before the Tribunal filed by the Assessee, the assessee raised the additional ground for the first time that since the requisite notice u/s. 143(2) was not issued before completing assessment u/s. 147 the assessment u/s. 147 has to be held to be invalid. The Tribunal allowed the ground and decided in favour of the assessee.

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

“i) The legal position appears to be fairly well settled that section 292BB talks of the drawing of the presumption of service of notice on an assessee and is basically a rule of evidence. The failure of the Assessing Officer, in reassessment proceedings, to issue notice u/s. 143(2), prior to finalising the reassessment order, cannot be condoned by referring to section 292BB. Consequently the Court does not find merit in the objection of the Revenue that the assessee was precluded from raising the point concerning the nonissuance of notice u/s. 143(2) in the present case in view of the provisions of section 292BB.

ii) As regards the objection of the Revenue to the Tribunal permitting the assessee to raise the point concerning the non-issuance of notice u/s. 143(2) for the first time in the appeal before the Tribunal, the Court is of the considered view that in view of the settled legal position that the requirement of issuance of such notice u/s. 143(2) is a jurisdictional one, it does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147/148 is concerned. It raises a question of law as far as present cases are concerned since it is not in dispute that prior to finalisation of the reassessment orders, notice u/s. 143(2) was not issued by the Assessing Officer to the assessee. With there being no fresh evidence or disputed facts sought to be on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise such a point before it.”

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DCIT vs. Mahanagar Gas Ltd. ITAT Mumbai `B’ Bench Before R. C. Sharma (AM) and Mahavir Singh (JM) ITA No. 1945/Mum/2013 A.Y.: 2009-10. Date of Order: 15th April, 2016 Counsel for revenue / assessee: Sanjiv Jain / A. V. Sonde & P. P. Jayaraman

Sections 40(a)(ia), 192 – Amounts paid by way of reimbursement of salary of employees, working with the assessee under a secondment agreement are not subject to TDS in assessee’s hands.

Facts
In the course of assessment proceedings, the Assessing Officer (AO) noticed from Schedule M forming part of P & L Account that the assessee had debited a sum of Rs. 193.46 lakh on account of secondment charges under the head `personnel cost’ but TDS had not been deducted on the same. He disallowed this sum u/s. 40(a)(ia) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who, relying on the decision of the co-ordinate bench in the case of IDS Software Solutions (India) Pvt. Ltd. 122 TTJ 410 (Bang.) and also the decision of the Bombay High Court in the case of CIT vs. Kotak Securities Ltd. (ITA No. 3111 of 2009) decided the appeal in favour of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
Upon going through the joint venture agreement entered into by the assessee with M/s GAIL and British Gas in respect of secondment charges paid by the assessee, it was observed that there was no mark up in payments made by them. Secondment agreement was entered into because the IPR rights were to remain with British Gas. The assessee also filed a letter from British Gas which clearly stated that all the taxes due in India of the employees seconded to the assessee have been deducted from salary paid to secondees and paid to the Government of India

The Tribunal observed that the issue is covered by the decision of ITAT Bangalore Bench in the case of IDS Software Solutions (India) (P.) Ltd. vs. ITO (supra). Following the ratio of the said decision, the Tribunal dismissed the appeal filed by the revenue.

The appeal filed by the Revenue was dismissed.

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Gurpreet Kaur vs. ITO ITAT Amritsar Bench (SMC) Before A. D. Jain (JM) ITA No. 87/Asr/2016 A.Y.: 2011-12. Date of Order: 24th March, 2016 Counsel for assessee / revenue : J. S. Bhasin / Tarsem Lal

Section 143(3), CBDT Instruction dated 8.9.2010 – As per CBDT instruction dated 8.9.2010, if a case is selected for scrutiny on the basis of AIR information then the scope of scrutiny is to be limited to verification of the said AIR information. AO is not entitled to widen the scope of scrutiny without approval of the CIT. Order passed by the AO in violation of the specific CBDT instruction is not legally sustainable.

Facts
The assessee filed his return of income on 17.10.2011. The Assessing Officer (AO) issued a notice dated 21.9.2012 seeking information in connection with return of income submitted by the assessee. This notice was marked “AIR Only”. Thereafter, the AO issued a notice, dated 15.7.2013, u/s. 142(1) of the Act, asking the assessee to produce accounts/or documents and information as per questionnaire to the said notice. The questionnaire called for details on various issues apart from the information of cash deposits made by the assessee in his savings bank account. The assessee, in his reply, stated that the notice was seeking information with evidence on various issues not covered by AIR information, though the first notice was marked “AIR Only” and that in accordance with instruction dated 8.9.2010 issued by CBDT scrutiny of cases selected on the basis of information received through the AIR returns would be limited only to aspects of information received through AIR.

In response to the query regarding the source of alleged cash deposit of Rs. 25 lakh in the assessee’s savings bank account with OBC, the assessee stated that she sold her residential house for Rs.32.25 lakh of which Rs. 25 lakh were received by cash which cash was deposited by her into her savings bank account. To substantiate her contention, copy of the sale deed was filed.

The AO noticed that the assessee had received a sum of Rs. 3,00,000 from Smt. Balbir Kaur under agreement dated 15.3.2009 entered into by the assessee with Smt. Balbir Kaur for sale of assessee’s property. Copy of the agreement was filed. He called upon the assessee to produce Smt. Balbir Kaur for his examination. Since the assessee had subsequently on 7.5.2010 sold this property to a different person, but had not refunded the amount received from Balbir Kaur to her, the AO added this sum of Rs. 3,00,000 as income of the assessee on the ground that it was forfeited by the assessee. He also denied exemption claimed by the assessee under section 54 of the Act.

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

Aggrieved, by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that in the present case, the question is, whether while computing capital gain and denying benefit of section 54 to the assessee, the AO has contravened CBDT’s Instruction no. F.No. 225/26/2006- ITA –II(Pt.) dated 8.9.2010 thereby rendering the assessment order invalid. It was observed that the Delhi Bench of ITAT has in the case of Crystal Phosphates Ltd. vs. ACIT 34 CCH 136 (Del. Trib.) held that once CBDT has issued instructions, the same have to be followed in letter and spirit by the AO. It also noted that the Calcutta High Court has in the case of Amal Kumar Ghosh vs. Addl. CIT 361 ITR 458 (Cal.), held that when the department has set down a standard for itself, the department is bound by that standard and it cannot act with discrimination. It also noted that the operative word in section 119(1) is `shall’. It observed that in the present case, the assessee’s case was picked up for scrutiny on the basis of AIR information and the notice was stamped “AIR Only” in compliance with para 3 of the CBDT instruction dated 8.9.2010. The AIR information in the present case was regarding cash deposit of Rs. 25 lakh by assessee in her savings bank account with OBC. The assessee explained the same as sale proceeds of her residential house. This assertion of the assessee was supported by a copy of the sale deed. As per CBDT instruction, nothing further was to be gone into by the AO since the information received through AIR was the cash deposits. The act of the AO of asking the assessee to produce Smt. Balbir Kaur for examination to ascertain whether the agreement was finalised or cancelled was not covered by AIR information and therefore, was not within the purview of the AO. This act of the AO amounted to widening the scope of scrutiny, which as per para 2 of the CBDT instruction, could have been done with the approval of the administrative Commissioner. Since this approval was not taken, the Tribunal held that the action of the AO was violative of the CBDT instruction and therefore the order passed by the AO in violation of specific CBDT instruction was not legally sustainable.

