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Representation of cases before Authority for Advance Ruling- Instruction F.No.225/261/2015/ITA.II dated 28.10.2015 ( copy available on www.bcasonline.org)
Notification No. 86 /2015/F. No. 500/1/2014-APA-II dated 29.10.15
Where the variation between the arm’s length price determined u/s. 92C and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed one percent of the latter in respect of wholesale trading and three percent of the latter in all other cases, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price for Assessment Year 2015-2016.
The CBDT has instructed all CCITs to strictly follow the time limit of six months as specified in sec. 12AA(2) of the Act for passing an order granting or refusing registration and to take suitable administrative action against those officers not adhering to the time limit – Instruction No. 16 of 2015 dated 06.11.2015 (copy available on www.bcasonline.org)
CBDT has issued an internal instruction to constitute local committees to deal with taxpayers grievances from high pitched scrutiny assessment – Instruction No. 17/2015 dated 9.11.15 ( copy available on www. bcasonline.org)
At times, a taxpayer deducts tax at source under a particular section of the Act, while the tax authorities take a view that tax ought to have been deducted under another section of the Act. For example, an assessee while deducting tax on payment deducts tax at 2% u/s. 194C, while the tax authorities take a view that the tax should have been deducted u/s. 194J as in their view the payment represented the payment of fees for the technical services. If the rate at which tax has been actually deducted is lower than the rate at which tax is deductible in the view of the tax authorities, it is usual for them to disallow the claim for deduction on the ground that the tax was not deducted at source leading to a violation of the provisions of section 40(a)(ia) of the Act. The question which arises for consideration, under the circumstances, is, whether the tax authorities can disallow the whole or part of the expenditure on the ground that tax has not been deducted at source on such expenditure ignoring altogether the fact that the tax was in fact deducted though under a different provision of the Act .
While the Calcutta High Court has taken the view that no disallowance u/s. 40(a)(ia) could be made in such cases, the Kerala High Court has taken a contrary view and has held that the provisions of section 40(a)(ia) would apply if tax was deducted under a wrong provision of law and the claim for deduction would be disallowed.
S. K. Tekriwal’s case:
The issue first arose for consideration before the Calcutta High Court in the case of CIT vs. S. K. Tekriwal, 361 ITR 432.
In this case, the assessee had deducted tax at source from payments made to a machinery contractor u/s. 194C as payment to a sub-contractor at the rate of 1%. The assessing officer took a view that the payments were in the nature of machinery hire charges, which amounted to rent under the provisions of section 194-I, and that tax therefore ought to have been deducted u/s. 194-I at the rate of 10%. The assessing officer therefore, disallowed proportionate payments (90%) by invoking section 40(a)(ia).
In the appeal, the Tribunal deleted the disallowance. The Tribunal noted that section 40(a)(ia) had 2 limbs – one requiring deduction of tax, and the second requiring payment of the tax into the government account. There was nothing in that section, treating the assessee as a defaulter where there was a shortfall in deduction. According to the Tribunal, it could not be assumed that on account of the shortfall, there was a default in the deduction. If there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee could be declared to be an assessee in default u/s. 201, and no disallowance could be made by invoking the provisions of section 40(a)(ia).
The Calcutta High Court, on an appeal by the Revenue, after noting the observations of the Tribunal, held that no substantial question of law was involved in the case before it, and therefore refused to admit the appeal.
PVS Memorial Hospital’s case:
The issue again came up before the Kerala High Court recently in the case of CIT vs. PVS Memorial Hospital Ltd, 60 taxmann.com 69. The 2 years involved in this appeal were assessment years 2005-06 and 2006-07.
In this case, the assessee was a hospital, which had entered into an agreement with another hospital, where that other hospital had undertaken to perform various professional services in the assessee’s hospital. The assessee, on payment to the other hospital for its services, deducted tax at source at 2% u/s. 194C by treating the payments as the payment for carrying out the work in pursuance of the contract.
The assessing officer took the view that the payment was in the nature of fees for technical services and the tax was deductible at 5% u/s. 194J, and therefore disallowed the entire payment u/s. 40(a)(ia) in both the years. For assessment year 2005-06, the Commissioner(Appeals) as well as the Tribunal confirmed the addition and rejected the appeals.
For assessment year 2006-07, the Tribunal allowed the appeal following the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra). According to the Tribunal, the disallowance u/s. 40(a)(ia) could be made only if both the conditions were satisfied, i.e. tax was deductible at source and such tax had not been deducted. The Tribunal took the view that where tax was deducted by the assessee, even if it was under a wrong provision of law, the provisions of section 40(a)(ia) could not be invoked. The Kerala High Court, while examining the issue, noted that in the case before it, tax was deductible u/s. 194J and not u/s. 194C.
The Kerala High Court on examination of the provisions of section 40(a)(ia), expressed the view that the section was not a charging section but was a machinery section, and that such a provision should therefore be understood in such a manner that it was made workable. For this proposition, it relied on the Supreme Court observations in the case of Gurusahai Saigal vs. CIT 48 ITR 1, where the Supreme Court had observed that the provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that was to say, in accordance with the clear intention of the Legislature, which was to make effective a charge that was levied .
According to the Kerala High Court, if section 40(a)(ia) was to be understood in the manner as laid down by the Supreme Court, the expression “tax deductible at source under chapter XVII-B” had to be understood as a tax deductible at source under the appropriate provision of chapter XVII-B. Therefore, if tax was deductible u/s. 194J but was deducted u/s. 194C, according to the Kerala High Court, such a deduction did not satisfy the requirements of section 40(a)(ia). The latter part of the section that ‘such tax had not been deducted’, in the view of the Kerala High Court, again referred to the tax deducted under the appropriate provision of chapter XII-B.
The Kerala High Court held that a cumulative reading of the provision showed that deduction under a wrong provision of law would not save an assessee from the disallowance u/s. 40(a)(ia) expressly dissenting from the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra), and confirmed the disallowance u/s. 40(a)(ia).
Observations
On a bare reading of the provisions of section 40(a)(ia), it is gathered
that the said provision requires a disallowance in a case where there
is a failure to deduct tax at source,where it was deductible, or after
deduction the same has not been paid on or before the due date specified
u/s. 139(1). It does not, at least expressly, cover a case of a partial
non-deduction on the lines similar to the one provided u/s. 201 which
provides for the consequences of the failure to deduct tax at source.
Section 201 by express language using the specific terms,“ wholly or
partly” seeks to rope in the cases of partial or a complete failure and
makes an assessee liable for the consequences. The legislature by not
including the above terms “ wholly or partly” in section 40(a)(ia) have
sought to cover the cases of the absolute failure to deduct tax and not
the case of the partial failure to deduct. Importantly section 201, as
it originally stood, did not provide for the cases of partial deduction
and hence did not seek to penalise an assessee in a case where there was
a short deduction of tax by him. Section 201 has since been amended to
rope in the cases of even a partial failure to pay the deducted taxes.
Further,
section 201 of the Income-tax Act clearly brings out that a failure in
whole or in part, would result in an assessee being treated as in
default. Similarly, section 271C clearly specifies that the penalty can
be levied for failure to deduct the whole or any part of the tax as
required by chapter XVII-B. Unlike both the sections, section 40(a)(ia)
uses the term “has not been deducted”, without specifying whether it
applies to deduction in whole or in part.
Secondly, even in
cases of acknowledged failure, the Andhra Pradesh High Court, followed
by many high courts, in the case of P. V. Rajagopal vs. Union of India
99 Taxman 475, held, in the context of the provisions of section 201 as
it then stood [the language of which was similar to the language used in
section 40(a)(ia)], that if there was any shortfall due to any
difference of opinion as to the taxability of any item, the employer
could not be declared to be an assessee in default. The Tribunal in the
cases of DCIT vs. Chandabhoy & Jassobhoy 49 SOT 448 (Bom), Apollo
Tyres vs. DCIT 60 SOT 1 (Coch) and Three Star Granites (P) Ltd vs. ACIT
32 ITR (Trib) 398, held that the provisions of section 40(a)(ia) would
be attracted only in the case of total failure to deduct tax at source,
and where tax had partly been deducted at source, it could not be said
that tax had not been deducted at source. In all these cases, the
tribunal noted the decision of the Andhra Pradesh High Court in the case
of P. V. Rajagopal vs. Union of India(supra) with approval.
The
enormous litigation on the subject of TDS clearly indicate that there
is a lack of clarity on the applicability of the appropriate provision
of chapter XVIIB for deducting tax at source on a particular payment,
which needs to be interpreted and settled by the courts alone. Over a
period of time, certain clarity has emerged on various types of
payments, but there are still various types of payments where the
position is still not so clear, some of which ultimately have to be
resolved by the Supreme Court.
In such a situation, where a tax
deductor has taken a bona fide view in respect of tax deductible from a
particular type of payment, adopting one of the two possible views on
the matter, should he be penalised by disallowance of the expenditure,
besides being asked to pay the tax short deducted, as well as interest
on such short deduction? Can a tax deductor be expected to have the same
legal competence in interpreting a legal provision as a High Court or a
Supreme Court?
In the context of penalty for concealment, the
Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. 322
ITR 58 held that where a taxpayer based on a possible view of a matter,
claimed a deduction, a penalty for concealment could not be levied on
him even where his claim for deduction of such payment was disallowed in
assessment of his total income. The Supreme Court held that if the
contention of the revenue was accepted, then in case of every return
where the claim made was not accepted by the Assessing Officer for any
reason, the assessee would invite penalty u/s. 271(1)(c). That was
clearly not the intendment of the Legislature.
The disallowance
u/s. 40(a)(ia) is a form of penalty on a tax deductor for failing to
perform an onerous duty, and therefore where a taxpayer makes a genuine
mistake, taking a possible interpretation of the provision under which
tax should be deducted, he should not be penalised for it.
Undoubtedly,
the intention was to ensure that a deductor on payment did deduct tax
at source from payments on which tax was deductible at source and in
doing so he should tax at the rate applicable under a specific provision
which in his bona fide belief is the provision that is applicable to
such a payment. The intention of the Legislature certainly could not
have been to penalise actions taken under a bona fide belief of a
deductor, particularly when the view taken by him is a possible one.
The
better view therefore seems to be that taken by the Calcutta High
Court, that no disallowance can be made u/s. 40(a)(ia) where tax has
been deducted at source at a lower rate under a particular section,
though the rate of tax under the correct section under which tax is
deductible at source may be higher, particularly in cases where there is
a genuine dispute as to the appropriate section under which tax is
deductible at source. In our opinion, the mistake if any of deducting
under a wrong provisions of law, if based on a bona fide belief, is a
case of trivial mistake and should not even lead to holding the assessee
as in default as has been held by the apex court in the case of
Hindustan Steels Ltd., 83 ITR 26 (SC). The question of disallowance
should not arise at all.
Section 12AA (3) of the Income-tax Act,
1961 (hereinafter referred to as “the Act”) deals with cancellation of
registration of a charitable institution in circumstances specified in
the said section. The Income-tax Appellate Tribunal [“Tribunal”] has
consistently held in a number of cases that registration of an
institution cannot be cancelled u/s. 12AA (3) merely because section
13(1) of the Act applies to it. [Krupanidhi Educational Trust vs. DIT,
(2012) 27 taxmann.com 11 (Bang); Cancer Aid and Research Foundation vs.
DIT, (2014) 34 ITR (Trib) 56 (Mum); Parkar Medical Foundation vs. DCIT,
(2014) 34 ITR (Trib) 286 (Pune), TS-469-ITAT -2014 (Pune)]. In order to
overcome this position in law, the Finance (No.2) Act, 2014 inserted
section 12AA (4) with effect from 1-10-2014 to provide for cancellation
of registration of a charitable institution upon operation of section
13(1). This article attempts to explain and analyse the provisions of
section 12AA(4).
2. Text
Section 12AA(4) reads as follows:
“(4)
Without prejudice to the provisions of sub-section (3), where a trust
or any institution has been granted registration under clause (b) of
sub-section (1) or has obtained registration at any time under section
12A [as it stood before its amendment by the Finance (No.2) Act, 1996]
and subsequently it is noticed that the activities of the trust or the
institution are being carried out in a manner that the provisions of
section 11 and 12 do not apply to exclude either whole or any part of
the income such trust or institution due to operation of sub-section (1)
of section 13, then, the Principal Commissioner or the Commissioner may
by an order in writing cancel the registration of such trust or
institution:
Provided that the registration shall not be
cancelled under this sub-section, if the trust or institution proves
that there was a reasonable cause for the activities to be carried out
in the said manner.”
3. Summary
Preconditions for applicability of section 12AA(4)
(a) A charitable institution been granted registration u/s. 12AA(1)(b) or section 12A.
(b) After the registration, it is noticed that
(i) section 13(1) applies to the charitable institution;
(ii)
the activities of the charitable institution are being carried out in a
manner that section 11/12 do not apply to whole or any part of the
income due to operation of section 13(1)
(c) The charitable
institution cannot prove that there was reasonable cause for the
activities to be carried out in the said manner.
Consequences of applicability of section 12AA94)
(a) The Principal Commissioner (“PCIT”) or the Commissioner (“CIT”) may cancel the registration of such charitable institution.
(b) Such cancellation shall be done by an order.
(c) Such cancellation order shall be in writing.
4. Rationale/Purpose
4.1 The relevant passage in Memorandum explaining the provisions of the Finance (No. 2) Bill, 2014 reads as follows:
“There
have been cases where trusts, particularly in the year in which they
have substantial income claimed to be exempt under other provisions of
the Act, deliberately violate provisions of section 13 by investing in
prohibited mode etc. Similarly, there have been cases where the income
is not properly applied for charitable purposes or has been diverted for
benefit of certain interested persons. Due to restrictive
interpretation of the powers of the Commissioner under section 12AA,
registration of such trusts or institutions continues to be in force and
these institutions continue to enjoy the beneficial regime of
exemption. …
Therefore, in order to rationalise the provisions
relating to cancellation of registration of a trust, it is proposed to
amend section 12AA of the Act to provide that where a trust or an
institution has been granted registration, and subsequently it is
noticed that its activities are being carried out in such a manner
that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Act);
(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or
(iv)
its funds are invested in prohibited modes, then the Principal
Commissioner or the Commissioner may cancel the registration if such
trust or institution does not prove that there was a reasonable cause
for the activities to be carried out in the above manner.”
4.2 The relevant paragraphs in Circular explaining the provisions of the Finance (No.2) Act, 2014 read as follows:
“9.2
There have been cases where trusts, particularly in the year in which
they had substantial income claimed to be exempt under other provisions
of the Income-tax Act though they deliberately violated the provisions
of section 13 of the said Act by investing in prohibited modes other
that specified modes, etc. Similarly, there have been cases where the
income is not properly applied for charitable purposes or is diverted
for the benefit of certain interested persons. However, due to
restrictive interpretation of the powers of the Commissioner under the
said section 12AA, registration of such trusts or institutions continued
to be in force and these institutions continued to enjoy the beneficial
regime of exemption.
…
9.4 Therefore, in order to
rationalise the provisions relating to cancellation of registration of a
trust, section 12AA of the Income-tax Act has been amended to provide
that where a trust or an institution has been granted registration, and
subsequently it is noticed that its activities are being carried out in
such a manner that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Income-tax Act, 1961);
(iii)
any income or property of the trust is used or applied directly or
indirectly for benefit of specified persons like author of trust,
trustees etc.; or
(iv) its funds are not invested in specified modes,
then
the Principal Commissioner or the Commissioner may cancel the
registration, if such trust or institution does not prove that there was
a reasonable cause for the activities to be carried out in the above
manner.”
[CBDT Circular No. 1 / 2015, dated 21.01.2015]
5. Violation of section 13 cannot be used as a ground to deny registration
Courts/Tribunal have held that violation of section 13 is not a ground on which registration can be denied to a charitable institution [see CIT vs. Leuva Patel Seva Samaj Trust, (2014) 42 taxmann.com 181 (Guj), (2014) 221 Taxman 75 (Guj); Malik Hasmullah Islamic Educational and Welfare Society vs. CIT, (2012) 24 (taxmann.com 93 (Luck), (2012) 138 ITD 519 (Luck), (2013) 153 TTJ 635 (Luck); PIMS Medical & Education Charitable Society vs. CIT, (2013) 31 taxmann.com 371 (Chd)(Trib), (2013) 56 SOT 522 (Chad)(Trib), (2012) 150 TTJ 891 (Chd)(Trib); Chaudhary Bishambher Singh Education Society vs. CIT, (2014) 48 taxmann.com 152 (Del)(Trib); Kurni Daivachara Sangham vs. DIT, (2014) 50 taxmann.com 53 (Hyd)(Trib); Modern Defence Shikshan Sanstha vs. CIT, (2008) 26 SOT 21 (Joh)(URO); Ashoka Education Foundation vs. CIT, (2014) 42 CCH 0090 (Pune)(Trib)]. On a plain reading, there is no change in this position even after amendment. This is because section 12AA(4) provides that “where a trust or any institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [asit stood before its amendment by the Finance (No.2) Act, 1996] and subsequently it is noticed that …”. Thus, the section is triggered only subsequent to the registration.
6. Is cancellation independent of assessment? Can CIT suo moto take cognisance of the violation of section 13(1) prior to assessment by AO?
The section states that “if it is noticed that the activities of the trust or the institution are being carried out in a manner …” It does not state that the violation of section 13(1) is noticed only upon assessment. If the CIT can independently come to a conclusion that there has been a default u/s. 13(1) and the provisions of section 11 and 12 do not apply as a result of the default, then, on a literal reading, he can suo moto take cognisance of the violation of section 13(1) prior to assessment by AO. Thus, the action u/s.er section 12AA(4)
a. could precede the assessment; or
b. be concurrent with the assessment; or
c. succeed the assessment.
To illustrate :
Suppose, a search and seizure action u/s. 132 is taken against a charitable institution and during the proceedings, it is found that the Managing Trust has siphoned off certain funds of the institution. In that case, section 13(1)(c) could apply and the PCIT or CIT could initiate proceedings u/s. 12AA(4).
However, it appears that the ultimate outcome of cancellation would, inter alia, depend on the position taken or finally accepted in assessment proceedings vis-à-vis the operation of section 13(1). Hence, if the assessment order is reversed at the appellate stage, then the cancellation order cannot survive.
7. Cancellation only in respect of operation of section 13(1)
7.1 The provision applies pursuant to operation of section 13(1). Thus, it does not apply pursuant to operation of the following sections :
Section 13(7) – anonymous donations
Section 13(8) – exemption not available on account of first proviso to section 2(15) becoming applicable to the institution.
7.2 The position vis-à-vis other sub-sections of sectio 13 is explained in the following paragraphs :
Section 13(2)
The said sub-section provides for situations when the income or property of an institution is deemed to have been used or applied for the benefit of an interested party. This sub-section is an “extension of section 13(1)(c) / (d)” and hence a violation of section 13(2) could also trigger the proceedings for cancellation of registration u/s. 12AA(4).
Section 13(4) and 13(6)
Section 13(4) provides that if the investment in a concern in which an interested person referred to in section 13(3) does not exceed 5% of the capital of that concern, then, subject to its provisions, the exemption u/s. 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment.
Section 13(6) provides that if a trust has provided educational or medical facilities to an interested person referred to in section 13(3), the exemption u/s. 11 or 12 shall not be denied in relation to any income other than the income referred to in section 12(2).
It appears that the above sections are not independent sections : both are in connection with violation u/s. 13(1)(c) or section 13(1)(d). They merely give a concession and relax the rigors of section 13(1)(c) and section 13(1)(d) apply. Income is not excluded from section 11 by reason of application of section 13(4) or (6), The breach would be only be on account of section 13(1)(c) or (d). Hence, it appears that, on a literal interpretation, the provision covers cases where section 13(4) and section 13(6) are applicable.
8. General principles for interpretation of section 12AA(4)
Section 186 (1) of the Act, prior to its omission with effect from 01.04.1993, read as follows:
“(1) If, where a firm has been registered or is deemed to have been registered, or its registration has effect under sub-section (7) of section 184 for an assessment year, the Assessing Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard cancel the registration of the firm for that assessment year:”
It is noticed that both, section 186(1) and section 12AA(4), refer to cancellation of registration and both use the term ‘may’, that is, the Assessing Officer (in section 186) and the PCIT or CIT [in section 12AA(4)] may cancel the registration.
Hence, the principles laid down by Courts in section 186 could be applied for interpreting section 12AA(4), to the extent applicable. Now, in the context of section 186, it has been held that withdrawal of the benefit of registration in respect of an assessment year results in serious consequences; it is penal in nature in that the consequences are very serious to the assessee and that is why discretion is conferred on the authority by requiring him to give a second opportunity [CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP)]. Likewise, it is submitted that section 12AA(4) is also a penal provision and the principles applicable in interpretation of penal proceedings, including the following, could ordinarily apply in interpreting section 12AA(4):
A penal provision must be interpreted strictly and in favour of the assessee [CIT vs. Sundaram Iyengar & Sons (P) Ltd. (TV), (1975) 101 ITR 764 (SC); Jain (NK) vs. Shah (CK), AIR 1991 SC 1289 and CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]
If two views are possible, the benefit should go to the assessee. [CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) (in the context of section 271 of the Income-tax Act); CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]. In other words if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. A court is not competent to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742]
9. Does a default u/s. 13 automatically lead to cancellation of registration?
For the following reasons, it appears that a mere default u/s. 13(1) would not automatically result in cancellation of registration:
Section 12AA(4) provides that the PCIT/CIT may by an order in writing cancel the registration. The use of the word “may” shows that it is discretionary, and the PCIT/CIT has a discretion not to cancel registration even in spite of the default of the assessee. [see J. M. Sheth vs. CIT, (1965) 56 ITR 293 (Mad); CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (both in the context of section 186)].
A similar term is used in section 271(1)(c), where the AO “may” levy penalty on an assessee upon the assessee furnishing inaccurate particulars of income or concealing income. Courts have held that in view of the word “may”, the penalty is not automatic [Dilip N. Shroff vs. JCIT, (2007) 161 Taxman 218 (SC), (2007) 191 ITR 519 (SC)]. Now, section 12AA(4) is also a penal provision. Hence, applying the same principle, the cancellation u/s. 12AA(4) is also not automatic.
Section 12AA(3) provides that if the Commissioner is satisfied that the activities of trusts are not genuine, he shall pass an order in writing cancelling the registration. The use of the word “may” in section 12AA(4) as against “shall” in section 12AA(3) clearly shows that the power in section 12AA(4) is discretionary.
The proviso to section 12AA(4) states that the registration shall not be cancelled if the charitable institution proves that there was a reasonable cause for the activities to be carried out in the manner provided in the section. Hence, a mere default does not trigger cancellation, if there is a reasonable cause for the default.
The relevant passage in section 12AA(4) reads as follows:
“… it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principle Commissioner or the Commissioner may by an order in writing cancel the registration …”
Suppose the expression “the activities of the trust or the institution are being carried out in a manner” (hereinafter referred to as “the relevant expression”) is removed from the language. In that case, the provision (hereinafter referred to as “modified provision”) would read as follows:
“It is noticed that … the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration.”
A plain reading of modified provision shows that if provisions of section 11 and 12 do not apply due to operation of section 13(1), then it could trigger cancellation of registration. Thus, if mere default in section 13(1) triggered cancellation, then the modified provision without the relevant expression would have been sufficient and the relevant expression would be superfluous!
It is now very well settled that redundancy should not be attributed to the legislature and no part of a statute should be read in a manner that it becomes superfluous. [CWT vs. Kripashankar Dayashanker Worah, (1971) 81 ITR 763 (SC)] If a mere default in section 13(1) could result in the CIT exercising his power, then the entire expression “the activities of the trust or the institution are being carried out in a manner ” would not have been required and it would have been sufficient if the section had been worded as “it is noticed that the provisions of section 11 and 12 …”. In view of this, some meaning has to be attributed to the relevant expression. The point for consideration is what meaning should be attributed to the said phrase? It is submitted as follows:
i)“Activities”
The relevant expression refers to “activities”. Now ordinarily, section 13 of General Clauses Act, 1897, provides that singular includes plural and vice versa, unless the context otherwise requires. It could be argued that in this case, depending on facts, the expression “activities” in plural may not include singular “activity” especially because cancellation of registration is an onerous provision and a single default should not result in such harsh consequences.
ii)“Are being carried out”
The relevant expression uses the phrase “are being carried out”. The terms ‘is’ (singular of ‘are’) and “being” have been judicially interpreted as follows:
In F. S. Gandhi vs. CWT, (1990) 51 Taxman 15 (SC), (1990) 184 ITR 34 (SC), (1990) 84 CTR 35 (SC), the Supreme Court had to interpret the expression “any interest in property where the interest is available to an assesssee for a period not exceeding six years…” The Court observed as follows:
The word ‘available’ is preceded by the word ‘is’ and is followed by the words ‘for a period not exceeding six years’. The word ‘is’, although normally referring to the present often has a future meaning. It may also have a past signification as in the sense of ‘has been’ (See Black’s Law Dictionary, 5th edn., p. 745). We are of the view that in view of the words ‘for a period not exceeding six years’ which follow the word ‘available’ the word ‘is’ must be construed as referring to the present and the future. In that sense it would mean that the interest is presently available and is to be available in future for a period not exceeding six years.
The term “being” has been interpreted as follows:
“In Stroud’s Judicial Dictionary (fourth edition) the expression “being” is explained thus at page 267 of volume I:
“Being — ‘Being as used in a sense similar to that of the ablative absolute, has sometimes been translated as, ‘having been’; but it properly denotes a state or condition existent at the time when the conclusion of law or fact has to be ascertained.”
In other words, it is clear that the phrase “the business of such company is not being continued” must be interpreted to mean the company whose business is non-existent at a time when the requisite opinion contemplated by the section is formed by the Central Government and if at such time the business is not continued or has stopped, the case would fall within that phrase.”
[UOI vs. Seksaria Cotton Mills Ltd., (1975) 45 Comp. Cas 613 (Bom)] [for the purpose of: section 15A of the Industries (Development & Regulation) Act, 1951] In Harbhajan Singh vs. Press Council of India, AIR 2002 SC 135, the Supreme Court observed as follows :
“In Maradana Mosque (Board of Trustees) vs. Badi-ud-Din Mahmud and Anr.- (1966) 1 All ER 545, under the relevant Statute the Minister was empowered to declare that the school should cease to be an unaided school and that the Director should be the Manager of it, if the Minister was satisfied that an unaided school “is being administered” in contravention of any provisions of the Act. Their Lordships opined, “Before the Minister had jurisdiction to make the order he must be satisfied that ‘any school. is being so administered in contravention of any of the provisions of this Act’. The present tense is clear. It would have been easy to say ‘has been administered’ or ‘in the administration of the school any breach of any of the provisions of this Act has been committed’, if such was the intention of the legislature; but for reasons which common sense may easily supply, it was enacted that the Minister should concern himself with the present conduct of the school, not the past, when making the order.
This does not mean, of course, that a school may habitually misconduct itself and yet repeatedly save itself from any order of the Minister by correcting its faults as soon as they are called to its attention. Such behaviour might well bring it within the words ‘is being administered’ but in the present case no such situation arose. There was, therefore, no ground on which the Minister could be
‘satisfied’ at the time of making the order. As appears from the passages of his broadcast statement which are cited above, he failed to consider the right question. He considered
only whether a breach had been committed, and not whether the school was at the time of his order being carried on in contravention of any of the provisions of the Act. Thus he had no jurisdiction to make the order at the date on which he made it”.
On a combined reading of the term “are” as a plural of “is” and “being”, as interpreted above, it could be argued that the defaulting activities should continue to be carried out or at least they have been carried out in near past. The CIT cannot invoke the provision for a default committed before many years and especially in a re-assessment when the default u/s. 13 was completed much earlier and was not detected or was held as not being applicable in the original assessment.
10. Proceedings before PCIT/CIT
10.1 Cancellation of the registration should only be after complying with the principles of natural justice, which necessarily implies that –
if the PCIT/CIT is satisfied with the explanation offered by the assessee, he must drop the proposal to cancel the registration. [see CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 185)]
a reasonable opportunity of being heard shall be given to the assessee;
the PCIT/CIT shall not use any material without giving an opportunity to the assessee to rebut such material.
10.2 The PCIT/CIT should exercise his power not arbitrarily or capriciously but judicially in a manner consistent with judicial standards and after a consideration of all relevant circumstances. [see Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 11 (SC), (1972) 83 ITR 26 (SC); J.M Sheth vs. CIT, (1965) 56 ITR 293 (Mad) (in the context of section 186)].
10.3 For the purpose of section 271(1) it has been held that the regular assessment order is not the final word upon the pleas which can be taken at the penalty stage. The assessee is entitled to show-cause in penalty proceedings and to establish by the material and relevant facts which may go to affect his liability or the quantum of penalty. He cannot be debarred from taking appropriate pleas simply on the ground that such a plea was not taken in the regular assessment proceedings. [Jaidayal Pyarelal vs. CIT, (1973) Tax LR 880 (All)]
Applying the same principle an assessee cannot be debarred from taking appropriate pleas in the cancellation proceedings simply on the ground that such a plea was not taken in the regular assessment proceedings.
10.4 For the purpose of section 271 it has been held that the findings given in assessment proceedings, though relevant and admissible material in penalty proceedings, cannot operate as res judicata. [CIT vs. Gurudayalram Mukhlal, (1991) 95 CTR 198 (Gau), (1992) 60 Taxman 313 (Gau), (1991) 190 ITR 39 (Gau).] Similarly, the findings in respect of section 13(1) given in assessment proceedings cannot operate as res judicata.
10.5 It has been held that additional evidence is admissible in penalty proceedings and it is possible for the parties to bring on record additional material for determining if the penalty should be imposed. [CIT vs. Babu Ram Chander Bhan, (1973) 90 ITR 230 (All)]. Applying the same principle it appears that additional evidence is admissible in the cancellation proceedings.
11. Order passed by CIT/PCIT
Section 12AA(4) requires the CIT/PCIT to pass an order ‘in writing’.
It is now well settled that a quasi-judicial order has to be a speaking order containing
a) submissions of the assessee;
b) detailed reasons why the submissions are not acceptable. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742; Travancore Rayons vs. UOI, AIR 1971 SC 862; Appropriate Authority vs. Hindumal Balmukand Investment Co. P. Ltd., (2001) 251 ITR 660 (SC)] or a mere statement that after hearing the assessee and perusing the record, he did not find any substance in the submissions is not enough [see Sanju Prasad Singh vs. Chotanagpur Regional Transport Authority, AIR 1970 Pat 288 explaining the meaning of “speaking order”].
12. Reasonable cause
12.1 Registration cannot be cancelled if the assessee proves that there was reasonable cause for the activities to be carried out in a particular manner.
12.2 Institution to prove reasonable cause
The institution has to prove that a reasonable cause existed for the activities being carried out in the particular manner. The term “proved” is defined in section 3 of the Indian Evidence Act, 1872 as follows:
“A fact is said to be ‘proved’ when after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”
In view of the above, the test of proof is that there is such a high degree of probability that a prudent man would act on the assumption that the thing is true. [Pyare Lal Bhargava vs. State of Rajasthan, AIR 1963 SC 1094, (1963) 1 SCR Supl. 689 (SC)]
12.3 Reasonable cause – meaning
Courts have explained the term “reasonable cause” as follows:
‘Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow. [Woodward Governors India (P.) Ltd. vs. CIT, (2002) 253 ITR 745 (Del) (For the purpose of section 273B of the Income-tax Act, 1961)]
In Oxford English Dictionary (first edn. published in 1933 and reprinted in 1961, Volume VIII), the expression ‘reasonable’ has been defined to mean ‘fair, not absurd, not irrational and not ridiculous’. Likewise, the expression ‘good’ has been defined in the said Dictionary in Volume IV to mean ‘adequate, reliable, sound’. Similarly, the expression ‘sufficient’ has been defined under the same very Dictionary in Volume X to mean ‘substantial, of a good standard’.
From the definitions referred to above, it would appear that reasonable cause or excuse is that which is fair, not absurd, not irrational and not ridiculous … if a reason is good and sufficient, the same would necessarily be a reasonable cause. [Banwarilal Satyanarain vs. State of Bihar, (1989) 46 TAXMAN 289 (Pat), (1989) 179 ITR 387 (Pat), (1989) 80 CTR 31 (Pat) (for the purpose of section 278AA of the Income-tax Act, 1961)]
Reasonable cause, as correctly observed by the Administrative Tribunal, is a cause that a prudent man accepts as reasonable. The test to assess the reasonableness of the cause for default is, therefore, to find whether in the judgment of a common prudent man the cause is such that any normal man would, in the same or similar circumstances be also a defaulter. [Eknath Kira Akhadkar vs. Administrative Tribunal, AIR 1984 Bom 144 [for the purpose of section 22(2)(a) and section 32(4) of the Goa, Daman and Diu Buildings (Lease , Rent and Eviction) Control Act, 19968]]
The Bombay High Court has held that the expression ‘reasonable cause’ in section 273B for non-imposition of penalty u/s. 271E would have to be construed liberally depending upon the facts of each case. [CIT vs. Triumph International Finance (India) Ltd., (2012) 22 taxmann. com 138 (Bom), (2012) 208 TAXMAN 299 (Bom), (2012) 345 ITR 270 (Bom), (2012) 251 CTR 253 (Bom)]
12.4 Some illustrations/principles regarding reasonable cause
a) Ignorance of law
It has been held that ignorance of law can constitute a reasonable cause [see ACIT vs. Vinman Finance & Leasing Ltd., (2008) 115 ITD 115 (Visk)(TM), para 13; Kaushal Diwan vs. ITO (1983) 3 ITD 432 (Del)(TM) (in the context of 285A of the Income-tax Act, 1961)]. Hence, in a given situation, the ignorance of the provisions of section 13(1) may constitute a reasonable cause.
b) Bonafide belief
It has been held that penalty is not justified where the breach flows from a bonafide belief of the offender that he is not liable to act in the manner prescribed by the statute. [see
Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC);
DCIT vs. Dasari Narayana Rao, (2011) 15 taxmann.com 208 (Chennai Trib) (in the context of section 272A of the Income-tax Act, 1971);
ACIT vs. Dargapandarinath Tuljayya & Co. (1977) 107 ITR 850 (AP) followed in Thomas Muthoot vs. ACIT, (2014) 52 taxmann.com 114 (Coch Trib) (in the context of section 271C of the Income-tax Act, 1961);
IL & FS Maritime Infrastructure Co. Ltd. vs. ACIT, (2013) 37 taxmann.com 297 (Mum Trib), para 8 (in the context of section 271BA of the Income-tax Act, 1961)].
Applying the aforesaid principle, a mistaken bonafide belief that section 13(1) is not applicable can constitute a reasonable cause.
(c) Expert opinion
It has been held that if a particular action is bonafide taken on the basis of an opinion from a senior counsel, then, it constitutes a reasonable cause and merely because it turns out to be wrong, a penalty cannot be levied on the assessee. [CIT vs. Viswapriya Financial Services & Securities Ltd., (2008) 303 ITR 122 (Mad)] Applying the same principle, if a charitable institution has relied upon an expert opinion, then, merely because the expert had held a different view, it does not mean that there is no reasonable cause for the default.
(d) Bonafide mistake
It has been held that registration of an assessee firm cannot be cancelled upon a bonafide mistake which was not intentional.[see CIT vs. Pawan Sut Rice Mill, (2004) 136 Taxman 640 (Pat) (in the context of section 186 of the Act)]. Applying the principle, the registration may not be cancelled if there is unintentional, bonafide mistake as a result of which section 13(1) became applicable to an assessee.
13. No penalty upon technical or venial breach
It has been held that the authority competent to impose the penalty will be justified in refusing to impose the penalty when there is a technical or venial breach of the provisions of the Act. [Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC)]. Applying the same principle, the registration may not be cancelled when there is technical or venial breach upon application of section 13(1).
14. Whether registration can be cancelled in certain situations involving quantum assessment
For the purpose of section 271(1)(c), it has been held that penalty cannot be levied in the following situations :
a. the assessee’s appeal against the quantum assessment has been admitted as substantial question of law (because this shows that the issue is debatable) [CIT vs. Liquid Investment and Trading Co., ITA No. 240/Del/2009, dated 05.10.2010].
b. where two views are possible in respect of a particular addition in the quantum assessment and the issue is debatable.
c. where the position adopted by the assessee is supported by a Tribunal or High Court judgment in another case.