The Tribunal allowed the appeal filed by the assessee.

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[2015] 154 ITD 768 (Mumbai) ITO vs. Structmast Relator (Mumbai) (P.) Ltd. A.Y.: 2009-10 Date of Order: 25th March, 2015.

Section 24(b) of the Income-tax Act, 1961 – The interest bearing security deposits partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.

FACTS
During the year under consideration, the assessee, who was engaged in the business of builders and developers, had taken an interest-free loan of Rs. 11 crore from ‘R’ for a short period to purchase an immovable property which was then let out to various tenants. The assessee received deposits from them whereon it had to pay interest at the rate of 6% p.a. These deposits were utilised for the repayment of loan taken from the ‘R’. The assessee claimed deduction of interest u/s. 24(b).

The A.O. disallowed the deduction u/s. 24(b) on the grounds that interest should be payable on capital borrowed or the capital borrowed must be for the purpose of repayment of old loan. He held that the security deposits cannot be termed as capital borrowed for the purpose of repayment of old loan.

CIT(A) holding in favour of assessee stated that such deposits were in fact a kind of loan only, as they bore interest and were utilised for the purpose of repayment of original loan taken for the purchase of house property.

On Revenue’s Appeal-

HELD
It is an undisputed fact that interest at 6% is payable on these refundable deposits under consideration which were taken to repay the original loan. The controversy is whether these deposits can be considered as borrowed money and accordingly whether interest on the same should be allowed u/s 24(b) to the assessee or not.

The word ‘borrow’ as defined in Law Lexicon (2nd edition) means to take or receiving from another person as a loan or on trust money or other article of value with the intention of returning or giving an equivalent for the same. A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and are to be refunded, then a debt is created on the assessee which it is liable to be discharged in future.

If the deposits had been security deposit simplicitor to cover the damage of the property or lapses on part of the tenant either for non-payment of rent or other charges, then such a deposit cannot be equated with the borrowed money, because then there is no debt on the assessee. However in the given case, it is clear that the intention of taking the deposit is not so.

It was held in favour of the assessee that the moment the security put is accepted on interest, it partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.

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[2015] 154 ITD 803 (Chennai) DCIT vs. Ganapathy Media (P.) Ltd. A.Y.: 2009-10 Date of Order: 19th June 2015

Section 194J of the Income-tax Act, 1961 – The transaction of
acquiring the right to telecast a cinematographic film through satellite
for a period of 99 years is in the nature of purchase of
cinematographic film and not fees paid for technical services and
therefore is not liable to TDS.

FACTS
The assessee
company was in the business of buying and selling rights of the feature
films as a trader for consideration. During the year under
consideration, it was granted rights to telecast films through satellite
for a period of 99 years. The transaction was observed by the AO to be
in the nature of fees paid for technical services and therefore he
disallowed the payment u/s. 40(a)(ia) on the grounds that no TDS u/s.
194J was deducted on the same. The CIT(A) held the transaction to be in
the nature of purchase of cinematographic film by the assessee and
therefore deleted the disallowance made by the AO.

On revenue’s appeal –

HELD
The
issue before the Tribunal was whether the right to telecast the
cinematographic film through satellite is a mere assignment of right or
it is a purchase of the feature film.

The assessee claimed that
it amounted to purchase of films since the satellite right was given to
the assessee for 99 years. However, the Revenue claimed that it is only
an assignment, therefore, the assessee had to deduct tax u/s. 194J of
the Act.

The Tribunal relied on the decision of the Madras High
Court in K. Bhagyalakshmi vs. Dy. CIT [2014] 221 Taxman 225 wherein it
was held the copyright subsists only for a period of 60 years.
Therefore, the right given to the assessee beyond the period of 60 years
has to be treated as sale of the right for cinematographic film. The
order of CIT(A) was upheld and the issue was decided in favour of the
assessee.

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Appeal to High Court – Finding of fact arrived at by the Tribunal cannot be set aside without a specific question regarding a perverse finding of fact having been raised before the High Court. Business Expenditure – Legal expenses incurred after the take over of a partnership firm is allowable as a deduction u/s. 37. Depreciation – Plant includes intellectual property rights.

Mangalore Ganesh Beedi Works v. CIT [2015] 378 ITR 640 (SC)

In 1939, the late Sri S. Raghuram Prabhu started the business of manufacturing beedis. He was later joined the business by Sri Madhav Shenoy as a partner and thus M/s. Mangalore Ganesh Beedi Works (for short “MGBW”) came into existence with effect from February 28, 1940.

The partnership firm was constituted from time to time and its last constitution and partnership deed contained clause 16 relating to the manner in which the affairs of the partnership firm were to be wound up after its dissolution. Clause 16 of the partnership deed reads as follows:

“16. If the partnership is dissolved, the going concern carried on under the name of the firm Mangalore Ganesh Beedi Works and all the trade marks used in course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefore as a single group at a sale to be then held as among the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise and him/her name or their names of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners.”

Due to differences between the partners of MGBW, the firm was dissolved on or about December 6, 1987, when the two partners of the firm applied for its winding up by filing Company Petition No.1 of 1988 in the High Court. While entertaining the Company Petition the High Court appointed an official liquidator and eventually, after hearing all the concerned parties, a winding up order was passed on June 14, 1991.

In its order passed on June 14, 1991, the High Court held that the firm is dissolved with effect from December 6, 1987, and directed the sale of its assets as a going concern to the highest bidder amongst the partners.

Pursuant to the order passed by the High Court on June 14, 1991, an auction was conducted in which three of the erstwhile partners forming an association of persons (hereinafter referred to as “AOP-3”) emerged as the highest bidders and their bid of Rs.92 crores for the assets of MGBW was accepted by the official liquidator on or about November 17, 1994. With effect from November 18, 1994, the business of the firm passed on into the hands of AOP-3 but the tangible assets were actually handed over by the official liquidator to AOP-3 on or about January 7, 1995.

MGBW (hereinafter referred to as “the assessee”) filed its return for the assessment year 1995-96 relating to period November 18, 1994, to March 31, 1995, and, subsequently, filed a revised return. Broadly, the assessee claimed a deduction of Rs.12,24,700 as a revenue expenditure permissible u/s. 37 of the Incometax Act, 1961 (hereinafter referred to as “the Act”) towards legal expenses incurred. The assessee also claimed deduction u/ss.35A and section 35AB of the Act towards acquisition of intellectual property rights such as rights over the trade mark, copyright and technical know-how. In the alternative, the assessee claimed depreciation on capitalizing the value of the intellectual property rights by treating them as plant.