Likewise, if the applicability of section 13(1) has been admitted by the High Court as a substantial question of law or if two views are possible regarding operation of section 13(1) or there is a case u/s. 13(1) supporting the view adopted by the assessee, it is a point for consideration as to whether the PCIT/CIT should not cancel the registration on the ground that the discretionary power u/s. 12AA(4) entails him to use the discretion in favour of the assessee in such matters and/or their exists a reasonable cause for the activity to be carried out by the assessee in the manner it has done.
15. Wilful default
The registration can be cancelled if the default is a wilful default. [See CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (in the context of section 186)]
16. Cancellation – whether with retrospective effect?
16.2 There are two views on the issue :
a. Registration cannot be cancelled retrospectively
b. Registration can be cancelled retrospectively
16.3 Registration cannot be cancelled retrospectively
For the purpose of section 35CC/CCA, Courts have held that an approval granted could not be withdrawn with retrospective effect.
[see B. P. Agarwalla & Sons Ltd. vs. CIT, (1993) 71 Taxman 361 (Cal), (1994) 208 ITR 863 (Cal)
CIT vs. Bachraj Dugar, (1998) 232 ITR 290 (Gau), (1999) 152 CTR 367 (Gau)
Jai Kumar Kankaria vs. CIT, (2002) 120 Taxman 810 (Cal)]
Applying the aforesaid principle, registration cannot be cancelled with retrospective effect.
For the purpose of sales tax, it has been held that the registration certificate of a dealer could not be cancelled with retrospective effect. [M. C. Agarwal vs. STO, (1986) 11 TMI 372 (Ori), (1987) 64 STC 298 (Ori)]
Section 12AA(4) does not refer to cancellation with retrospective effect. In the absence of such specific provision, registration cannot be cancelled with retrospective effect.
16.4 Registration can be cancelled retrospectively
In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), the Tribunal held that registration of a charitable institution could be cancelled u/s. 12AA(3) with retrospective effect. Applying the same principle, registration could be cancelled u/s. 12AA(4) with retrospective effect.
The judgments for section 35C/CCA and under sales tax are distinguishable since a retrospective cancellation in those cases prejudicially affected the counterparty. However, in retrospective cancellation of certificate u/s. 12AA(4), it is primarily the charitable institution which is affected.
16.5 Even if registration can be cancelled retrospectively it can not be before 1st October 2014
Even if registration could be cancelled with retrospective effect, it could not be retrospective before 1st October, 2014 being the date of insertion of section 12AA(4). This is supported by the following arguments:
In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), it was held that the registration to a charitable institution could not be cancelled beyond 1st October, 2010, being the date on which the provision became applicable.
It is now well settled that law that a person, who has complied with the law as it exists, cannot be penalised by reason of the amendment to the law effected subsequently, unless such intention is expressly stated and the imposition of such penalty is not contrary to any of the provisions of the Constitution.[CIT vs. Kumudam Endowments, (2001) 117 Taxman 716 (Mad)]
Again, it is now well settled that unless the terms of a statute expressly so provide or necessarily imply, 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. [CED vs. Merchant (MA), (1989) 177 ITR 490 (SC); CWT vs. Hira Lal Mehra, (1994) 205 ITR 122 (P&H); A fiscal statute will not therefore be regarded as retrospective by implication, particularly a penal provision therein. [CWT vs. Ram Narain Agarwal, 1976 TLR 1074 (All); Thangalakshmi vs. ITO, (1994) 205 ITR 176 (Mad)]
16.6 Summary
The matter is not free from doubt. However, even if it is held that the registration can be cancelled with retrospective effect, the retrospectivity cannot be prior to 1.10.2014.
To illustrate, suppose an assessee commits a default in financial year 2013-14; the CIT notices the default in June 2015 and cancels the registration in July 2015. In this case, the cancellation can have effect from 1st October 2014, and not for the period prior to 1st October, 2014.
16.7 Impact of cancellation of registration upon past years if registration cannot be cancelled with retrospective effect. (view 1)
Suppose a charitable institution violates section 13(1) during financial year 2015-16 and its registration is cancelled in financial year 2018-19. If there is no default u/s. 13(1) in financial year 2016-17 and 2017-18, can it avail of the benefit of section 11 and 12 during these years?
Section 12A(1)(a)/(aa) provide that the provisions of section 11 and 12 shall not apply in relation to the income of a charitable institution unless such trust is registered u/s. 12AA. Thus, in order to avail of the benefit of exemption, an institution is required to be registered u/s. 12AA. It appears that if the registration is valid throughout the previous year and if it is cancelled after 31st March of the relevant previous year, then, so far as the said previous year is concerned, it ought to be regarded as registered u/s. 12AA for the purposes of aforesaid section 12A(1) (a)/(aa). Thus, in the aforesaid illustration, the institution should be regarded as registered for financial year 2016-17 and financial year 2017-18, that is, assessment years 2017-18 and 2018-19; the registration should be regarded as cancelled only from financial year 2018-19 onwards.
17 Writ
Like any other order, in an appropriate case, a writ under Article 226 of the Constitution would lie against the cancellation order before the jurisdictional High Court and the Court may stay the operation of the cancellation order; or quash the cancellation order; or set aside the order directing the PCIT/CIT to pass a fresh order after complying with the directions of the Court.
18 Appeal against the cancellation order
An assessee aggrieved by the order passed by PCIT or CIT, may appeal to the Appellate Tribunal against such order. [see section 253(1)(c)]
Dual appeal
An assessee whose registration has cancelled will now have to pursue two appeals, one against the assessment order with the CIT(A) and another against the cancellation order with the Tribunal.
19.On cancellation, whether the charitable institution is debarred from making fresh application for registration?
Suppose the registration is cancelled for a default which no longer exists. To illustrate, an institution made an investment contrary to the mode specified in section 11(5). It has liquidated the investment and there is no continuing default u/s. 11(5). In such circumstances, even if the CIT cancels the registration, it appears that the institution can immediately reapply for fresh registration and the CIT has to deal with such application in accordance with the provisions of section 12AA(1).
20. Impact on cancellation order upon deletion of operation of section 13(1) in merits
The Supreme Court has authoritatively laid down that where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled. [K. C. Builders vs. ACIT, (2004) 265 ITR 562 (SC)]
Likewise, if it is held in the appellate proceedings that there is no violation of section 13(1) then, the cancellation order cannot survive. Further, such reversal of the cancellation order should be regarded to have retrospective effect ab initio and all the actions taken on the basis of the cancellation order would no longer survive.
21 Implications under other sections
21.2 Section 56(2)(vii)
Section 56(2)(vii) provides that if an individual or HUF receives any sum of money or property without consideration, then, the sum of money so received or the value of property so received shall be regarded as income
of the individual. The proviso to the said section provides that the provision will not apply in respect of any sum of money or property received from a charitable institution registered u/s. 12AA. Hence, if the institution supports any individual after the cancellation of registration, then such donation or contribution/aid would be regarded as income of the individual and shall be taxable beyond the basic exemption of Rs.50,000.
21.3 Section 80G
Section 80G(5)(i) provides that an institution is eligible for approval u/s. 80G if its income is not liable to inclusion in its total income under the provisions of sections 11 and
Now, if the registration is cancelled, the exemption u/s. 11 and 12 would not be available to the institution and the income would be liable to inclusion in total income. In such circumstances, the institution would not be eligible to obtain an approval u/s. 80G(5) or its existing approval would be liable for cancellation.
21.4 Exemption u/s. 10
Where an institution has been granted registration u/s. 12AA or 12A and the said registration is in force for any previous year, then the assessee is not eligible for exemption u/s. 10 except exemption in respect of agricultural income or u/s. 10(23C) [section 11(7)]. By implication once the registration is cancelled, the assessee would be entitled to claim exemption under section 10 e.g. dividend income u/s. 10(34) or long term gains u/s. 10(38).
22 Conclusion
Section 12AA(4) is another measure by the Government to tighten the law relating with charitable institutions. While the tax department may invoke it in many cases involving operation of section 13(1), it is felt that the ultimate cancellation of registration hinges on fulfilment of many conditions and restrictions and would lead to protracted litigation.
The assessee was a public religious trust. For the A. Y. 2009-10 the assessee had received anonymus donations to the extent of Rs. 27,25,306/-. The Assessing Officer applied the provisions of section 115BBC of the Incometax Act, 1961 and levied tax at the special rate. The Tribunal held that the Revenue had incorrectly applied section 115BBC to the facts of the assessee’s case.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) T he question of receipt of anonymus donations could not be addressed within the narrow scope of the specific wordings of some of the clauses of the trust deed but in the overall context of the actual activities in which the trust was involved in including imparting spiritual education to persons of all casts and religions, organizing samagams, distribution of free medicine and cloths to the needy and destitute, provision of free ambulance service for needy and destitute patients and so on.
ii) What can constitute religious activity in the context of Hindu religion need not be confined to the activities incidental to a place of worship like a temple. A Hindu religious institution like the assessee is also engaged in charitable activities which were very much part of the religious activity. In carrying on charitable activities along with organizing of spiritual lectures, the assessee by no means ceased to be religious institution. The activities described by the assessee as having been undertaken by it during the assessment year in question could be included in the broad conspectus of Hindu religious activity when viewed in the context of objects of the trust and its activities in general.
iii) Thus, the Tribunal was justified in coming to the conclusion that for the purpose of section 115BBC(2)(a) anonymus donations received by the assessee would qualify for deduction and it can not be included in its assessable income.”
In the A. Y. 2008-09, the assessee claimed Rs. 9.25 crores as short term capital gain. The Assessing Officer held that it was business income. The Commissioner (Appeals) found that the assessee had been an investor in shares and had consistently treated her entire investment in shares as investment and not stock-intrade. The assessee was dealing in 35 scrips, involving 59 transactions for the entire year could not be considered for high volume so as to be classified as trading income. The assesee had not borrowed any funds but had used her own funds. He held the income to be treated as shortterm capital gains. The Tribunal upheld the decision of the Commissioner (Appeals).
In appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“(i) T he Commissioner (Appeals) considered all the facts including the stand taken by the Revenue as found in the Assessing Officer’s order. On examination of all the facts he came to the conclusion that the activities carried out by the assesee could not be classified under the head “business income” but more appropriately as claimed by the assessee under the head “shortterm capital gains”. This was particularly so on application of the CBDT circular.
(ii) In view of the concurrent finding of fact arrived at by the Commissioner (Appeals) and the Tribunal no substantial question of law would arise.”
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) T he Tribunal has accepted the explanation of the assessee that the IFA is a professional body and a non-profit organization engaged in the study of international tax laws and policies. It, inter alia, undertakes research, holds conferences and publishes materials for the use of its members. Mr. Ajay Vora, one of the partners of the assessee firm, was also a member of the executive body of the IFA.
ii) T he contribution made by the assessee to the IFA was held to be for inter alia creating greater awareness of the assessee firm’s activities and therefore an expenditure incurred for the purposes of the profession of the assessee. It was accordingly held to be allowable as a deduction u/s. 37(1) of the Act.”
In the A. Y. 2009-10, the assessee had earned dividend income which was exempt. The Assessing Officer asked the assessee to furnish an explanation why the expenses relevant to the earning of dividend should not be disallowed u/s. 14A. The assessee submitted that as no expenses had been incurred for earning dividend income, this was not a case for making any disallowance. The assessing Officer held that the invocation of section 14A is automatic and comes into operation, without any exception. He disallowed an amount of Rs. 33,35,986/- u/s. 14A read with rule 8D and added the amount to the total income. The Commissioner (Appeals) found that no interest expenditure was incurred and that the investments were done by using administrative machinery of PMS, who did not charge any fees. He deleted the addition. The Tribunal affirmed the order of the Commissioner (Appeals).
In appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) The Assessing Officer had indeed proceeded on the erroneous premise that the invocation of section 14A is automatic and comes into operation as soon as the dividend income is claimed as exempt. The recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable or unsatisfactory, is a mandatory requirement of the law.
ii) N o substantial question of law arises. The appeal is dismissed.”
CIT vs. Everest Kanto Cylinders Ltd.; 378 ITR 57 (Bom):
For the A. Y. 2007-08, the assessee and the Assessing Officer worked out the amount disallowable u/s. 14A read with rule 8D at Rs.20,27.896/- Before the Tribunal the assessee pointed out that the disallowance is on a higher side and claimed that a reasonable amount should be disallowed. The Tribunal restricted the disallowance to Rs. 1 lakh.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“The Tribunal had gone into the factual aspects in great detail and interpreted the law as it stood on the relevant date. Therefore, the order of the Tribunal restricting the disallowance to Rs. 1 lakh u/s. 14A was justified.”
The assessees had undertaken construction projects which were approved by the municipal authorities/local authorities as housing projects. On that basis, they claimed deduction u/s. 80IB(10) of the Act.
However, the income tax authorities rejected the claim of deduction on the ground that the projects were not “housing project” inasmuch as some commercial activity was also undertaken in those projects. This contention of the Revenue was not accepted by the Income-tax Appellate Tribunal as well as the High Court. The High Court interpreted the expression “housing project” by giving grammatical meaning thereto as housing project is not defined under the Income-tax Act insofar as the aforesaid provision is concerned. The High Court held that since sub-section (10) of section 80-IB very categorically mentioned that such a project which is undertaken as housing project is approved by a local authority, once the project is approved by the local authority it is to be treated as the housing project. The High Court had made observations in the context of Development Control Regulations (hereinafter referred to as ‘DCRs’ in short) under which the local authority sanctions the housing projects and noted that in these DCRs itself, an element of commercial activity is provided but the total project is still treated as housing project. The Supreme Court noted that on the basis of this discussion, after modifying some of the directions given by the ITAT , the conclusions arrived at by the High Court were as follows:-
a) Upto 31/3/2005 (subject to fulfilled other conditions), deduction u/s. 80-IB(10) is allowable to housing projects approved by the local authority having residential units with commercial user to the extent permitted under DC Rules/Regulations framed by the respective local authority.
b) I n such a case, where the commercial user permitted by the local authority is within the limits prescribed under the DC Rules/Regulation, the deduction u/s. 80- IB(10) upto 31/3/2005 would be allowable irrespective of the fact that the project is approved as ‘housing project’ or ‘residential plus commercial’.
c) I n the absence of any provision under the Income-tax Act, the Tribunal was not justified in holding that upto 31/3/2015 deduction u/s. 80-IB(10) would be allowable to the projects approved by the local authority having residential building with commercial user upto 10% of the total built-up area of the plot.
d) Since deductions u/s. 80-IB(10) is on the profits derived from the housing projects approved by the local authority as a whole, the Tribunal was not justified in restricting section 80-IB(10) deduction only to a part of the project. However, in the present case, since the assessee has accepted the decision of the Tribunal in allowing section 80-IB(10) deduction to a part of the project, the findings of the Tribunal in that behalf were not disturbed.
e) Clause (d) inserted to section 80IB(10) with effect from 1/4/2005 was prospective and not retrospective and hence could not be applied for the period prior to 1/4/2005.
The Supreme Court agreed with the aforesaid answers given by the High Court to the various issues. The Supreme Court however, clarified that in so far as answer at para (a) was concerned, it would mean those projects which were approved by the local authorities as housing projects with commercial element therein.
There was much debate on the answer given in para (b) above before the Supreme Court. It was argued by learned senior counsel, for the Revenue that a project which was cleared as “residential plus commercial” project could not be treated as housing project and therefore, this direction was contrary to the provisions of section 80-IB(10) of the Act. However, according to the Supreme Court reading the direction in its entirety and particularlly the first sentence thereof, the commercial user which was permitted was in the residential units and that too, as per DCR.
The Supreme Court clarified that direction (b) was to be read in the context where the project was predominantly housing/residential project but the commercial activity in the residential units was permitted.
The question of law that arose for consideration before the Supreme Court was formulated by it as under:
“Whether section 80-IB(10)(d) of the Income-tax Act, 1961, applies to a housing project approved before March 31, 2005, but completed on or after April 1, 2005”?
The Supreme Court observed that sub-section (10) of section 80IB stipulates certain conditions which are to be satisfied in order to avail of the benefit of the said provision. Further, the benefit is available to those undertakings which are developing and building “housing projects” approved by a local authority. Thus, this section is applicable in respect of housing projects and not commercial projects. At the same time, it is a fact that even in the housing projects, there would be some are for commercial purposes as certain shops and commercial establishments area needed even in a housing project.
That has been judicially recognised while interpreting the provision that existing before 1st April, 2005 in CIT vs. Veena Developers [SLP (c) No.22450/2011 dated 30-4- 2015], and there was no limit fixed in section 80-IB(10) regarding the built-up area to be used for commercial purpose in the said housing project. The extent to which such commercial area could be constructed was as per the local laws under which local authority gave the sanction to the housing project. However, vide clause (d), which was inserted by the aforesaid amendment and made effective from 1st April, 2005, it was stipulated that the built-up area of the shops and other commercial establishments in the housing projects would not exceed 5 % of the aggregate built-up area of the housing project or 2,000 square feet, whichever is less (there is a further amendment whereby 5 % is reduced to 3 % and instead of the words “2,000 square feet, whichever is less” the words “5,000 square feet, whichever is higher” have been substituted). According to the Supreme Court, the question, thus, that required for consideration was as to whether in respect of those housing projects which finished on or after 1st April, 2005, though sanctioned and started much earlier, the aforesaid stipulation contained to clause (d) also has to be satisfied. The Supreme Court noted that all the High Courts have held that since this amendment is prospective and has come into effect from 1st April, 2005, this condition would not apply to those housing projects which had been sanctioned and stared earlier even if they finished after 1st April, 2005.
The Supreme Court noted that with effect from 1st April, 2001, section 80-IB(10) stipulated that any housing project approved by the local authority before 31st March, 2001, was entitled to a deduction of 100 % of the profits derived in any previous year relevant to any assessment year from such housing project, provided—(i) the construction/ development of the said housing project commenced on after 1st October, 1998, and was completed before 31st March, 2003; (ii) the housing project was on a size of a plot of land which had a minimum area of one acre; and (iii) each individual residential unit had a maximum built-up area of 1,000 square feet, where such housing project was situated within the cities of Delhi or Mumbai or within 25 kms. from municipal limits of these cities, and a maximum built-up area of 1,500 square feet at any other place. Therefore, for the first time, a stipulation was added with reference to the date of approval, namely, that approval had to be accorded to the housing project by the local authority before 31st March, 2001. Before this amendment, there was no date prescribed for the approval being granted by the local authority to the housing project. Prior to this amendment, as long as the development/ construction commenced on or after 1st October, 1998, and was completed before 31st March, 2001, the assessee was entitled to the deduction. Also by this amendment, the date of completion was changed from 31st March, 2001, to 31st March, 2003. Everything else remained untouched.
Thereafter, by the Finance Act, 2003, further amendments were made to section 80-IB(10). The only changes that were brought about were that with effect from 1st April, 2002: (i) the housing project had to be approved before 31st March, 2005; and (ii) there was no time limit prescribed for completion of the said project. Though these changes were brought about by the Finance Act, 2003, the Legislature thought it fit tht these changes be deemed to have been brought into effect from 1st April, 2002. All the remaining provisions of section 80-IB(10) remained unchanged.
Thereafter, significant amendment, with which the Supreme Court was directly concerned, was carried out by the Finance (No.2) Act, 2004, with effect from 1st April, 2005. The Legislature made substantial changes in subsection (10). Several new conditions were incorporated for the first time, including the condition mentioned in clause (d). This condition/restriction was not on the statute book earlier when all these projects were sanctioned. Another important amendment was made by this Act to sub-section (14) of section 80-IB with effect from 1st April, 2005, and for the first time under clause (a) thereof the words “built-up area” were defined.
Prior to the insertion of section 80-IB(14)(a), in many of the rules and regulations of the local authority approving the housing project “built-up area” did not include projections and balconies. Probably, taking advantage of this fact, builders provided large balconies and projections making the residential units far bigger than as stipulated in section 80-IB(10), and yet claimed the deduction under the said provision. To plug this lacuna, clause (a) was inserted in section 80-IB(14) defining the words “built-up area” to mean the inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls but did not include the common areas shared with other residential units.
According to the Supreme Court, the only way to resolve the issue was to hold that clause (d) is to be treated as inextricably linked with the approval and construction of the housing project and an assessee cannot be called upon to comply with the said condition when it is not in contemplation either of the assessee or even the Legislature, when the housing project was accorded approval by the local authorities.
The Supreme Court held that by way of an amendment in the form of clause (d), an attempt is made to restrict the size of the said shops and/or commercial establishments. Therefore, by necessary implication, the said provision has to be read prospectively and not retrospectively. As is clear from the amendment, this provision came into effect only from the day the provision was substituted. Therefore, it cannot be applied to those projects which were sanctioned and commenced prior to 1st April, 2005, and completed by the stipulated date, though such stipulated date is after 1st April, 2005. According to the Supreme Court, these aspects were dealt with by various High Courts elaborately and convincingly in their judgments and had taken a correct view that the assesses were entitled to the benefit of section 80-IB(10). The Supreme Court dismissed the appeals filed by the Revenue.
Section 24AA of the Surtax Act, vests in the Central Government the power to make exemption, reduction in rate or other modification in respect of surtax in favour of any class of foreign companies which are specified in s/s. (2), in regard to the whole or any part of the chargeable profits liable to tax under the Surtax Act. Sub-section (2) of section 24AA refers to two categories of foreign companies. The first is foreign companies with whom the Central Government has entered into agreements for association or participation, including participation by any authorised person, in any business consisting of the prospecting or extraction or production of mineral oils. The second category of foreign companies mentioned in s/s. (2) is foreign companies that may be providing services or facilities or supplying any ship, aircraft, machinery or plant in connection with any business of prospecting or extraction or production of mineral oils carried on by the Central Government or any authorised person. Specifically the section states that mineral oils will include petroleum and natural gas.
The exemption notification bearing No. G. S. R. 307(E), dated 31st March, 1983, specifically grants exemption in respect of surtax in favour of foreign companies with whom the Central Government has entered into agreements for association or participation of that Government or any authorised person in the business of prospecting or extraction or production of mineral oils.
The ONGC had executed agreements with different foreign companies for services or facilities or for supply of ship, aircraft, machinery and plant, as may be, all of which were to be used in connection with the prospecting or extraction or production of mineral oils. Such agreements did not contemplate a direct association or participation of the ONGC in the prospecting or extraction or production of mineral oils but involved the taking of services and facilities or use of plant or machinery which is connected with the business of prospecting or extraction or production of mineral oils.
In the above situation, the primary authority took the view that the agreements executed by the ONGC with the foreign companies being for services to be rendered and such agreements not being for association or participation in the prospecting or extraction or production of mineral oils, would not be covered by the exemption notification in question which by its very language granted exemption only to foreign companies with whom there were agreements for participation by the Central Government or the person authorised in the business of prospecting, extraction or production of mineral oils. The agreements in question, according to assessing authority, were, therefore “service agreements” and, hence, covered by sub-section (2)(b) of section 24AA of the Surtax Act and were, accordingly, beyond the purview of the exemption modification.
The said view was reversed by the learned Appellate Commissioner and upheld by the learned Income-tax Appellate Tribunal. In the appeal u/s. 260A of the Act, the High Court of Uttarakhand overturned the view taken by the Appellate Commissioner and the learned Tribunal.
The Supreme Court held that section 24AA of the Surtax Act vests power in the Central Government, inter-alia, to grant exemption to foreign companies with whom agreements have been executed by the Central Government for association or participation in the prospecting or extraction or production of mineral oils and also to foreign companies who are providing support services or facilities or making available plant and machinery in connection with the business of prospecting or extraction or production of mineral oils in which the Central Government or an authorised person is associated. In other words, the power to grant exemption is two-fold and covers agreements directly associated with the prospecting or extraction or production of mineral oils or contracts facilitating or making available services in connection with such a business. There is nothing in the provisions of the Act which could have debarred the Central Government from granting exemptions to both categories of foreign companies mentioned above or to confine the grant of exemption to any one or a specified category of foreign companies. The Notification No. G. S. R. 307(E), dated 31st March, 1983, however grants exemption only to foreign companies with whom the Central Government had executed agreements for direct association or participation by the Central Government or the person authorised by it (ONGC) in the prospecting or extraction or production of mineral oils. In other words, the exemption notification confines or restricts the scope of the exemption to only one category of foreign companies which has been specifically enumerated in sub-section (2)(a) of section 24AA of the Surtax Act. The Second category of foreign companies that may be providing services as enumerated in sub-section (2)(b) of section 24AA is specifically omitted in the exemption notification. The power u/s. 24AA of the Surtax Act, is wide enough to include even this category of foreign companies. The omission of this particular category of foreign companies in the exemption notification, notwithstanding the wide amplitude and availability of the power u/s. 24AA, clearly reflects a conscious decision on the part of the Central Government to confine the scope of the exemption notification to only those foreign companies that are enumerated in and covered by sub-section 2(a) of section 24AA of the Surtax Act.
The Supreme Court affirmed the orders of the High Court and dismissed the appeals.
The appellant – ONGC and a non-resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sagar Ratna for the assessment year 1986-87.
The appellant – ONGC has been assessed in a representative capacity on behalf of the foreign company with whom it had executed agreements for services to be rendered by such company in connection with prospecting extraction or production of mineral oils by ONGC. The primary/assessing authority took the view that the assessments should be made u/s. 44D of the Act and not section 44BB of the Act. The Appellate Commissioner and the Income-tax Appellate Tribunal disagreed with the views of the assessing authorities leading to the institution of appeal before the High Court of Uttarakhand. The High Court overturned the view taken by the Appellate Commissioner and the Tribunal and held the payments made to be liable for assessment u/s. 44D of the Act.
The High Court took the view that under the agreement, payment to M/s. Foramer France was required to be made at the rate of 3,450 $ per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company as the contract did not mention that the personnel of the non-resident company were also carrying out the work of drilling of wells and as the company had received fees for rendering service, the payments made were liable to be taxed under the provisions of section 44D of the Act.
Aggrieved, the ONGC has filed appeal before the Supreme Court.
The Supreme Court held that a careful reading of the provisions of the Act goes to show that u/s. 44BB(1) in the case of a non-resident providing services or facilities in connection with or supplying plant and machinery used or to be used in prospecting, extraction or production of mineral oils the profit and gains from such business chargeable to tax is to be calculated at a sum equal to 10 per cent of the aggregate of the amounts paid or payable to such non-resident assessee as mentioned in s/s. (2). On the other hand, section 44D contemplates that if the income of a foreign company with which the Government or an Indian concern had an agreement executed before 1st April, 1976, or on any date thereafter but before April, 2003 the computation of income would be made as contemplated under the aforesaid section 44D. Explanation (a) to section 44D, however, specifies that “fees for technical services” as mentioned in section 44D would have the same meaning as in Explanation 2 to clause (vii) of section 9(1). The said Explanation, defines “fees for technical services” to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the Explanation excludes from consideration for the purposes of the expression, i.e., “fees for technical services” any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head “Salaries”. Fees for technical services, therefore, by virtue of the aforesaid Explanation would not include payments made in connection with a mining project.
The Supreme Court noted that the Income-tax Act does not define the expressions “mines” or “minerals”. The said expressions however were found defined and explained in the Mines Act, 1952, and the Oil Fields (Development and Regulations) Act, 1948. The Supreme Court having regard to the said definition and to the Seventh Schedule of the Constitution, held that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it was the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or a mining operation that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed u/s. 44BB or section 44D of the Act. The Supreme Court noted that the Central Board of Direct Taxes had accepted the said test and had in fact issued a Circular as far back as 22nd October, 1990, to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and, hence, payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act.
According to the Supreme Court, it was not possible to take any other view if the works or services mentioned under a particular agreement was directly associated or inextricably connected with prospecting, extraction or production of mineral oils. Keeping in mind the above provisions and looking into each of the contracts involved in the group of cases before it, it found that the pith and substance of each of the contracts/agreements was inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement was for prospecting, extraction or production of mineral oils though there would be certain ancillary works contemplated thereunder. The Supreme Court therefore held that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts was more appropriately assessable under the provisions of section 44BB and not section 44D of the Act.
The assessee, a private limited company, had an industrial unit at Majiwada, Thane, which was notified urban area as per notification dated 22nd September, 1967 issued u/s. 280Y(d) for the purpose of Chapter XXII-B. With a view to shift its industrial undertaking from an urban area to a non-urban area at Kurukumbh Village, Pune District, Maharashtra, it sold its land, building and plant and machinery situated at Majiwada, Thane to Shree Vardhman Trust for a consideration of Rs.1,20,00,000, and after deducting an amount of Rs.11,62,956, had earned a capital gain of Rs.1,08,33,044. Since it intended to shift its industrial undertaking from an urban area to a non-urban area, out of the capital gain so earned, the appellant paid by way of advances, various amounts to different persons for purchase of land, plant and machinery, construction of factory building, etc. Such advances amounted to Rs.1,11,42,973 in the year 1991-92. The appellant claimed exemption u/s. 54G of the Income-tax Act on the entire capital gain earned from the sale proceeds of its erstwhile industrial undertaking situated in Thane in view of the advances so made being more than the capital gain made by it. Section 54G was introduced by the Finance Act, 1987 with effect from assessment year 1988-89.
The Assessing Officer imposed a tax on capital gains, refusing to grant exemption to the appellant u/s. 54G. According to the Assessing Officer, non-urban area had not been notified by the Central Government and therefore the plea of shifting the non-urban area could not be accepted. Further, it could not be said that giving advance to different concerns meant utilisation of money for acquiring the assets. Hence, failure to deposit the capital gain in the Capital Gains Deposit Account by the assessee the claim could not be allowed.
The Commissioner of Income-tax (Appeals) dismissed the appellant’s appeal. The Income-tax Appellate Tribunal however, allowed the assessee’s appeal stating that even an agreement to purchase is good enough and that the Explanation to section 54G being declaratory in nature would be retrospective.
The High Court reversed the judgment of the Incometax Appellate Tribunal and held that as the notification declaring Thane to be an urban area stood repealed with the repeal of the section under which it was made, the appellant did not satisfy the basic condition necessary to attract section 54G, namely, that a transfer had to be made from an urban area to a non-urban area. Further, the expression “purchase” in section 54G could not be equated with the expression “towards purchase” and, therefore, admittedly as land, plant and machinery had not been purchased in the assessment year in question, the exemption contained in section 54G had to be denied.
The Supreme Court held that on a conjoint reading of the Budget Speech, Notes on clauses and Memorandum Explaining the Finance Bill of 1987, it was clear that the idea of omitting section 280ZA and introducing on the same date section 54G was to do away with the tax credit certificate scheme together with the prior approval required by the Board and to substitute the repealed provision with the new scheme contained in section 54G. It was true that section 280Y(d) was only omitted by the Finance Act, 1990, and was not omitted together with section 280ZA. However, this would make no material difference inasmuch as section 280Y(d) was a definition section defining ‘urban area” for the purpose of section 280ZA only and for no other purposes. It was clear that once section 280ZA was omitted from the statute book, section 280Y(d) had no independent existence and would for all practical purposes also be “dead”. Quite apart from this, section 54G(1) by its Explanation introduced the very definition contained in section 280Y(d) in the same terms. Obviously, both provisions were not expected to be applied simultaneously and it was clear that the Explanation to section 54G(1) repealed by implication section 280Y(d). Further, from a reading of the Notes on Clauses and the Memorandum of the Finance Bill, 1990, it was clear that section 280Y(d) which was omitted with effect from 1st April 1, 1990, was so omitted because it had become “redundant”. It was redundant because it had no independent existence, apart from providing a definition of “urban area” for the purpose of section 280ZA which had been omitted with effect from the very date that section 54G was inserted, namely, 1st April, 1988.
The Supreme Court further held that the idea of section 24 of the General Clauses Act is, as its marginal note shows, to continue uninterrupted subordinate legislation that may be made under a Central Act that is repealed and re-enacted with or without modification. It being clear in the present case that section 280ZA which was repealed by omission and re-enacted with modification in section 54G, the notification declaring Thane to be an urban area dated 22nd September, 1967, would continue under and for the purposes of section 54G. It was clear, therefore, that the impugned judgment in not referring to section 24 of the General Clauses Act at all had thus fallen into error.
The Supreme Court for all the aforesaid reasons was therefore, of the view that on omission of section 280ZA and its re-enactment with modification in section 54G, section 24 of the General Clauses Act would apply, and the notification of 1967, declaring Thane to be an urban area, would be continued under and for the purposes of section 54G. The Supreme Court held that a reading of section 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land. The High Court had completely missed the window of three years given to the assessee to purchase or acquire machinery and building or land. This is why the expression used in section 54G(2) is “which is not utilised by him for all or any of the purposes aforesaid.” According to the Supreme Court, it was clear that for the assessment year in question all that was required for the assessee to avail of the exemption contained in the section was to “utilize” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land. It was undisputed that the entire amount claimed in the assessment year in question had been so “utilized” for purchase and/or acquisition of new machinery or plant and land or building. If the High Court was right, the assessee had to purchase and/or acquire machinery, plant, land and building within the same assessment year in which the transfer takes place. Further, the High Court missed the key words “not utilized” in sub-section (2) which would show that it was enough that the capital gain made by the assessee should only be “utilized” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets.
In the first judgment of the High Court dated 16th September, 2010, various points on the merits were gone into, inter alia, as to whether deductions to be made u/s. 80-IB of the Income-tax Act, 1961, were allowable on facts and whether transport subsidies were or were not available together with other incentive. Ultimately, the High Court after stating in paragraph 2 that two substantial questions of law arose u/s. 260A of the Income-tax Act went on to answer the two questions. The first question so framed was answered in the negative, that is in favour of the Revenue, and against the assessee. However, the second question was answered in the affirmative, in favour of the assessee, and against Revenue, and the appeal was disposed of in the aforesaid terms.
Against the aforesaid judgment dated 16th September, 2010, a Review Petition was filed by the assessee before the very Division Bench. In a long judgement dated 8th April, 2013, the Division Bench recalled its earlier order dated 16th September, 2010 for the reason that there was an omission to formulate the substantial questions of law. Before the Supreme Court Learned Senior Advocate appearing on behalf of the Revenue, assailed the aforesaid judgment dated 8th April, 2013, stating that it was factually incorrect that no substantial question of law have been framed and that such questions were to be found in the very beginning of the judgment dated 16th September, 2010, itself. He further argued, referring to section 260A(7), that only those provisions of the Civil Procedure Code could be looked into for the purposes of section 260A as were relevant to the disposal of appeals, and since the review provision contained in the Code of Civil Procedure were not so referred to, the High Court would have no jurisdiction u/s. 260A to review such judgment.
The Supreme Court noted that by the review order dated 8th April, 2013, the Division Bench felt that it should not have gone into the matter at all given the fact that on an earlier occasion, before 16th September, 2010, it had reserved the judgment on whether substantial questions of law in fact exist at all or not. This being the case, in a lengthy order the Division Bench has thought it fit to recall its own earlier judgment.
The Supreme Court in such circumstances was not inclined to interfere with the judgment in view of what had been recorded in the impugned judgment dated 8th April, 2013. The Supreme Court further held that High Courts being courts of record under article 215 of the Constitution of India, the power of review would in fact be inherent in them. Also on reading of section 260A(7), it was clear that the said section did not purport in any manner to curtail or restrict the application of the provisions of the Code of Civil Procedure. Section 260A(7) only states that all the provisions that would apply qua appeals in the Code of Civil Procedure would apply to appeals u/s. 260A. That does not in any manner suggest either that the other provisions of the Code of Civil Procedure are necessarily excluded or that the High Court’s inherent jurisdiction is in any manner affected.