The Assessing Officer passed an order on March 30, 1998, rejecting the claim of the assessee under all the three sections mentioned above. Feeling aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who passed an order on October 15, 1998. The appeal was allowed in part inasmuch as it was held that the assessee was entitled to a deduction towards legal expenses. However, the claim of the assessee regarding deduction or depreciation on the intellectual property rights was rejected by the Commissioner of Income-tax(Appeals).

As a result of the appellate order, the Revenue was aggrieved by the deduction granted to the assessee in respect of legal expenses and so it preferred an appeal before the Tribunal. The assessee was aggrieved by the rejection of its claim in respect of the intellectual property rights and also filed an appeal before the Tribunal.

By an order dated October 19, 2000, the Tribunal allowed the appeal of the assessee while rejecting the appeal of the Revenue.

The High Court set aside the findings of the Income-tax Appellate Tribunal (for short “the Tribunal”) and restored the order of the Assessing Officer.

The Supreme Court with regards to the claim of deduction of Rs.12,24,700/- as revenue expenditure held that there was a clear finding of fact by the Tribunal that the legal expenses incurred by the assessee were for protecting its business and that the expenses were incurred after November 18, 1994. According to the Supreme Court there was no reason to reverse this finding of fact particularly since nothing had been shown to them to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court.

The Supreme Court therefore set aside the conclusion arrived at by the High Court on this question and restored the view of the Tribunal.

In so far as the question of granting depreciation on the value of trade marks, copy rights and know how was concerned, the Supreme Court noted that the fundamental basis on which these questions were decided against the assessee and in favour of the Revenue was the finding of the High Court that what was sold by way of auction to the highest bidder was the goodwill of the partnership firm and not the trade marks, copyrights and technical know-how.

According to learned counsel for the Revenue, MGBW was already the owner of the trade marks, copyrights and technical know-how and essentially the rights in the intellectual property might be included in goodwill, but these were not auctioned off but were relinquished in favour of AOP-3.

The Supreme Court observed that the trade marks were given a value since in the beedi industry the trade mark and brand name have a value and the assessee’s product under trade mark “501” had a national and international market. As far as the copyright valuation was concerned, beedis were known not only by the trade mark but also by the depiction on the labels and wrappers and colour combination on the package. The assessee had a copyright on the content of the labels, wrappers and the colour combination on them. Similarly, the know-how had a value since the aroma of beedis differ from one manufacturer to another, depending on the secret formula for mixing and blending tobacco.

The Supreme Court noted that AOP-3 had obtained a separate valuation from the chartered accountant M. R. Ramachandra Variar. In his report dated September 12, 1994, the technical know-how was valued at Rs.36 crore, copyright was valued at Rs.21.6 crore and trade marks were valued at Rs.14.4 crore making a total of Rs.72 crore.

The Supreme Court noted that in the case of M. Ramnath Shenoy (an erstwhile partner of MGBW) the Tribunal had accepted (after a detailed discussion) the contention of the assessee that trade marks, copyrights and technical know-how alone were comprised in the assets of the business and not goodwill. It was also held that when the Revenue alleges that it is goodwill and not trade marks, etc., that is transferred the onus will be on the Revenue to prove it, which it was unable to do. The Tribunal then examined the question whether the sale of these intangible assets would attract capital gains. The question was answered in the negative and it was held that the assets were self-generated and would not attract capital gains. The decision of the Tribunal was accepted by the Revenue and therefore according to the Supreme Court there was no reason why a different conclusion should be arrived at in so far as the assessee was concerned.

The Supreme Court observed that the High Court denied any benefit to the assessee u/ss 35A and 35AB of the Act since it was held that what was auctioned off was only goodwill and no amount was spent by AOP-3 towards acquisition of trade marks, copyrights and know-how. In coming to this conclusion, reliance was placed in the report of the chartered accountants Rao and Swamy who stated that the assets of MGBW were those of a going concern and were valued on the goodwill of the firm and no trade marks, copyrights and know-how were acquired. According to the Supreme Court, the High Court rather speculatively held that the valuation made by the chartered accountant of AOP-3 that is M. R. Ramachandra Variar that the goodwill was split into know-how, copyrights and trade marks only for the purposes of claiming a deduction u/ss 35A and 35AB of the Act and the value of the goodwill was shown as nil and the deduction claimed did not represent the value of the know-how, copyrights and trade marks.

The Supreme Court however left open the question of the applicability of sections 35A and 35AB of the Act for an appropriate case. This was because learned counsel submitted that if the assessee was given the benefit of section 32 read with section 43(3) of the Act (depreciation on plant) as had been done by the Tribunal, the assessee would be quite satisfied. The Supreme Court observed that unfortunately, this alternative aspect of the assessee’s case was not looked into by the High Court. Therefore, according to the Supreme Court now the question to be answered was whether the assessee was entitled to any benefit u/s. 32 of the Act read with section 43(3) thereof for the expenditure incurred on the acquisition of trade marks, copyrights and know-how.

The Supreme Court noted that the definition of “plant” in section 43(3) of the Act was inclusive. A similar definition occurring in section 10(5) of the Income-tax Act, 1922 was considered in CIT vs. Taj Mahal Hotel wherein it was held that the word “plant” must be given a wide meaning. The Supreme Court held that for the purposes of a large business, control over intellectual property rights such as brand name, trade mark, etc., are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the assessee. Therefore, it could not be doubted that so far as the assessee was concerned, the trade marks, copyrights and know-how acquired by it would come within the definition of “plant” being commercially necessary and essential as understood by those dealing with direct taxes. The Supreme Court noted that section 32, as it stood at the relevant time did not make any distinction between tangible and intangible assets for the purposes of depreciation.

In this context, the Supreme Court observed that by denying that the trade marks were auctioned to the highest bidder, the Revenue is actually seeking to re-write clause 16 of the agreement between the erstwhile partners of MGBW. This clause specifically states that the going concern and all the trademarks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the highest bidder. Under the circumstances, it was difficult to appreciate how it could be concluded by the Revenue that the trade marks were not auctioned off and only the goodwill in the erstwhile firm was auctioned off. The Supreme Court restored the order of the Tribunal directing the Assessing Officer to capitalise the value of trade marks, copyrights and technical know-how by treating the same as plant and machinery and to grant depreciation thereon.

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Recovery of Tax – Stay of Demand – Subsequent events should be taken into consideration.

Sidhi Vinayak Metcom Ltd. vs. UOI [2015] 378 ITR 372 (SC)

The assessment in respect of the assessment years 2010-11 and 2011-12 was reopened by the Income-tax Department by issuing notice u/s. 148. Assessments for these years were carried out afresh by the Assessing Officer imposing an additional tax demand of Rs.64 lakhs. The Petitioner had filed appeals against the said order which were pending before the Commissioner of Income-tax (Appeals). The Petitioner also moved an application for stay of the demand. On this, application, the Commissioner of Income-tax (Appeals) passed orders granting stay of interest and in respect of the tax amount, the petitioner was permitted to deposit the same in 16 installments. However, the Petitioner committed default in making payment of the very first installment because of which the bank account of the Petitioner was attached. The order was challenged by filing a writ petition in the High Court which was dismissed.

Before the Supreme Court it was pointed out that up to now the Petitioner had paid a sum of Rs.27.7 lakh in all. It was also pointed out by the learned counsel for the Petitioner that the main reason for reopening of the assessment for the aforesaid years by issuance of notice u/s. 148 was certain proceedings under the Central Excise Act. A copy of the decision dated September 16, 2015, paused by the Customs, Excise and Service Tax Appellate Tribunal was filed before the Supreme Court by way of additional document, revealing that in appeal against the Order-in- Original of the Excise Department, the CESTAT had set aside the said order and remitted the case back to the adjudicating authority for fresh adjudication.

According to the Supreme Court, in view of the aforesaid subsequent event, it would be appropriate if the petitioner approached the Commissioner of Income-tax (Appeals) once again with an application for stay bringing the aforesaid events to the notice of the Commissioner of Income-tax (Appeals). The Supreme Court was confidant that the Commissioner of Income-tax (Appeals) would consider the application on its own merits and pass orders thereon within a period of four weeks from the date of filing the application. The Supreme Court disposed the special leave petition accordingly.

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TDS – Payment to non-resident – Sections 195 and 201 – A. Y. 2002-03 – Transaction not resulting in liability to tax – Tax not deductible at source – Assessee not in default

Anusha Investments Ltd. vs. ITO; 378 ITR 621 (Mad):

The assessee had purchased shares from a non-resident company which had resulted in capital loss to the nonresident company. Therefore, the assessee had not deducted tax at source. The Tribunal held that whether or not the non-resident company suffered a loss or gain on the sale of shares, a duty was cast on the assessee to deduct the tax whenever it made payment to the nonresident and that the assessee was not only liable to deduct the tax at source, but it also had to pay the tax so collected to the exchequer.

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

“In the present transaction, admittedly, there was no liability to tax. As a result, the question of deducting tax at source and the assessee violating the provisions of section 195 did not arise and, therefore, the assessee could not be treated as an assessee in default.”

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Revision – Section 263 – A. Y. 2007-08 – Question whether total income for purposes of section 36(1)(viia)(c) should be computed after allowing deduction u/s. 36(1)(viii) – Two possible views – Debatable issue – Revision u/s. 263 not justified

CIT vs. Power Finance Corporation Ltd.; 378 ITR 619 (Del):

For the A. Y. 2007-08, the Assessing Officer completed the assessment u/s. 143(3), allowing the deduction u/s. 36(1)(viia)(c) and u/s. 36(1)(viii). The Commissioner exercised the revisional powers u/s. 263 and held that the deduction u/s. 36(1)(viia)(c) should have been computed after allowing deduction u/s. 36(1)(viii). The Tribunal set aside the order of the Commissioner holding that on the question whether the total income for the purpose of section 36(1)(vii)(c) should be computed after allowing the deduction u/s. 36(1)(viii) there were at least two possible views as reflected in the orders of the Delhi and Chennai Benches of the Tribunal. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) I ndependent of the two decisions, the stand of the Revenue as set out in its memorandum of appeal and that of the assessee that both deductions were independent of each other, gave rise to two further possible interpretations.

ii) The view taken by the Assessing Officer was a possible one and there was no occasion for the Commissioner to have exercised the jurisdiction u/s. 263.”

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Presumptive tax – Section 44BBA – A. Y. 1989-90 to 1993-94 – Non-residents – Business of operation of air craft – Section 44BBA is not charging provision, but only a machinery provision – It cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income – When there is no taxable income, section 44BBA cannot be applied to bring to tax presumptive income constituting 5 per cent of gross receipts

DIT vs. Royal Jordanian Airlines; [2015] 64 taxmann.com 93 (Delhi):

The assessee-airline was established by the Ministry of Transport of the Kingdom of Jardon. It appointed Jet Air Pvt. Ltd. as its general sales agency in India. The assessee commenced its operations in India, carrying passengers and cargo on international flights from and to India from 1989 onwards. Since commencement of operations in India, assessee had been incurring losses. For relevant years, the assessee filed its return declaring nil income. The Assessing Officer opined that assessee was a foreign company and was liable to pay tax in India in terms of section 44BBA. He thus proceeded to determine income at the rate of 5 per cent of the net sales. The Tribunal upheld the order of Assessing Officer on merits. However, the Tribunal remanded the matter back for recomputation of income u/s. 44BBA.

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

“i) Inasmuch as section 44BBA is not charging provision, but only a machinery provision, it cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income.

ii) Where there is no income, section 44BBA cannot be applied to bring to tax the presumptive income constituting 5 per cent of the gross receipts in terms of section 44BBA(2). No doubt, for that purpose the assessee has to produce books of account to substantiate that it has incurred losses or that its assessable income is less than its presumptive income, as the case may be.

iii) The Tribunal has noted the factual position regarding the losses incurred by assessee for the relevant years. This has not been disputed by the revenue in its appeal against the aforesaid order. Consequently, the question of assessee being asked to pay tax on presumptive basis u/s. 44BBA for the said year, or the matters being sent to the Assessing Officer for verifying the said facts does not arise.

In the result, assessee’s appeal has to be allowed.”

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Uday K. Pradhan vs. Income Tax Officer ITAT “F” Bench, Mumbai Before Jason P. Boaz (AM) and Sandeep Gosain (JM) ITA No. 4669/Mum/2014 A.Y.: 2005-06. Date of Order: 6th April, 2016 Counsel for assessee / revenue: Dharmesh Shah / Sandeep Goel

Section 2(22)(d): Redemption of preference shares does not constitute “deemed dividend”

Facts
The assessee was a partner in a firm which was converted into a company. As per the books of the erstwhile firm, the assessee had a credit balance of Rs. 38.74 lakh and in lieu of the said credit balance, the assessee received two lakh equity shares and 2,07,417 redeemable preference shares. In the year under appeal, the said redeemable preference shares were redeemed at par and the assessee received Rs. 20.74 lakh. The AO was of the view that the assessee’s receipt of the sum of Rs. 20.74 lakh on redemption of preference shares resulted in reduction of the share capital and therefore, invoked the provisions of section 2(22)(d) of the Act to bring the same to tax as deemed dividend. On appeal, the CIT(A) was of the view that this was a colourable device for distribution of accumulated profits without any payment by the assessee and which benefitted the assessee/shareholder to the tune of Rs. 20.74 lakh therefore it was exigible to tax u/s. 2(22)(d).