The appellant was assessed to wealth-tax under the Act for the assessment years 1977-78 to 1986-87. The valuation of the property which was the subject matter of wealth-tax under the Act was the urban land appurtenant to the Bangalore Palace (hereinafter referred to as “the property”). The total extent of the property was 554 acres or 1837365.36 sq. mtrs. It comprised of residential units, non-residential units and land appurtenant thereto, roads and masonry structures along the contour and the vacant land. The vacant land measured 11,66,377.34 sq.mtrs. The aforesaid property was the private property of the late Sri Jaychamarajendra Wodeyar, the former ruler of the princely State of Mysore. He died on 23rd September, 1974. After the death of Sri Jaychamarajendra Wodeyar, his son Sri Srikantadatta Wodeyar, the assessee applied to the Settlement Commission to get the dispute settled with regard to valuation of property and lands appurtenant thereto for the assessment years 1967-68 to 1976-77.
The application of the assessee before the Settlement Commission for the assessment years 1967-68 to 1976- 77 was disposed of on 29th September, 1988 laying down norms for valuation of the property. The Wealthtax Officer adopted the value as per the Settlement Commission for the assessment years 1976-77, 1977- 78 and 1978-79 at Rs.13.18 crore (for both land and buildings). For the assessment year 1979-80, since there was no report of the Valuation Officer, the Commissioner of Income-tax (Appeals) worked out the value of the property at Rs.19.96 crore for the assessment year 1979- 80, which was adopted by the Wealth-tax Officer for the assessment year 1980-81 as well. For the assessment years 1981-82, 1982-83 and 1983-84, the Wealth-tax Officer fixed the value of land and building at Rs.18.78 crore, Rs.29.85 crore and Rs.29.85 crore, respectively. For the assessment year 1984-85, the Wealth-tax Officer took the value at Rs.31.22 crore on the basis of the order passed by the Commissioner (Appeals) for earlier years.
The orders of the Wealth-tax Officer passed under the Act fixing the value of the land for different assessment years for the purpose of the Act was challenged by the assessee before the Commissioner (Appeals). In these appeals, the contention of the assessee was that the value of the property was covered by the Ceiling Act for which maximum compensation that could be received by the assessee was only Rs.2 lakh. The appeals filed for the assessment years, namely, 1980-81, 1982-83 and 1983- 84 were disposed of by the Commissioner of Income-tax (Appeals) by a common order dated 9th January, 1990, in which he made slight modifications to value adopted for the assessment year 1981-82 and confirmed the valuation of the Wealth-tax Officer for the assessment years 1982-83 and 1983-84. However, in respect of appeals relating to the assessment years 1977-78 to 1980-81, the Commissioner (Appeals) passed the orders dated 31st July, 1990, accepting that the urban land appurtenant to the property be valued at Rs.2,00,000. Similar orders came to be passed by the Commissioner of Incometax (Appeals) for the assessment years 1984-85 and 1985-86 also. Against these orders of the Commissioner (Appeals), both the assessee as well as the Revenue/ Department went up in appeals before the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore.
The issue before the Income-tax Appellate Tribunal was only with regard to the valuation of vacant land attached to the property since the assessee had accepted the valuation in regard to residential and non-residential structures within the said property area and appurtenant land thereto.
The Income-tax Appellate Tribunal, Bangalore, passed the order directing the vacant land be valued at Rs.2 lakh for each year from the assessment years 1977-78 to 1985-86. Its reasoning was that the competent authority under the Ceiling Act had passed an order determining that the vacant land was in excess of the ceiling limit, and had ordered that action be taken to acquire the excess land under the Karnataka Town and Country Planning Act, 1901. And under the Land Ceiling Act, an embargo was placed on the assessee to sell the subject land and exercise full rights. The assessee was only eligible to maximum compensation of Rs.2 lakh under the Ceiling Act. Hence, given these facts and circumstances the subject land could only be valued at Rs.2 lakh for wealthtax purposes on the valuation date for the assessment years 1977-78 to 1985-86.
Against the order of the Tribunal, the Commissioner of Wealth-tax sought reference before the Karnataka High Court in respect of the assessment years, namely, 1977-78 to 1985-86 arising out of the consolidated order of the Tribunal.
The High Court, vide the impugned order dated 13th June, 2005 holding that although the prohibition and restriction contained in the Ceiling Act had the effect of decreasing the value of the property, still the value of the land cannot be the maximum compensation that is payable under the provision of the Ceiling Act. Thus, the question referred had been answered against the assessee.
The Supreme Court observed that the valuation of the asset in question has to be in the manner provided u/s. 7 of the Act. Such a valuation has to be on the valuation date which has reference to the last day of the previous year as defined u/s. 3 of the Income-tax Act, if an assessment was to be made under that Act for that year. In other words, it is 31st March, immediately preceding the assessment year. The valuation arrived at as on that date of the asset is the valuation on which wealth-tax is assessable. It is clear from the reading of section 7 of the Act that the Assessing Officers has to keep hypothetical situation in mind, namely, if the asset in question is to be sold in the open market, what price it would fetch. The Assessing Officer has to form an opinion about the estimation of such a price that is likely to be received if the property were to be sold. There is no actual sale and only a hypothetical situation of a sale is to be contemplated by the Assessing Officers. The tax officer has to form an opinion about the estimated price if the asset were to be sold in the assumed market and the estimated price would be the one which an assumed wiling purchaser would pay for it. On these reckoning, the asset has to be valued in the ordinary way.
The Supreme Court noted that the effect of the provisions of the Urban Land (Ceiling and Regulation) Act, 1976 in the context of instant appeals was that the vacant land in excess of the ceiling limit was not acquired by the State Government as notification u/s. 10(1) of the Ceiling Act had not been issued. However, the process had started as the assessee had filed statement in the prescribed form as per the provisions of section 6(1) of the Ceiling Act and the competent authority had also prepared a draft statement u/s. 8 which was duly served upon the assessee. The fact remained that so long as the Act was operative, by virtue of section 3 the assessee was not entitled to hold any vacant land in excess of the ceiling limit. Order was also passed to the effect that the maximum compensation payable was Rs.2 lakh.
The Supreme Court held that the Assessing Officer took into consideration the price which the property would have fetched on the valuation date, i.e., the market price, as if it was not under the rigours of the Ceiling Act. Such estimation of the price which the asset would have fetched if sold in the open market on the valuation date(s), would clearly be wrong even on the analogy/rationale given by the High Court as it accepted that restrictions and prohibitions under the Ceiling Act would have depressing effect on the value of the asset. Therefore, the valuation as done by the Assessing Officer could not have been accepted. The Supreme Court observed that it was not oblivious of those categories of buyers who may buy “disputed properties” by taking risks with the hope that legal proceedings may ultimately be decided in favour of the assessee and in such a eventuality they were going to get much higher value. However, as stated above, hypothetical presumptions of such sales are to be discarded as one has to keep in mind the conduct of a reasonable person and “ordinary way” of the presumptuous sale.
The Supreme Court held that when such a presumed buyer is not going to offer more than Rs.2 lakh, the obvious answer is that the estimated price which such asset would fetch if sold in the open market on the valuation date(s) would not be more than Rs.2 lakh. The Supreme Court having held so pointed out one aspect which was missed by the Commissioner (Appeals) and the Tribunal as well while deciding the case in favour of the assessee. The compensation of Rs.2 lakh was in respect of only the “excess land” which was covered by sections 3 and 4 of the Ceiling Act. The Supreme Court held that the total vacant land for the purpose of the Wealth-tax Act is not only excess land but other part of the land which would have remained with the assessee in any case. Therefore, the valuation of the excess land, which was the subject matter of the Ceiling Act, would be Rs.2 lakh. To that market value of the remaining land would have to be added for the purpose of arriving at the valuation for payment of wealth-tax.
In many a case, no additions are made for the issues that formed part of the reasons for reopening, while passing an order of reassessment, and instead, additions are made on altogether new issues that are not part of the reasons recorded.
There has been an ongoing conflict concerning the scope of reassessment. Should the scope extend to cover issues not recorded in the reasons and, if yes, should such extension be denied, at least in cases where the reasons for which the reopening was made, have been found to be invalid on final reassessment. An additional issue that arises is whether a fresh notice u/s. 148 is required to be issued for covering the new issue in reassessment.
The issue about including new issues where additions are also made in respect of the recorded reasons is settled in favour of sustenance of addition on account of a new or additional issues. What appears however, to be open is the issue where addition is made on account of an issue that has not been found in the reasons recorded and where no addition is made for the reasons recorded. Conflicting decisions are delivered on the subject by High Courts with some upholding the right of the Assessing Officer, and some dismissing it.
N. Govindaraju’s case
The issue recently came up for consideration of the Karnataka High court in the case of N. Govindaraju vs. ITO, 60 taxmann.com 333 (Karnataka).In that case, the assessee, an individual, had income from house property, transport business, capital gains and other sources, and had filed the return of income, which was processed u/s. 143(1) and accepted. A notice u/s. 148 was issued for reopening the assessment for the purpose of assessing the income from the sale of property u/s. 45(2) and also for denying the benefit of indexation. The reassessment was completed on total income of Rs.29.91 lakh. No addition was made u/s. 45(2), nor was indexation denied to him in reassessment. Additions were however made for reasons other than the one recorded in the notice.
On appeal, the Commissioner (Appeals) confirmed the reassessment and the Tribunal held that the reopening of assessment was justified in law.
On appeal to the High Court, the assessee raised the following questions for consideration of the court; “Whether the Tribunal was correct in upholding reassessment proceedings, when the reason recorded for re-opening of assessment u/s.147 of Act itself does not survive. Whether the Tribunal was correct in upholding levy of tax on a different issue, which was not a subject matter for re-opening the assessment and moreover the reason recorded for the re-opening of the assessment itself does not survive.”
On behalf of the assessee, it was submitted that the order u/s. 147 of the Act had to be in consonance with the reasons given for which notice u/s. 148 had been issued, and once it was found that no tax could be levied for the reasons given in the notice for reopening the assessment, independent assessment or reassessment on other issues would not be permissible, even if subsequently, in the course of such proceedings some other income chargeable to tax was found to have escaped assessment; the reason for which notice was given had to survive, and it was only thereafter that ‘any other income’ which was found to have escaped assessment could be assessed or reassessed in such proceedings; the reopening of assessment should first be valid (which could be only when reason for reopening survived) and once the reopening was valid, then u/s. 147 of the Act, the entire case could be reassessed on all grounds or issues; if reopening was valid and reassessment could be made for such reason, then only the AO could proceed further and not doing so, without even the reason for reopening surviving, it could lead to fishing and roving enquiry and would give unfettered powers to the AO.
The Revenue submitted that under the old section 147 (as it stood prior to 1989), grounds or items for which no reasons had been recorded could not be opened, and because of conflicting decisions of the High Courts, the provisions of the said section had now been clarified to include or cover any other income chargeable to tax which might have escaped assessment and for which reasons might not have been recorded before giving the notice; that the said section 147 was in two parts, which had to be read independently, and the phrase “such income”, in the first part, was with regard to which reasons had been recorded and the phrase “any other income” in the second part was with regard to where no reasons were recorded in the notice and had come to notice of the AO during the course of the proceedings. Both being independent, once the satisfaction in the notice was found sufficient, addition could be made on all grounds, i.e., for which reason had been recorded and also for which no reason had been recorded. All that was necessary was that during the course of the proceedings u/s. 147, income chargeable to tax must be found to have escaped assessment. Strong reliance was placed by the Revenue on the insertion of Explanation 3 in support of its contentions.
The court, on hearing the contentions of the parties, held that once the notice for reopening of a previously closed assessment was held to be valid, the assessment proceedings as well as the assessment order already passed would be deemed to have been set aside and the AO would then have the power to pass fresh assessment order with regard to the entire income which escaped assessment and to levy tax thereon. and doing so was his duty .
The court observed that the issue was whether the latter part of the section relating to ‘any other income’ was to be read in conjunction with the first part (relating to ‘such income’) or not; if it was to be read in conjunction, then without there being any addition made with regard to ‘such income’ (for which reason had been given in the notice for reopening the assessment), the second part could not be invoked; however, if it was not to be so read in conjunction, the second part could be invoked independently even without the reason for the first part surviving.
In the opinion of the court, from a plain reading of section 147, it was clear that its latter part provided that ‘any other income’ chargeable to tax which had escaped assessment and which had come to the notice of the AO subsequently in the course of the proceedings, could also be taxed. It further noted that the sole purpose of Chapter XIV of the Act was to bring to tax the entire taxable income of the assessee and, in doing so, where the AO had reason to believe that some income chargeable to tax had escaped assessment, he might assess or reassess such income. In doing so, it would be open to him to also independently assess or reassess any other income which did not form the subject matter of notice.
The court took note of the conflicting decisions of the high courts on the subject, noting that some had held that the second part of section 147 was to be read in conjunction with the first part, and some had held that the second part was to be read independently.
It held that the insertion of Explanation 3 could not be but for the benefit of the revenue, and not the assessee. In that view of the matter, on reading section 147, it was clear that the phrase ‘and also’ joined the first and second parts of the section; the phrase ‘and’ was conjunctive which was to join the first part with the second part, but ‘also’ was for the second part and was disjunctive; it segregated the first part from the second. Upon reading the full section, the phrase ‘and also’ could not be said to be conjunctive. It was thus clear to the court that once satisfaction of reasons for the notice was found sufficient, i.e., if the notice u/s. 148(2) was found to be valid, then addition could be made on all grounds or issues (with regard to ‘any other income’ also) which might come to the notice of the AO subsequently during the course of proceedings u/s. 147, even though reason for notice for ‘such income’ which might have escaped assessment, did not survive.
Importantly, the court held that Explanation 3 was inserted to address the ambiguity in the main provision of the enactment that had arisen because of the different interpretation of different High Courts about the issue whether the second part of the section was independent of the first part, or not. To clarify the same, Explanation 3 was inserted, by which it had been clarified that the AO could assess the income in respect of any issue which had escaped assessment and also ‘any other income’ (of the second part of section 147) which came to his notice subsequently during the course of the proceedings under the section. After the insertion of Explanation 3 to section 147, it was clear that the use of the phrase ‘and also’ between the first and the second parts of the section was not conjunctive and assessment of ‘any other income’ (of the second part) can be made independent of the first part (relating to ‘such income’ for which reasons were given in notice u/s. 148), notwithstanding that the reasons for such issue (‘any other income’) had not been given in the reasons recorded u/s. 148(2).
Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 was for the benefit of the revenue and not the assessee, and was aimed at garnering the escaped income of the assessee, and also keeping in view that it was the constitutional obligation of every assessee to disclose his total income on which it was to pay tax, it was held by the court that the two parts of section 147 (one relating to ‘such income’and the other to ‘any other income’) were to be read independently. In doing so, it observed that the phrase ‘such income’ used in the first part of section 147 was with regard to which reasons had been recorded u/s. 148(2), and the phrase ‘any other income’ used in the second part of the section was with regard to a case where no reasons had been recorded before issuing notice and a reason had come to the notice of the AO subsequently during the course of the proceedings, which could be assessed independent of the first part, even when no addition could be made with regard to ‘such income’, once the notice on the basis of which proceedings had commenced, was found to be valid.
The Karnataka High Court took note of the decisions in the cases of CIT vs. Jet Airways (I) Ltd. 331 ITR 236( Bom.) Ranbaxy Laboratories Ltd. vs. CIT, 336 ITR 136(Dl.) and CIT vs. Adhunik Niryat Ispat Ltd.(Del.) and CIT vs. Mohmed Juned Dadani, 355 ITR 172 (Del.). and noted that, with due respect to the view taken in the aforesaid cases, it was unable to persuade itself to follow the same.
The court concurred with the decision of the Punjab & Haryana High Court in the case of Majinder Singh Kang vs. CIT, 344 ITR 358 which was delivered after noticing that the earlier judgments in the cases of CIT vs. Atlas Cycle Industries 180 ITR 319 and CIT vs. Shri Ram Singh 306 ITR 343 were rendered prior to the insertion of Explanation 3 to section 147 of the Act, wherein it was held that “a plain reading of Explanation 3 to section147 clearly depicts that the Assessing Officer has power to make additions even on the ground that reassessment notice might not have been issued in the case during the reassessment proceedings, if he arrives at a conclusion that some other income has escaped assessment which comes to his notice during the course of proceedings for reassessment u/s.148 of the Act. The provision nowhere postulates or contemplates that it is only when there is some addition on the ground on which reassessment had been initiated, that the Assessing Officer can make additions on any other grounds on which the income has escaped assessment”.
The court further noted that the same view was reiterated by the Punjab & Haryana High Court in the case of CIT vs. Mehak Finvest (P.) Ltd,.367 ITR 769 wherein it was also noticed that the Special Leave Petition filed against the judgment in the case of Majinder Singh (supra ) had been dismissed by the Supreme Court.
Mohmed Juned Dadani’s case
The issue had arisen in the case of CIT-II vs. Mohmed Juned Dadani, 30 taxmann.com 1 (Gujarat). In this case, the assessment was completed allowing assessee’s claim for deduction u/s. 80HHC. Subsequently, the Assessing Officer initiated reassessment proceedings taking a view that if two export incentives, i.e., DEPB licence income and excise duty refund were excluded from the income of the assessee, there would be a loss from export business and, consequently, assessee would not be entitled to deduction u/s. 80HHC. In the reassessment, the AO made additions of cash credit u/s. 68 and on account of some unverifiable purchases. However, the AO did not disturb the deduction u/s. 80HHC, previously claimed by the assessee.
The assessee carried such order in appeal before the Commissioner (Appeals) where he contended that the AO had no jurisdiction to travel beyond the reasons for reopening the assessment, which appeal however, was rejected by the Commissioner (Appeals). The Tribunal, finding that in the reassessment proceedings, no disallowance had been made towards assessee’s claim for deduction u/s. 80HHC, which was the reason on the basis of which notice for reopening of the assessment was issued, held that the order of reassessment was without jurisdiction and bad in law.
On revenue’s appeal to the Gujarat High Court, the court addressed the following substantial question of law. “Whether the Income-tax Appellate Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the Assessing Officer in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him.” .
On behalf of the revenue, it was submitted that the Tribunal committed a grave error in interpreting the provisions contained in section 147 of the Act ; the section as amended w.e.f. 01.04.1989, gave ample authority to an AO to assess or reassess any income chargeable to tax which had escaped assessment, as long as the requirements of a valid reopening of the assessment were satisfied; once an assessment was reopened, by virtue of valid exercise of powers u/s. 147 of the Act, thereafter, there would be no further limitation on the AO framing assessment on all or any of the grounds mentioned in the reasons recorded or even on the grounds not so mentioned; that the position was clear even before Explanation 3 to section 147 of the Act was added with retrospective effect from 01.04.1989; in any case, by virtue of such Explanation being introduced in section 147, the issue had been put beyond any pale of controversy. The decision of the Punjab and Haryana High Court in case of Majinder Singh Kang vs. CIT 344 ITR 358 was relied upon by the revenue.
On the other hand, the assessee drew attention to the statutory provisions contained in section 147 of the Act, as amended w.e.f. 01.04.1989, and the explanatory memorandum clarifying the background in which Explanation 3 to section 147 of the Act was enacted. It was submitted that section 147 of the Act, prior to introduction of Explanation 3, permitted the AO to assess or reassess any income chargeable to tax which had escaped assessment and also any other income which had escaped assessment and which came to the notice of the AO subsequently in the course of the proceedings for reassessment; that the words “and also any other income” must be understood as to be referring to such income which had escaped assessment but the ground for which had not been mentioned in the reasons recorded, in addition to income which had escaped assessment and for which mention had been made in the reasons recorded; that Explanation 3 to section 147 of the Act did not change the basic proposition, nor it was meant to do so, as would be clear from the explanatory memorandum explaining the reasons for introduction of the said explanation; that power to reopen the assessment which had been previously closed was peculiar in nature and was available to the AO under the Income-tax Act which was not normally available to an officer exercising judicial or quasi judicial powers; such powers, therefore, must be strictly construed, authorising an AO to assess income under any head even if the same was not part of the reasons recorded for reopening of the assessment, would give wide powers which were possible of arbitrary exercise; that for an AO to assess income on any ground not mentioned in the reasons recorded, it was essential that there was a valid reopening of assessment; if the grounds, on which the reopening of the assessment failed, there would thereafter be no longer a valid reopening of an assessment in which the AO could make any additions on some other grounds.
The Gujarat High Court held that the Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment was based, no additions were made by the AO in the order of assessment, he could not make additions on some other grounds which did not form part of reasons recorded by him. It was not in dispute that once an assessment was reopened by a valid exercise of jurisdiction u/s. 147, it was open for the AO to assess or reassess any income which had escaped assessment which came to his light during the course of his assessment proceedings which was not mentioned in the reason for issuing notice u/s. 148, provided the ground on which the notice was issued for reopening survived.
Significantly, the court supplied an interesting dimension by noting that in a notice for reassessment which had been issued beyond a period of four years from the end of relevant assessment year, the condition that income chargeable to tax had escaped assessment for the reason of the failure on the part of the assessee to disclose truly and fully all material facts for the purpose of assessment must also be established. If in such a situation, the stand of the revenue was accepted, a very incongruent situation would come about, if ultimately the AO were to drop the ground on which notice for reopening had been issued, but to chase some other grounds not so mentioned for issuance of the notice. In such a situation, even if a case where notice for reopening had been issued beyond a period of four years, the assessment would continue even though on all the grounds on which the additions were being made, there was no failure on the part of the assessee to disclose true and full material facts. In such a situation, an important requirement of failure on part of the assessee to disclose truly and fully all material facts would be totally circumvented. Thus, it was apparent that Explanation 3 to section 147 does not change the situation insofar as the present controversy was concerned.
In deciding the case, the High court approved the decision relied upon by the assessee in the case of CIT vs. Jet Airways (I) Ltd. 331 ITR 236 in which the Bombay High Court considering an identical situation, interpreting the provisions contained in section 147 of the Act, held that the situation would not be different by virtue of introduction of Explanation 3 to the said section. The High Court, placing heavy reliance on the explanatory memorandum, held that if upon issuance of a notice u/s. 148 of the Act, the AO did not assess the income which he had reason to believe had escaped assessment and which formed the basis of a notice u/s.148, it was not open to him to assess independently any other income which did not form the subject matter of the notice.
In addition, the Gujarat High Court approved the decisions in the case of Ranbaxy Laboratories Ltd. vs. CIT , 336 ITR 136 (Delhi) wherein the court besides approving the ratio of the decision of the Bombay High Court in the case of Jet Airways, held that sub-section (2) of section 148 mandated reasons for issuance of notice by the AO and s/s. (1) thereof mandated service of notice to the assessee before the AO proceeded to assess, reassess or recompute the escaped income and those conditions were required to be fulfilled to assess or reassess the escaped income chargeable to tax. The Gujarat High court also approved the observations of the Delhi High Court to the effect that the Legislature could not be presumed to have intended to give blanket powers to the AO such that on assuming jurisdiction u/s. 147 regarding assessment or reassessment of the escaped income, he could keep on making roving inquiry, and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction, and also the finding of the Delhi High Court, that for every new issue coming before the AO during the course of proceedings of assessment or reassessment of escaped income, and which he intended to take into account, he would be required to issue a fresh notice u/s. 148. The ratio of the decision in the case of Asstt. CIT vs. Major Deepak Mehta, 344 ITR 641 (Chhattisgarh) was also approved by the court.
The Gujarat High Court, relying on the Memorandum explaining the provisions of Explanation 3, held that it was meant to be clarificatory in nature and to put the issue beyond any legal controversy; when the Legislature found that in face of the provisions contained in section 147 of the Act post 01.04.1989, some of the courts had taken a view that the AO was restricted to the reassessment proceedings only on issues in respect of which the reasons were recorded for reopening the assessment, such explanation was introduced in the statute; thus, the explanation was meant to be merely clarificatory in nature and was introduced with the purpose of putting at rest the legal controversy regarding the true interpretation of section 147 of the Act which had arisen on account of certain judicial pronouncements especially in the cases of CIT vs. Atlas Cycle Industries, 180 ITR 319 (P&H), Travancore Cements Ltd. vs. Asstt. CIT 305 ITR 170 (Kerala).
The Gujarat High Court did not agree with the decision of the Punjab and Haryana High Court in case of Majinder Singh Kang (supra) by noting that all other courts had uniformly taken a view that Explanation 3 to section 147 of the Act did not change the situation insofar as the present controversy was concerned, and for the reason that the explanatory memorandum to Explanation 3 to section of the Act was not brought to the notice of the High Court in the said case.
Observations
On a bare reading of the main provision, it is gathered that section 147, as is substituted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 01.04.1989, enables inclusion of any other income that has escaped assessment and which comes to the notice subsequently in the course of proceedings. Accordingly, it should be possible for an AO to also include any new item while making reassessment, though such item was not included in recorded reasons. This main provision was found to be deficient, in the past by the courts, on the following two counts;
The substituted provision while permitting the AO to rope in a new issue in the scope of reassessment, did not override the specific provisions of section148(2), which required an AO to record reasons before issue of a notice u/s. 148 for doing so.
The substituted provision permitted the AO to rope in a new issue in the scope of reassessment only where the original issue on which the reassessment was reopened has been found to be valid.
One of the above referred deficiencies has been expressly cured by insertion of Explanation 3 w.e.f 01.04.1989 by the Finance (No.2) Act, 2009, whereunder the requirement of the new issue being recorded in reasons for reopening as per section 148(2), before a notice is issued, has been dispensed with. As regards the other deficiency concerning the need for survival of the recorded issue, some courts recently have found that the AO is empowered to expand the scope of reassessment either by virtue of Explanation 3 or independent of it, while a few other courts have found that the deficiency continued in spite of Explanation 3.
The issue that has attracted conflicting views therefore is narrowed down to whether the word ‘and also’ used in the main proviso are conjunctive and cumulative or they are disjunctive and detach the latter part of the provision from the earlier part. In the alternative, whether, with insertion of Explanation 3, the AO is authorised to rope in a new issue, even where no addition is made in respect of the issue recorded in reasons for reopening.
The question is that when the reason recorded for reopening the assessment u/s. 147 itself does not survive, can tax be levied for a totally different reason or issue, which was not the subject matter of reopening the assessment. In other words, if reasons for reopening are (a) and (b) and during reassessment proceedings , income is found to have escaped from assessment for some other reason say, (c) and (d), then, if reasons (a) and (b) do not survive, and no addition can be made for such reasons, can additions be made on the basis of reasons or grounds (c) and (d) that did not find place in the reasons recorded. The related questions are whether the main provision permits such an assessment and whether the insertion of the Explanation 3 has made such an assessment possible.
Section 147 of the Act, even without the aid of Explanation 3, enabled the AO while framing an assessment section 147 of the Act, to assess or reassess such income for which he had recorded his reasons to believe had escaped assessment and also any other income which escaped assessment which came to his notice subsequently in the course of the assessment proceedings.
Insertion of Explanation in a section of an Act is for a different purpose than insertion of a ‘Proviso’. Explanation gives a reason or justification and explains the contents of the main section, whereas ‘Proviso’ puts a condition on the contents of the main section or qualifies the same. ‘Proviso’ is generally intended to restrain the enacting clause, whereas Explanation explains or clarifies the main section. ‘Proviso’ limits the scope of the enactment as it puts a condition, whereas Explanation clarifies the enactment as it explains and is useful for settling a matter or controversy. In the instant case, insertion of Explanation 3 to section 147 does not in any manner override the main section and has been added with no other purpose than to explain or clarify the main section so as to also bring in ‘any other income’ (of the second part of section 147) within the ambit of tax, which may have escaped assessment, and comes to the notice of the AO subsequently during the course of the proceedings.
Circular 5 of 2010 issued by the CBDT also makes this position clear. There is no conflict between the main section 147 and its Explanation 3. This Explanation has been inserted only to clarify the main section and not to curtail its scope, even though it is for the benefit of the revenue and not the assessee.
Explanation 3 thus does not, in any manner, even purport to expand the powers of the AO u/s. 147 of the Act. In any case, an explanation cannot expand the scope and sweep of the main body of the statutory provision. In case of S. Sundaram Pillai vs. V. R. Pattabiraman AIR 1985 (SC) 582 the Supreme Court observed that, an explanation added to a statutory provision is not a substantive provision, but as the plain meaning of the word itself shows, it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision.
An explanation cannot override the scope of the main provision nor can it extend the scope. An explanation can only explain the scope of the main provision by eliminating the ambiguity.
The Rajasthan High Court in Shri Ram Singh 306 ITR 343 and the Punjab & Haryana High Court in CIT vs. Atlas Cycle Industries, 180 ITR 319 had interpreted the words ‘and also’, used in the main section itself, in a cumulative and conjunctive sense and held that to read these words as being in the alternative, would be to rewrite the language used by the Parliament. The said decision was delivered before insertion of Explanation 3.
Parliament must be regarded as being aware of the interpretation that was placed on the words “and also”. Parliament however has not taken away the basis of that decision while it was open to the Parliament, having regard to the plenitude of its legislative powers, to do so. It could have clearly provided in Explanation 3 that power to deal with a new issue would be irrespective of survival of the old issues for which reasons were recorded. It was not so done, and in view of that, the provisions of section 147 as they stood after the amendment of 1st April, 1989, continue to hold the field.
The fluid state of law on the issue prevailing up to 31.03.1988, was sought to be addressed by insertion of substituted provision w.e.f. 01.04.1989. This insertion was found inadequate by the courts for addressing the issue under consideration and to meet the concerns of the courts, Explanation 3 is claimed to have been inserted witnesses cannot be procured for various other reasons, like death of both attesting witness, out of jurisdiction, physical incapacity, insanity etc. Section 69 should apply and can be extended to such cases. Hence, the word “not found” occurring in section 69 of Evidence Act should receive a wider purposive interpretation than its literal meaning and should take in situation where the presence of the attesting witness cannot be procured. This view gets its support from Venkataramayya vs. Kamisetti Gattayya (AIR 1927 Madras 662) and Ponnuswami Goundan vs. Kalyanasundara Ayyar (AIR 1930 Madras 770).
It is settled that mode of proving a Will does not ordinarily differ from that of proving any other document except as to the special requirement of attestation prescribed by section 63 of Indian Succession Act. Section 69 imposes a twin fold duty on the propounder. It provides that if no such attesting witness can be found, it must be proved that attestation of one attesting witness at least is in his handwriting and also that the signature of the person executing the document is in the handwriting of that person. Hence, to rely on a Will propounded in a case covered by section 69 the propounder should prove i) that the attestation is in the handwriting of the attesting witness and ii) that the document was signed by the executant. Both the limbs will have to be cumulatively proved by the propounder. Evidently, the section demands proof of execution in addition to attestation and does not permit execution to be inferred from proof of attestation. However, section 69 presumes that once the handwriting of attesting witness is proved he has witnessed the execution of the document. The twin requirement of proving the signature and handwriting has to be in accordance with section 67 of the Indian Evidence Act.
Object of introducing section 194-IA
In case the language of the provision is capable of two interpretations then the one which advances the object of introducing the provision will have to adopted. The Memorandum explaining the salient features of the Finance Bill, 2013 classified this provision under the caption `Widening of Tax Base and Anti Tax Avoidance Measures’. The Heydon’s Mischief Rule of Interpretation states that while interpreting a provision that interpretation has to be adopted which removes the mischief which was prevalent before the introduction of the provision. The Object of introducing the provision and the Mischief which the Legislature sought to remove can be better understood from the following extracts from the Explanatory Memorandum to the Finance Bill:
“E. WIDENING OF TAX BASE AND ANTI TAX AVOI DANCE MEASURES
Tax Deduction at Source (TDS) on transfer of certain immovable properties (other than agricultural land)
…………. However, the information furnished to the department in Annual Information Returns by the Registrar or Sub-Registrar indicate that a majority of the purchasers or sellers of immovable properties, valued at Rs. 30 lakh or more, during the financial year 2011-12 did not quote or quoted invalid PAN in the documents relating to transfer of the property.
……… In order to have a reporting mechanism of transactions in the real estate sector and also to collect tax at the earliest point of time, it is proposed to insert a new section 194-IA to provide that every transferee, at the time of making payment or ………”
A perusal of the above, clearly indicates that the difficulty faced was that the Annual Information Return, furnished to the Department, by the Registrar or Sub-Registrar, in a majority of the cases, did not have a PAN or had an invalid PAN in the documents relating to transfer of property. This is what is sought to be curbed by introducing the provisions of section 194-IA.
The two objects of introducing the provisions of section 194-IA are:-
(i) to have a reporting mechanism of transactions in the real estate sector; and
(ii) to collect tax at the earliest point of time.
These objectives will have to be kept in mind while interpreting some of the provisions, the language whereof is capable of two interpretations.
Text of Section 194-IA:
For the sake of convenience, the provisions of section194- IA are reproduced hereunder:
“194-IA. (1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon.
(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.
(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.
Explanation.–– For the purposes of this section,––
(a) “agricultural land” means agricultural land in India, not being a land situated in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2;
(b) “immovable property” means any land (other than agricultural land) or any building or part of a building.”
Analysis of Section 194-IA:
Conditions for applicability of the section:
(i) there is a transferee;
(ii) there is a transferor;
(iii) the transferor is a resident;
(iv) there is a transfer of an immovable property, as defined, from the transferor to the transferee;
(v) the transferee is responsible for paying any sum;
(vi) such sum is by way of consideration for transfer of any immovable property;
(vii) the amount of consideration is Rs. 50 lakh or more;
(viii) the transferee is not a person referred to in section 194LA;
(ix) the transferee either :
(a) credits such sum referred to in (vi), or
(b) makes a payment of such sum;
(x) the payment referred to in (ix)(b) is made either by
(a) cash, or
(b) by issue of cheque, or
(c) by issue of draft, or
(d) by any other mode.
Consequences if the above conditions apply:
(i) The transferee becomes liable to deduct tax at source;
(ii) such deduction shall be of an amount;
(iii) the amount of deduction shall be equal to 1% of the sum referred to in (vi) above;
(iv) such a liability arises upon credit of such sum or at the time of making the payment, whichever is earlier;
(v) provisions of section 203A shall not apply to the transferee.
Exceptions: This section would not apply if –
(i) The transferee is a person covered by section 194LA; or
(ii) the transferor is a non-resident; or
(iii) consideration for transfer of immovable property is less than Rs. 50 lakh; or
(iv) the immovable property transferred is an agricultural land as explained subsequently.
Analysis of certain terms used in section 194-IA:
Immovable Property has been defined in Explanation (a) to section 194-IA to mean:
• any land [including land described in section 2(14) (iiia) and 2(14)(iiib) i.e. land which is commonly known as urban agricultural land];
• any building; and
• any part of a building;
• but does not include `agricultural land’.
Agricultural land has been defined in Explanation (b) to section 194-IA – Agricultural land situated in India not being land referred to in section 2(14)(iiia) and 2(14)(iiib). Transferee: The obligation to deduct tax is on the transferee of any immovable property, as defined. The transferee may be any person. He may be an individual, Hindu undivided family, firm, LLP, company, AOP, BOI, cooperative society. He could even be a builder / developer. However, where Government is the purchaser, the section may not apply since Government is not a person (CIT vs. Dredging Corporation of India) (174 ITR 682) (AP). Residential status of the transferee is immaterial. The section applies even to a non-resident buyer or even to a buyer who is an agriculturist. Other conditions being satisfied, the section will apply even when the purchaser / transferee is a family member / relative of the seller / transferor. However, the purchaser / transferee should not be a person referred to in section 194LA. If the purchaser / transferee is a person referred to in section 194LA, such a person is not required to deduct tax under this section. Joint transferee: In case of joint transferee each coowner will be liable for compliance with this section. Transferor: The transferor / seller may be any person. The transferor should be a resident. He may even be Resident but Not Ordinarily Resident. If the transferor / seller happens to be a non-resident the provisions of section 195 may apply but certainly not the provisions of this section.
Any sum: The section states that the purchaser / transferee should be responsible for paying to the seller / transferor any sum by way of consideration for transfer of immovable property. The term `sum’ has not been defined in the Act.
The expression “any sum paid” has been interpreted by the Hon’ble Supreme Court in the case of H.H. Sri Rama Verma vs. CIT (187 ITR 308) (SC) to mean only amount of money given as donations and not to donations in kind.
In the context of section 194-IA an issue would arise as to whether the section applies when the consideration is in kind e.g. in cases of exchange. This issue has been dealt with, in detail, subsequently under the caption `Issues’.