Held
Based on the records, the Tribunal noted it was evident that the assessee received the 2,07,417 redeemable preference shares in lieu of his credit balance in capital account of Rs. 38.74 lakh in the erstwhile firm which had since been corporatised. Thus, the assessee was allotted the redeemable preference shares for valuable consideration and that there was no distribution of accumulated profits by the company to its shareholders on redemption of preference shares, which could result in reduction of share capital. Therefore the Tribunal held that the provisions of section 2(22) (d) of the Act would not apply. The Tribunal noted that even as per section 80(3) of the Companies Act, 1956, the redemption of preference shares is not considered as reduction of share capital. Therefore, according to the Tribunal, treating the redemption of preference shares as deemed dividend u/s. 2(22) (d) of the Act does not arise, as it can be treated so only when there is distribution of accumulated profits by way of reduction of share capital.

In coming to this finding the Tribunal relied on the decision of the Coordinate Bench in the case of Parle Biscuits Pvt. Ltd. In ITA Nos. 5318 & 5319/Mum/2008 and 447/ Mum/2009 dated 19.08.2001.

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[2016] 156 ITD 770 (Mumbai ) GSB Capital Markets Ltd. vs. DCIT A.Y.: 2010-11 Date of Order: 16th December, 2015

Section 74 – Even though loss arising from transfer of short-term capital assets (on which STT is paid) is assessed at 15% tax rate, the said loss can be brought forward and set off against the long term capital gains which are assessed at 20% tax rate.

Facts
The assessee-company was a member of the Bombay Stock Exchange and engaged in the business of share broking, trading and dealing in shares and securities

The assessee had claimed set-off of brought forward short term capital loss against the long term capital gains during the relevant assessment year.

The AO opined that loss arising from transfer of shortterm capital assets (on which STT is paid) was assessed at 15 per cent tax rate while the long-term capital gain was assessed at 20 per cent tax rate and hence it could not be set-off in view of section 70(3).

The CIT(A) upheld the order of AO.

On appeal before Tribunal.

Held
Section 70 deals with the set-off of losses from one source against the income from another source under the same head of income and deals with intra-head adjustment of losses during the same assessment year under the different heads of income.

On the other hand, section 74 which deals with the carry forward of capital losses and set-off against the income of the subsequent financial year, clearly stipulates that loss arising from transfer of short-term capital asset which is brought forward from earlier years, can be set-off against the capital gain assessable for subsequent assessment year, in respect of any other capital asset which could be either long-term capital gain or short-term capital gain.

Circular no. 8 of 2002, dated 27-08-2002 issued by CBDT explains the amendment made by the Finance Act, 2002 as follows:

“Since long-term capital gains are subject to lower incidence of tax, the Finance Act, 2002 has rectified the anomaly by amending the sections to provide that while losses from transfer of short-term capital assets can be set-off against any capital gains, whether short-term or long-term, losses arising from transfer of long-term capital assets, will be allowed to be set-off only against long-term capital gains. It is further provided that a long term capital loss shall be carried forward separately for eight years to be set-off only against long-term capital gains. However, a short-term capital loss, may be carried forward and setoff against any income under the head Capital gains”.

Thus, in view of our above discussions and reasoning, it was held that the assessee had rightly claimed set-off of brought forward short term capital loss against the long term capital gains during the relevant assessment year.

In result, the appeal filed by the assessee-company was allowed and the orders of CIT-(A) and AO were set aside.

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[2016] 156 ITD 793 (Kolkata ) Manoj Murarka vs. ACIT A.Y.: 2007-08 Date of order: 20th November, 2015

Section 2(22)(e) – For the purposes of artificial categories of dividends u/s. 2(22), accumulated profits do not include any exempt capital gains. Thus, where assessee has negative accumulated profits excluding exempt capital gains, provisions of deemed dividend cannot be invoked in respect of any amount overdrawn by the assessee.

Facts
During the relevant assessment year, the assessee, his son and daughter had overdrawn certain amount from a company in which the assessee was a substantial shareholder holding 41% of shares. The son and daughter were not shareholders in the company.

The AO treated the aforesaid amount overdrawn by the assessee and his son and daughter from the company as deemed dividend u/s. 2(22)(e) and added the same in the income of the assessee.

The CIT(A) held that the deemed dividend could be taxed only in the hands of shareholder holding more than 10% voting power in the company from which monies are drawn. He therefore deleted the addition made towards deemed dividend in respect of the amount overdrawn by the son and daughter, as they were not shareholders of company.

However, he confirmed the addition made towards deemed dividend in respect of the amount overdrawn by the assessee by ignoring assessee’s contention that there was only negative accumulated profits, if the tax exempt long term capital gain was excluded from accumulated profits.

On cross appeals to the Tribunal:

Held
In respect of amount overdrawn by son and daughter
Both the son and daughter of the assessee are not shareholders in the lending company. The deemed dividend, if any, could be assessed only in the hands of the shareholders and not otherwise. This argument was taken by the assessee even before the lower authorities and the revenue has not brought on record any contrary evidence to this fact. Hence, the provisions of section 2(22)(e) could not be invoked in respect of amount overdrawn by the son and daughter.

In respect of amount overdrawn by assessee
The legal fiction created in the Explanation 2 to section 2(22) states that ‘accumulated profits’ shall include all profits of the company up to the date of distribution or payment. For reckoning the said accumulated profits, apart from the opening balance of accumulated profits, only the profits earned in the current year are to be added and then the total accumulated profits should be considered for the purpose of calculation of dividend out of accumulated profits, if any. The said Explanation nowhere contemplates to bring within the ambit of expression ‘accumulated profits’ any capital profits which are not liable to capital gains tax.

In the instant case, the capital gains derived by the company are tax exempt and hence, the same should not be included in accumulated profits and if the said gains are excluded, then there are only negative accumulated profits available with the company.

In the absence of accumulated profits, there is no scope for making any addition towards deemed dividend u/s. 2(22)(e).

Accordingly, the ground raised by the assessee is allowed and appeal of the revenue is dismissed.

Note: Reliance was placed on CIT vs. Mangesh J. Sanzgiri [1979] 119 ITR 962 (Bom. HC) and ACIT vs. Gautam Sarabhai Trust No. 23 [2002] 81 ITD 677 (Ahd. Trib).

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[2016] 177 TTJ 18 (Chandigarh) H. P. State Electricity Board vs. Addl. CIT A.Y.s.: 2007-08 to 2010-11 Date of Order : 10th December, 2015

Section 271C – Penalty u/s. 271C is not leviable on an assessee who is not treated as an “assessee-in-default” as per section 201 of the Act more so when there was a reasonable cause for not deducting tax on payment made by the assessee.

Facts
The assessee company was engaged in generation, transmission and distribution of power in the State of Himachal Pradesh. It purchased/sold power from PGCIL and was also selling power to consumers. Power was transmitted through transmission network of PGCIL and assessee made payments on account of wheeling charges, SLDC, transmission charges to PGCIL. In respect of payments made by the assessee to PGCIL, during the financial years 2006-07 to 2009-10, the assessee company was liable to deduct tax at source, but did not deduct tax at source.