Consideration: The term `consideration’ has not been defined in the Act. The term is also not defined in the Transfer of Property Act. The Patna High Court in Rai Bahadur H.P. Banerjee vs. CIT ([1941] 9 ITR 137)(Pat) held that the word ‘consideration’ is not defined in the Transfer of Property Act and must be given a meaning similar to the meaning which it has in the Indian Contract Act. Similar view has been taken by the Kerala High Court in the case of CGT vs. Smt. C K Nirmala (215 ITR 156)(Ker) and by the Bombay High Court in the case of Keshub Mahindra vs. CGT (70 ITR 1)(Bom). Section 2(b), of the Indian Contract Act defines `consideration’ as under:
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”
An issue which arises for consideration is whether the amount of service tax, VAT payable by the transferee to the transferor constitutes part of consideration and therefore tax is required to be deducted even on these amounts. By virtue of Circular No. 1/2014 dated 13.1.2014, tax is not required to be deducted at source on the amount of service tax. The question of deduction of tax at source, therefore, survives only in respect of VAT . Looked at it from a common man’s perspective the amount of service tax and VAT agreed to be paid by the transferee to the transferor would certainly form part of consideration for transfer of immovable property. The liability to pay these amounts under the respective statutes is of the transferor. Accordingly, it appears that VAT amount constitutes consideration and tax will have to be deducted even on the amount of VAT . In addition, these amounts may also attract stamp duty under the stamp law of a State. However, in cases where the transferee is faced with a show cause notice for failure to deduct tax at source on the amount of VAT , the transferee may contend that the analagoy of excluding service tax would apply equally to VAT as well.
Immovable Property: This term is defined exhaustively to mean land (other than agricultural land) or any building or a part of a building. Agricultural land is not immovable property. Agricultural land is defined for this purpose. Urban agricultural land is immovable property. Immovable property could be land, agricultural land outside India, urban agricultural land, office, flat, shop, godown, theatre, hotel, hospital, etc. Immovable property could be stock-intrade of the developer. Immovable property could be held as either stock-in-trade or as capital asset.
Meaning of ‘transfer’: The section applies to consideration for transfer. The question which arises is whether the term `transfer’ would mean only transfer by way of conveyance under general law through a registered instrument or it would even cover the transactions / agreements referred to in section 2(47)(v) and (vi) i.e. in cases where possession is given in part performance of the contract u/s. 53A of the Transfer of Property Act or a transaction of becoming a member of a co-operative society, company, etc. Also, would the provisions be applicable to part payments made but not in the year of transfer (conditions of 2(47)(v) not being satisfied)?
Immovable Property located outside India: The section does not mention that the immovable property should be situated in India. Therefore, a literal interpretation would be that the immovable property could be situated any where may be in India or may be outside India. Further, the term `agricultural land’ has been defined to mean agricultural land situated in India. The fact that agricultural land in India is excluded from immovable property could be understood in two ways – one that from the immovable property in India exclusion is to be made of agricultural land in India and the other could be that from the immovable property wherever situated only the agricultural land in India is excluded. Thus, two interpretations are possible. However, if a view is taken that the section applies even in respect of immovable property situated outside India then the position will be that a buyer who is outside India and who is neither a citizen of India nor a resident of India who is buying immovable property located outside India from a resident of India, will be required to deduct income-tax under the provisions of the Act. Therefore, it would mean that it is expected of every person dealing with a resident of India to be aware of the provisions of the Indian laws. Assuming that such a buyer is aware of these provisions and decides to comply with the provisions of this section, he will have to obtain a PAN so as to be able to make payment of the amount of TDS. A question would arise as to whether the Government of India can cast an obligation on a non-resident to deduct tax from payments made by him for purchase of a property which is situated outside India. The only nexus which such a transferor has with India being that he is buying immovable property from a person who is a resident of India. In case of default in complying with the provisions of this section, the buyer would be regarded as an assessee-in-default and would be liable to pay interest and penalty as well. Such an interpretation may not be upheld by Courts. Therefore, it appears that the section would apply to only immovable property situated in India.
Threshold for non-deduction: Sub-section (1) of section 194-IA casts an obligation on the transferee to deduct tax at source. S/s. (1) does not have a threshold limit. S/s. (2) provides that no deduction under subsection (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees. The issue for consideration is whether the limit of fifty lakh rupees is qua the immovable property or is it qua the transferee. This issue is dealt with, in detail, subsequently under the caption `Issues’.
Quantum of tax to be deducted: Deduction is to be of an amount equal to one per cent of such sum as incometax. Surcharge and cess on this amount are not to be deducted. If the transferor / seller does not provide PAN, technically, the rate of tax could be 20% by virtue of provisions of section 206AA. However, the challan for payment of tax deducted u/s. 194-IA requires PAN as a compulsory field and it does not proceed without PAN having been filled in. Challan No. 281 which is applicable for payment of TDS other than TDS u/s. 194-IA, does not have a field to make payment of TDS u/s. 194-IA, though the same may have been deducted at the rate mentioned in section 206AA. It seems that the procedure has been so designed so as to further the objective stated in the Memorandum explaining the salient features of the provisions of the Finance Bill, 2013 viz. to overcome the difficulty which was being faced viz. the PAN Nos. not being quoted or invalid PAN Nos. being quoted in the AIR.
At this stage, it would be relevant to note the Karnataka High Court in the case of A. Kowsalya Bai vs. UOI (346 ITR 156)(Kar) has read down the provisions of section 206AA and has held it to be inapplicable to persons whose income is less than the taxable limit.
The deduction is with reference to consideration and not with reference to valuation as done by stamp valuation authorities though in the case of transferor / seller section 50C / section 43CA may be attracted.
No deduction / Deduction at lower rate: There is no provision of either the transferor giving a declaration to the transferee asking him not to deduct tax at source or to deduct tax at lower rate. Transferor cannot even obtain an order from the Assessing Officer authorizing the transferee / buyer not to deduct tax or to deduct it at a lower rate. Thus, tax is deductible at source even in cases where the transferor is entitled to exemption u/s. 54, 54EC, 54F. Similar is the position where the transferor is to suffer a loss as a result of transfer or has brought forward losses which are available for set off against gain on transfer of immovable property.
Consequences of non-deduction: Failure to deduct tax under this section may result in the person i.e. the transferee being deemed to be an assessee in default. Failure to deduct tax will attract interest and penalty. Also, provisions of section 40(a)(ia) will be attracted with effect from assessment year 2015-16.
No requirement to obtain TAN / file quarterly returns: The transferee is not required to obtain TAN if he does not have one. Also, he is not required to file quarterly returns / statements.
Obligation to pay tax so deducted and issue certificate: The tax deducted by the transferee has to be paid to the credit of the Central Government within 7 days from the end of the month in which the deduction is made. TDS payment shall be accompanied by a challancum- statement in Form 26QB. Payment is to be made by remitting it electronically to RBI or SBI or any authorised bank or by paying it physically in any authorised bank. Payer / Transferee is required to issue TDS certificate in Form 16B, to be generated online from the web portal. The TDS certificate is to be issued within 15 days from the due date for furnishing challan-cum-statement in Form 26QB.
Issues: Various issues arise in day to day practice on the applicability of the provisions of section 194-IA of the Act. The author does not necessarily have an answer to all the issues which may arise. Some of the important and more common issues are as under: –
(a) Amounts paid before the provision coming into effect – Provisions of section 194-IA have been introduced in the Income-tax Act, 1961 with effect from 1.6.2013. The obligation to deduct tax under this section arises at the time of payment or at the time of credit of the amount to the account of the transferor, which ever is earlier. Therefore, in a case where either the payment or the credit has been made before 1.6.2013, the question of deduction of tax at source under this section should not arise. While this position may appear to be quite obvious interpretation of the provision, if an authority is required for this proposition a reference can be made to the order dated 3rd June, 2015 of the Karnataka High Court while deciding the Writ Petition in the case of Shubhankar Estates Private Limited vs. The Senior Sub-Registrar, The Union Bank of India and the Chief Commissioner of Income-tax (Writ Petition No. 57385/2013). The Karnataka High Court in this case directed the Registrar to complete the registration without insisting on the deduction of tax at source and to release the document to the petitioner. The Court has, in para 5 of the order, held as under –
“5. In that light, if the provision contained in Section 194-IA as extracted above is noticed, the obligation on the transferee to deduct 1% of the sale consideration towards TDS had come into effect only on 1.6.2013. If that be the position, as on 2.3.2012 when the petitioner in the instant case as the transferee had paid the amount to the transferor, there was no obligation in law on the petitioner to deduct the said amount. If this aspect of the matter is kept in view, even though the provision had come into force as on the date of presentation of the sale certificate for registration, the petitioner having parted with the sale consideration much earlier, was not expected to deduct the amount and produce proof in that regard to the Sub-Registrar. It is no doubt true that in respect of the said amount the third respondent would have the right to recover the taxes due. But, in the instant case, the communication as addressed from the third respondent to the first respondent could not have been held against the petitioner in the circumstances stated above. In the peculiar circumstances of the instant case, where the petitioner being an auction purchaser had paid the entire sale consideration much earlier to the provision coming into force, the endorsement dated 4.12.2013 requiring the petitioner to deduct the income-tax and indicating that the registration would be made thereafter cannot be sustained.”
(b) Applicability of section 206AA – Section 194-IA requires deduction of tax at source at the rate of one per cent. In a case where the transferor does not provide the payer with his PAN, technically, the provisions of section 206AA would be attracted and the deduction would have to be made at the rate of 20%. However, such a situation seems to be quite unlikely since the challan by which the tax is required to be paid by the deductor, transferee, requires the PAN of the transferor as a compulsory field. Hence, in the event that the deduction has to be made, it will have to be made at the rate mentioned in section 194- IA i.e. one per cent.
(c) Applicability to composite transactions where both land and building are subject matter of transfer – Under provisions of section 194-IA tax is required to be deducted, subject to satisfaction of other conditions mentioned in the section, on the amount of consideration for transfer of immovable property. The term `immovable property’ is defined in Explanation (a) to the section as meaning any land or any building or part of a building. Provisions of sections 43CA, 50C and 56(2)(vii) use the term land or building or both. The word `both’ is absent in section 194-IA. Therefore, in cases where tax has not been deducted (not deliberately as a planning measure) on amount of consideration for transfer of a composite transfer comprising of land and building both, one may contend that the Legislature has consciously used a different language in section 194-IA and has left out composite transactions of both land and building e.g. purchase of a bungalow comprising of building and also the land beneath it.
(d) Payment of consideration by a Bank / Housing Finance Institution to a transferor on behalf of the transferee – In a case where the transferee has taken a loan for discharge of consideration to the transferor, the bank / housing finance institution disburses the loan by issuing a cheque / pay order to the transferor towards consideration due to him from the transferee. In such a case, a question arises as to how does a transferee comply with his obligation to deduct tax at source under this section. The banks / financial institutions in such a case issue a cheque / pay order in favour of the transferor of the net amount and the amount equivalent to tax deductible at source under this section is given to the transferee upon his producing a challan evidencing the amount deposited by him towards tax deducted at source. The alternative to this could be that the transferee requests and authorises the bank / financial institution, in writing, to disburse the net amount to the transferor and to deposit the amount required to be deducted at source under this section to the credit of the Central Government on behalf of the transferee i.e. in such a case, the bank / financial institution will deposit tax at source as an agent of the transferee and the challan will contain the PAN and other particulars of the transferee. In actual practice, it is understood that, the first option is what the banks / financial institutions have been following.
(e) Limit of Rs. 50 lakh – whether it is qua an immovable property or qua the transferee / transferor – Threshold for non-deduction: Sub-section (1) of section 194-IA casts an obligation on the transferee to deduct tax at source. S/s. (1) does not have a threshold limit. S/s. (2) provides that no deduction under subsection (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees. The issue for consideration is whether the limit of fifty lakh rupees is qua the immovable property or is it qua the transferee. The following paragraphs attempt to address this issue :-
(i) The Memorandum explaining the salient provisions of Finance Bill, 2013 says the Annual Information Returns filed by sub-registrars often indicate that in majority of the cases purchaser or sellers of immovable property did not quote or quoted an invalid PAN in the documents relating to transfer of immovable property. The Sub-Registrar in terms of Rule 114E read with section 285BA is required to report each transaction involving purchase or sale of an immovable property valued at Rs. 30 lakh or more in the Annual Information Return.
(ii) Thus it is clear that the purpose of the newlyinserted section 194-IA is to augment what is already being reported by the Sub-Registrar.
(iii) It may be noted that the Sub-Registrar has got to report a transaction even if the share of each buyer, in case of joint ownership, is below Rs. 30 lakh.
(iv) Following the purpose for which the section 194-IA was inserted, one may conclude that the threshold limit of Rs. 50 lakh for applicability of Section 194-IA is to be determined property-wise and not transferee-wise. This is so because the buyers of immovable properties can’t be allowed to do what the sub-registrar couldn’t do i.e. split up the sale consideration buyer-wise and claim immunity from deduction of TDS since consideration attributable to each buyer is below Rs. 50 lakh.
(v) Thus, the provisions of section 194-IA will apply to a property transaction involving more than one buyer though the share of each buyer in the property is less than Rs. 50 lakh, but the consideration for transfer of the immovable property, in aggregate, is more than Rs. 50 lakh. In such case, tax will be deducted and deposited by each buyer in respect of their respective share in the immovable property.
(vi) Similarly, in case of a transaction involving more than one seller, tax will be deducted in respect of amount paid to each seller and their respective PAN will be quoted in Form 26QB while making payment.
(vii) Judicial pronouncements under Chapter XX-C of the Income-tax Act, 1961 (hereinafter referred to as Chapter XX-C) propose a similar philosophy that immovable property which is the subject matter of the transfer has to be seen in real light and provisions of Chapter XX-C shall apply when by a single agreement of transfer, co-owners of a property agreed to sell the property to the respondent which was above the limit prescribed for application of 269C.
(viii) Chapter XX-C dealt with purchase by Central Government of immovable properties in certain cases of transfer and provided for pre-emptive right of purchase of immovable property by the Government in a case where the apparent consideration for transfer of such property exceeded the specified limit mentioned under Section 269UC.
(ix) Section – 269-UC (1) read as follows:
“Notwithstanding anything contained in the Transfer of Property Act, 1882 (4 of 1882), or in any other law for the time being in force, no transfer of any immovable property in such area and of such value exceeding five lakh rupees, as may be prescribed, shall be effected except after an agreement for transfer is entered into between the person who intends transferring the immovable property (hereinafter referred to as the transferor) and the person to whom it is proposed to be transferred (hereinafter referred to as the transferee) in accordance with the provisions of s/s. (2) at least four months before the intended date of transfer.”
(x) The Bombay High Court in the case of Jodharam Daulat Ram Arora vs. M. B Kodnanai (120 CTR 166)(Bom) wherein there was one vendor and three purchasers, held as under:
‘The agreement in question before it was a composite agreement in respect of the flat and there was nothing in the agreement which indicate that the purchasers had agreed to buy individually an undivided 1/3rd share of the flat from the vendor. All the concerned parties had filed Form No.37-I and therefore it was not open to them to contend that section 269UD had no application and the appropriate authority had no jurisdiction.’
(xi) However, the Madras High Court took a contrary view in the case of K. V. Kishore vs. Appropriate Authority (189 ITR 264)(Mad). The Court held that –
‘What is sold, is the individual undivided share in the property and the value of each such share in the said immovable property was less than Rs. 25 lakh. The transferors were co-owners and each coowner was getting an apparent consideration that was less than the limit prescribed i.e less than Rs. 25 lakh. The provisions of Chapter XX-C was not attracted even though the amount that all the coowners received exceeded Rs. 25 lakh.’
(xii) Other High Courts in various judgments also upheld the above stated view of the Madras High Court.
(xiii) However, in Appropriate Authority vs. Smt. Varshaben Bharatbhai Shah (248 ITR 342)(SC), where two co-owners entered into an agreement to transfer immovable property, situated in Ahmedabad, to a seller for a sum of Rs. 47 lakh which was above the limit prescribed for application to appropriate authority u/s. 269UC of the Act, the Supreme Court reversing the decision of Gujarat High Court in Varshaben Bharatbhai Shah vs. Appropriate Authority (221 ITR 819)(Guj) and various judgments of other High Courts held that :
‘What, in our opinion, has to be seen for the purposes of attracting Chapter XX-C is: what is the property which is the subject-matter for such transfer and what is the apparent consideration for such transfer. This has to be seen in a real light with due regard to the object of the Chapter and not in an artificial or technical manner. Looked at realistically, it was the immovable property which was the subject matter of transfer. If the apparent consideration for the transfer is more than the limit prescribed for the relevant area under Rule 48K, what has then to be seen is whether the apparent consideration for the property is less than the market value thereof by 15 % or more. If so, the notice for pre-emptive purchase can be issued and it is then for the parties to the transaction to satisfy the appropriate authority that the apparent consideration is the real consideration for the transfer.’
‘In the present case the said agreement is for the sale of the immovable property and that the equal shares of the Respondent Nos. 2 and 3 therein were to be transferred to Respondent No. 1 is a necessary incident of such sale. The parties had also in Form 37-I correctly stated that what was being sold was the property and not the onehalf shares of the transferors and that the total apparent consideration for the transfer was Rs. 47 lakh. It was of no consequence that Respondents owned the property as tenants-in-common or that that was how they had shown their ownership in their income-tax returns. The provisions of Chapter XX-C applied.’
(xiv) The Supreme Court further added that: ‘Even if the agreement had been so drawn so as to show the transfer of the equal shares of the second and third respondents in the said immovable property, our conclusion would have been the same for, looked at realistically, it was the said immovable property which was the subject of transfer.’
‘We are of the opinion that the judgments of the Madras, Karnataka, Delhi and Calcutta High Courts referred to above are based on a wrong approach and are erroneous. We approve of the view taken by the Bombay High Court in Jodharam Daulatram Arora’s Case [1996]’
(xv) From the above judgment of the Apex Court, it is the law of the land that even if the property is owned by more than one persons and the apparent consideration in relation to the interest of each co-owner in the property is less than the ‘specified limit’, the provisions of Chapter XXC would be applicable if such property is transferred under a single agreement and the apparent consideration for the property as a whole exceeds the ‘specified limit’.
(xvi) Therefore, u/s. 194-IA also, if the consideration for the purchase of an immovable property shoots beyond 49,99,999/-, one has to withhold tax @ 1 per cent. The number of buyers signing up the agreement for transfer will not make a difference nor would the number of sellers make any difference either.
(f) Applicability of the section to a transaction of transfer by way of an exchange / where the consideration is in kind – The section requires deduction of tax at source by the transferee to a resident transferor out of any sum paid by way of consideration for the transfer of any immovable property (other than agricultural land). Questions do arise as to whether the provisions of this section are to be complied with, in cases, where the consideration is in kind eg., transactions of exchange or cases where the agreement is for joint development of the land belonging to the transferor by the transferee and the transferor is entitled to receive from the transferee a portion of the developed area i.e. a certain percentage of flats. There is no monetary consideration involved in such transactions. Assuming that the other conditions of the section are satisfied, the question being examined in this paragraph is whether the section contemplates the deduction only in cases where the consideration is in monetary terms or even in cases where the consideration is in kind. This controversy arises because of the words `any other mode’ used in sub-section (1) of section 194-IA.
The following arguments can be considered to support the proposition that the provisions of section 194-IA would apply only when the consideration is fixed in monetary terms:-
As has been stated earlier, the expression “any sum paid” has been interpreted by the Hon’ble Supreme Court in the case of H. H. Sri Rama Verma vs. CIT (187 ITR 308) (SC) to mean only amount of money given as donations and not to donations in kind.
The provision contemplates `deduction’ – in cases where consideration is paid in kind ‘deduction’ is not possible.
Section 194B which deals with deduction from payment of any income by way of winnings from any lottery or cross word puzzle or card game or other game of any sort. This section has a specific proviso which was inserted by the Finance Act, 1997, w.e.f. 01.06.1997 which specifically deals with winnings wholly in kind or partly in cash and partly in kind, but the part in cash not being sufficient to meet liability of tax. Prior to the insertion of the proviso the CBDT had in Circular No. 428 dated 8.8.1985 stated that the section does not apply where the prize is given only in kind. The relevant portion of the circular is reproduced hereunder –
Circular : No. 428 [F. No. 275/30/85-IT(B)], dated 8-8-1985.
“3. The substance of the main provisions in the law insofar as they relate to deduction of income-tax at source from winnings from lotteries and crossword puzzles, is given hereunder :
(1) No tax will be deducted at source where the income by way of winnings from lottery or crossword puzzle is Rs. 1,000 or less.
(2) Where a prize is given partly in cash and partly in kind, income-tax will be deductible from each prize with reference to the aggregate amount of the cash prize and the value of the prize in kind. Where, however, the prize is given only in kind, no income-tax will be required to be deducted. ………..” U/s. 194B deduction is out of specified income.
U/s. 194-IA deduction is out of consideration for transfer of immovable property. Like consideration, income could be in cash or in kind. Following the above mentioned circular it can be safely argued that tax is not deductible when consideration is in kind. Recently, the Karnataka High Court in the case of CIT vs. Chief Accounts Officer, Bruhat Bangalore Mahanagar Palike (BBMP) (ITA NO. 94 of 2015 and ITA No. 466 of 2015; order dated 29th September, 2015), was dealing with a case where BBMP had taken over certain lands which were reserved and in lieu thereof it had allotted CDR (Certificate of Development Rights) to the persons who were the owners of the land so taken over. The owners of land were allotted CDR rights in the form of additional floor area, which shall be equal to one and a half times of area of land surrendered. The AO treated the BBMP as an assessee in default for not having deducted TDS u/s. 194LA. The language of section 194LA is materially similar to the language of section 194-IA. The Court has in para 9 held that where there is neither any quantification of the sum payable in terms of money nor any actual payment is made in monetary terms, it would not be fair to burden a person with the obligation of deducting tax at source and exposing him to the consequences of such default.
Thus, for the reasons stated above, it appears that the tax will be required to be deducted at source only in those cases where consideration is fixed in monetary terms. The consideration having been fixed by the parties in monetary terms the same may be discharged in kind. In cases, where the consideration is fixed in monetary terms but is discharged in kind, it is possible to argue that the provisions of the section may apply. In cases where consideration is fixed in kind (e.g. exchange transactions or cases of development agreement where the land owner is entitled to a share in the developed area and no monetary consideration), the better view appears to be that tax will not be required to be deducted at source. (f) Applicability of the section to rights in land or buildings or to reversionary rights -The section applies to consideration for transfer of immovable property (other than agricultural land). Immovable property has been defined to mean land or building or part of a building. Questions do arise as to whether tax is required to be deducted at source when the subject matter of transfer is not land or building or part of a building but rights in land or rights in building e.g. transfer of tenancy rights, grant of lease, etc. In the context of section 50C which applies to cases of transfer of land or building or both, the Tribunals have in the following cases taken a view that the provisions of section 50C do not apply to cases of transfer of rights in land or building but applies only when there is a transfer of land or building:
Kishori Sharad Gaitonde (ITA No. 1561/M/2009) (Mum SMC)(URO)
DCIT vs. Tejinder Singh [2012] 50 SOT 391 (Kol.)(Trib.)
Atul G. Puranik vs. ITO [2011] 58 DTR 208 (Mum.)(Trib.)
ITO vs. Yasin Moosa Godil [2012] 18 ITR 253 (Ahd.)(Trib.)
Following the ratio of the above decisions, it is possible to take a view that the provisions of section 194-IA do not apply to transfer of rights in land or building.
However, when reversionary rights are transferred by the landlord, the consideration paid for acquiring reversionary rights would be subject to deduction of tax at source in accordance with the provisions of this section.
(g) Applicability of the section to introduction of an immovable property by a partner of a firm into a firm – When a partner of a firm introduces land or building into a partnership firm where he is a partner, question arises whether tax is required to be deducted at source. If yes, who will deduct tax at source and on what amount? In a case where a partner of a firm introduces immovable property into a firm as his capital contribution, there is undoubtedly a transfer. Supreme Court has in the case of Sunil Siddharthbhai vs. CIT (1985) (156 ITR 509) (SC) held that what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into a shared interest with the other partners in that asset. Qua that asset, there is a shared interest. For the purposes of computing capital gains, the amount credited to the capital account of the partner is deemed to be full value of consideration by virtue of the deeming fiction created by section 45. The deeming fiction had to be introduced to overcome the observations of the Supreme Court in the case of Sunil Siddharthbhai (supra) where the SC held that the interest of a partner in the partnership firm is an interest which cannot be evaluated immediately. It is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner’s interest takes place only when there is a dissolution of the firm or upon his retirement from it. While it may be an arguable proposition, to contend that the deeming fiction is only for the purposes of computation of capital gain and cannot be extended to provisions of section 194-IA of the Act, it would certainly be safer for the partnership firm to deduct tax at source u/s. 194-IA by considering the amount credited to the partner’s capital account as the amount of consideration.
Conclusion:
The above are some of the issues which arise in connection with the applicability of the provisions of section 194-IA. There are several other issues which are not covered here e.g. Applicability to cases of slump sale, amalgamation, amount paid by builder to a co-operative housing society/member thereof on redevelopment of property, applicability to acquisition of shares with occupancy rights attached to them, assignment of booking rights, etc. It would now be worthwhile to remind the reader of the golden rule applicable while interpreting the provisions of TDS i.e. when in doubt – Deduct. The arguments stated above can be resorted to in the event of any inadvertent slip in complying with the provisions.
For the assessment year 1993-94, the appellant , a co-operative sugar mill engaged in the business of manufacturing sugar and allied products from the sugarcane supplied to it by its member farmers (sugarcane growers), claimed deduction of Rs.16,75,462 under the provisions of section 80P(2)(d) of the Act. During the pendency of the appeal before the Tribunal, the following two additional grounds were sought to be taken under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963:
“1. That the appellant was entitled to claim of deduction u/s. 80P(2)(a)(iii) of the Act being co-operative society engaged in marketing of agriculture produce of its members. Hence, its total income was not liable to be taxed.
2. That in the alternative, the appellant was entitled to be allowed claim for deduction amounting to Rs.1,74,64,478 representing benefit earned under the Sampath Incentive Scheme, 1997, being the capital receipt in contradistinction to revenue receipt as wrongly returned while computing the total income.”
The Hon’ble Tribunal, vide judgment dated 24th September, 2002, declined the request of the appellant to raise the abovementioned two additional grounds on the ground that the entire material was not before the subordinate authorities and detailed investigation of facts for want of facts would not be possible.
The High Court held that the appellant sugar-mill was engaged in the manufacturing of sugar products from the sugarcane supplied by members, who were admittedly sugarcane growers. Since the appellant sugar-mill was engaged in the marketing of agricultural produce of its members, therefore, it was entitled for the exemption as provided u/s. 80P(2)(a)(iii) of the Act.
The High Court drew support from its Full Bench judgment in the case of the Budhewal Co-operative Sugar Mills Ltd. vs. CIT [2009] 315 ITR 351 (P&H) [FB], wherein it was held that co-operative society engaged in the manufacturing and sale of sugar out of the sugarcane grown by its members is entitled for deduction u/s. 80P(2) (a)(iii) of the Act.
The High Court noted that the Hon’ble Apex Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) has held that keeping in mind the object behind the payment of the incentive subsidy, that the payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. According to the High Court in the present case also, the grant was not for the purpose of bringing into existence new assets but was for the purpose of making payment to the sugarcane growers, therefore, same should be treated as capital receipt.
On appeal by the Revenue, the Supreme Court remanded the matter to the file of the Commissioner of Income-tax (Appeals), in view of the order passed by it in Morinda Cooperative Sugar Mills Ltd. vs. CIT [2013] 354 ITR 230 (SC).
The Supreme Court however clarified that it had not expressed any opinion on the merits of the case and that the assessee was entitled to raise the contention before the Commissioner that in so far as the second issue was concerned, it was covered in its favour by the decision of the Supreme Court in CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC)].
The assessee claimed depreciation on certain machinery allegedly purchased from Andhra Pradesh State Electricity Board (APSEB), vide sale deed dated 29-9-1995, which, as per the assessee, was given to the APSEB itself on lease. All the authorities found, as a fact, that there was no such purchase of machinery and the transaction in question was sham. On that basis, it was concluded that since the machinery was not purchased by the assessee, it never became the owner of the machinery and therefore could not claim any depreciation thereof. The Supreme Court held that these were pure findings of facts recorded by the authorities below and did not give rise to any question of law.
CIT vs. Century Park (2015) 373 ITR 32 (SC)
The High Court dismissed the appeal filed by the Revenue as not maintainable without going into merits since the net tax effect in respect of the subject matter of the appeal was less than Rs.10,00,000 in view of the Circular No.3 of 2011. On appeal by the Revenue, the Supreme Court [vide order dated 1st April, 2015] granted liberty to the Department to move the High Court to point out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. The Supreme Court observed that there are cases under the Income-tax Act, 1961, in which common principle may be involved in subsequent group of matters or large number of matters. According to the Supreme Court, in such cases if the attention of the High Court is drawn, the High Court would not apply the Circular ipso facto.
The appellant-assessee had set up its unit some time in September, 1985 to carry on the business of manufacturing and compressing oxygen, hydrogen, nitrogen amonis, carbonic acid, action (including dissolved) argon, cooking gas and other types of industrial gases or kind substances etc. For running the aforesaid plant, the assessee had also bought 1,250 gas cylinders. However, since the unit had not started functioning, these gas cylinders were leased out to M/s. Saraveshwari Gases (P) Limited, Ghaziabad and M/s. Malik Industries. In the return filed by the assessee, he claimed depreciation on those gas cylinders at the rate of 100 %, as provided under the rules on the aforesaid item.
The Assessing Officer, however, rejected the claim of depreciation on the ground that hiring business was not proved. The appeal filed by the assessee before the Commissioner of Income Tax (Appeals) was accepted on the ground that the income received from leasing the aforesaid equipments would be treated as business income and on that basis he allowed the depreciation.
The aforesaid order of the CIT(Appeals) was set aside by the Income Tax Appellate Tribunal, and the order of the Income Tax Appellate Tribunal was upheld by the High Court. The High Court has concurred with the opinion of the Tribunal on the ground that the cylinders were not purchased for leasing business and one of the parties to whom the cylinders were leased out is the manufacturer and seller of the cylinders. It was further stated that the cylinders were dispatched to the other party only a day before the closing of the accounting period.
On an appeal by the Appellant-assessee, the Supreme Court held that the aforesaid reasons given by the Income Tax Appellate Tribunal and the High Court in denying the depreciation did not appear to be valid reasons in law. Insofar as the purchase of gas cylinders by the assessee was concerned, this fact was not disputed. It was also not disputed that these gas cylinders were purchased for business purpose. In fact, the plea of the assessee that the manufacturing unit had not started functioning and this had necessitated the assessee to lease out these gas cylinders to the aforesaid two parties to enable it to earn some income, rather than keeping those cylinders idle, was also not in dispute. On the contrary, the income which was generated from leasing out those gas cylinders was treated as “business income”. Once the income from leasing those gas cylinders was accepted as the “business income”, which was taxed at the hands of the assessee as such, there was no reason how the depreciation on these gas cylinders could have been disallowed on the ground that the cylinders were not purchased for “leasing business”.
According to the Supreme Court, the aforesaid facts clearly demonstrated that the assessee had proved ownership of these gas cylinders and use of these gas cylinders for business purpose. Once these ingredients were proved, the assessee was entitled to depreciation u/s. 32 of the Income-tax Act. The Supreme Court, therefore, set aside the judgment of the High Court, and held that the assessee was entitled to depreciation as claimed for the assessment year in question.
Section
234E of the Income tax Act, with effect from 1st January, 2012, makes
an assessee liable to pay, by way of fee, a sum of Rs. 200 for every day
of default in filing a statement within the time prescribed in section
200(3) or section 206C(3). However, the fee shall not exceed the amount
of tax deductible or collectible. The amount of fee payable is required
to be paid before filing the statements. The constitutionality of that
levy of fees has been upheld by various high courts. A delay in
furnishing the statement is thus made liable to a fee u/s. 234E.
Section
200A inserted by the Finance (No.2) Act, 2009, w.e.f. 01.04.2010,
provides for the processing of a statement of TDS, furnished u/s 200(3),
to enable the processor to ascertain the correctness of TDS and in
doing so carry out permissible adjustments and levy interest for delay
in payment of the deducted tax. The processor is also required to
prepare and generate an intimation of the sum payable or refundable to
the deductor, and send the same to him. These provisions of the
processing and issue of intimation are modified w.e.f. 01.06.2015 to
provide for the computation of the fee payable u/s. 234E while issuing
an intimation. Simultaneously, section 206 CB is inserted by the Finance
Act, 2015 to provide for processing of the statement of TCS and issue
of intimation w.e.f. 01.06.2015, for the first time.
In recent
times, a number of intimations are issued by the processor u/s 200A,
inter alia levying the fee payable u/s. 234E of the Act and demanding
the same vide such intimations. An aspect common to such intimations is
that all of them are issued before 1st June, 2015.
The
intimations issued before 1st June, 2015, levying and demanding fee u/s
234E, are being challenged by the tax deductors on the ground that the
processor had no authority to demand, under an intimation, any fee prior
to 1st June, 2015 – as such authority is available only from 1st June,
2015. In addition, it is also contended that the processor and/or an AO
in any case had no authority to pass any orders for computing and
levying such fee u/s. 234E of the Act in as much as no power is vested
in them for doing so.
The Amritsar bench of the Income Tax
Appellate Tribunal, under the circumstances held that an intimation,
issued u/s. 200A, demanding the fees u/s 234E, was not valid in law
where it was issued on or before 1st June, 2015. The Chennai bench of
the Tribunal, while concurring with the view, held that the AO was
empowered to pass a separate order for levy of such fee outside the
intimation u/s. 200A of the Act.
Sibia Healthcare’s case
The
issue first arose in the case of the Sibia Healthcare Private Limited,
171 TTJ 145(Asr.). The AO in that case, had processed the statement of
TDS filed for the third quarter of the financial year 2012-13 by the
assessee and had in the process thereof levied the fees u/s. 234 E for
the default of delay in filing the statement. The assessee in the appeal
before the tribunal had called into question the correctness of the
order of the CIT(A) upholding levy of fees, u/s 234 E of the Income-tax
Act, 1961 and challenged such levy by way of intimation dated 11th
January 2014 issued u/s. 200A.
The Tribunal noted that it was a
case in which there was admittedly a delay in filing of the TDS returns,
and the AO(TDS), in the course of the processing of the TDS return, had
raised a demand under an intimation issued u/s. 200A of the Act, for
levy of fees u/s. 234 E for delayed filing of TDS statement. Aggrieved
by the levy of fees, the assessee carried the matter in appeal before
the CIT(A), but without any success. The assessee, not being satisfied,
filed a further appeal before the Tribunal. The Tribunal, on the above
facts, concerned itself with the question as to whether or not, for the
period prior to 1st June 2015, fees u/s. 234 E of the Act in respect of
defaults in furnishing TDS statements, could be levied in issuing
intimation u/s. 200A of the Act.
The Tribunal noted that there
was no enabling provision for raising a demand in respect of levy of
fees u/s. 234E prior to 1st June, 2015 . It noted that at the relevant
point of time, section 200A permitted computation of amount recoverable
from, or payable to, the tax deductor after making the adjustments on
account of “arithmetical errors” and “incorrect claims apparent from any
information in the statement ” and 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.
In the considered view of the Tribunal; the
adjustment in respect of levy of fees u/s. 234E was beyond the scope of
‘permissible adjustments’ contemplated u/s. 200A; as an intimation was
an ‘appealable order’ u/s. 246A(a), the CIT(A) ought to have examined
legality of the adjustment made under the said intimation in the light
of the scope of section 200A which the CIT(A) had not done and instead
he had justified the levy of fees on the basis of the provisions of
section 234E. The answer to the question whether such a levy could be
effected in the course of intimation u/s. 200A. was clearly in the
negative.
Importantly, the Tribunal noted that no other
provision enabling a demand in respect of the levy had been pointed out
to the Tribunal, and it was thus an admitted position that in the
absence of the enabling provision u/s. 200A, no such levy could be
effected. The Tribunal also held that the said intimation was issued
beyond the time permissible in law by noting that a demand u/s. 200A, in
the facts of the case, was to be issued latest by 31st March 2015 and
the defect of delay in issuing the intimation thus was not curable.
Bearing in mind the entirety of the case, the impugned levy of fees u/s.
234 E was found by the tribunal to be unsustainable in law. The
Tribunal therefore, upholding the grievance of the assessee, deleted the
levy of fee u/s. 234E of the Act.
G. Indhirani & Other cases
The
issue again came up before the Chennai bench of the Income tax
Appellate Tribunal in the case of G. Indhirani in ITA No. 1020
&1021/Mds./2015 and other cases. The appeals of the different
assessees directed against the respective orders of the CIT(A), Salem
were heard together and disposed of by a common order as the issue
involved was common. The only issue for consideration of the Tribunal
was with regard to the levy of fee u/s 234E of the Income-tax Act, while
processing the statement furnished by the assessees, u/s. 200A of the
Act.
Attention was invited to section 234E of the Act to highlight that when an assessee failed to deliver the statement within the prescribed time, he was liable to pay by way of fee a sum of Rs. 200/- for every day during the period of the failure. Referring to the words used in the section 234E “he shall be liable to pay”, it was pointed out that the assessee was liable to pay fee and the section did not empower the AO to levy the fee which was clear by reading of section 234E(3) of the Act that provided for payment of the fee before delivery of statement u/s. 200(3) of the Act. It was thus clear that the fee had to be paid by the assessee voluntarily before filing the statement u/s. 200(3) of the Act and the AO had no power to levy the fee before the amendment.
On the contrary,on behalf of the Income tax Department, it was submitted that section 234E of the Act provided for payment of fee in cases where the assessee failed to deliver the statement as prescribed in section 200(3) of the Act and therefore, the AO had every authority to levy fee either by a separate order or while processing the statement u/s. 200A of the Act.
On consideration of the rival submissions on either side and perusal of the relevant material on record, the Tribunal noted that section 200A of the Act provided for processing of the statement of tax deducted at source by making adjustment as provided therein; the AO could not make any adjustment other than the one prescribed in section 200A of the Act; it was obvious that prior to 01.06.2015, there was no enabling provision in section 200A of the Act for making adjustment in respect of the statement filed by the assessee with regard to tax deducted at source by levying fee u/s. 234E of the Act; the parliament for the first time enabled the AO to make adjustment by levying fee u/s. 234E of the Act with effect from 01.06.2015.
The Tribunal accordingly held that while processing the statement u/s. 200A of the Act, the AO could not make any adjustment by levying fee u/s. 234E prior to 01.06.2015 in the following words; “In the case before us, the Assessing Officer levied fee u/s. 234E of the Act while processing the statement of tax deducted at source u/s. 200A of the Act. Therefore, this Tribunal is of the considered opinion that the fee levied by the Assessing Officer u/s. 234E of the Act while processing the statement of tax deducted at source is beyond the scope of adjustment provided u/s. 200A of the Act. Therefore, such adjustment cannot stand in the eye of law.”
The assessee next contended that the AO had no authority to levy the fee u/s. 234E in view of the language of the said section 234E which provided that ‘the assessee’ “shall be liable to pay” ‘by way of fee’. The language in the assessee’s opinion clearly conveyed that the assessee had to voluntarily pay the fee and the AO had no authority to levy fee. This argument was found to be very attractive and fanciful by the Tribunal, but was also found to be devoid of any substance.
The Tribunal held that;
The Tribunal proceeded to examine the contention of the assessee that the AO had no power to levy fee u/s. 234E in the light of the provisions of Indian Penal Code and in particular section 396 of the Code that provided for punishment for dacoity with murder as also for the liability to fine. It also examined section 408 of the said Code which provided for payment of fine in addition to the punishment in cases of criminal breach of trust by a clerk or servant. Similarly, the other provisions of the Code that provided for fine were referred to by the Tribunal to observe as follows; “The language used by the Parliament in Indian Penal Code is “shall also be liable to fine”. This means that the Magistrate or Sessions Judge, who tries the accused for an offence punishable under the provisions of Indian Penal Code, in addition to punishment of imprisonment, shall also levy fine. If the contention of the Ld. counsel for the assessees is accepted, then the Magistrate or Sessions Judge, as the case may be, who is trying the accused for the offence punishable under Indian Penal Code, may not have authority to levy fine. .. It is well known principle that the fine prescribed under the Indian Penal Code has to be levied by the concerned Magistrate or Sessions Judge who is trying the offence punishable under the Indian Penal Code. Therefore, the contention of the Ld. counsel that merely because the Parliament has used the language “he shall be liable to pay by way of fee”, the assessee has to pay the fee voluntarily and the Assessing Officer has no authority to levy fee could not be accepted. No one would come forward to pay the fee voluntarily unless there is a compulsion under the statutory provision. The Parliament welcomes the citizens to come forward and comply with the provisions of the Act by paying the prescribed fee before filing the statement u/s. 200(3) of the Act. However, if the assessee fails to pay the fee before filing the statement u/s. 200(3) of the Act, the assessing authority is well within his limit in passing a separate order levying such a fee in addition to processing the statement u/s. 200A of the Act. In other words, before 01.06.2015, the assessing authority could pass a separate order u/s. 234E levying fee for delay in filing the statement u/s. 200(3) of the Act. However, after 01.06.2015, the assessing authority is well within his limit to levy fee u/s. 234E of the Act even while processing the statement u/s. 200A and making adjustment.”
The Tribunal, in the facts of the case however, was of the considered opinion that the AO had exceeded his jurisdiction in levying fee u/s. 234E while processing the statement and making adjustment u/s. 200A of the Act and therefore, the impugned intimation of the lower authorities levying fee u/s. 234E of the Act could not be sustained in law. At the same time while holding so in the assessee’s favour, it was made clear by the Tribunal that it was open to the AO to pass a separate order u/s. 234E of the Act for levying fee provided the limitation for such a levy had not expired.
Observations
The constitutional validity of section 234E of the Act has been examined by the Bombay High Court in the case of and Rashmikant Kundalia (Bom.), 373 ITR 248 and is upheld by the court. However, in a series of the decisions of the court in the cases of Narath Mapila LP School, [WP (C) 31498/2013(J)](Ker.), Adithya Bizor P. Solutions(Karn.) [WP No. 6918-6938/2014(T-IT), Om Prakash Dhoot (Raj.) [WP No. 1981 of 2014], a stay has been granted on the recovery of the demands raised in respect of fees u/s. 234E.
The power of the AO, while processing the statement of TDS u/s. 200A, to levy fee u/s. 234E and demand the same vide an intimation issued on 1st June, 2015 or thereafter is not in dispute. Also not in dispute is the fact that such fee cannot be demanded under an intimation that is issued before that date. The amendment of section 200A by the Finance Act, 2015 has made up for the deficiency, if any, by enabling the levy of the fee while processing the statement of TDS and demanding the payment of such levy under an intimation. The dispute appears to be about the power of the AO to levy a fee u/s. 234E outside the intimation u/s. 200A of the Act. Can an income-tax authority levy and demand the fee prescribed u/s. 234E on the basis of provisions of section 234E alone? Can it pass an order outside the provisions of section 200A for demanding the levy of fee? Is it prevented from demanding such fee in view of specific language of section 234E that require an assessee to pay the fee and pay the same before filing the statement u/s. 200(3) of the Act? These are the questions that require Section 234E of the Act, was inserted by the Finance Act 2012 brought into effect from 1st July 2012 reads as under:
234E. Fee for defaults in furnishing Statements
(1) Without prejudice to the provisions of the Act, where a person fails to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C, he shall be liable to pay, by way of fee, a sum of two hundred rupees for every day during which the failure continues.
(2) The amount of fee referred to in s/s. (1) shall not exceed the amount of tax deductible or collectible, as the case may be.
(3) The amount of fee referred to in s/s. (1) shall be paid before delivering or causing to be delivered a statement in accordance with sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C.
(4) The provisions of this section shall apply to a statement referred to in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C which is to be delivered or caused to be delivered for tax deducted at source or tax collected at source, as the case may be, on or after the 1st day of July, 2012
On a bare reading of the provisions of section 234E, one gathers that the liability to pay the fee is that of the assessee who had defaulted in filing the statement of TDS within the time prescribed u/s. 200(3). It is also clear that the fee is to be paid before the filing of the statement of TDS u/s. 200 by the assessee. It is further clear from a bare reading of the amended provisions of section 200A, in particular clauses (c) and (d), that with effect from 1st June 2015, the fee, if any, shall be computed in accordance with the provisions of section 234E while processing the statement of TDS and the sum payable by, or the amount of refund due to, the deductor shall be determined after adjustment of the amount computed under clause (b) and clause (c) against any amount paid u/s. 200 or section 201 or section 234E and any amount paid otherwise by way of tax or interest or fee and an intimation shall be prepared or generated and sent to the deductor specifying the sum determined to be payable by, or the amount of refund due to, him under clause (d) and the amount of refund due to the deductor in pursuance of the determination under clause (d) shall be granted to the deductor.
It is true that there was no express or specific provisions on or before 1st June, 2015 that empowered an authority to levy such fee and demand the payment of the same. However, such an interpretation would mean that the provisions of section 234E, though introduced w.e.f 1st July, 2012 has no teeth and are redundant till 31st May, 2015. Such an interpretation shall also render many provisions of the Act redundant where they provide for a levy or payment for an offence specified in the respective provision without express provision for levy and demand thereof. It also would mean that for each provision for any tax, interest, fee, levy, fine there should be an express and corresponding provision authorising an income-tax authority to effectively levy the same and demand the same from the assessee failing which the charge would remain ineffective.
The Chennai bench of the Tribunal in G. Indrihani’s case is right in holding that the AO or the authority is empowered to pass an appropriate order for levy of the fees u/s 234E and to demand the same under such an order. The effect of the amendment in section 200A is limited to authorising the AO or any other authority to levy the fee or ascertain the correctness of the fee paid while processing the statement of TDS and demand the same vide an intimation, a power which was not hitherto available till 31st May, 2015. An independent power to pass an order had always been vested in the AO or other authority once a liability to fee for the default was imposed under the Act.
Under the notification, these standards come into force from 1st April 2016, i.e. assessment year 2016-17, apply to all assessees following mercantile system of accounting, and are to be followed for the purposes of computation of income chargeable to income tax under the head “Profits and gains of business or profession” or “Income from other sources”. The notification also supercedes notification dated 25th January 1996 [which notified 2 Accounting Standards u/s 145(2) – Disclosure of Accounting Policies, and Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies], except as regards such things done or omitted to be done before such supersession.
Background
Section 145, which deals with method of accounting, was substituted by the Finance Act, 1995, with effect from assessment year 1997-98. Sub-section (2) to this section, after this amendment, provided that the Central Government may notify in the Official Gazette from time to time accounting standards (“AS”) to be followed by any class of assessees or in respect of any class of income.
The provisions of sub-section (1) were made subject to the provisions of sub-section (2), whereby the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” was to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee, subject to the provisions of subsection (2).
Sub-section (3) provided that where the assessing officer was not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or AS notified under sub-section (2) had not been regularly followed by the assessee, the assessing officer could make an assessment in the manner provided in section 144 (i.e. a best judgement assessment).
In 1996, AS notified by ICAI were not mandatory for companies, but were mandatory for auditors auditing general purpose financial statements. On 29th January 1996, two AS (“IT-AS”) were notified by the CBDT, Disclosure of Accounting Policies, and Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies.
In July 2002, the Government constituted a Committee for formulation of AS for notification u/s 145(2). In November 2003, this Committee recommended the notification of the AS issued by ICAI without any modification, since it would be impractical for a taxpayer to maintain two sets of books of account. It also recommended appropriate legislative amendments to the Act for preventing any revenue leakage due to the AS being notified by ICAI. These recommendations were not implemented.
With the imminent introduction of International Financial Reporting Standards (IFRS) in India in the form of Ind- AS, in December 2010, the Government constituted a Committee of Departmental Officers and professionals to suggest AS for notification u/s. 145(2). The terms of the Committee were as under:
i) to study the harmonisation of AS issued by the ICAI with the direct tax laws in India, and suggest AS which need to be adopted u/s. 145(2) of the Act along with the relevant modifications;
ii) to suggest method for determination of tax base (book profit) for the purpose of Minimum Alternate Tax (MAT) in case of companies migrating to IFRS (IND AS) in the initial year of adoption and thereafter; and
iii) to suggest appropriate amendments to the Act in view of transition to IFRS (IND AS) regime. This Committee submitted an interim report in August 2011. The recommendations of the Committee in such interim report were as under:
1. Separate AS should be notified u/s. 145(2), since the AS to be notified would have to be in harmony with the Act. The notified AS should provide specific rules, which would enable computation of income with certainty and clarity, and would also need elimination of alternatives, to the extent possible.
2. Since it would be burdensome for taxpayers to maintain 2 sets of books of account, the AS to be notified should apply only to computation of income, and books of account should not have to be maintained on the basis of such AS.
3. T o distinguish such AS from other AS, these AS should be called Tax Accounting Standards (“TAS ”).
4. S ince TAS were based on mercantile system of accounting, they should not apply to taxpayers following cash system of accounting.
5. S ince TAS are meant to be in harmony with the Act, in case of conflict, the provisions of the Act should prevail over TAS .
6. S ince the starting point for computation of taxable income was the profit as per the financial accounts, which are prepared on the basis of AS whose provisions may be different from TAS , a reconciliation between the income as per the financial statements and the income computed as per TAS should be presented.
In October 2011, drafts of 2 TAS – Construction Contracts and Government Grants – were released for public comment. In May 2012, drafts of another 6 TAS were released for public comment.
The Committee gave its final report in August 2012. It focused only on formulation of TAS harmonised with the provisions of the Act, since the position regarding the transition to Ind-AS was fluid and uncertain, and therefore even the impact of Ind-AS on book profits relevant for the purposes of MAT could not be ascertained.
It recommended that of the 31 AS issued by ICAI, 7 AS did not need to be examined, since they did not relate to computation of income. Of the remaining 24 AS, 10 related to disclosure requirements, were not yet mandatory or were not required for computation of income. The Committee therefore provided drafts of 14 TAS . The Committee also recommended that TAS in respect of certain other areas be considered for notification – Share based payment, Revenue recognition by real estate developers, Service concession arrangements (example, Build Operate Transfer agreements), and Exploration for and evaluation of mineral resources.
In January 2015, the CBDT released the draft of 12 TAS (renamed as ICDS) for public comment. These did not include 2 TAS recommended by the Committee – Contingencies and Events Occurring After the Balance Sheet Date and Net Profit or Loss for the Period, Prior Period Items and changes in Accounting Policies.
Section 145 was amended by the Finance (No. 2) Act, 2014 with effect from 1st April 2015 (assessment year 2015-16), by substituting the term “income computation and disclosure standards” for the term “accounting standards” in sub-section (2). Similarly, sub-section (3) was amended to substitute the “not regular following of accounting standards” with “non-computation of income in accordance with the notified ICDS”.
Finally, in March 2015, the CBDT notified 10 ICDS as under:
ICDS I – Accounting Policies
ICDS II – Valuation of Inventories
ICDS III – Construction Contracts
ICDS IV – Revenue Recognition
ICDS V – Tangible Fixed Assets
ICDS VI – Effects of Changes in Foreign Exchange Rates
ICDS VII – Government Grants
ICDS VIII – Securities
ICDS IX – Borrowing Costs
ICDS X – Provisions, Contingent Liabilities and Contingent Assets
The draft ICDS prepared by the Committee but not notified were those relating to Leases and Intangible Fixed Assets.
Applicability & Issues
The notified ICDS apply with effect from assessment year 2016-17, while section 145(2) was amended with effect from assessment year 2015-16. Therefore, for assessment year 2015-16, IT-AS would not apply, since the section provides for ICDS to be followed. Further, since ICDS were not notified till March 2015, ICDS were also not required to be followed for that year. Effectively, for assessment year 2015-16, neither IT-AS nor ICDS would apply. ICDS would apply only with effect from assessment year 2016-17.
ICDS would apply to all taxpayers following mercantile system of accounting, irrespective of the level of income. It would not apply to taxpayers following cash system of accounting. It would not apply only to taxpayers carrying on business, but even to other taxpayers, who may have income under the head “Income from Other Sources”. Effectively, since almost every taxpayer would have at least bank interest, which is taxable under the head “Income from Other Sources”, it would apply to most taxpayers. Further, most taxpayers choose to offer income for tax on an accrual basis, to facilitate matching of tax deducted at source (TDS) from their income with their claim for TDS credit as per their return of income.
Would it apply to taxpayers who do not maintain books of accounts? The provisions would certainly apply to all taxpayers who offer their income to tax under these 2 heads of income on a mercantile basis. Can a taxpayer choose to offer his income to tax on a cash basis, where books of account are not maintained, or is it to be presumed that his income has to be taxed on a mercantile or accrual basis in the absence of books of accounts?
In N. R. Sirker vs. CIT 111 ITR 281, the Gauhati High Court considered the issue and held as under:
“It can safely be assumed that ordinarily people keep accounts in cash system, that is to say, when certain sum is received, it is entered in his account and in the case of firms, etc., where regular method of accounting is adopted, sometimes accounts are kept in mercantile system. In the instant case it was not the case of the department that the assessee’s accounts were kept in mercantile system. On the other hand, the assessment orders showed that no proper accounts were kept. That being so it would not be justified to presume that the assessee kept his accounts in the mercantile system. Income-tax is normally paid on money actually received as income after deducting the allowable deductions. In the case of an assessee maintaining accounts in mercantile system, there was some variation, inasmuch as moneys receivable and payable were also shown as received and paid in the books. In order to apply this method, the proved or admitted position must be that the assessee keeps his accounts in mercantile system.”
Similarly, in Dr. N. K. Brahmachari vs. CIT 186 ITR 507, the Calcutta High Court held that unless and until it was found that the assessee maintained his accounts on accrual basis, income accrued but not received could not be taxed.
In CIT vs. Vimla D. Sonwane 212 ITR 489, the Bombay High Court considered a case where the assesse did not maintain regular books of accounts and did not follow mercantile system of accounting. The Bombay High Court held in that case:
“Option regarding adoption of system of accounting is with the assessee and not with the Income-tax Department. The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case. The department cannot compel the assessee to adopt the mercantile system of accounting. As a matter of fact, it was not adopted.”
In Whitworth Park Coal Co. Ltd. vs. IRC [1960] 40 ITR 517, the House of Lords laid down that where no method of accounting had been regularly employed, a non-trader cannot be assessed, (in the Indian context, u/s. 56 under the head ‘Income from other sources’) in respect of money which he has not received. The House of Lords observed:
“…The word ‘income’ appears to me to be the crucial word, and it is not easy to say what it means. The word is not defined in the Act and I do not think that it can be defined. There are two different currents of authority. It appears to me to be quite settled that in computing a trader’s income account must be taken of trading debts which have not yet been received by the trader. The price of goods sold or services rendered is included in the year’s profit and loss account although that price has not yet been paid. One reason may be that the price has already been earned and that it would give a false picture to put the cost of producing the goods or rendering the services into his accounts as an outgoing but to put nothing against that until the price has been paid. Good accounting practice may require some exceptions, I do not know, but the general principle has long been recognised. And if in the end the price is not paid it can be written off in a subsequent year as a bad debt.
But the position of an ordinary individual who has no trade or profession is quite different. He does not make up a profit and loss account. Sums paid to him are his income, perhaps subject to some deductions, and it would be a great hardship to require him to pay tax on sums owing to him but of which he cannot yet obtain payment. Moreover, for him there is nothing corresponding to a trader writing off bad debts in a subsequent year, except perhaps the right to get back tax which he has paid in error.” (p. 533)
“The case has often arisen of a trader being required to pay tax on something which he has not yet received and may never receive, but we were informed that there is no reported case where a non-trader has had to do this whereas there are at least three cases to the opposite effect—Lambe v. IRC [1934] 2 ITR 494, Dewar v. IRC 1935 5 Tax LR 536 and Grey v. Tiley [1932] 16 Tax Cas. 414, and I would also refer to what was said by Lord Wrenbury in St. Lucia Usines & Estates Co. Ltd. v. St. Lucia ( Colonial Treasurer) [1924] AC 508 (PC). I certainly think that it would be wrong to hold now for the first time that a non-trader to whom money is owing but who has not yet received it must bring it into his income-tax return and pay tax on it. And for this purpose I think that the company must be treated as a non-trader, because the Butterley’s case [1957] AC 32 makes it clear that these payments are not trading receipts.” (p. 533)
Therefore, for income falling under the head “Income from other sources”, it is clear that in the absence of books of accounts, and where the assessee has not exercised any option, the income would be taxable on a cash basis.
It is well settled that the method of accounting is vis-a-vis each source of income, since computation of income is first to be done for each source of income, and then aggregated under each head of income. An assessee can choose to follow one method of accounting for some sources of income, and another method of accounting for other sources of income. In J. K. Bankers vs. CIT 94 ITR
107 (All), the assessee was following mercantile system of accounting in respect of interest on loans in respect of its moneylending business, and offered lease rent earned by it to tax on a cash basis under the head “Income from Other Sources”. The Allahabad High Court held that an assessee could choose to follow a different method of accounting in respect of its moneylending business and in respect of lease rent. Similarly, in CIT vs. Smt. Vimla D. Sonwane 212 ITR 489, the Bombay High Court held that “The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case”.
Where an assessee follows cash method of accounting for certain sources of income and mercantile system of accounting for others, ICDS would apply only to those sources of income, where mercantile system of accounting is followed and would not apply to those sources of income, where cash method of accounting is followed. For instance, an assessee may have a manufacturing business, and a separate commission agency business. He may be following mercantile system of accounting for his manufacturing business, and a cash method of accounting for his commission agency business. ICDS would then apply only to the manufacturing business, and not to the commission agency business.
Can a taxpayer opt to change his method of accounting from mercantile to cash basis, in order to prevent the applicability of ICDS? Under paragraph 5 of ICDS I, an accounting policy shall not be changed without reasonable cause. Under AS 5, such a change was permissible only if the adoption of a different accounting policy was required by statute or for compliance with an accounting standard or if it was considered that the change would result in a more appropriate presentation of the financial statements of the enterprise. Would a change in law amount to reasonable cause? If such a change is made from assessment year 2016-17, the year from which ICDS comes into effect, an assessee would need to demonstrate that such change was actuated by other commercial considerations, and not merely to bypass the provisions of ICDS.
Do ICDS apply to a taxpayer who is offering his income to tax under a presumptive tax scheme, such as section 44AD? Under the presumptive tax scheme, books of account are not relevant, since the income is computed on the basis of the presumptive tax rate laid down under the Act. It therefore does not involve computation of income on the basis of the method of accounting, or on the basis of adjustments to the accounts. Therefore, though there is no specific exclusion under the notification for taxpayers following under presumptive tax schemes from the purview of ICDS, logically, ICDS should not apply to such taxpayers. However, where the presumptive tax scheme involves computation of tax on the basis of gross receipts, turnover, etc., it is possible that the tax authorities may take a view that the ICDS on revenue recognition would apply to compute the gross receipts or turnover in such cases.
Would ICDS apply to non-residents? The provisions of ICDS apply to all taxpayers, irrespective of the concept of residence. However, where a non-resident taxpayer falls under a presumptive tax scheme, such as section 115A, on the same logic as that of presumptive tax schemes applicable to residents, the provisions of ICDS should not apply. Further, where a non-resident claims the benefit of a double taxation avoidance agreement (DTAA), by virtue of section 90(2), the provisions of the DTAA would prevail over the provisions of the Income-tax Act, including section 145(2) and ICDS notified thereunder. In other cases of incomes of non-residents, which do not fall under presumptive tax schemes or DTAA, the provisions of ICDS would apply.
It has been stated in each ICDS that the ICDS would not apply for the purpose of maintenance of books of accounts. While theoretically this may be the position, the question arises as to whether it is practicable or even possible to compute the income under ICDS without maintaining a parallel set of books of account, given the substantial differences between AS being followed in the books of accounts and ICDS. Most taxpayers would end up at least preparing a parallel profit and loss account and balance sheet, to ensure that ICDS and its consequences have been properly taken care of while making the adjustments.
Further, the Committee had recommended that a tax auditor is required to certify that the computation of taxable income is made in accordance with the provisions of ICDS. Before certification, a tax auditor would invariably require such parallel profit and loss account and balance sheet to be prepared, to ensure that all adjustments required on account of ICDS have been considered. This will result in substantial work for most businesses, and may even result in the requirement of parallel MIS, one for the purposes of regular accounts, and the other for the purposes of ICDS. One wonders whether the Committee really wanted to avoid the requirement of maintenance of 2 sets of books of account, as stated by it, or has taken into account the practical difficulties, given the complex and myriad adjustments it has suggested through ICDS.
An interesting issue arises in this context. Can an assessee maintain 2 separate books of accounts – one under the Companies Act or other applicable law on a mercantile system, and a parallel set of books of accounts for income tax purposes on a cash basis? If one looks at the provisions of section 145(1), it provides that income chargeable under these 2 heads of income shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. What is the meaning of the term “regularly employed”? Normally, the system of accounting adopted by the assesse in his books for his dealings with the outside world would be adopted for the purposes of computing the profit or loss for tax purposes also. The accounts are those maintained in the regular course of business. It may therefore be difficult for an assessee to maintain separate books of account with different system of accounting only for income tax purposes.
It may be noted that even after the introduction of ICDS, the computation still has to be in accordance with the method of accounting regularly employed by the assessee. Compliance with ICDS is an additional requirement. Therefore, the computation in accordance with the method of accounting is merely modified by the requirements of ICDS, and not substituted entirely.
Since ICDS is not applicable for the purposes of maintenance of books of account, one wonders as to what is the purpose and ambit of ICDS I on Accounting Policies. Since the purpose of ICDS is not to lay down accounting policies which are to be followed in the maintenance of the books of account, ICDS I should be regarded as merely a disclosure standard and not a computation standard. There are however certain provisions in ICDS I which relate to computation.
For example, the provision that accounting policies adopted shall be such was to represent a true and fair view of the state of affairs and income of the business, profession or vocation, and that for this purpose, the treatment and presentation of transaction and events shall be governed by their substance and not merely by their legal form, and marked to market loss or an expected loss shall not be recognised, unless the recognition of such loss is in accordance with the provisions of any other ICDS, really relates to what accounting policies an assessee should follow in its books of account. This is inconsistent with the preamble to this ICDS, that it is not applicable for the purpose of maintenance of books of account. This is also ultra vires the powers available under the provisions of section 145(2), which provide for computation in accordance with notified ICDS, and no longer contain the power to notify accounting standards.
This anomaly possibly arose on account of the fact that the provisions of section 145(2) were modified only after the Committee provided the draft of the relevant ICDS. Possibly, such provisions of ICDS I may not be valid.
Each ICDS states that in the case of conflicts between the provisions of the Income-tax Act and the ICDS, the provisions of the Act would prevail to that extent. Such a provision is ostensibly to harmonise the provisions of the ICDS with the provisions of the Act. One wonders as to why the Committee did not take into account the various provisions of the Act while framing ICDS. While such a provision is helpful, it would lead to substantial litigation in cases where there is no express provision in the Act, but where courts have interpreted the provisions of the Act in a manner which is inconsistent with the provisions of the ICDS.
There have been 3 specific amendments made to the Income-tax Act by the Finance Act 2015, to ensure that the provisions of the Act are in line with the provisions of ICDS. These 3 provisions are as under:
1. The definition of “income” u/s. 2(24) has been amended by insertion of clause (xviii) to include assistance in the form of a subsidy or grant or cash incentive or duty drawback or favour or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee, other than the subsidy or grant or reimbursement, which is taken into account for determination of the actual cost of the asset in accordance with the provisions of explanation 10 to clause (1) of section 43. This is to align it with the provisions of ICDS VII on Government Grants.
2. The provisions of the proviso to section 36(1)(iii) have been modified to delete the words “for extension of existing business or profession”, after the words “in respect of capital borrowed for acquisition of an asset”, to bring the section in line with ICDS IX on Borrowing Costs, whereby interest in respect of borrowings for all assets acquired, from the date of borrowing till the date of first put to use of the asset, is to be capitalised.
3. A second proviso has been inserted to section 36(1) (vii), to provide that where a debt has been taken into account in computing the income of an assessee for any year on the basis of ICDS without recording such debt in the books of accounts, then such debt would be deemed to have been written off in the year in which it becomes irrecoverable. This is to facilitate the claim for deduction of bad debts, where the debt has been recognised as income in accordance with ICDS, but has not been recognised in the books of accounts in accordance with AS.
Obviously, with the amendment of the Income-tax Act as well, the provisions of the ICDS in this regard read along with the amended Act, which may be contrary to earlier judicial rulings, would now apply.
There could be earlier judicial rulings which are based on the relevant provisions of the accounting standards, and where the court therefore interpreted the law on the basis of such accounting standards. These judicial rulings would now have to be considered as being subject to the requirements of ICDS, as the method of accounting is now subject to modification by the provisions of ICDS.
The third and last category of judicial rulings would be those where the courts have laid down certain basic principles while interpreting the tax law, in particular, the relevant provisions of the tax law. In such cases, such judicial rulings would override the provisions of ICDS, since such rulings have interpreted the provisions of the Act, which would prevail over ICDS.
For instance, various judicial rulings have propounded the real income theory. The Delhi High Court, in the case of CIT vs. Vashisht Chay Vyapar 330 ITR 440 has held, based on the real income theory, that interest accrued on non-performing assets of non-banking financial companies cannot be taxed until such time as such interest is actually received. Would the contrary provisions of ICDS IV on revenue recognition change the position? It would appear that the ruling will still continue to hold good even after the introduction of ICDS.
In case any of the provisions of ICDS is contrary to the Income Tax Rules, which one would prevail? The provisions of ICDS are silent in this regard. Given the fact that rules are a form of delegated legislation, while ICDS is in the form of a notification, which then becomes a part of the legislation, it would appear that the provisions of ICDS should prevail in such cases.
Since ICDS is not applicable for the purpose of maintenance of books of account, it is clear that the provisions of ICDS would not apply to the computation of “book profits” for the purposes of minimum alternate tax under section 115JB.
In fact, most of the ICDS provisions would increase the gap between the taxable income and the book profits, instead of narrowing down the gap. In this context, one wonders whether a recent Telangana & Andhra Pradesh High Court decision would be of assistance. In the case of Nagarjuna Fertilizers & Chemicals Limited 373 ITR 252, the High Court held that where an item of income was taxed in an earlier year but was recorded in the books of account of the current year, on the principle that the same income could not be taxed twice, such income had to be excluded from the book profits of the current year.
Can one use the provisions of AS for interpreting ICDS, where the provisions of both are identical? If one compares the ICDS with the corresponding AS, one notices that the bold portion of the AS has been picked up and modified, and issued as ICDS. Where the provisions of the AS and ICDS are identical, one should therefore be able to take resort to the explanatory paragraphs forming part of the AS, though they do not form part of the ICDS, in order to interpret the ICDS.
Impact & Conclusion
One thing is certain – the provisions of ICDS will create far greater litigation, then what one is now witnessing. That would defeat the very purpose of ICDS of bringing in tax certainty and reduction of litigation. Does reduction of litigation mean introduction of complicated provisions which are unfair to taxpayers? Is there at least one provision in the ICDS which decides a disputed issue in favour of taxpayers?
Does the CBDT believe that what is accepted worldwide as income (profit determined in accordance with IFRS), is not the real income when it comes to taxation? Are the Indian tax authorities an exception to the rest of the world? ICDS does not increase taxes – it merely results in advancement of taxability of income to an earlier year, and postponement of allowability of expenditure to a later year. Is the need for advancement of tax revenues so pressing, that taxpayer convenience and compliance costs are brushed aside?
Looking at the requirements of ICDS, one cannot but help wonder as to whether ICDS has been merely brought in to overcome the impact of adverse judicial rulings, and not really with a view to facilitate transition to IndAS. What ought to have been done by amendments to the law is being sought to be implemented through ICDS.
Assessees would now have to cope with not only frequent changes to the law, but also with frequent changes to ICDS, given the unfinished agenda of 4 draft ICDS yet to be notified, and the further 4 recommended for notification by the Committee. One understands that the Committee is in the process of drafting further ICDS for notification.
One also understands that the CBDT is likely to issue FAQs to clarify various aspects of ICDS. One only hopes that such FAQs will not create further confusion, but would help clear the confusion created by the ICDS.
One wonders as to how such ICDS fits in with the Prime Minister’s promise to improve the ease of doing business. The additional compliance costs in order to comply with ICDS would far outweigh the advantages gained by the tax department by recovering taxes at an earlier stage. Would business be keen to expand or would persons be willing to set up new businesses, given the significant compliance costs? The country would certainly take a significant hit in the “Ease of Doing Business Survey” once ICDS is implemented.
Tax auditors will now be in an extremely difficult situation, if the recommendation relating to requirement of certification of computation of income in accordance with ICDS is implemented. So far, they merely had to certify the true and fair view of the accounts, and the correctness of the information provided in Form 3CD. They did not have to certify the correctness of the claims for various deductions. If an auditor would now have to certify the correctness of the computation of income, this would give rise to various issues as to how such certification could be carried out, particularly in cases where the issue was debatable.
Instead of taxpayers, tax auditors may bear the brunt of the income tax department’s actions in respect of claims for deduction or exemption made which, in the view of the income tax department, is not allowable. Would assessees be willing to remunerate tax auditors for such additional high risks which they would bear in certifying the computation of income? If such a requirement of certification of the computation of income were introduced, it is possible that many chartered accountants may no longer be willing to carry out tax audits.
The biggest beneficiaries of ICDS may be tax lawyers and chartered accountants, who will have to handle the resultant additional litigation. The biggest losers will be the taxpayers, due to additional compliance and litigation costs, and the country, due to loss of productive manhours, and the loss of potential growth in business.
In this article, I have tried to capture various issues which have cropped up with the enactment of the Black Money law. Even after the CBDT has tried to address few issues by rolling out circular of frequently asked questions, still there is a lack of clarity in many areas on applicability of this dreadful law.
Constitutional Validity of Change in Date of Commencement of Act
To start with the list of issues, firstly, the move of the Finance Ministry to advance the date of operation of the black money law from April 1, 2016 to July 1, 2015 is highly questionable. Could the government have “amended” a law passed by the Parliament which had already received the assent of the President through an Executive Order? If the date from which the law would come into force was part of the Bill passed by both Houses of Parliament, then how anybody other than Parliament could have changed it. The government should have gone to the Parliament for amending it.
Section 86 (1) of the Act empowers the Central government to order to remove difficulties not inconsistent with the provisions of the main Act as a delegate of Parliament. But in the instant situation, the government has actually amended section 1(3) of the main Act by altering the date when the Act shall come into force from 1st April, 2016, to 1st July, 2015 in a notification issued by an officer of the rank of Under Secretary to remove any “difficulty” that comes in the way of giving effect to the provisions of the Act through an order. But the “difficulty” that the section refers to cannot apply to the date from which the law would come into force. Further, a delegated legislation cannot amend the parent legislation.
Duration of Compliance Window
It was expected that the government would provide a compliance window of 3 to 6 months, though the author’s view is that a period of 6 to 9 months would have to be provided for those, who may want to take this one time opportunity and to get the proper valuation of their assets done in terms of complicated Rules for valuation. The 3-month window will certainly be a practical difficulty faced by persons who are genuinely interested in making a disclosure of undisclosed foreign assets. Supposedly, a person having investments and assets in, let us say, 7 tax havens (Switzerland, Cayman Islands, Bermuda, Luxembourg, Jersey, Singapore and Mauritius) and wants to come clean by making declaration of undisclosed assets. Further, calculating the fair value of unlisted shares will be a pain and above that it will be a task to satisfy the tax authority that the disclosure made under the one-time compliance window is correct. An individual who holds shares in an unlisted firm will have to find out the fair value of all assets that firm holds which will be time-consuming. It will not be easy to complete the valuation exercise in three months time frame allotted (at the time of writing this article, approximately one month of the time frame has already elapsed) for one-time compliance window, but the downside of not declaring could be severe in view of the automatic exchange of information becoming effective soon. If this three-month compliance scheme is compared with the tax authority’s 2 year time frame to complete an assessment, such short compliance scheme may cause undue hardship and be a burden to declarants to satisfy the requirements prescribed under the scheme. If the information comes to the notice of the tax department post this window, the payout would be much more and there would be the risk of imprisonment and prosecution. More so if anyone, even by mistake, makes an incorrect declaration, then the entire declaration will be treated as null and void. The tax and penalty paid will not be refunded and the information given in the form will be used against the person for initiating proceedings by any demand raised against the declarant.