Since PGCIL was found to have paid taxes on its income received from the assessee, the assessee was not treated as an assessee-in-default u/s. 201 of the Act. However, the AO levied penalty u/s. 271C of the Act amounting to Rs.1,36,00,187; Rs., 2,48,13,453; Rs.2,76,67,625 and Rs.5,71,017 for the financial years 2006-07, 2007-08, 2008-09 and 2009-10 respectively. He held that there was no reasonable cause for the deductor assessee not to deduct tax at source. 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 Tribunal, having noted the provisions of section 271C of the Act and also the ratio of the decision of the Karnataka High Court in the case of Remco (BHEL) House Building Co-operative Society Ltd. vs. ITO (2015) 273 CTR 57 (Kar), and observed that the assessee has not been treated as “assessee in default” as per section 201 of the Act, and is therefore neither liable to deduct nor pay any tax as per Chapter XVII-B. It held that in such circumstances, the question of levy of penalty u/s. 271C does not arise. It observed that this view has been upheld by the Hyderabad Bench of the Tribunal, in the case of ACIT vs. Good Health Plan Ltd. in ITA No. 155/Hyd/2013, wherein penalty levied u/s. 271C was deleted, since the assessee was not held to be an assessee in default. The Tribunal held that no penalty u/s. 271C could be levied in the case of the assessee.

The Tribunal also observed, that the fact that the tax on impugned sums had been reimbursed to PGCIL had not been controverted by the Revenue. It held that in such circumstances, the belief harboured by the assessee that by deducting further TDS, it would tantamount to double taxation, appears to be a reasonable and bonafide belief. It considered the explanation of the term “reasonable cause” as explained by the Delhi High Court in the case of Woodward Governor India (P.) Ltd. vs. CIT (2001) 168 CTR 394 (Del), and held that there is no merit in the contention of the Department Representative (DR) that the assessee did not have reasonable cause for not deducting tax at source.

The Tribunal held that the assessee not being in default in respect of the amount of tax itself, there cannot be any levy of penalty u/s. 271C, and more so, where there was a reasonable cause for not deducting the TDS on the payment made.

This ground of appeals filed by the assessee was allowed.

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2016-TIOL-547-ITAT-DEL Hindustan Plywood Company vs. ITO A.Y.: 2009-10 Date of Order: 19th February, 2016

Section 40(a)(ia) – Section 40(a)(ia) inserted w.e.f. 1.4.2013 is curative in nature and has retrospective effect.
Section 40(b)(v) – Profit on sale of godown credited to profit & loss account by the assessee is not to be excluded for computing remuneration allowable to partners.

Facts – I
The Assessing Officer (AO) in the course of assessment proceedings, noticed that the assessee had not deducted tax at source on interest amounting to Rs. 2,52,043 paid to various depositors and also on Rs. 1,44,000 paid towards car hire charges. He disallowed both these expenses u/s. 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 where it contended that the second proviso is curative in nature, intended to supply an obvious omission, take care of unintended consequence and make the section workable and is therefore retrospective.

Held – I
The Tribunal noted that the contention made on behalf of the assessee is supported by the decision of the ITAT , Kolkata Bench in the case of Santosh Kumar Kedia vs. ITO in ITA No. 1905/Kol/2014 for AY 2007-08; order dated 4.3.2015. It observed that the Delhi High Court in the case of CIT vs. Ansal Landmark Township Pvt. Ltd. (377 ITR 635) has also taken the similar view. The Tribunal restored this issue to the file of the AO, with the direction that the assessee shall provide all details to the AO with regard to the recipients of the income and taxes paid by them. The AO shall carry out necessary verification in respect of the payments and taxes of such income and also filing the return by the recipient. In case, the AO finds that the recipient has duly paid the taxes on the income, the addition made by the AO shall stand deleted.

This ground of appeal filed by the assessee was allowed.

Facts – II
The assessee had credited Rs. 10,20,430 to its Profit & Loss Account being profit on sale of godown on which it had been claiming depreciation from year to year. The AO was of the view that salary paid to partners is not to be paid on these profits. He excluded profit on sale of godown for the purposes of computation of remuneration to partners. Accordingly, he recomputed the partners remuneration and disallowed Rs. 3,60,540 out of Rs. 5,40,000 claimed by the assessee as salary paid to the partners.

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 – II
The Tribunal considered the provisions of section 40(b)(v) which lay down the maximum quantum of remuneration payable to partners and also Explanation 3 thereto which defines “book profit”. It held that from the Explanation 3, it is apparent that the book profit has to be the profit as has been shown in the profit & loss account for the relevant previous year. It observed that the profit received by the assessee on sale of godown amounting to Rs. 10,20,430 was credited to Profit & Loss Account as prepared by the assesse and was part of net profit as shown in profit & loss account. Both the authorities below did not appreciate the provisions of section 40(b)(v), Explanation 3 and misinterpreted definition of “book profit” as given under Explanation 3 to section 40(b) of the Act. It observed that this view is supported by the decision of the Calcutta High Court in the case of Md. Serajuddin & Brothers vs. CIT (2012 – TIOL- 593- HC – CAL) as well as the following decisions –

i) Suresh A. Shroff & Co. (Mum) (2013) 140 ITD 1;

ii) CIT v. J. J. Industries – (2013)(Guj.) 216 Taxman 162;

iii) S. P. Equipment & Services vs. ACIT – (Jaipur)(2010) 36 SOT 325;

iv) ITO vs. Jamnadas Muljibhai – 99 TTJ 197 (Rajkot);

v) Deepa Agro Agencies vs. ITO – 154 Taxman 80 (Bang. Trib.);

vi) Allen Career Institution vs. Addl CIT – (2010) 37 DTR 379 (Jp)(Trib.);

vii) ACIT vs. Bilawala & Co. – 133 TTJ 168 (Mum.)(Trib.)

The Tribunal allowed this ground of appeal filed by the assessee.

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[2016] 177 TTJ 1 (Mumbai.) Crompton Greaves Ltd. vs. CIT A.Y.: 2007-08 Date of Order: 1st February, 2016

Sections 246A(1)(a), 253(1) – An appeal against order passed u/s.
143(3) r.w.s. 263 lies with CIT(A) u/s. 246A(1)(a) being an order passed
by AO u/s. 143(3). Order passed u/s. 143(3) r.w.s. 263 does not find
place in section 253(1).

Facts
The assessment of total
income of the assessee company was completed by the Assessing Officer
(AO) vide his order dated 28th December, 2010 passed u/s. 143(3) of the
Act. Subsequently, the AO passed an order, dated 24th February, 2014, to
give effect to an order dated 6th February, 2013 passed u/s. 263 of the
Act.

Aggrieved by the additions made in the order dated 6th
February, 2013 passed u/s. 143(3) r.w.s. 263 of the Act, the assessee
preferred an appeal to the Tribunal.

Held
The
Tribunal observed that the assessee company has preferred a first appeal
directly before the Tribunal against order passed u/s. 143(3) r.w.s.
263 of the Act. The Tribunal noticed that an appeal against an order
passed u/s. 143(3) r.w.s. 263 lies with the CIT(A), u/s. 246A(1)(a) of
the Act, being an order passed u/s. 143(3) and not with the Tribunal
under section 253. Referring to the decision of the Apex Court in the
case of CIT vs. Ashoka Engineering Co. (1992) 194 ITR 645 (SC), it
observed that an appeal under the Act is a statutory right which
emanates only from the statute. The assessee does not have a vested
right to appeal, unless provided for in the statute.

The
Tribunal held that it cannot adjudicate the appeal filed by the
assessee, and that the assessee is at liberty to file an appeal before
the CIT(A) u/s. 246A(1)(a) of the Act, for adjudication on merits. It
also observed that while adjudicating the condonation application, the
CIT(A) shall liberally consider the fact that in the intervening period,
the assessee company was pursuing the appeal with the Tribunal, albeit
at the wrong forum with the Tribunal, instead of filing the first appeal
with the CIT(A) as provided in the Act.

The appeal filed by the assessee was dismissed.

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Exemptions – On sale of Agricultural land – Sections 54 B & 54 F:

Commissioner of Income Tax vs. Narsing Gopal Patil INCOME TAX APPEAL NO. 2319 of 2013 dated: 1st MAR CH, 2016. (Bom HC)

(Narsing Gopal Patil, Pune vs. Asst CIT ITA No. ITA No.1544/PN/2012 & ITA 1815/PN/2012 (A Y: 2008-09) dt 3rd, May 2013).

The assessee for the subject assessment year, sold land which according to him had been used as agricultural land. The sale consideration was partly invested in the purchase of agricultural land and partly utilised for construction of the two buildings claiming it to be a residential house. The assessee claimed the benefit of exemption as available u/s. 54B of the Act to the extent the sale proceeds were utilised for purchase of the agricultural land and section 54F to the extent that the sale proceeds were utilised to construct the residential house. The Assessing Officer denied both the claims. Regarding the claim for the benefit of section 54B was concerned, he held that the assessee had not been able to prove that the land sold had been used for Agricultural purposes in the two preceding years prior to its sale.

The CIT(A) held that the assessee was entitled to the benefit of section 54B in as much as it had led evidence before the Assessing Officer, that the user of the land sold was for agricultural purposes by furnishing 7/12 extract and his return of income filed for the Assessment years 2002 – 03 to 2007 – 08 disclosing agricultural income. The other claim of the assessee for exemption u/s. 54F was denied by the CIT(A).

The Dept. challenged the CIT (A) order to the extent it allowed the claim for benefit of section 54B, and assessee as regard section 54 F, before the Tribunal. The Tribunal upheld the order of the CIT(A) in granting the benefit of section 54B to the assessee, on the ground that the assessee had produced evidence, to show that the land which was sold, was in fact used for agricultural purpose during the period of two years prior to the date of its transfer. This evidence was in the form of 7/12 extract as per land revenue record and also return of income filed for the assessment year 2005 – 2006 to 2007- 2008 in which the assessee had declared its agricultural income.

Similarly, the Tribunal upheld the claim of section 54 F by holding that, so long as the assessee’s claim of exemption was limited to the investment in the construction of the residential portion of the building, the same was held to be allowable.

The Hon’ble High Court observed that the finding recorded by the lower authorities was a finding of fact, that the subject land was being used for agricultural purpose in the two years preceding the date of the sale. This finding of fact was rendered on the basis of 7/12 extract led as evidence before the Assessing Officer, which indicates the manner in which the land is being used. In fact, as correctly observed by the Tribunal, there is a presumption of the correctness of entries in the land revenue record in terms of section 157 of the Maharashtra Land Revenue Code, 1966. This presumption is not an irrebuttable presumption and it will be open for the Assessing Officer to lead evidence to rebut the presumption. However, no such evidence was brought on record by the Revenue to rebut the presumption. Moreover, the assessee has also placed before the authorities its return of income filed for the assessment year 2005 – 2006 to 2007- 2008, wherein he had inter alia declared agricultural income. In view of the fact that the revenue has not been able to establish that the evidence led by the assessee is unreliable by leading any contrary evidence, there is no reason to discard the evidence produced by the assessee. Thus, there is a concurrent finding of fact by CIT(A) as well as the Tribunal that the land has been used for agricultural purpose. Thus, no substantial question of law arises. However, the Court admitted the question relating to section 54 F claim i.e allowing exemption under section 54F, when the investment made by the assessee is in a ‘commercial cum housing complex’.

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Section 14A – Shares held as stock in trade – Disallowance cannot be made :

Difference in brokerage income shown in service tax return and in the Profit and Loss account – Excess brokerage on account of method of accounting:

Commissioner of Income Tax 4 vs. Credit Suisse First Boston (India) Securities Pvt. Ltd. INCOME TAX APPEAL NO.2387 of 2013 dt : 21ST MAR CH, 2016 (Bom HC) (Affirmed Mumbai ITAT decision on the above issues DCIT, CIT – 4(1) vs. M/s Credit Suisse First Boston (India) Securities Ltd. ITA no : 7354/Mum/2004, AY : 2001- 02 dt: 06/03/ 2013)

The assessee had been reflecting in the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage was been shown on actual basis on the basis of constant method adopted by the assessee. The AO made an addition on this account . The CIT (A) and Tribunal recorded a finding that sometime the assessee was required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee was also required to waive part of the brokerage disputed by the clients. Therefore, difference as per the service tax return and as per profit and loss account was found explainable. This was a minor difference, which had been reconciled by the assessee. In the above view, the Hon’ble Court held that question as formulated does not give rise to any substantial question of law.

As regards section 14 A, it was observed that the Assessing Officer had disallowed the expenditure, on the ground that the Assesee had earned dividend income in respect of the shares held by the assessee. There is no dispute between the parties that the shares held by the Assessee are stock in trade, as the assessee is a trader in shares and had in its books classified it under the head ‘Stock in Trade’. The Revenue conceeded that the issue stood concluded against the Revenue and in favour of the Assessee, by the decisions of this Court in HDFC Bank Ltd. vs. The Deputy Commissioner of Income Tax2(3) (Writ Petition No.1753 of 2016 rendered on 25th February, 2016). In view of the above, the Hon’ble Court held that question as formulated did not give rise to any substantial question of law.

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Section 48 – Capital gain – Full value of consideration – computation of capital gain only refers to full value of consideration received – no occasion to substitute the same :

Commissioner of Income Tax Central IV vs. M/s. B. Arunkumar & Co. Income Tax Appeal NO.2337 OF 2013 dt 8/3/2016 . (Bom HC)

(Affirmed Mumbai ITAT decision in ACIT Cir.16(3) vs. M/s. B. Arunkumar & Co., ITA No.8272/M/11, AY : 2008- 09, Bench B, dt: 24.05.2013).