CONFUSION OVER NON-REFUNDABLE TAX AND PENAL TY UPON REJECTION OF THE DECLARA TION UNDER CO M-LIANCE WINDOW SCHEME
If the declaration is regarded as void under section 68 of the Act (Chapter VI – Compliance Window Scheme), then whether the tax and penalty paid would be refunded? This question requires clarification from the CBDT. However, having regard to the provisions of section 66 and section 68, such tax and penalty may not be refunded to the declarant and the declaration shall be deemed never to have been filed under Chapter VI of the Act. Now, since the declaration is deemed never to have been filed, the Assessing Officer may issue a notice under the normal provisions of this Act. Consequently, the declaration may be required to pay tax and penalty, as per the provisions of the Act. However, the declarant should be allowed to claim set-off of the amount of tax and penalty already paid under this chapter for the assets declared vide the declaration (which was regarded as void under section 68) and therefore only the remaining amount of tax and/or penalty should be required to be paid.
PROBLEM ON OBTAINING INFORMATION ON BANKS ACCOUN TS BY THE DECLARANT
Under Indian Income Tax Act, the tax department can go back up to 16 years whereas under the Black Money Act (which prescribes no time limit) the resident is expected to disclose, as per the circular issued, income or assets even for a period beyond 16 years also. This could be 20, 30 or even 40 years depending on when an account was opened or even sums inherited by a person or person from whom assets were inherited did not pay taxes on such assets. Some of the accountholders in the Liechtenstein bank LGT had opened accounts in the late 1960s and 1970s. Foreign banks do not have account details beyond 10 years. If a person cannot furnish all details, then he would not be able to comply and the tax department will reject the application which is made under the one-time compliance window. However, in a case where there are undisclosed assets other than bank accounts in the declaration, it is uncertain whether the entire declaration would be rejected or only the bank account declaration would stand reject on account of non-compliance of the details so prescribed by the Government.
In some countries like the UAE, there is no income tax and also no legal requirement to maintain books of accounts for tax purpose. In such cases, it will be difficult for individuals to get details of all transactions in the bank account.
Prior Information received by Govt under DTAA
Declarant under the compliance window has no means to know whether the Government has received any prior information under DTAA on or before 30 June 2015 about his undisclosed assets. Supposedly, where a declarant has disclosed the information under the compliance window scheme and is later on informed by the Government that they had information about these undisclosed assets, then that declarant would have to exclude such undisclosed assets from the declaration and will also lose immunity from prosecution under Income-tax Act, Wealth Tax Act, Customs Act, FEMA and Companies Act. But the question here arises, on what grounds that declarant should rely on Government’s statement of having prior information. So, declarants may contest the Government’s assertion by filing RTI application to disclose documentary evidence substantiating Government’s claim that information under DTAA was received on or before 30th June 2015.
Valuation of Immovable Properties acquired abroad
Properties acquired abroad will be taxed on the basis of a valuation report of a valuer recognised by the foreign government. Clarification is required regarding the evidence the declarant will have to produce to prove that the valuer is recognised by that particular foreign government and to get valuation done. In most of the foreign countries, there is no system of a registered valuers notified by the Government and valuation is generally carried out by private asset valuation companies. This becomes more difficult and time-consuming for a person to first conduct a search for finding a registered valuer otherwise the declaration made would be rejected and deemed to have never been made leading to more severe and harsh consequences like higher penalty and fear of prosecution.
Valuation of Any other assets
The rules prescribed by the Government provide for valuation of any other asset. Clarification is required regarding its definition. Whether that will include intangible assets as well. Further regarding its valuation the rules provide that FMV shall be higher of cost and the price that the asset would fetch if sold in the open market on the valuation date in an arm’s-length transaction. Whether a valuation report is required for this?
Indian Nationals returning to India after few years
Professionals who return to India after having worked abroad may have opened retirement pension accounts like 401K account in US. CBDT has clarified that assets acquired when the person was a non-resident do not fall under the definition of undisclosed assets and will not be taxed under the Black Money Act or Income-tax Act. However, a question arises whether the balance in the 401k accounts will have to be disclosed by a resident in the Income Tax Return under the Schedule for Foreign Assets? Since CBDT’s circular has stated that non-reporting of foreign assets in Income-tax return and makes the person liable for penalty of Rs 10 lakh under the Act. Further, the threshold limit of Rs. 5 lakh prescribed by the Government for which the penalty is not applicable is in respect of bank account only. So, such 401k balances does not represent as bank account and the threshold limit would also not be applicable in this regard. Clarification needs to be sought from CBDT on this issue since the penalty will be harsh for a mere non-disclosure even if there is no detriment to the Government as the asset was created out of income earned when the individual was a non-resident and which is not taxable in India.
Further, there is a practical difficulty of retrieving details of such balance for those who returned to India from abroad long back. It makes no sense in putting such people to hardship without any commensurate benefit to the Government. It would be better if CBDT instructs Assessing Officers not to impose penalty in cases where non-disclosure causes no loss to the Revenue.
Inheritance of property
The CBDT in the circular containing a list of frequently asked questions has stated that in case of inheritance of property from the father and which has been sold by the son in an earlier year, son can make the declaration in respect of such property as legal representative where source of investment in the property by the father was unexplained. What happens if son is not aware of the source? Can he be liable under this Act, in case he fails to make such disclosures? Similarly, there is conflict between the Act and the Circular issued by the CBDT, where in the Circular it appears as if the non-residents are also being covered by the Act, while section 3 of the Act provides the applicability of this act to ordinarily residents only.
Further, would it be correct to argue that non-disclosure would only attract penalty of Rs. 10 lakh u/s. 42? Tax and penalty of 120% would be attracted only on income accrued on such inherited property that is not disclosed post inheritance?
Threat of Abetment
The Act imposes liability for abetting or inducing another to wilfully attempt to evade tax or to make false statements/ declarations in relation to foreign income and assets. The objective of this provision is to target professional advisors such as private banks, accountants, lawyers and other consultants whose actions may potentially be covered under ‘abetment or inducement’. This move is intended to make the Act comprehensive in its scope. That said, it is bound to cause concern among practitioners as there is no clear guidance on what precautions or due diligence will be sufficient to indicate practitioners acted within their rights or that they did not beach their code of conduct. Imposition of such liability on professional advisors and intermediaries may adversely affect advising of Indian clients by practitioners may apprehend the risk of undue harassment at the hands of Revenue officials.
There is a dire need for the Government to step in and clear the air on many issues and by not just issuing a press release stating the views in the media reports are based on surmises and may not be factually accurate or correctly reflecting the legal position. Thus, until and unless the Government lends an ear to the problems faced and helps in resolving them, this dreadful Black Money Law will only be a tool of tax terrorism.
For the A. Y. 1998-99, the assessee showed gross lease rental of Rs. 1,14,91,395/- as income. Out of this, a sum of Rs. 48,56,224/- was claimed as deduction of lease equalization charges from the lease rental income following the guidance note on accounting of leases, Issued by the ICAI. The Assessing Officer disallowed the lease equalisation charges. The Tribunal allowed the claim.
On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:
“(i) The Assessing Officer could not have disregarded the method of accounting followed by the assessee in respect of the lease rental as it was based on a guidance commended for adoption by a professional body such as the ICAI. The guidance note reflected the best practices adopted by accountants the world over. The fact that at the relevant point of time, it was not mandatory to adopt the methodology professed by the guidance note issued by the ICAI was irrelevant because as long as there was a disclosure of the change in the accounting policy in the accounts, which had the backing of a professional body such as the ICAI, it could not be discarded by the Assessing Officer.
(ii) Notwithstanding the fact that the opinion of ICAI was expressed in a guidance note which had not attained a mandatory status, would not provide a basis to the Assessing Officer to disregard the books of account of the assessee and in effect the method of accounting of leases followed by the assessee.
iii) Merely because the Central Government has not notified in the Official Gazette “accounting standards” to be followed by any class of assesses or in respect of any class of income, it could not be stated that the accounting standards prescribed by the ICAI or the accounting standards reflected in the “guidance note” cannot be adopted as an accounting method by an assessee.
iv) T he questions of law are answered in favour of the assessee and against the Revenue.”
CIT vs. Tata Autocomp Systems Ltd.; 374 ITR 516 (Bom):
The Revenue had filed an appeal before the High Court against the order of the Tribunal relating to section 92B. Appeal was not preferred against the decisions of the Tribunal on identical issue in other cases:
The Bombay High Court dismissed the appeal filed by the Revenue and held as under:
“i) T he order of the Tribunal, inter alia, had followed the decisions of the Bombay Bench of the Tribunal to reach the conclusion that the arm’s length price in the case of loans advanced to associate enterprises would be determined on the basis of the rate of interest being charged in the country where the loan is received/ consumed.
ii) T he Revenue had not preferred any appeal against those decisions of the Tribunal on the above issue. No reason had been shown as to why the Revenue sought to take a different view in the present case from that taken in those decisions of the Tribunal. The Revenue having not filed any appeal against those decisions, had in fact accepted the decisions of the Tribunal. The appeal was not maintainable.”
The appellant/assessee was engaged in production and distribution of motion pictures mainly in Tamil language. There was a search u/s. 132 of the Income-tax Act, at the business premises of the assessee during which certain book of accounts were seized. Consequent to the search, proposal was made for assessment for the block period of ten years 1.4.1986 to 31.3.1996 and thereafter, up to 13.9.1996.
The Assessing Officer disallowed the expenditure where the payments were made in cash in excess of Rs.10,000/- relying on section 40A(3) of the Act as it stood prior to 1.4.1996.The appellant filed appeal before the Income Tax Appellate Tribunal, Madras Bench (‘the Tribunal’). The Tribunal vide order dated 28.6.2000 partly allowed the appeal and remitted the matter to the Assessing Officer for considering the claim whether the income/loss from the film Thirumurthy was to be computed for the assessment year 1996-97 in accordance with Rule 9A of the Income Tax Rules. It was also directed that in making the computation, the Assessing Officer will consider the expenditure and make the disallowance under the provisions of section 40A(3) of the Act, as was applicable for the assessment year in question.
Feeling aggrieved by the order of the Appellate Tribunal, the appellant filed appeal before the High Court. The High Court did not accept the contentions of the appellant which were based on the amended section 158B(b) in Chapter XIVB of Finance Act, 2002 and dismissed the appeal.
Questioning the validity of the aforesaid judgment of the High Court, the appellant preferred an appeal with the leave of the Supreme Court.
The Supreme Court noted that in the year 1996, the provisions of section 40A(3) of the Act did not allow any expenditure if it was more than Rs.20,000/- and paid in cash. The only exception that was carved out in such cases was where the assessee could satisfactorily demonstrate to the Assessing Officer that it was not possible to make payment in cheque. Even in those cases, the expenditure was allowable up to Rs.10,000/- and all cash payments made in excess of Rs.10,000/- were to be disallowed as the expenditure. Provisions of section 40A(3) were amended with effect from 1.4.1996. With this amendment, in cases where the cash payment is made in excess of Rs.20,000/-, disallowance was limited to 20% of the expenditure.
The Supreme Court observed that since the date of the amendment fell within the aforesaid block period, the assessee wanted the benefit of this amendment for the entire block period of ten years, i.e., 1.4.1986 to 31.3.1996. According to the Supreme Court, such a plea was unacceptable on the face of it inasmuch as the amendment was substantive in nature, which was made clear in the explanatory notes of amendments as well.
The Supreme Court held that once the amendment was held to be substantive in nature, it could not be applied retrospectively. The only ground on which the assessee wanted benefit of this amendment from 1.4.1986 was that the assessment was of the block period of ten years. The Supreme Court noted that, however, on its pertinent query, learned counsel for the appellant was fair in conceding that there was no judgment or any principle which would help the appellant in supporting the aforesaid contention. According to the Supreme Court, the order of the High Court was perfectly justified.
Facts:
Assessee-company was engaged in the business of leasing, financing and trading. Its application for registration to Reserve Bank of India to register it as NBFC was rejected as its net owned funds were below the prescribed minimum level. According to the AO the assessee was not authorised to carry on business of financing and thus the business carried on by the assessee was prohibited under the law. Therefore, he held that the interest income earned by the assessee cannot be said to be arising from business activity and he taxed the same as income from other sources. Further, various expenditure claimed by the assessee was also disallowed on the ground that the RBI had not recognised the assessee as NBFC and the claim for set-off of brought forward losses and unabsorbed depreciation was also denied. The first appellate authority, on appeal upheld the order of the AO.
Held:
According to the Tribunal permission/denial by the RBI to register an assessee as NBFC does not decide the issue of carrying on of business or make the business illegal. If the assessee had violated any provisions of law under the RBI Act, it would be penalised by the appropriate authority. But that does not mean that the systematic organized activity carried on by the assessee for earning profit would not be treated as business. The Tribunal further noted that in the scrutiny assessment in the earlier years, the AO had assessed the interest income as business income and had allowed all the expenditure related with the business activity. According to the Tribunal, the rule of consistency demanded that for deviating from the stand taken from the earlier years, the AO should bring on record the distinguishing feature of that particular year. The Tribunal found that the AO or the first appellate authority in their orders had not mentioned as to how the facts of the case were different from the facts in the earlier or subsequent years. As regards disallowance of other expenditure like audit fee, professional fee, general expenses, etc., the tribunal, relying on the decision of the Allahabad High Court in the case of Rampur Timber & Turnery Co. Ltd. (129 ITR 58), held that since the assessee is a corporate entity, even if it is not carrying on any business activity it has to incur some expenditure to keep up its corporate entity. Therefore, the expenditure incurred by it has to be allowed. Accordingly, it was held that the interest income earned by the assessee has to be taxed under the head business income and all the expenses related with it have to be allowed.
As far as the disallowance of carry-forward of loss and depreciation was concerned, the Tribunal relied on the decision of the Delhi high court in the case of Lavish Apartment Pvt. Ltd. vs. ACIT (23 taxmann.com 414) and held that the assessee was entitled to claim set-off.
FACTS
The assessee, a Credit Co-operative Society, duly registered under Maharashtra Co-operative Societies Act, 1960, had filed its return of income without claiming deduction u/s. 80P(2)(a)(i). The return of income was processed u/s. 143(1) and accepted.
Subsequently, the assessee filed an application u/s. 154 requesting the Assessing Officer to allow deduction u/s. 80P(2)(a)(i). The Assessing officer rejected the application and denied the claim.
On appeal, the Commissioner (Appeals) on the point of rectification observed that due to technical difficulties in preparing the return in “Tax Base Software”, small clerical errors had led to incorrect filing of return. Further, due to errors in programming of the said software, although the deduction was not allowed in the e-return resulting into tax demand, the acknowledgement of e-return generated by the software resulted into Nil demand as the deduction was allowed. Therefore, the said mistake was rectifiable u/s. 154 by the Assessing Officer and while allowing the assessee’s claim, Commissioner (Appeals) held that even on merit, the assessee society was eligible for deduction u/s. 80P(2)(a)(i).
On departments appeal.
HELD
It is settled law that correct income of the assessee is to be assessed as per provisions of Income-tax Act, 1961, inspite of higher income incorrectly declared by the assessee in the return of income. If an assessee, under a mistaken belief, , misconception or on account of being not properly instructed returns higher income, the concerned authority is obliged, required to assist such an assessee by ensuring that only legitimate taxes are determined as collectible. If particular levy is not permissible, the tax cannot be collected. In view of above, the Commisioner (Appeals) was justified in holding that such a mistake is rectifiable u/s. 154 and the assessee society is eligible for deduction u/s. 80P(2)(a)(i) on merit as well.
FACTS
The assessee had entered into contract with different parties to supply tankers which were being hired from time to time, against which freight payments were made by the assessee.
The assessee’s case was that no TDS was required to be deducted from the freight expenses as all 15-I and 15-J forms regarding the same had been duly submitted to the department.
The AO found certain discrepancies in 15-I and 15-J forms and made addition for failure to deduct TDS under the provisions of section 194C and consequently, made disallowance as per section 40(a)(ia).
It was held by the CIT-(A) that the provisions of section 194C were not applicable to the instant case as the assessee had only hired the trucks from time to time and deleted the additions made u/s. 40(a)(ia).
On appeal by Revenue
HELD THAT
It may be noted that the said Form 15-I and 15-J are to be filed before the prescribed authority, i.e., the Commissioner and not the Assessing Officer. In the instant case, the said forms were filed before the prescribed authority and within the prescribed time and no defect was pointed out by the said authority. In the absence of the same, there is no merit in the observation of the Assessing Officer that there are discrepancies in Form 15-I and 15-J.
Further, the assessee had entered into contract with several parties on whose behalf it was arranging the truck from time to time and the expenditure was booked as freight payment against which freight income was received by the assessee. Hence the assessee is not liable for tax deduction at source u/s. 194C as the amounts paid by the assessee were on behalf of the principal on whose behalf it was arranging the said tankers.
The assessee was making payment for carriage of goods and there was admittedly no oral or written agreement between the assessee and transporters and in the absence of the same, there is no merit in the order of the Assessing Officer in holding that the provisions of section 194C had been violated. In the absence of the same no disallowance is warranted u/s. 40(a)(ia). The order of the CIT-(A) is upheld.
CIT vs. Anil Kumar Chada; 374 ITR 10 (All):
On 2nd May, 1998, the police recovered a sum of Rs. 17 lakh from the possession of three persons. On interrogation, they stated that the money belonged to the assessee who in reply to the query by the police stated that the cash belonged to the firm, C. When the matter was referred to the Income Tax Department, it issued a notice u/s. 158BC in the name of the assessee for the block period 1 st April, 1988, to 3rd May, 1998, and made an assessment of undisclosed income of Rs. 18,11,700/- in the hands of the assessee. The Tribunal cancelled the assessment holding that since no search warrant was issued u/s. 132 in the name of the assessee, no notice could be issued in the name of the assessee u/s. 158BC.
On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:
“i) There was no search warrant in the name of the assessee nor were assets requisitioned from the assessee. Therefore, the provisions of section 158BC were not applicable. Further, no warrant or requisition was issued either in the name of the firm or the assessee.
ii) The order of the Tribunal did not call for interference.”
Stock Holding Corporation of India Ltd vs. CIT; 373 ITR 282 (Bom):
For the A. Y. 1994-95, the Assessing Officer did not pay interest u/s. 244A in respect of the excess amount paid by the petitioner as self assessment tax. The petitioner’s application u/s. 264 of the Income-tax Act, 1961 was rejected by the Commissioner.
The Bombay High Court allowed the writ petition filed by the petitioner and held as under:
“i) The requirement to pay interest arises whenever an amount is refunded to the assessee as it is a kind of compensation for use and retention of money collected by the Revenue.
ii) Circular No. 549 dated 31/10/1989, makes it clear that if refund is out of any tax other than out of advance tax or tax deducted at source, interest shall be payable from the date of payment of tax till the date of grant of refund. The circular even remotely did not suggest that interest is not payable by the Department on self-assessment tax.
iii) The tax paid on self-assessment would fall u/s. 244A(1)(b). The provisions of section 244A(1)(b) very clearly mandate that the Revenue would pay interest on the amount refunded for the period commencing from the date payment of tax is made to the Revenue up to the date when refund is granted by the Revenue. Thus, the submission that the interest is payable not from the date of payment but from the date of demand notice u/s. 156 could not be accepted as otherwise the legislation would have so provided in section 244A(1)(b), rather than having provided from the date of payment of the tax. Therefore, the interest was payable u/s. 244A(1)(b) on the refund of excess amount paid as tax on self-assessment u/s. 140A.”
In the relevant years, the assessee was forced to stay in India for more than 182 days in a previous year due to impounding of passport. Such impounding was found by courts to be wrongful. The assessee was fighting court cases to get his passport released so that he could travel outside India to maintain his NRI status. If such forced stay was excluded then the assessee’s stay in India was less than 182 days and his status would have been that of non-resident. The assessee claimed that such forced stay should be excluded and the asessee should be treated as non-resident. The Assessing Officer rejected the claim and treated the assessee as resident. The Tribunal held that the assessee continued to enjoy the status of nonresident and, thus, not amenable to be held accountable under the Income-tax Act for income not earned here.
In appeal by the Revenue, the following question was raised:
“Whether the ITAT was correct in taking the view that the period for which the assessee was in India involuntarily on account of his passport having been impounded is not to be counted for purposes of section 6(1)(a) of the Income -tax Act so as to hold him entitled to be a non-resident?”
The Delhi High Court upheld the decision of the Tribunal and held as under:
“i) Where assessee was forced to stay in India for more than 182 days in a previous year due to impounding of passport found by courts to be wrongful and he was fighting court cases to get passport released so that he could travel outside India to maintain his NRI status, the period of such forced/unwilling stay in India cannot be counted for determining his residential status u/s 6. If assessee’s stay in India without counting such forced stay is for less than 182 days, he retains his NRI status for tax purposes.
ii) We must, however, add a caveat here. The conclusion reached by us on the facts and in the circumstances of the case at hand cannot be treated as a thumb rule to the effect that each period of involuntary stay must invariably be excluded from computation for purposes of Section 6(1)(a) of Income-tax Act. The view taken by us in the case of assessee here is in the peculiar facts and circumstances wherein he was inhibited from travelling out of India on account of such action of the law enforcement agencies as was found to be wholly unjustified. Here, it is important to notice that the passport impounding order was invalidated as without authority of law. The finding on whether in a given case an assessee’s claim to extended stay being involuntary, has to be fact dependent. For purposes of section 6(1)(a), each case will have to be examined on its own merits in the light of facts and circumstances leading to “involuntary” stay, if any, in India.”
CIT vs. Voora Property Developers P. Ltd.; 373 ITR 317 (Mad):
For the A. Y. 2007-08, in the assessment order u/s. 143(3) of the Income-tax Act, 1961, the Assessing Officer had allowed the assessee’s claim for deduction u/s. 80-IB(10) in respect of the housing project consisting of six blocks in a area exceeding one acre. The Commissioner set aside the assessment order u/s. 263 for reconsidering the claim for deduction u/s. 80-IB(10) of the Act holding that the assessee had developed six separate projects in one single piece of land measuring 1.065 acres and the assessee did not fulfill the essential condition of the minimum area of one acre for a single project as laid down u/s. 80-IB(10). Accordingly, the Assessing Officer disallowed the claim for deduction u/s. 80-IB(10) of the Act. 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) There was no dispute in the approval granted by the CMDA in respect of the composite housing scheme. When the Legislature introduced 100% deduction it was known that the local authorities could approve a housing project to the extent permitted under the Development Control Rules. When the project fulfilled the criteria for being approved as a housing project, the deduction could not be denied u/s. 80-IB(10) merely because the assessee had obtained a separate plan permit for six blocks.
ii) If the conditions specified u/s. 80-IB are satisfied, then deduction is allowable on the entire project. Since the project was approved in accordance with the Development Control Rules, the assessee would be entitled to 100% deduction on the entire project approved by the local authority.
iii) The assessee constructed six blocks in a land measuring one acre and 6.5 cents which admittedly exceeded the required area specified in clause (a) of section 80-IB(10), viz., one acre. Therefore, the assesee was entitled to the deduction.”
80HHCCIT vs. Shamanur Kallappa & Sons; 373 ITR 373 (Karn)
The assessee exported rice to Cambodia through State Trading Corporation of India as a supporting manufacturer and claimed deduction u/s. 80HHC of the Income-tax Act, 1961. The Assessing Officer disallowed the claim on the ground that the State Trading Corporation had declared loss. The Tribunal allowed the asessee’s claim.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
“i) In order to attract the provisions of section 80HHC(1A), the supporting manufacturer sells the goods or merchandise to the export house or trading house. The export house or trading house has to issue a certificate under the proviso to subsection (1) of section 80HHC of the Act. If these two conditions are fulfilled, the supporting manufacturer is entitled to the deduction as contemplated u/s. 80HHC of the Act to the extent as mentioned in section 80HHC(1A) of the Act. It is immaterial whether in the process, the export house or trading house sells the goods to any foreign country or earns profit or realises any foreign exchange.
ii) In order to attract section 80HHC(1A) of the Act, after purchase of goods or merchandise from the supporting manufacturer, the goods have to be exported out of India. Once such export is established, a certificate under the proviso to subsection (1) is issued by the export house or trading house and when they do not claim the benefit u/s. 80HHC, the assessee would be entitled to the benefit of deduction as prescribed u/s. 80HHC(1A).
iii) The assessee was entitled to deduction u/s. 80HHC. The Tribunal was justified in granting the relief to the assessee upon the certificate produced in the course of the proceedings.”
The assessee sold a property and sale proceeds were used for construction of a new building. The Tribunal found that the assessee invested the entire net consideration within the stipulated period and in fact had even constructed the major portion of the residential property except some finishing, making it fit for occupation. The Tribunal held that as the assessee had acquired substantial domain over the new house and had made substantial payment towards cost of land and construction, within the period specified u/s. 54 of the Income-tax Act, 1961 the assessee could be said to have complied with the requirements for claiming the exemption u/s. 54. Accordingly, the Tribunal allowed the assessee’s claim for exemption u/s. 54 of the Act.
On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:
“i) In order to get the benefit of section 54 of the Act, it does not appear that in case of purchase of property with sale proceeds it has to be reconed within three years, in case of construction of new building utilizing sale proceeds, the construction has to be completed within a period of three years of the sale. In this case, the question of registration of document does not arise and it is a question of investment in construction of the new building.
ii) When it was found on the facts that the construction was completed within three years of sale of the property, the benefit would automatically follow. Hence we dismiss the appeal.”
For the A. Ys. 2008-09, 2009-10 and 2011-12, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80P(2)(a)(i), on the ground that the assessee was a primary co-operative bank. The Tribunal upheld the decision.
On appeal by the assessee, the Bombay High Court reversed the decision of the Tribunal and held as under:
“i) There was no dispute between the parties that the assessee was a co-operative society as the society was registered under the Goa Co-operative Societies Act, 2001. Its transactions with non-members were insignificant or miniscule. On the above basis, it could not be concluded that the assessee’s principal business was of accepting deposits from the public and, therefore, it was in banking business. Besides, the qualifying condition 3 for being considered as a primary co-operative bank is that the bye-laws must not permit admission of any other co-operative society. This is a mandatory condition, i.e., the bye-laws must specifically prohibit the admission of any other cooperative society to its membership. The Revenue had not been able to show any such prohibition in the bye-laws of the assessee.
ii) The assessee could not be considered to be a cooperative bank for the purposes of section 80P(4) of the Act. Thus, the assessee was entitled to the benefit of deduction u/s. 80P(2)(a)(i) of the Act.
iii) The authorities should restrict the benefit of deduction u/s. 80P of the Act only to the extent that the income is earned by the assessee in carrying on its business of providing credit facilities to its members.”
Facts:
The assessee was a legally wedded wife of Mr. Zaun. The said marriage was performed as per the Hindu customary rights. The said marriage was dissolved on 20.06.1978 as per the provisions of Hindu Marriage Act. During the year under consideration the assessee received Rs. 73,60,787 from her ex-husband Mr. Siguar Erich Zaun, a German citizen. The assessee claimed the said amount to have been received as alimony on divorce with her husband and the same was claimed as exempt. The Assessing Officer (AO) however, held the said amount as taxable under the head `Income from Other Sources’.
Aggrieved, the assessee preferred an appeal to the CIT(A) who observed that the divorce granted by the City Civil Court is recognised by German law. Mr. Zuan had applied to German Court for approval of divorce already granted by City Civil Court. German court granted divorce on 17.07.2001. There was no evidence of any claim before the German court regarding alimony at the time of recognition of her divorce with her husband. The order of the German court did not have any reference of payment of alimony. Alimony was paid after a gap of five years. Since on the date of receiving the amount there was no relationship between assessee and Mr. Zaun, he held that the amount received by the assessee from Mr. Zaun was chargeable to tax u/s. 56(2)(vi) of the Act.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
Under the Hindu Law, a wife has a pre-existing right of maintenance and alimony. The said right exists even after divorce from the husband. So far the granting of divorce under the German Law is concerned, the CIT(A) has discussed at length about the German Law relating to marriage and divorces and thereafter has concluded that even under the German Law, the maintenance can be claimed, if any of the spouse is unable to maintain himself/herself. He has further held that under the German Law spouses are free to arrange for the financial consequences only in case of an eventual divorce possibly by way of prenatal agreement. However, the CIT(A) has not discussed, if there is any bar in paying alimony by the husband to his wife in lieu of her maintenance for the whole life.
In the proviso to section 56(2)(vi) any sum received from a relative is exempt from tax. In the definition of relative, the receipt from whom is exempt under the Act, inter alia not only the spouse but the brother and sister of the spouse have also been included. As we have observed above that the maintenance or alimony is paid by the husband to his wife in recognition of her pre-existing right, whether marriage relationship is still continuing or has been dissolved, does not bar the payment of alimony by the ex-husband, to the divorced wife. Under such type of circumstances, in our view, in the definition of spouse, exspouse is also included except where there is an evidence that the payment is not made as a gift or an alimony but for some other consideration or by virtue of some other transaction. In the absence of any such evidence, the payment of alimony amount by the ex-husband to his wife is nothing more than a gift and is exempt under proviso to section 56(2)(vi) of the Act.
The appeal filed by assessee was allowed.
Facts:
The Assessing Officer (AO) while assessing the total income of the assessee disallowed a sum of Rs. 85,05,05,515, being payments by the assessee to various hospitals without deduction of tax at source u/s. 194J of the Act, by invoking the provisions of s. 40(a)(ia) of the Act.
Aggrieved, the assessee preferred an appeal to the CIT(A) who restricted the addition to Rs. 10,65,669 and deleted the remaining addition of Rs. 84,94,39,847 on the basis of certificates submitted by the payee hospitals u/s. 197 of the Act.
Aggrieved, the assessee preferred an appeal to the Tribunal and contended that the assessee had not claimed these payments as expenditure, hence there was no question of disallowance of any expenditure. Once an expenditure has not been claimed, no question of disallowance of the same can arise.
Held:
The Tribunal noted that in the assessee’s own case for assessment year 2009-10 vide ITA No. 2188/M/2013 dated 25.07.2014 the Tribunal, after detailed discussion, has observed as under –
“7. Though the assessee is under the obligation to deduct tax at source u/s. 194J however, the consequential liability is only u/s. 201 and 201(1A) and the disallowance u/s. 40(a)(ia) cannot be automatic when the assessee has not claimed this payment as expenditure against the income. The assessee has shown the income, only the service charges receivable from insurance companies for rendering services as 3rd party administrator and not having any margin or profit element in the payment received from the insurers for the purpose of remitting to the hospitals to settle medical claim of the insured. Therefore, when the said payment has not been claimed as expenditure incurred for earning the income by the assessee then the provisions of section 40(a)(ia) is not attracted for non deduction of tax at source in respect of the said payment. Following the decisions of the Tribunal as relied upon by the assessee and discussion above we hold that no disallowance can be made under section 40(a)(ia) in respect of the payment in question. Accordingly the ground raised in assessee’s appeal is allowed and ground raised in the revenue’s appeal is dismissed.”
The Tribunal, following the above stated observations, decided the issue in favor of the assessee and directed the lower authorities to delete the disallowance.
The appeal filed by assessee was allowed.
(I ) Section 32(2) – Unabsorbed depreciationpertaining to assessment year 2002-03 or before can be set-off after a period of eight years.
(ii) Section 115JB – In the absence of exempt income addition to book profit applying provisions of section 14A cannot be made.
Facts:
Following issues amongst others were raised before the tribunal:
i). Whether the unabsorbed depreciation of Rs 4.39 crore which pertained to the assessment years 1999-2000 and 2000-01, can be set off against business income during the current assessment year;
ii) I n the absence of exempt income whether disallowance u/s. 115JB on the ground that the amount pertained to disallowance u/s.14A, can be made.
The assessee’s claim for set-off against business income of unabsorbed depreciation brought from the assessment year 1999-2000 and 2000-01, aggregating to Rs. 4.39 crore, was rejected by the AO as according to him the unabsorbed depreciation pertaining to the assessment years prior to the assessment year 2002-03 could only be carried forward for eight subsequent assessment years. For the purpose, he relied on a Special Bench decision of the Delhi Tribunal in thecase of DCIT vs. Times Guaranty Limited [(2010) 4 ITR (Trib) 210 MumbaiSB]. On appeal, the CIT(A) upheld the decision of the AO.
Applying the provisions of Clause (f) of Explanation to section 115JB(2) the AO disallowed expense of Rs. 2 lakh u/s. 14A. On appeal, the CIT(A) confirmed the order. Before the Tribunal, the assessee contended that since it has not earned any exempt income during the year, the disallowance u/s. 115JB was not called for. While the revenue relied on the orders of the lower authorities and contended that once the assessee has on its own accepted this disallowance, the adjustment u/s. 115JB in respect thereof was only a natural corollary thereto.
Held:
i) Re: Depreciation: The Tribunal referred to the decision of the Gujarat high court in the case of General Motors India Pvt. Ltd. vs. DCIT [(2013) 354 ITR 244(Guj)] and noted its “considered opinion” to the effect that “any unabsorbed depreciation available to an assessee on 1st day of April 2002 will be dealt with in accordance with the provisions of section 32(2) asamended by Finance Act, 2001”. Accordingly, it observed that the legal position is that the restriction of eightyears, which was in force till the law was amended by the Finance Act 2001 w.e.f. 2002-03, does not come into play. Further, relying on the decisions in the cases of Tej International Pvt.Ltd.vs. DCIT[(2000) 69 TTJ 650] and ACIT vs. Aurangabad Holiday Resorts Pvt. Ltd. [(2007) 118 ITD 1], the Tribunal accepted the plea of the assessee.
ii) Re: Disallowance u/s 14A: Relying on the Delhi High Court’s decision in the case of CIT vs. Holcim India Pvt. Ltd. [2014 TIOL 1586 HC DEL IT] wherein it is held that unless there is an exempt income, disallowance u/s. 14 A cannot be invoked, the Tribunal accepted the assessee’s pleas and held that adjustment under Clause (f) of Explanation to section 115JB (2) cannot be made.
Facts :
The assessee was the owner of two properties, one of which was a flat in Marble Arch and the other was a flat in Nestle. The flat in Marble Arch was considered as self occupied property and the flat in Nestle was vacant throughout the previous year. The book value of the flat in Nestle was Rs. 57,22,000. This property was acquired by taking loan from bank. Interest of Rs. 3,50,641 was paid.
In respect of this property, the Assessing Officer (AO) considered Rs 4,00,540 (7% of book value of this property i.e. 7% of Rs. 57,22,000) to be its annual value. He restricted the claim for deduction of interest to Rs. 1,40,193 on the ground that the assesse could not be allowed a cumulative deduction more than Rs. 1,50,000 as per second proviso to section 24 of the Act.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
According to section 24(b), where the property is acquired, constructed, repaired or renewed or constructed with the borrowed capital than any interest payable on such borrowed capital would be an allowable deduction. The restriction of Rs. 1,50,000 described in second proviso is with reference to the property which is referred to in sub-section (2) of section 23. Section 23(2) would be applicable to a house or part of the house which either is in the occupation of the owner for the purpose of his residence or the same is not actually occupied by the owner for the reason that owing to his employment, business or profession carried on at any other place and he is to reside at that other place in a building not belonging to him and ALV of such property would be taken as nil. Undisputedly, the flat at Bandra falls under the category of property mentioned in section 23(2) fo the Act as AO did not assess the ALV of the said property as income of the assessee. Therefore, provisions of second proviso to section 24 would not be applicable and the case of the assesse would fall within clause (b) of section 24 in which there is no limit for allowability of the interest and the condition is that the said property should inter alia be acquired out of borrowed capital. In respect of the Nestle property the assessee has paid interest of Rs. 3,50,641. Interest deductible from ALV of Nestle property could not be restricted to any amount less than the interest paid by the assesse. The Tribunal directed the AO to give full deduction of interest paid of Rs. 3,50,641.