The assessee was a firm belonging to one Harshad Mehta Group. The assessee firm owned 19% shares in a company namely M/s. Inter Gold (India) Pvt. Ltd. Shares in the aforesaid company were acquired by the assessee-firm during the years 2002 and 2003 at different rates and these shares were not tradable in the open market. The balance share holding in M/s. Inter Gold was held by Sh. Arun Kumar Mehta family members (38%) and by foreign companies (41%). The assessee sold its 19% shareholdings in M/s. Inter Gold (India) Pvt. Ltd. to one M/s. Rosy Blue (I) (P) Ltd. and returned a capital loss on account of indexation. The consideration for the sale of shares in two tranches was Rs.750 per share and Rs.936 per share respectively.

The Assessing Officer did not accept the capital loss as claimed and sought to substitute the consideration received by the assessee at Rs.936 and Rs.750 per share with the value of Rs.1,225 per share as consideration received on the sale of its shares to M/s. Rosy Blue India Pvt. Ltd. This substituted value being the breakup value of the shares, was taken as its fair market value (FMV). In the result, the Assessing officer worked out the long term capital gains at Rs.4.57 crore instead of loss at Rs.3.65 crore as claimed. Being aggrieved, the assessee carried the issue in appeal to the CIT (Appeals). The CIT (Appeals) allowed the appeal of the assessee. He held that in the absence of any provision in the Act to replace the consideration received on sale of shares, by adopting the market value is not permissible.

In contrast, attention was drawn to section 50C, which provides for substitution of the consideration received on sale of land and buildings by the stamp duty value of land and buildings (immovable property). He further held, that the Assessing Officer cannot substitute the consideration shown as received on sale of shares by the assessee in the absence of evidence, to indicate that the consideration disclosed on sale of shares was not the complete consideration received and/or accrued to the assessee. Being aggrieved, the Revenue carried this issue in appeal to the Tribunal. The Tribunal reiterated the findings of fact rendered by the Commissioner of Income Tax (Appeals) that the transfer of the shares at the declared consideration was not done by the assessee with the object of tax avoidance or reducing its tax liability. The Tribunal, in the impugned order, placed reliance upon the decision of the Apex Court in CIT vs. Gillaners Arbuthnot and Co. (87 ITR 407) and CIT vs. George Henderson & Co. Ltd. (66 ITR 622), to conclude that, where a transfer of a capital assets takes place by sale on receipt of a price, then the consideration fixed/bargained for by the parties should be accepted for the purpose of computing capital gains. It cannot be replaced by the market value or a notional value. The full value of consideration is the money received to transfer the assets. Accordingly, the Tribunal dismissed the Revenue’s Appeal and upheld the order of the CIT (Appeals).

The Revenue before the Hon’ble High Court, contented that the decisions of the Apex Court relied upon in the impugned order were rendered under Income-tax Act, 1922 and therefore, would not apply while considering the Act.

The Hon’ble court held that, it was not the case of the revenue that the amount disclosed by the respondent assessee, was less than what has been received by them or what had accrued on sale of its shares. The revenue has not in any manner shown that the consideration disclosed by the assessee to the revenue, is not the correct consideration received by them and that the same should be replaced. Moreover, wherever the Parliament thought it fit ,that the consideration on a transfer of a capital asset has to be ascertained on the basis of market value of the asset transferred, specific provision has been made in the Act. To illustrate section 50C provides for stamp value duty in case of transfer of land or buildings. Similarly, section 45(2) and 45(4) provide that in cases of conversion of the investment into stock in trade or transfer of shares on dissolution of a firm to its partners respectively has to be at market value. The consideration disclosed on sale of shares by the assessee was infact the only consideration received/ accrued to it, no occasion to substitute the same can arise. Accordingly, the appeal of Revenue was dismissed.

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TDS – Disallowance u/s. 40(a)(i) – Royalty – Payment for import of software – Not royalty – Tax not deductible at source on such payments – Amount not disallowable u/s. 40(a)(i)

Wipro Ltd. vs. Dy. CIT; 382 ITR 179 (Karn)

The Assessing Officer disallowed the claim for deduction of expenditure incurred for import of software relying on section 40(a)(i), on the ground that the payment was a royalty and that the tax was not deducted at source. The Tribunal allowed the assessee’s claim, holding that the payment made by the assessee for import of software is not royalty.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held that the payments made by the assessee for import of software did not constitute royalty u/s. 9(1)(vi) of the Act and there was no obligation to deduct tax at source u/s. 195 and as such the expenditure cannot be disallowed u/s. 40(a)(i) of the Act.

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TDS – Rent – Section 194I – Where One Time Nonrefundable Upfront Charges paid by the assessee was not (i) under the agreement of lease and (ii) merely for the use of the land and the payment was made for a variety of purposes such as (i) becoming a co-developer (ii) developing a Product Specific SEZ(iii) for putting up an industry in the land and both the lessor as well as the lessee intended to treat the lease virtually as a deemed sale, the upfront payment made by the assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years could not be taken to constitute rental income at the hands of the lessor and hence lessee, not obliged to deduct TDS u/s. 194-I

Foxconn India Developer (P.) Ltd. vs. ITO; [2016] 68 taxmann.com 95 (Mad)

In the appeal filed by the assessee, the following questions were raised before the Madras High Court:

“i)
Whether the upfront payment made by an assessee, under whatever name
including premium, for the acquisition of leasehold rights over an
immovable property for a long duration of time say 99 years, could be
taken to constitute rental income at the hands of the lessor, obliging
the lessee to deduct tax at source u/s. 194-I ?

ii) Whether in
the facts and circumstances of the case and in law, the Tribunal was
right in confirming the levy of interest u/s. 201(1-A) ?”

The High Court held as under:

“i)
The One Time Non-refundable Upfront Charges paid by the assessee was
not (i) under the agreement of lease and (ii) merely for the use of the
land. The payment made for a variety of purposes, such as (i) becoming a
co-developer (ii) developing a Product Specific Special Economic Zone
in the Sriperumbudur Hi-Tech Special Economic Zone (iii) for putting up
an industry in the land. The lessor as well as the lessee intended to
treat the lease virtually as a deemed sale, giving no scope for any
confusion. In such circumstances, we are of the considered view that the
upfront payment made by the assessee for the acquisition of leasehold
rights over an immovable property for a long duration of time, say 99
years, could not be taken to constitute rental income at the hands of
the lessor, obliging the lessor to deduct tax at source u/s. 194-I.
Hence, the first substantial question of law is answered in favour of
the appellant/assessee.

ii) Once the first substantial question
of law is answered in favour of the appellant/assessee, by holding that
the assessee was not under an obligation to deduct tax at source, it
follows as a corollary that the appellant cannot be termed as an
assessee in default. As a consequence, there is no question of levy of
interest u/s. 201(1-A).

iii) In the result, the appeal is allowed.”

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