This ground of appeal filed by the assessee was allowed by the Tribunal.
Compiler’s Note:
It appears that the assessee had interest of Rs. 9,807 in respect of borrowing for flat in Marble Arch and that is why the AO restricted interest on loan for Nestle property to Rs. 1,40,193 (Rs. 1,50,000 – 9,807).
The assesse received certain payments from customers who initially booked flats by making advance payments plus 1 or 2 installments. Due to various reasons, these customers could not fulfill the payment schedule and requested for a refund. After certain period, the assessee identified new customers and flats were sold at a higher rate than the previous price. After the sale, the assessee returned the payments received from previous customers with a margin, in order to maintain good business relationship. The excess amount paid was debited to ‘Excess Payment Refund’. No tax was deducted at source from such excess payment made.
The Assessing Officer (AO) held that the excess amount paid to customers was interest u/s. 2(28A) and the payment thereof required deduction of tax at source u/s. 194A of the Act. He, accordingly, regarded the assessee as an assessee-in-default.
Aggrieved, the assessee preferred an appeal to CIT(A) who held that the provisions of section 194A are not applicable to the transactions undertaken by the assessee. Aggrieved, the revenue preferred an appeal to the Tribunal.
Held:
The excess payment made to the customers was in the nature of interest paid in respect of amount lying with the assessee. Mere nomenclature in the books of account will not change the character of actual payment which was precisely in the nature of interest as defined u/s. 2(28A) of the Act. Having reproduced the provisions of section 2(28A), the Tribunal observed that it is crystal clear from the plain reading of section 2(28A) of the Act, that money paid in respect of amount borrowed or debt incurred, is interest payable in any manner. The statutory definition given u/s. 2(28A) of the Act regards amounts which may not otherwise be regarded as interest, as interest for the statute. The definition of interest has been carried to the extent that even the amounts payable in transactions where money has not been borrowed and debt has not been incurred, are brought within the scope of its definition, as in the case of service fees paid in respect of a credit facility which has not been utilised.
In the instant case, the amounts were paid in respect of an obligation in respect of purchase of flat through agreement, therefore, no fault can be found on the part of the AO for treating these charges as interest and liable for TDS u/s. 194A of the Act. The mere fact that the assessee did not choose to characterise such payment as interest will not take such payment out of the ambit of definition of ïnterest’’, in so far as payment made by the assessee was in respect of an obligation incurred with earlier flat holder. The assessee has essentially incurred an expenditure and the amount of charges paid was with respect to the amount incurred by the flat agreement-holder and the period for which the money was so utilised by the assessee. The Tribunal reversed the order of CIT(A) and restored that of the AO on this issue.
This ground of appeal of the revenue was decided in favour of the revenue.
Facts:
The assessee acquired the running business in terms of ‘undertaking sale agreement’ of the “Elevator Division” of M/s. ECE Industries Ltd. on a slump basis for a value of Rs. 20,32,10,000. Apart from acquiring various other assets of the said business, the assessee has acquired maintenance contracts of 3,578 elevators which was the main source of revenue for the assessee and also maintenance contracts for 1,001 elevators which were under the warranty period and which would start yielding revenue once the warranty period expires. This portfolio of various maintenance contracts was valued at Rs.18,34,74,000 and depreciation u/s. 32 was claimed on it by treating it as an intangible asset. The learned AO while disallowing the claim of assessee for depreciation on ‘maintenance portfolio’ observed that the assessee was following a ‘complete contract method’ and hence, was not eligible to claim depreciation, as there was no income from the said contracts offered to taxation. Aggrieved by the disallowance the assessee preferred an appeal before the CIT (A). The learned CIT (A) observed that , the consideration can be equated to an amount paid to acquire income yielding apparatus which is nothing but capital in nature and cannot be inferred to result into a depreciable intangible assets.
Further, the excess of consideration over the net value of assets amounting to Rs. 1,85,44,612 was separately shown in the balance sheet and was treated to be ‘goodwill’ pertaining to the business. It was this value of goodwill that was claimed by the assessee as eligible for depreciation for the first time directly before the Tribunal based on the apex Court judgement in the case of CIT vs. SMIFS Securities Ltd. (2012) 75 DTR (SC) 417.
Held:
It was held that the aforesaid maintenance contracts were the very backbone of the business of the assessee. The fact that after the specified intangible assets referred to u/s. 32 (1)(ii) the words “business or commercial rights of similar nature” have been additionally used clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets but also other categories of intangible assets which were neither feasible nor possible to exhaustively enumerate. These annual maintenance contracts which constituted the whole and sole of the “maintenance division” business of the transferor and which was hitherto being carried out by the transferor, without any interruption were transferred under the said undertaking and sale agreement. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing business of the transferor. In absence of the aforesaid intangible assets, the assessee would have to commence the business from scratch and go through the gestation period whereas by creating new/fresh business right, the assessee got an up and running business. It would be prudent to note that these AMC’s in terms of value only come next to the value of fixed assets. Thus, it is unambiguously clear from the various clauses of the agreement and documents available on record that the present agreement represents a bundle of rights in the form of commercial rights. Thus, by applying the principle of ejusdem generis, it was held that such AMCs should get covered within the expression “business or commercial rights of similar nature” specified u/s. 32(1)(ii) of the Act and accordingly eligible for depreciation.
Regarding the issue of depreciation on the goodwill, the Honourable ITAT relied upon the decision of CIT vs. SMIFS Securities Ltd. (supra) wherein it was held that excess consideration paid by the assessee over the value of net assets should be considered as goodwill of business. Accordingly, the depreciation on the same was also allowed u/s. 32(1)(ii) by considering it as falling within the expression “business or commercial rights of similar nature”.
Section 115JAA – MAT credit has to be given against gross tax payable exclusive of surcharge/cess and only after the MAT credit tax liability, the surcharge and cess has to be calculated.
Facts:
The Assessing Officer (AO) computed the gross tax liability by granting MAT credit against tax liability inclusive of surcharge and cess.
Aggrieved, the assessee preferred an appeal before CIT(A) and contended that MAT credit has to be given against gross tax payable exclusive of surcharge and cess. The CIT(A) allowed the appeal preferred by the assessee.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held:
The Tribunal observed that an identical issue has been considered by the co-ordinate Bench in the case of Wyeth Limited vs. ACIT (ITA No. 6682/Mum/2011 vide order dated 09.01.2015). The Tribunal had, in the case of Wyeth Limited (supra), following the decision of the Allahabad High Court in the case of CIT vs. Vacment India (394 ITR 304)(All), directed the AO to allow the MAT credit against the tax liability payable before surcharge and education cess or alternatively the amount of MAT credit should be inclusive of surcharge and education cess and then allow the credit against the tax payable inclusive of surcharge and education cess.
Following the earlier order of co-ordinate Bench in the case of Wyeth Limited (supra), the Tribunal upheld the order of CIT(A).
The appeal filed by revenue was dismissed.
The
assessee, a Co-operative Housing Society, received a sum of Rs.
39,68,000 on account of transfer of flat and garage and credited it to
‘general amenities fund’ as well as ‘repair fund’. The assessee claimed
that the said receipt is exempted from tax on the ground of mutuality.
However, the Assessing Officer held that the principles of mutuality
will not apply. However, the CIT(A) and Tribunal allowed the assessee’s
claim by relying on Sind Co-operative Housing Society vs. ITO; 317 ITR
47 (Bom).
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
i)
The very issue and the very question was raised repeatedly in the case
of the assessee society. Repeatedly, the Revenue has failed in
convincing the Tribunal that Sind Co-operative Housing Society will not
cover the Society’s case. The contribution is made to the repair fund or
to the general fund and credited as such. While it may be true that it
is occasioned by transfer of a flat and garage, yet, we do not see how
merely because there was cap or restriction placed on the transfer fees
or the quantum thereof, in this case the principle of mutuality cannot
be applied.
ii) The underlying principle and of a co-operative
movement has been completely overlooked by the Revenue. The Revenue
seems to be of the view that a Co-operative Housing Society makes
profit, if it receives something beyond this amount of Rs. 25,000. There
has to be material brought and which will have a definite bearing on
this issue. If the amount is received on account of transfer of a flat
and which is not restricted to Rs. 25,000/- but much more, then
different consideration may apply. However, in the present case, what
has been argued and vehemently is the amount was received by the Society
when the flat and the garage were transferred. Therefore, it must be
presumed to be nothing but transfer fees. It may have been credited to
the fund and with a view to demonstrate that it is nothing but a
voluntary contribution or donation to the Society, but still it
constitutes its income. However, for rendering such a conclusive finding
there has to be material brought by the Revenue on record. Beyond
urging that it has been received at the time of a transfer of the flat
and credited to such a fund will not be enough to displace the principle
laid down in the decision of Sind Cooperative Housing Society.
iii)
The attempt of the Revenue therefore is nothing but overcoming the
binding judgment of this Court. In the present case, the Commissioner
and the Tribunal both have held that the receipt may have been
occasioned by the transfer but the principle of mutuality will still
apply.
iv) It is a typical relationship between the member of
the Co-operative Society and particularly a Housing Society and the
Society which is a body Corporate and a legal entity by itself that is
forming the basis of the principle laid down by the Division Bench.
Co-operative movement is a socio economic and a moral movement. It has
now been recognised by Article 43A of the Constitution of India. It is
to foster and encourage the spirit of brotherhood and co-operation that
the Government encourages formation of Co-operative Societies. The
members may be owning individually the flats or immovable properties but
enjoying, in common, the amenities, advantages and benefits. The
Society as a legal entity owns the building but the amenities are
provided and that is how the terms “flat” and the “housing society” are
defined in the statute in question. We do not therefore find any reason
to deviate from the principle laid down in Sind Co-operative Housing
Society’s case and which followed a Supreme Court judgment.”
The following question of law was raised in an appeal by the Revenue:
“Whether the non-disposal of an application for registration, by granting or refusing registration, before the expiry of six months as provided u/s. 12AA(2) of the Income-tax Act, 1961, would result in deemed grant of registration?”
The Full Bench of the Allahabad High Court held as under:
“Parliament has carefully and advisedly not provided for a deeming fiction to the effect that an application for registration would be deemed to have granted, if it is not disposed of within six months. Therefore, nondisposal of an application for registration before the expiry of six months as provided u/s. 12AA(2) would not result in a deemed grant of registration.”
The Bombay High Court had to consider whether an assessee enjoying exemption u/s. 11 could claim that the income exempt u/s. 10(33) and 10(38) had to be excluded while computing the application of income for charitable or religious purpose.
The High Court held as under:
“There is nothing in the language of sections 10 or 11 which says that what is provided by section 10 or dealt with is not to be taken into consideration or omitted from the purview of section 11. If we accept the argument of the Revenue, the same would amount to reading into the provisions something which is expressly not there. In such circumstances, the Tribunal was right in its conclusion that the income which in this case the assessee trust has not included by virtue of section 10, then, that cannot be considered u/s. 11.”
The assessee sold piece of land for Rs. 10,00,000/-. The stamp duty value of the same was Rs. 35,00,000/-. The Assessing Officer adopted the stamp duty value u/s. 50C of the Income-tax Act, 1961 and computed the capital gain on that basis. The Tribunal upheld the same.
On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:
“i) T he case of the assessee was that the price offered by the buyer was the highest prevailing price in the market. If this were his case then it is difficult to accept the proposition that the assessee had accepted that the price fixed for stamp duty was the fair market value of the property. No such inference could be made as against the assessee because he had nothing to do in the matter.
ii) Stamp duty was payable by the purchaser. It was for the purchaser to either accept it or dispute it. The assessee could not have done anything. In the case of this nature the Assessing Officer should, in fairness, have given an option to the assessee to have the valuation made by the DVO contemplated u/s. 50C.”
In the A. Y. 1993-94, the assessee firm was converted into a private limited company. The entire assets and liabilities of the firm were made over to the company. The respective partners were issued shares by the company corresponding to the value of their share in the firm. The Assessing Officer took the view that there was transfer of assets from the firm to the private limited company and thereby the capital gains tax u/s. 45 became payable. The Tribunal held that section 45 was not applicable and deleted the addition.
On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:
“i) From a perusal of section 45(4) of the Incometax Act, 1961, it becomes clear that two aspects become important, viz., the dissolution of the firm and the distribution of the assets as a consequence thereof. The distribution must result in some tangible act of physical transfer of properties or tangible act of conferring exclusive rights vis-à-vis an item of property on the erstwhile shareholder. Unless these other legal correlatives take place, it cannot be inferred that there was any distribution of assets.
ii) The shares of the respective shareholders in the assessee company were defined under the partnership deed. The only change that had taken place on the assessee being transformed into the company was that the shares of the partners were reflected in the form of share certificates. Beyond that, there was no physical distribution of the assets in the form of dividing them into parts, or allocation of the assets to the respective partners or even distribution the monetary value thereof. Section 45 was not applicable.”
For the A. Y. 2001-02, the assessee declared a total income of Rs. 42.08 lakh. The Assessing Officer disallowed an expenditure of Rs. 1.33 crore on account of purchases from seven parties on the ground that they were not genuine. The Tribunal found that the assessee had filed the letters of confirmation of suppliers, copies of bank statements showing entries of payment through account payee cheques to the suppliers, copies of invoices for purchases and stock statement, i.e. stock reconciliation statement and no fault was found with regard to it. Books of account of the assessee had not been rejected. The Tribunal deleted the disallowance holding that the purchases were not bogus.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The Tribunal had deleted the additions made on account of bogus purchases not only on the basis of stock statement, i.e. reconciliation statement but also in view of other facts. The Tribunal recorded that the books of account of the assessee had not been rejected. Similarly, the sales had not been doubted and it was an admitted position that a substantial amount of sales had been made to the Government Department.
ii) Further, there were confirmation letters filed by the suppliers, copies of invoices of purchases as well as copies of bank statements all of which would indicate that the purchases were in fact made.
iii) Merely because the suppliers had not appeared before the Assessing Officer or the Commissioner (Appeals), one could not conclude the purchases were not made by the assessee. The order of the Tribunal was well reasoned order taking into account all the facts before concluding that the purchases of Rs. 1.33 crore were not bogus. No fault could be found with the order of the Tribunal.”
The assessee was a joint venture between the Hero Group and Honda, Japan, for manufacture and sale of motorcycle using technology licensed by Honda. The assessee and Honda thereupon entered into an agreement called ‘licence and technical assistance agreement’ in terms of which assessee paid royalty to the Honda. The assessee claimed deduction of said payment u/s. 37(1). The Assessing Officer rejected assessee’s claim holding that it was in the nature of capital expenditure. 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) In the facts of the present case, one has to consider whether the expenditure incurred on acquisition of right to technical information and know-how would satisfy the enduring benefit test in the capital field, or the right acquired had enabled the assessee’s trading and business apparatus, in practical and commercial sense.
ii) Technical information and know-how are intangible and have unique characteristics as distinct from tangible assets. These are acquired by a person over a period of time or acquired from a third person, who may transfer ownership or grant a licence in the form of right to use, i.e., grant limited rights, while retaining ownership rights. In the latter case technical information or know-how even when parted with, the proprietorship is retained by the original holder and in that sense what is granted to the user would be a mere right to use and not transfer absolute or complete ownership.
iii) In the instant case, from perusal of terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical know how and information. The ownership and the intellectual property rights in the know how or technical information were never transferred or became an asset of the assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to assessee for day to day running and operation, i.e., to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24-1-1984. After expiry of the first agreement, the second agreement dated 2-6-1995, ensured continuity in manufacture, development, production and sale.
iv) In view of the aforesaid, it is held that the Tribunal was right in holding that the payment made to ‘Honda’ Japan under the ‘know-how’ agreement is revenue expense and not partly or wholly capital expense.”
(i) rate specified in the Act,
(ii) rate in force, or
(iii) rate of 20%.
Section 206AA also provides that a person cannot furnish a valid declaration u/s 197A without furnishing his PAN.
Section
195 requires a payer to deduct tax at source, at the rates in force, on
payments to a non-resident or a foreign company of any interest or any
other sum chargeable to tax under the Act. Section 2(37A) defines ‘rate
or rates in force’. One of the clauses of this section provides that for
the purposes of deduction of tax u/s. 195, the rate at which tax to be
deducted is the rate of income tax specified by the Finance Act of the
relevant year or the rate or rates specified in the relevant DTAA.
Section 2 of the Finance (No.2) Act, 2014, vide various sub-sections,
provides for payment of surcharge, education cess and secondary and
higher education cess on taxes, including on tax deduction at source, on
payments to a non-resident or a foreign company.
Issues have arisen, in the context of abovementioned provisions, which are listed as under;
are provisions of section 206AA applicable to cases of payees who are non resident or foreign companies,
are they applicable in cases where the tax is payable as per the provisions of DTAA ,
is
there a liability to deduct and pay surcharge and education cess in
cases where tax is deducted at 20% as per section 206AA, on payments to
non-resident or foreign company, and
what shall be the amount of tax that is to be grossed up for the payment of section 195A in cases where tax is paid by payer.
Bosch Ltd .’s case.
The
issue first came up for consideration of the Bangalore tribunal in the
case of Bosch Ltd., 28 taxmann.com 228 (Bangalore – Trib.) for
Assessment Year 2011-12. In that case, the assessee, a manufacturing
company with both imported and indigenous plant and machinery, entrusted
Annual Maintenance Contracts as well as repairs contracts to foreign
suppliers of machinery and equipments. The suppliers were residents of
Germany. The assessee made payments towards the AMCs and RCs without
deduction of tax at source on the understanding that the payments
represented business receipts of non-resident companies, who did not
have any PE in India, and as such, the payments were not chargeable to
tax in India. The AO as well as the Commissioner (Appeals) held that the
payments made by the assessee to the non-residents towards AMC and RC
were not their business profits, but were ‘fees for technical services’,
and the assessee was liable to withhold tax at the rate of 20 %. They
further held that since non-resident recipients did not furnish their
PANs to assessee-deductor, tax was required to be deducted at source at
higher rate u/s. 206AA.
In the appeal to the Tribunal, as
regards the applicability of the rate of 20% u/s. 206AA, the assessee
submitted that, the non-residents are not required to apply and obtain a
PAN u/s. 139A as per section 139A(8)(d) r.w.rule 114c(b); the reliance
of the CIT(A) on the press note dated 20.01.2010 was misplaced, as a
press note could not override the provisions of law; the provisions of
section 206AA were applicable only where the recipients were required
under the law to obtain the PAN and not otherwise. In support of the
contention, reliance was placed upon the judgment of the Karnataka High
Court in the case of Smt. A. Kowsalya Bai, 346 ITR 156.
On the
other hand, the Income tax Department supported the orders of the CIT(A)
and submitted that as per the form 15CB furnished by the assessee, the
payments for repairs had been treated as ‘FTS’ and the rate of tax was
mentioned as 20%; that the certificate issued by the assessee’s own
auditors was binding on the assessee and the assessee had rightly
deducted tax @ 20%, though out of caution, as provided u/s. 206AA of the
Act; that the CBDT in its press note dated 20.01.2010 had clearly
stated that the procedure of obtaining PAN was easy and inexpensive and
that even non-residents were required to obtain the same; s. 206AA had
overriding effect over all other provisions of the Act and, therefore,
whenever there was taxable income, the non-residents were required to
furnish their PANs to the deductor, failing which the rate specified u/s
206AA had to be applied; the decision of the Karnataka High Court, in
the case of Smt. A. Kowsalya Bai (supra), relied upon by the assessee,
was distinguishable on facts in as much as in that case, the assessees’
therein, whose income was below the taxable limit were residents, while
in the case before the tribunal, the recipients of the remittances were
non-residents having income above the taxable limit; and the income
being taxable in India as FTS, the recipients were required to obtain
PAN, failing which the rate u/s 206AA was applicable.
In
rejoinder, the assessee submitted that the Form 15CB prepared by the C.A
of the assessee company only reflected the opinion or a view of the C.A
and could not be considered as the admission of the assesse, and the
assessee had the right to deny its liability to deduct tax at source and
the issue had to be decided in accordance with law, and not on the
basis of the opinion of the C.A of the assessee.
The tribunal
first dealt with the issue of Form No.15CB and its binding nature on the
assessee. It held that the argument of the Department that the assessee
by furnishing Form No.15CB had admitted that the payment was ‘fees for
technical services’ could not be accepted, because Form No.15CB was a
certificate issued by an accountant (other than an employee) and,
therefore, it was the opinion or view of the accountant and could not be
said to be binding on the assessee; every transaction between the
assessee and the non-residents had to be considered in its own right,
and its nature was to be decided in accordance with the intention of the
parties and in accordance with law; even where it was to be considered
as an admission by the assessee, the same could not be accepted to be
the gospel truth and had to be verified by the AO; and the assessee had
every right to challenge the opinion given by its own C.A and it was for
the Revenue authorities to decide the issue in accordance with law and,
therefore, Form No.15CB alone would not determine the nature of the
transaction.
On applicability of section 206AA the tribunal
observed that the provisions of section 206AA clearly override the other
provisions of the Act and therefore, a nonresident whose income was
chargeable to tax in India had to obtain PAN and provide the same to the
assessee deductor; the only exemption given was that non-resident whose
income was not chargeable to tax, in India was not required to apply
for and obtain a PAN; however, where the income was chargeable to tax
irrespective of the residential status of the recipients, every assessee
was required to obtain a PAN and this provision was brought to ensure
that there was no evasion of tax by foreign entities.
The assessee’s contention that the assesse, being a non resident, was not required to apply for and obtain a Pan by virtue of rule 114(C)(b) of income-tax rules read with section 139a(8)(d) of the income-tax act was negatived by the tribunal as, in its view, the provisions of section 206aa clearly override the other provisions of the act. therefore, a non-recipient whose income was chargeable to tax in india had to obtain a Pan and provide the same to the assessee deductor. the assessee’s reliance upon the decision of the Karnataka high Court in the case of Smt. A. Kowsalya Bai (supra), was found to be misplaced and distinguishable on facts from the facts of the case as, in the case of Smt. A. Kowsalya Bai (supra), the recipients of the interest were residents of india and their total income was less than the taxable limit prescribed by the relevant finance act. it was in such facts and circumstances that the high Court had held that where the recipients of the ‘interest income’ were not having income exceeding taxable limits, it was not required to obtain a Pan. it held that in the instant case, the recipients were non-residents and admittedly the income exceeded the taxable limit prescribed by the relevant finance act. In the circumstances, the recipients were bound and were under an obligation to obtain a Pan and furnish the same to the assessee; for failure to do so, the assessee was liable to withhold tax at the higher of rates prescribed u/s. 206aa i.e. 20 % and the Commissioner (appeals) had rightly held that the provision of section 206aa were applicable to the assessee.
Serum Institute of India LTD.’s case
The issue again came up for consideration of the Pune tribunal in the case of Serum institute of india Ltd., ita no.s 1601 to 1604/Pn/2014. in that case, the assessee, a company incorporated under the Companies act, 1956 was engaged in the business of manufacture and sale of vaccines, and was a major exporter of the vaccines. in the course of its business activities, the assessee made payments to non-residents on account of interest, royalty and fees for technical services during the financial year 2010-11, relevant to the assessment year under consideration. These payments were subjected to withholding tax u/s 195 of the act and the assessee deducted tax at source on such payment in accordance with the tax rates provided in the double taxation avoidance agreements (dtaas) with the respective countries. The tax rate so provided in the dtaas was lower than the rate prescribed under the act and therefore, in terms of the provisions of section 90(2) of the act, the tax was deducted at source by applying the beneficial rates prescribed under the relevant dtaas.
The ao found that in cases of some of the non-residents, the recipients did not have Permanent account numbers (PANs). As a consequence of such finding, he treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206aa of the act. as a consequence, demands were raised on the assessee for the short deduction of tax and also for interest u/s. 201(1a) of the act. The aforesaid dispute was carried by the assessee in appeal before the Commissioner (appeals), who allowed the appeals of the assessee.
Aggrieved by the orders of the Commissioner (appeals), the revenue raised common Grounds of appeal as under :-
“1) The CIT(A) erred in law in concluding that sec 206AA is not applicable in case of non-residents as the DTAA overrides the Act as per section 90(2).
2) The decision of the CIT(A) is not according to the law and erred in ignoring the memorandum explaining the provisions of the Finance (No.2) Bill, 2009 which clearly states that the sec. 206AA applies to non-residents and also Press Release of CBDT No.402/92/2006-MC (04 of 2010) dated 20.01.2010 which reiterates that sec. 206AA will also apply to all non-residents in respect of payments/remittances liable to TDS.
3) The CIT(A) erred in ignoring the decision of the ITAT Bangalore in the case of Bosch Ltd. vs ITO, ITA No.552 to 558 (Bang.) of 2011 dated 11.10.2012, in which it was held that if the recipient has not furnished the PAN to the deductor, the deductor is liable to withhold tax at the higher rates prescribed u/s. 206AA.”
The assessee contested the claims of the department and reiterated the contentions raised before the Commissioner(appeals) by submitting that the provisions of section 206aa were not applicable to payments made to non-residents; that the provisions of section139a(8) of the act r.w. rule 114C(1) of the income tax rules, 1962 prescribed that non-residents were not required to apply for Pan; that section 206aa of the act prescribed that the recipient should furnish Pan and such furnishing would be possible only where the recipient was required to obtain Pan under the relevant provisions; that where the non-residents were not obliged to obtain a Pan, the requirement of furnishing the same in terms of section 206aa of the act did not arise; that the tax rate applicable in terms of section 206aa of the act could not prevail over the tax rate prescribed in the relevant dtaas, as the rates prescribed in the DTAAs were beneficial.
The assessee relied on the provisions of section 90(2) of the act, which prescribed that provisions of the act were applicable to the extent that they were more beneficial to the assessee, and since section 206aa of the act prescribed higher rate of withholding tax, it would not be beneficial to the assessee vis-à-vis the rates prescribed in the dtaas.
On consideration of the rival submissions, the tribunal observed and held as under;
In view of the schematic interpretation of the act, section 206AA of the act could not be understood to override the charging sections 4 and 5 of the act.
The provisions of section 90(2) of the act had the effect of overriding domestic law, including the charging sections 4 and 5 of the act, and in turn, section 206aa of the act.
The Pune tribunal accordingly held that where the tax had been deducted on the strength of the beneficial provisions of dtaas, the provisions of section 206AA of the act could not be invoked by the ao to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the act. The Tribunal affirmed the ultimate conclusion of the CIT(A) in deleting the tax demand relatable to difference between 20% and the actual tax rate on which tax was deducted by the assessee in terms of the relevant dtaas.
Observations
Section 90(2) provides for application of the provisions of the DTAA over the provisions of the income-tax act. The rate of tax provided for in dtaa apply in preference to the rate provided in the Act where beneficial. The internationally acclaimed position that the provisions of dtaa override the provisions of the domestic law is now also enshrined in the income tax act vide section 90(2) of the act. Please see azadi Bachao aandolan, 263 ITR 706, wherein the Supreme court clearly confirms that the provisions of section 90(2) override the provisions of the act as also the provisions of sections 4 and 5 thereof.
Section 206 aa provides for the rate at which tax is to be deducted at source in cases where the payee does not furnish his Pan. the provisions of section 206aa contain non-obstante clause that override the application of other provisions of the act. Section 90(2) also overrides the provisions of the act including the provisions of sections 4 and 5 of the act, in the manner noted above. in the circumstances, the issue that requires to be considered is which provision shall prevail over the other. apparently, both are special provisions and override the general provisions.
The operation of section 206aa however is limited to the provisions of chapter XVii-B of the act while the application of the dtaa r.w.s.90(2) is sweeping and travels to cover even the charging provisions. A combined reading of these provisions reveal that in deciding the tax that is ultimately payable by the payee, the tax that is determined by applying the dtaa rates, will alone be relevant and the amount of TDS if found higher will be refunded. There does not prevail any doubt on this position in law. There is therefore an agreement that the ultimate charge is based on the rate provided by section 90(2) read with the provisions of the DTAA and not by section 206 AA.
Section 195 read with the rules and the prescribed forms, clearly permit a deductor to deduct tax at such rate that has been provided under the DTAA. On a combined reading of these provisions, it is clear that the tax is to be deducted at the rate provided in DTAA in as much it is the rate at which the income of a non-resident will be ultimately taxable. There is also no disagreement that no tax is deductible where income is otherwise not taxable even where Pan is not furnished.
The two overriding provisions of the act operate in different fields. One for determining the rate at which the tax is deductible, and the other for determining the rate at which the income will ultimately be taxed. the usual approach in situations, where such conflicting special provisions exist, is to apply both of them to the extent possible. Accordingly, one view of resolving the issue on hand is to deduct tax at 20% while making payment to a non-resident who does not furnish Pan, and eventually tax his income at the rate prescribed under the dtaa and grant refund to him. The other view is to shorten this exercise by deducting only such tax as is ultimately payable by a non-resident which, in the absence of section 206AA, is otherwise the correct approach and meets the due compliance of sections 195, 4, 5, 90 and the provisions of the DTAA; an approach which has the benefit of avoiding the round tripping for refund. The second view is otherwise also supported by acceptance of the position in law by both the parties that provisions of section 206aa are not applicable where no tax is otherwise required to be deducted at source, on the ground that the income of the non-resident is not liable to tax at all.
It is also worthwhile to note that section 206aa is not a charging section and perhaps is also not a provision that creates an obligation to deduct tax at source. A primary obligation to deduct tax at source is under different provisions of chapter XViiB and is not u/s. 206AA, which section has a limited scope of redefining the rate at which tax, otherwise deductible, is to be deducted. In the absence of a preliminary obligation to deduct tax at source, provision of section 206aa fails.
An important consideration that has to be kept in mind is that there is no leakage of revenue in adopting the second view. The tax that is deducted as per the provisions of section 195 r.w.s 2(37a) and section 90 and the provisions of the dtaa, is the only tax that is otherwise payable on the income of the non-resident. The tax is deducted in full not leaving claim for payment of balance tax. as against that, not applying the provisions of section 206aa in cases of residents, may result into leakage of some
Revenue where the payee without PAN, chooses not to file a return of income.
We are of the considered view that in the following cases, the provisions of section 206aa should not be applied;
• where the income of the non-resident is not taxable under the income-tax act either on account of the provisions of the income-tax act or on account of the provisions of the dtaa,
• where the income of the non-resident is taxable at the fixed rate as specified in the Income-tax Act or in the dtaa and the tax deductible u/s. 195 matches such rate.
Logically, in most of the cases of payment to non- residents, the provisions of section 206aa should have no application for the simple reason that the tax that is required to be deducted by the payer u/s. 195, is the same that has to be paid on his total income. nothing less, nothing more, and nothing is gained by asking for a higher deduction for non-furnishing of the Pan and thereafter refunding the higher tax so deducted.
It is for this reason, perhaps, that the provisions of section 139A(8) of the act r.w. rule 114C(1) of the income tax rules, 1962 prescribed that non-residents were not required to apply for Pan.
Having said that, we need to take notice of sub- section(7) of section 206aa which grants exemption, from application of the provisions of section 206aa, in respect of payment of interest on long-term bonds referred to in section 194LC to a non-resident. This means that the tax is such a case is to be deducted at the specified rate of 5%, even where the non-resident does not furnish Pan. This provision in our opinion should be considered to have been inserted out of abundant precaution, and should not be construed to mean that in all other cases of payments to non-residents, provisions of section 206aa should apply.
There does not seem to be any apparent need for reading down the provisions of section 206AA, in our considered view, to exclude its applicability to the cases of non- residents, in as much as it is possible to exclude such application on the basis of the reasonable interpretation of the two special provisions of the act. However, it may be read down if it is so required in the interest of the administration of law.
The view expressed here can be further tested by answering the question as to what shall be the ao’s prescription of the rate at which tax is to be deducted, on a payment to a non-resident, where an application is made to him u/s 195(2) or 195(3). Can an ao order that the tax should be deducted at 20%, disregarding the provisions of dtaa and the act, simply because the non-resident has not furnished Pan? We do not think so.
The Press note dated 20.01.2010 has no legal force and, in any case, its scope should be restricted to the very limited cases of payments to non-residents, where the tax deducted at source u/s. 195 does not represent the tax that is finally payable by them.
Section 206aa therefore cannot be applied in isolation simply because it contains a non-obstante clause. in applying the provisions, it is necessary to read the provisions of the act and in particularly the provisions of sections 2(37a), 4, 5, 90 and 195 and the dtaa as also some of the provisions of the act that provide for the rate at which income of a non-resident is required to be taxed. The Supreme Court in the case of Ge india technology Centre Pvt. Ltd., 327 ITR 456 (SC) held that the provisions of dtaas along with the sections 4, 5, 9, 90 & 91 of the act would have a role to play while applying the provisions of tax deduction at source contained in chapter XVii B of the act.
In view of the observations, the surcharge and education cess in cases of payments to a non-resident, where applicable, shall be payable on the basis of the rate of tax determined in accordance with the provisions of section 195. However, section 206aa shall not apply, as discussed here.
It is also interesting to note that even the Bangalore tribunal in Bosch’s case, while upholding the revenue’s stand that the tax was required to be deducted at 20% in cases of non furnishing of Pan, held that for the purposes of grossing up in terms of section 195A, the rate that has to adopted is the rate in force and not 20% as prescribed by section 206AA.
In India, the term FFI,
would generally include banks, nonbank finance companies, housing
finance companies, depository participants (custodians), insurance
companies and similar institutions. In order to make FAT CA reporting
possible in the IGA Model 1 framework, the Government of India needed to
have a policy decision that India would participate in the information
exchange programme, a legal framework to authorise collection of such
financial information, an agency to administer the exchange of
information requirements. Work on some of these areas started in 2013
and significant steps have been taken till end of March 2015. Additional
steps are being taken to strengthen the information exchange programme.
India – policy decision
One of the first decision
points was whether India would participate in the FAT CA initiative
launched by the US. After examining possible consequences for the Indian
financial sector if India remains away and in light of India’s
commitment to global financial transparency, the Government of India
decided that it would enter into an IGA. As negotiation of tax treaties
and exchange of information was generally handled by the Ministry of
Finance (MoF), it was decided that the MoF would be the nodal agency for
FATCA and other similar financial information exchange initiatives.
From the second half of 2013 to early 2014, the MoF officials worked
with regulators in the Indian financial sector to determine what should
be the broad agreement with the US IRS. The principal regulators
involved in the consultation were the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI) and the Insurance
Regulatory & Development Authority (IRDA). Based on this
consultation, an agreement ‘in substance’ was entered into in April
2014. One crucial administrative detail that remained was the formal
approval by the Union Cabinet supporting the signing of the final IGA.
This was scheduled for March 2014 but ultimately was obtained in March
2015.
Regulations
Before the IGA in substance was
entered into, one of the key questions before the Indian Government, the
regulators and before the FFIs was whether there was any regulatory
support for FFIs to send financial information in respect of their
clients to the US IRS directly. One school of thought was that Article
28(1) and 28(2) of the India-US Double Tax Avoidance (DTAA ) allowed the
exchange of information subject to the limitations under Article 28(3) –
for ease of reference, all three are reproduced below – at Government
to Government level but FFIs could not directly report to the US IRS.
1.
The competent authorities of the Contracting State shall exchange such
information (including documents) as is necessary for carrying out the
provisions of this Convention or of the domestic laws of the Contracting
States concerning taxes covered by the Convention insofar as the
taxation thereunder is not contrary to the Convention, in particular,
for the prevention of fraud or evasion, of such taxes. The exchange of
information is not restricted by Article 1 (General Scope). Any
information received by a Contracting State shall be treated as secret
in the same manner as information obtained under the domestic laws of
that State. However, if the information is originally regarded as secret
in the transmitting State, it shall be disclosed only to persons or
authorities (including Courts and administrative bodies) involved in the
assessment, collection, or administration of, the enforcement or
prosecution in respect of or the determination of appeals in relation
to, the taxes which are the subject of the Convention. Such persons or
authorities shall use the information only for such purposes, but may
disclose the information in public Court proceedings or in judicial
decisions. The competent authorities shall, through consultation,
develop appropriate conditions, methods and techniques concerning the
matters in respect of which such exchange of information shall be made,
including, where appropriate, exchange of information regarding tax
avoidance.
2. The exchange of information or documents shall be
either on a routine basis or on request with reference to particular
cases, or otherwise. The competent authorities of the Contracting States
shall agree from time to time on the list of information or documents
which shall be furnished on a routine basis.
3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :
(a)
to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
(b)
to supply information which is not obtainable under the laws or in the
normal course of the administration of that or of the other Contracting
State;
(c) to supply information which would disclose any trade,
business, industrial, commercial, or professional secret or trade
process, or information the disclosure of which would be country to
public policy (ordre public).
The regulators, however, believed
that the statutes did not generally empower them to ask for financial
information of the type envisaged under FAT CA and that an amendment of
the statute was necessary. The Finance (No. 2) Act, 2015 amended the
Income-tax Act, 1961 by substituting new section 285BA for the earlier
section with effect from 1st April, 2015. This amendment also provides
for registration with the Government of India, of any reporting
institution, a provision that was absent in the old section 285BA.
Registration
Although
an FFI may be operating in an IGA Model 1 country like India and will
report through its host country Government, it is still required to
obtain the Global Intermediary Identification Number (GIIN) as an FFI.
Although India entered into an IGA in substance in early April 2014,
Indian regulators did not give the green signal to apply for GIIN in
April 2015 i.e. the cut-off date for getting the GIIN by June before the
FAT CA implementation date of 1st July, 2014. FFIs having multi-country
operations e.g. State Bank of India, however, applied for and obtained
GIIN in the first list. FFIs operating in India were treated as being
FAT CA compliant till 31st December, 2014 in terms of the IGA in
substance. On 30th December, 2014, both RBI and SEBI directed FFIs to
apply for and obtain GIIN by 1st January, 2015. The IRDA issued similar
instructions a little later. The stage was set for FFIs in India to
obtain GIIN.
Regulations
In late 2014, the mof circulated to a limited group, the draft version 3 of the proposed rules for CRS and fatCa for comments by stakeholders. in early 2015, the draft version 5 was similarly circulated for comments. the suggestions that have come in are currently under evaluation on the MOF side. It is understood that a reporting entity will obtain, apart from the 20-character GIIN under FATCA, a 16-character indian reporting entity identification number. This will be in addition to any Permanent account number (PAN) that the entity may have but will capture the PAN (or TAN) as part of the 16-characters. this requirement is broadly similar to that in the UK, where FATCA implementation under model 1 IGA has progressed further. The FFI will have to file separate reports in respect of different activities e.g. a bank maintaining bank accounts and also providing demat accounts will report the information for bank accounts separately from that relating to custody accounts. the nature of the reporting requirements and complications will also necessitate issuance of detailed guidance by the MOF.
Meanings of specific terms
Certain terms have been defined under the draft regulations. Some of the important ones are briefly discussed here.
A financial institution (hereinafter referred to as ‘fi’) is defined to mean a custodial institution, a depository institution, an investment entity or a specified insurance company. the terms ‘custodial institution’ and ‘depository institution’ are not directly defined. We have to derive the meaning indirectly from usage in the definition of ‘financial account’.
A ‘financial account’ means an account (other than an excluded account) maintained by an FI and includes (i) a depository account; (ii) a custodial account (iii) in the case of an investment entity, any equity or debt interest in the FI; (iv) any equity or debit interest in an FI if such interest in the institution is set up to avoid reporting under (iii); and
(v) cash value insurance contract or an annuity contract (subject to certain exceptions).
For this purpose, a ‘depository account’ includes any commercial, savings, time or thrift account or an account that is evidenced by certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness or other similar instrument maintained by a FI in the ordinary course of banking or similar business. It also includes an account maintained by an insurance company pursuant to a guaranteed investment contract. In ordinary parlance, a ‘depository account’ relates to a normal bank account plus certificates of deposit (CDs), recurring deposits, etc. A ‘custodial account’ means an account, other than an insurance contract or an annuity contract, or the benefit of another person that holds one or more financial assets. In normal parlance, this would largely refer to demat accounts. The national Securities depository Ltd. (NSDL) statement showing all of their investments listed at one place will give the readership an idea of what a ‘custodial account’ entails. These definitions are at slight variance with the commonly understood meaning of these terms in india.
the term ‘equity interest’ in an FI means,
(a) in the case of a partnership, share in the capital or share in the profits of the partnership; and
(b) in the case of a trust, any interest held by
– Any person treated as a settlor or beneficiary of all or any portion of the trust; and
– any other natural person exercising effective control over the trust.
For this purpose, it is immaterial whether the beneficiary has the direct or the indirect right to receive under a mandatory distribution or a discretionary distribution from the trust.
An ‘insurance contract’ means a contract, other than an annuity contract, under which the issuer of the insurance contract agrees to pay an amount on the occurrence of a specified contingency involving mortality, morbidity, accident, liability or property. an insurance contract, therefore, includes both assurance contracts and insurance contracts. an ‘annuity contract’ means a contract under which the issuer of the contract agrees to make a periodic payment where such is either wholly or in part linked to the life expectancy of one or more individuals. a ‘cash value insurance contract’ means an insurance contract that has a cash value but does not include indemnity reinsurance contracts entered into between two insurance companies. in this context, the cash value of an insurance contract means
(a) Surrender value or the termination value of the contract without deducting any surrender or termination charges and before deduction of any outstanding loan against the policy; or
(b) The amount that the policy holder can borrow against the policy
whichever is less. the cash value will not include any amount payable on death of the life assured, refund of excess premiums, refund of premium (except in case of annuity contracts), payment on account of injury or sickness in the case of insurance (as opposed to life assurance) contracts
An ‘excluded account’ means
(i) A retirement or pension account where
• The account is subject to regulation as a personal retirement account;
• The account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
• Information reporting is required to the income-tax authorities with respect to such account;
• Withdrawals are conditional upon reaching a specified retirement age, disability, death or penalties are applicable for withdrawals before such events;
• The contributions to the account are limited to either $ 50,000 per annum or to $ one million through lifetime.
(ii) An account which satisfies the following requirements viz.
• The account is subject to regulations as a savings vehicle for purposes other than retirement or the account (other than a uS reportable account) is subject to regulations as an investment vehicle for purposes other than for retirement and is regularly traded on an established securities market;
• The account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
• Withdrawals are conditional upon specific criteria (educational or medical benefits) or penalties are applicable for withdrawals before such criteria are met;
• The contributions to the account are limited to either $ 50,000 per annum or to $ one million through lifetime.
(iii) An account under the Senior Citizens Savings Scheme 2004;
(iv) A life insurance contract that will end before the insured reaches the age of 90 years (subject to certain conditions to be satisfied);
(v) An account held by the estate of a deceased, if the documentation for the account includes a copy of the will of the deceased or a copy of the deceased’s death certificate;
(vi) An account established in connection with any of the following
• A court order or judgment;
• A sale, exchange or lease of real or personal property, if the account is for the extent of down payment, earnest money, deposit to secure the obligation under the transaction, etc.
• An FI’s obligation towards current or future taxes in respect of real property offered to secure any loan granted by the FI;
(vii) In the case of an account other than a US reportable account, the account exists solely because a customer overpays on a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer. Up to 31st december, 2015, there is a cap of $ 50,000 applicable for such overpayment.
Before any analysis of these definitions can be done in the India context, it is important to note the definition of ‘non-reporting financial institution’. A ‘non-reporting financial institution’ means any FI that is, –
(a) A Government entity, an international organisation or a central bank except where the fi has depository, custodial, specified insurance as part of its commercial activity;
(b) Retirement funds of the Government, international organisation, central bank at (a) above;
(c) A non-public fund of the armed forces, an employee state insurance fund, a gratuity fund or a provident fund;
(d) An entity which is indian fi solely because of its direct equity or debt interest in the (a) to (c) above;
(e) A qualified credit card issuer;
(f) A FI that renders investment advice, manages portfolios for and acts on behalf or executes trades on behalf a customer for such purposes in the name of the customer with a fi other than a non- participating fi;
(g) An exempt collective investment vehicle;
(h) A trust set up under indian law to the extent that the trustee is a reporting fi and reports all information required to be reported in respect of financial accounts under the trust;
(i) An FI with a local client base or with low value accounts or a local bank;
(j) In case of any US reportable account, a controlled foreign corporation or sponsored investment entity or sponsored closely held investment vehicle.
An FI with a local client base is one that does not have a place of business outside india and which also does not solicit customers or account holders outside india. It should not operate a website that indicates its offer of services to uS persons or to persons resident outside india. The test of residency to be applied here is that of tax residency. The term ‘local bank’ will include cooperative credit societies. In this case also offering of account to US persons or to persons resident outside india, will be treated as a bar to being characterised as a local bank.
Due Diligence
The draft regulations provide for three categories of due diligence exercise in respect of client documentation under FATCA for accounts of US persons viz.
(i) new account due diligence (NADD);
(ii) Pre-existing account due diligence (PADD)
• For high value accounts i.e. where the balance is in excess of $ one million as at 30th june, 2014 or as at 31st december of any subsequent year;
• For low value accounts i.e. where the balance is in excess of $ 50,000 but does not exceed US$ one million as at 30th june, 2014 or as at 31st december of any subsequent year.
The methodology of the due diligence differs for these although the documentation requirements are broadly similar. For NADD, the residency certificate issued by the authorities overseas forms the primary evidence of tax residency. For Padd, the address on record should be treated as being the indicator of the tax residency. If the FI does not rely on current mailing address, it must do an electronic search of its records for identification of tax residency outside india, or a place of birth in the US, or a current mailing or residence address (including post office box) outside India, or one or more telephone numbers outside india and no telephone number in india, or standing instructions to transfer funds to an account maintained in a jurisdiction outside india, or power of attorney given to a person outside india, or ‘hold mail’ or ‘care of’ address outside india. all of these indicia may be overridden by specific declarations from the customer. The FI will not be entitled to rely on the customer’s self- declaration, if the fi knows or has reason to know that the self-certification or documentation is incorrect. An example of this is where an account holder who is ostensibly a resident of india informs the fi’s representative that he (the account holder) is uS ‘green card’ holder and has to visit the US to retain his green card this is a case where the fi has to ignore the local address in india and treat the account holder s being a US person. For high value accounts, enhanced due diligence is required to be done through the relationship manager meeting with the customer. Where any indicia show the account holder to be resident of more than one jurisdiction, the FI should treat the customer as being resident of each of the jurisdictions i.e. the FI shall not apply tie breaker tests. The Padd exercise must be completed by 30th june, 2015 for US reportable accounts and by 30th jun, 2016 for other accounts. For US reportable accounts, an FI is not required to do Padd (but may elect to do so) in respect of accounts where the depository account or the cash value of the insurance contract is up to $ 50,000 as at 31st december, 2014. For entity accounts (as opposed to individual accounts), the threshold cut off is $ 250,000 but the measurement date is 30th june, 20141. Once an account is identified as a US reportable account, it shall be continued to be treated in such a manner unless the indicia are appropriately cured at a later stage.
Reporting Deadlines
The draft regulations provide for reporting deadline of 31st july, 2015 for reporting to be done in respect for 2014 and as 31st may in later years. This reporting is, in terms of the model 1 IGA, to be done through the MOF.
Next Steps and Conclusion
The next steps, from the side of the Government, are signing of the IGA, issuance of the final regulations, notifying the data structure and setting up the infrastructure for receiving the reports. For the industry, the work has already begun with nadd and Padd. interim work on development of reporting systems is in progress but the UAT stages are held up for want of the final data structure from the Government side. Over the next few years, the fis will invest a lot of time and capital in the preparedness for financial transparency in respect of customer accounts in line with the expectations of the G20 nations, as we move beyond FATCA to the OECD’s Common reporting Standards (CRS).
Facts:
The assessee was a non-resident domiciled in France. The estate of the assessee’s late father consisted of shares of certain companies which were held in joint name of the assessee’s late father either with the assessee or with the brother of the assessee. In order to transfer such shares in the name of the assessee and to manage the affairs in India the assessee had executed a general power of attorney in favour of her friend ‘R’.
During the previous year relevant to A.Y. 2003-04, ‘R’ sold the shares for Rs. 93,70,135/- and deposited sum of Rs. 60,32,000/- in the bank account of the assessee. These facts were not in the knowledge of the assessee at all.
After realising the foul play and cheating on the part of ‘R’, the assessee sent a legal notice to R and filed criminal complaint against R before the Additional Chief Metropolitan Magistrate. As a result of such complaint, the police conducted enquiry and investigation into whole matter and gave prima facie findings that ‘R’ fraudulently sold these shares and have cheated the assessee. On filing of the findings of the police with the Magistrate, ‘R’ sought to settle the dispute and come forward with settlement agreement dated 31st March 2004, wherein she offered to pay Rs.1,20,00,000/- on the terms that the assessee would withdraw all the complaints filed against ‘R’.
As per the terms of the settlement agreement out of the total compensation, Rs. 33,38,135/- was towards the balance consideration of shares, and the balance lump sum amount of Rs. 86,61,865/- was for other disputes and differences. The above balance consideration was inclusive of the compensation of Rs.15,00,000/- which was on account of fraudulent sale of land situated in Alibaug.
While filing the return, the assessee allocated a substantial portion of compensation received, i.e. Rs. 1,01,97,000/- as compensation attributable to dispute relating to shares being a principal dispute (excluding compensation relating to land and other miscellaneous disputes). The assessee claimed that since she gave up her claim regarding to shares in the previous year relevant to the A.Y. 2005-06, i.e. the year in which settlement took place, the entire capital gain arising on account of initial sum of Rs. 60,32,000/- deposited in her account and allocated compensation of Rs.1,01,97,000/- was taxable in A.Y. 2005-06 but was claimed to be exempt as per Article 14(6) of the Indo-France DTAA .
The AO held that amount of Rs. 60,32,000/- received by the assessee in lieu of transfer of shares is taxable as capital gain in the A.Y. 2003-04 as it was accepted by ‘R’ that shares were actually sold in the A.Y. 2003-04. The compensation of Rs.1,20,00,000/- was taxed under the head ‘Income from Other Sources’ as in the settlement agreement there was no mention regarding agreeing on the compensation for high rise in the market price of the shares and the same cannot be attributed to transfer of shares. The AO held that if at all any capital gain is to be taxed, then same is to be taxed in the A.Y. 2003-04 and compensation received by the assessee will be taxable in the A.Y. 2005-06.
The CIT(A) held that the matter was settled in the year 2004-05 and therefore for the purpose of section 45 the shares transferred in the A.Y. 2005-06 and not in A.Y. 2003- 04. The stand taken by the assessee was accepted by the CIT(A) and a sum of Rs.1,01,97,000/- was considered to be consideration for misappropriation of shares by fraud and unfair means.
Held:
From the records and the impugned order, it is an admitted fact that in this case, no dispute other than the dispute relating to shares and land was involved. Thus, for the purpose of taxability/assessability of sum of Rs. 1.20 crore, the amount of Rs. 33,38,135, and Rs. 15 lakh has to be segregated, because, the sum of Rs. 33,38,135, pertains to transaction of shares which is to be assessed and taxed under the head capital gains, which in the present case is admittedly not taxable by virtue of Article-14(6).
Regarding balance amount of Rs. 71,61,865/-, the said amount cannot be taxed under the head capital gain as it was clearly specified that only Rs. 33,38,135/- was towards sale of shares and there cannot be any inference that the balance amount was also in lieu of shares, for the reason that at the time of settlement of agreement, the market value of these shares was very high. Further, nothing was brought on record to establish that balance amount was towards compensation for change in market value from date of sale and upto the date of settlement.
The balance compensation of Rs. 71,61,865/- was on account of personal damage done by ‘R’. The settlement has been agreed only to withdraw the police complaint and criminal case filed in the Court of Chief Metropolitan Magistrate. Under the given circumstances and facts the compensation is capital receipt and hence it cannot be taxed as it is beyond the purview of charging section.
Further, such compensation cannot be taxed under the head Income From Other Sources as nowhere it was mentioned that it was towards interest on delayed payment of shares sold in the year 2002. It has been received only towards damage for breach of trust or fraud and which has no co-relation with sale of shares and therefore compensation received cannot be taxed under any heads of income.
Thus, the sum of Rs. 71,61,865, cannot be taxed under the charging provision, as the same is compensation in the form of capital receipt.
ii. Section 54EC – Where sale consideration of property belonging to assessee-firm was credited directly in hands of partners of firm and specified bonds were also purchased in names of those partners, still assesseefirm would be entitled to claim benefit of deduction u/s. 54EC.
Facts:
i. The assessee-firm was having three partners. The land and hospital building was owned by the two partners individually before the formation of the assessee-firm in year 1992. The partners of firm introduced the said hospital building and land as their capital contribution.
The assessee-firm carried out its operation from the hospital premises after its formation. Subsequently, assessee-firm sold said land and building and earned short-term capital gain of Rs. 1,64,76,685/-.
The assessee firm contended that there was no transfer of the ownership to the assessee firm by the partners even though the land and hospital building was introduced as a capital contribution. Further, even if the immovable property is introduced by the partners towards their capital contribution but same must be by way of proper conveyance deed registered under the Indian Registration Act.
The Assessing Officer having rejected assessee’s explanation, brought to tax the short-term capital gain in the hands of the assessee-firm. The Commissioner (Appeals) confirmed the order of the Assessing Officer. Aggreived, the assessee appealed before the Tribunal.
ii. Against the capital gains which was offered to tax by the partners in their individual capacity, the exemption was claimed u/s. 54EC with respect to the investments in Rural Electrification Bonds by them. Upon shifting of taxability from partners to the partnership firm by the AO, the assessee-firm alternatively claimed that exemption u/s. 54EC be allowed to the assessee-firm.
The sale consideration received on sale of above land and building was directly credited to the Bank accounts of the two partners out of which both the partners invested the in notified bonds in terms of section 54EC. The firm, subsequent to sale of above land and building, was dissolved. Therefore, it was contended that whatever is invested by the partners on their individual names is in fact from the funds of the assets of the assessee firm which was sold out.
Held:
i. The Tribunal placed reliance on the case of K. D. Pandey vs. CWT 108 ITR 214 (All) wherein on identical issue it was observed that under the provisions of section 239 of the Indian Contract Act and section 14 of the Indian Partnership Act for the purpose of bringing the separate properties of a partner into the stock of the firm it is not necessary to have recourse to any written document at all, that as soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the Partnership Act, the properties become the properties of the firm and that this result is not prohibited by any provision in the Transfer of Property Act or the Indian Registration Act.
Therefore the Tribunal held that Capital gains arising on sale of land and building which were introduced by the partners as their capital contribution to the assessee-firm is taxable in the hands of the firm and not in the hands of the said partners irrespective of the fact that the transfer of the said property by the partners to the assessee-firm was not made by way of registered conveyance deed.
ii. There is no dispute on the legal position that the investment made by two partners on their individual names in the notified bonds is otherwise eligible investment for getting the exemption from the taxable capital gain u/s. 54EC.
As per the well-settled law, partnership is not a legal entity in strict sense and in all the movable and immovable assets which are held by the partnership, there is an interest of every partner though not specifically defined in terms of their shares.
On perusal of the language used in section 54EC, it is provided that the assessee has to make the investment within a period of six months in the notified securities after the date of transfer of capital asset. The words used in section 54EC are – ‘the assessee has invested the whole or any part of capital gains in the long-term specified asset’. As already held that the property which was sold out, it was property of the assesseefirm and hence, the capital gain is taxable in the hands of the assessee-firm.
At the same time even though the bonds are purchased on the names of the two partners, it can be said that irrespective of the way, how the sale consideration was credited to the bank accounts of two partners, but the benefit of section 54EC cannot be deprived to the assessee-firm. As admittedly, even on the dissolution of the firm the assessee as a partner has a right to get back their capital as per the final valuation done on the date of dissolution or otherwise. Accordingly, the exemption u/s. 54EC was allowed to the assessee-firm in respect of notified bonds purchased by its partners.
Facts:
In the instant case, appeals in respect of the order passed u/s. 263 as well as the order u/s.143(3) pursuant to said order u/s. 263 are pending for disposal before the Tribunal. Besides this, appeal is also pending before the Tribunal against the levy of penalty u/s. 271(1)(c).
In the meantime, Assessing Officer has issued showcause notice to the assessee for initiating prosecution proceedings u/s. 276C(1) in respect of the additions made in the assessment.
The assessee filed the application for stay of launching of prosecution proceedings before the Tribunal.
Held:
From reading of proviso to section 254(2A) it is apparent that “the Tribunal can pass an order of stay in any proceedings relating to an appeal filed u/s. 253(1)”. This phrase mandates that this power is not confined to a case where the appeal is pending before the Tribunal but also extends to any proceedings relating to an appeal pending before it.
The appeals pending relate to the validity of the order passed by the CIT u/s. 263 in consequence of which the additions have been made by the AO in the assessment order passed subsequent to that. It is also not denied that the appeal is also pending in respect of the penalty imposed u/s. 271(1)(c).
Until and unless the additions as well as the penalty are sustained, it cannot be said whether there was an attempt to evade tax or not or whether this attempt was wilful or not. Steps taken by the AO for launching of the prosecution proceedings u/s. 276C(1) depend on the outcome of the appeals pending before this Tribunal.
The Tribunal noted that there is no limitation prescribed for launching the prosecution proceedings u/s. 276C(1). Therefore, when the order of the Tribunal will have a bearing on the prosecution proceedings, the Tribunal opined that there will not be any loss if the prosecution proceedings are not launched immediately but kept pending till the outcome of the order of the Tribunal. The Tribunal further opined that it is not a case where the prosecution proceedings have already been launched before the criminal Court. Had the prosecution proceedings already been launched before the criminal Court, the Tribunal would not have any jurisdiction to entertain such petition filed by the assessee. Since in this case the Revenue has not launched so far the prosecution against the assessee in any criminal Court, the Tribunal granted stay against the launching of prosecution proceedings.
Facts:
The assessee sold a plot of land vide agreement to sell, dated 27th May 2004, for consideration of Rs. 2,62,08,000/-. The agreement to sell was duly registered on the same date. On the said date, the circle rate was Rs.13,000/- per sq mt. However, on the date of execution of sale-deed, i.e. 16th September 2004, the circle-rate enhanced to Rs. 20,000/- per sq mt resulting into stamp duty value of Rs. 4,03,20,000/-.
The assessee computed the capital gains on the basis of the circle rate on the date of agreement to sell and not the circle rate on the date of execution of sale deed.
However, the A.O. did not accept the above computation and he computed capital gains on the basis of circle rate prevailing on the date of execution of sales deed, i.e Rs. 20,000/- and enhanced the capital gains by the difference of Rs.1,41,12,000/-.
On further appeal, the CIT(A) upheld the A.O.’s view on the ground that the “agreement to sell” may bind the parties inter-se but does not override the statutory provision of section 50C as are applicable on the “date of transfer”; which in the instant case had been 16th September 2004.
Held:
It was held that the enhancement in the circle rate from Rs.13,000/- to Rs.20,000/- per sq mt was beyond the control of the assessee (seller). It is also not the case of the revenue, that the buyer has given more than the consideration that has been accepted by the parties when they executed the agreement to sale.
Further, reliance was placed on the Supreme Court’s decision in Sanjeev Lal Etc. vs. CIT (2014) 269 CTR 1 wherein it was held that the question whether the entire property can be said to have been sold at the time when an agreement to sell is entered into has to be answered in the negative in normal circumstances. However, looking at the provisions of section 2(47) which defines the word ‘transfer’ in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred.
Having regard to the above factual and judicial position, the additions made by A.O. were deleted.
The assessee, an Indian company, was one of the leading manufacturers of rider apparel. It had incorporated a subsidiary company in United States for undertaking distribution and marketing activities for the products manufactured by it and advanced loan to its subsidiary and received interest at the rate of 4%. It applied CUP method and claimed rate of 4% to be comparable with the export packing credit rate obtained from independent banks in India. The TPO opined that what was to be considered was the prevalent interest that could have been earned by advancing a loan to an unrelated party in India with the same financial health as that of the tax payer’s subsidiary. The TPO further noted that while deciding the interest rate that may be charged on receivables from AE’s, Libor rate for calculating interest was not proper and instead of US rate, Indian rate was to be adopted. Finally, the TPO held that interest rate at 14% would be fair and reasonable. DRP granted partial relief in the form of reduction in rate of interest to 12.20%, recording that the loan was given on fixed rate of interest out of shareholder funds and the Prime Lending Rate (PLR, for short) fixed by the Reserve Bank of India, ranged from 10.25% to 10.75% in April, 2006 to 12.25% to 12.50% in March, 2007. The Tribunal agreed with assessee in view of earlier year’s decision of Tribunal.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“Arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. Interest rates should not be computed on basis of interest payable on currency or legal tender of place or country of residence of either party. There is no justification or a cogent reason for applying PLR for outbound loan transactions where Indian parent has advanced loan to an AE abroad. Parameters cannot be different for outbound and inbound loans and a similar reasoning applies to both inbound and outbound loans.”
In this case the Bombay High Court had to consider as to whether scope of assessment u/s. 153A of the Incometax Act, 1961 in respect of completed assessments is limited to only undisclosed income and undisclosed assets detected during search.
The High Court held as under:
“(i) On a plain reading of section 153A of the Incometax Act, it becomes clear that on initiation of the proceedings u/s. 153A, it is only the assessment/ reassessment proceedings that are pending on the date of conducting search u/s. 132 or making requisition u/s. 132A of the Act stand abated and not the assessments/reassessments already finalised for those assessment years covered u/s. 153A of the Act. By a circular No. 8 of 2003 dated 18-9-2003 (263 ITR (St) 61 at 107) the CBDT has clarified that on initiation of proceedings u/s. 153A, the proceedings pending in appeal, revision or rectification proceedings against finalised assessment/ reassessment shall not abate. It is only because, the finalised assessments/reassessments do not abate, the appeal revision or rectification pending against finalised assessment/reassessments would not abate. Therefore, the argument of the revenue, that on initiation of proceedings u/s. 153A, the assessments/ reassessments finalised for the assessment years covered u/s. 153A of the Income-tax Act stand abated cannot be accepted. Similarly on annulment of assessment made u/s. 153A (1) what stands revived is the pending assessment / reassessment proceedings which stood abated as per section 153A(1).
ii) Once it is held that the assessment has attained finality, then the AO while passing the independent assessment order u/s. 153A read with section 143 (3) of the I.T. Act could not have disturbed the assessment / reassessment order which has attained finality, unless the materials gathered in the course of the proceedings u/s. 153A of the Income-tax Act establish that the reliefs granted under the finalised assessment/ reassessment were contrary to the facts unearthed during the course of section 153A proceedings. If there is nothing on record to suggest that any material was unearthed during the search or during the 153A proceedings, the AO while passing order u/s. 153A read with section 143(3) cannot disturb the assessment order.”
For the A. Y. 2010-11, the return of income was accepted u/s. 143(1) of the Income-tax Act, 1961. Subsequently, a notice u/s. 148 was issued on the ground that a specific aspect requires verification. The assessee filed a writ petition and challenged the notice.
The Bombay High Court allowed the writ petition and held as under:
“(i) The assessee filed a return of income which could have been subjected to verification and scrutiny and in terms of the applicable law and sections in the Income-tax Act, 1961 itself. However, if this notice has been issued in the present case and on the footing that the income chargeable to tax has escaped assessment during the course of the assessment proceedings, then, we would not go by the stand taken by the Revenue and on affidavit. It is too late now to urge that there was no assessment and therefore no question arises of reopening thereof. In the light of the language of the notice itself, it would not be proper for us and to permit the Revenue to raise such a plea.
(ii) In the present case, the AO does not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Thus, the reasons must be founded on the satisfaction of the AO that income chargeable to tax has escaped assessment. Once that is not to be found, then, we are not in a position to sustain the impugned notice (Smt. Maniben Valji Shah (2006) 283 ITR 453 and Prashant S. Joshi and Anr. vIncome Tax Officer (2010) 324 ITR 154 referred)”
The third proviso to section 254(2A) was amended by the Finance Act, 2008, with effect from 01/10/2008 to provide that the Tribunal shall not have the power to grant stay of demand for a period exceeding 365 days “even if the delay in disposing of the appeal is not attributable to the assessee”. The said amendment was inserted to overcome the judgement of the Bombay High Court in Narang Overseas Private Limited vs. ITAT 295 ITR 22(Bom). The Petitioners filed a Writ Petition to challenge the said amended third proviso to section 254(2A) on the ground that it is arbitrary and contrary to the provisions of the Article 14 of the Constitution of India.
The Delhi High Court allowed the writ petition and held as under:
“i) U /s. 254, there are several conditions which have been stipulated with respect to the power of the Tribunal to grant stay of demand. First of all, as per the first proviso to Section 254(2A), a stay order could be passed for a period not exceeding 180 days and the Tribunal should dispose of the appeal within that period. The second proviso stipulates that in case the appeal is not disposed of within the period of 180 days, if the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to extend the stay for a period not exceeding 365 days in aggregate. Once again, the Tribunal is directed to dispose of the appeal within the said period of stay. The third proviso, as it stands today, stipulates that if the appeal is not disposed of within the period of 365 days, then the order of stay shall stand vacated, even if the delay in disposing of the appeal is not attributable to the assessee.
ii) While it could be argued that the condition that the stay order could be extended beyond a period of 180 days only if the delay in disposing of the appeal was not attributable to the assessee was a reasonable condition on the power of the Tribunal to grant an order of stay, it can, by no stretch of imagination, be argued that where the assessee is not responsible for the delay in the disposal of the appeal, yet the Tribunal has no power to extend the stay beyond the period of 365 days. The intention of the legislature, which has been made explicit by insertion of the words – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– renders the right of appeal granted to the assessee by the statute to be illusory for no fault on the part of the assessee. The stay, which was available to him prior to the 365 days having passed, is snatched away simply because the Tribunal has, for whatever reason, not attributable to the assessee, been unable to dispose of the appeal. Take the case of delay being caused in the disposal of the appeal on the part of the revenue. Even in that case, the stay would stand vacated on the expiry of 365 days. This is despite the fact that the stay was granted by the Tribunal, in the first instance, upon considering the prima facie merits of the case through a reasoned order;
iii) The petitioners are correct in their submission that unequals have been treated equally. Assessees who, after having obtained stay orders and by their conduct delay the appeal proceedings, have been treated in the same manner in which assessees, who have not, in any way, delayed the proceedings in the appeal. The two classes of assessees are distinct and cannot be clubbed together. This clubbing together has led to hostile discrimination against the assessees to whom the delay is not attributable. It is for this reason that we find that the insertion of the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– by virtue of the Finance Act, 2008, violates the non-discrimination clause of Article 14 of the Constitution of India. The object that appeals should be heard expeditiously and that assesses should not misuse the stay orders granted in their favour by adopting delaying tactics is not at all achieved by the provision as it stands. On the contrary, the clubbing together of ‘well behaved’ assesses and those who cause delay in the appeal proceedings is itself violative of Article 14 of the Constitution and has no nexus or connection with the object sought to be achieved. The said expression introduced by the Finance Act, 2008 is, therefore, struck down as being violative of Article 14 of the Constitution of India.
iv) This would revert us to the position of law as interpreted by the Bombay High Court in Narang Overseas (supra), with which we are in full agreement. Consequently, we hold that, where the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to grant extension of stay beyond 365 days in deserving cases.”
If interest is leviable u/s. 234A, 234B or 234C, such levy of interest is mandatory and compensatory in nature but in order to levy interest under these sections, the Assessing Officer is specifically required to mention the specific section of charging interest, failing which, no interest could be levied under those sections.
The assessee was a trust established with the purpose of administering and maintaining technical training institutions at various places in India for pre-sea and post-sea training of ships and maritime industry as a public charitable institution for education, that is to provide on board and offshore training and continuing technical education for officers, both on the deck and engine side. The Assessing Officer held that the assessee was not entitled to exemption u/s. 11. The CIT(A) 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) We are of the opinion that the Tribunal has applied the correct test in concluding that the exemption u/s. 11 of the Act can be availed of by the respondent assessee. The Tribunal in paragraph 9.6 of the impugned order concludes that the assessee is giving training in the above area to seamen. All the courses may not be approved by the Director General of Shipping but that by itself is no ground to hold that the purpose is not charitable.
ii) The exemption u/s. 11 can be claimed and bearing in mind the object of the trust. We are of the opinion that the Tribunal and the CIT(A) have approached the issue correctly and in the light of the definition so also the tests laid down came to a factual conclusion that the respondent is entitled to exemption u/s. 11.
iii) This is not a case where the purpose can be said to run a coaching class or a centre. This is an institution which imparts education in the area of pre-sea and post-sea training to seamen so as to prepare them for all the duties. In such circumstances, we do not find that the concurrent findings of fact are vitiated by error of law apparent on the face of the record or perversity enabling us to entertain this appeal. The appeal is, therefore, dismissed.”
Under an agreement between a Danish company and an Indian company, the Danish company supplied equipment and information regarding installation of such equipment. For the A. Y. 1991-92, the Danish company claimed that its income consequent on the agreement was not taxable in India. The Assessing Officer rejected the claim. The Tribunal accepted the claim and held that the payments were not covered within the expression “royalty” provided u/s. 9(1)(vi) of the Income-tax Act, 1961, which was much wider than the one provided in the DTAA between India and Denmark.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The equipment was supplied to the Indian party for which the Indian party made payment. The contract included stipulations for giving all information so as to guide the Indian party to install the equipment at site and thereafter to use it.
ii) In these circumstances, this was a mixed question and finding of fact had been rendered considering the peculiar facts and circumstances. The finding of fact was a possible one. There was no perversity or error of law apparent on the face of the record. The payments were not assessable in India.”
CIT Vs. Sulzer India Ltd.; 369 ITR 717 (Bom):
In the A. Y. 2003-04, the assessee had opted for deferral scheme for payment of sales tax of Rs. 7,52,01,378/- under the deferral 1993 scheme of the Government of Maharashtra. The amount was allowed as deduction treating the option as deemed payment for the purpose of section 43B of the Income-tax Act, 1961 as per the circulars. The assessee also opted for the 2002 scheme for premature payment of net present value and paid an amount of Rs. 3,37,13,393/-. The Assessing Officer added the difference amount of Rs. 4,14,87,985/- as deemed income u/s. 41(1) of the Act. The Tribunal deleted the addition and held that the amount was not taxable u/s. 41(1) of the Act.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The first requirement of section 41(1) is that the allowance or deduction is made in respect of the loss, expenditure or a trading liability incurred by the assessee and the other requirement is that the assessee has subsequently obtained a benefit in respect of such trading liability by way of a remission or cessation thereof. The sales tax collected by the assessee during the relevant year amounting to Rs. 7,52,01,378/- was treated by the State Government as a loan liability payable after 12 years in six annual/equal installments.
ii) Subsequently, pursuant to the amendment made to the fourth proviso to section 38 of the 1959 Act, the assesee accepted the offer of the SICOM paid an amount of Rs. 3,37,13,393/- to the SICOM, which represented the net present value of the future sum as determined and prescribed by the SICOM. The State may have received a higher sum after a period of 12 years and in installments. However, the statutory arrangement and by section 38, fourth proviso did not amount to remission or cessation of the assessee’s liability assuming the liability to be a trading one. Rather that obtains a payment to the State prematurely and in terms of the correct value of the debt due to it. There was no evidence to show that there had been any remission or cessation of the liability by the State Government.
iii) A proper understanding of all this by the Tribunal cannot be termed as perverse. The view taken by it is imminently possible. Appeals are dismissed.”
In the A. Y. 2003-04, the assessee had opted for deferral scheme for payment of sales tax of Rs. 13,78,41,600/- under the deferral 1993 scheme of the Government of Maharashtra. The amount was allowed as deduction in the A. Y. 2003-04 treating the option as deemed payment for the purpose of section 43B of the Income-tax Act, 1961 according to the circulars. In the subsequent year, the assessee opted for the 2002 scheme for premature payment of net present value and paid an amount of Rs. 4,25,79,684/-. In the A. Y. 2004-05, the Assessing Officer added the difference amount of Rs. 9,52,61,916/- as deemed income u/s. 41(1) of the Act. The Tribunal deleted the addition and held that the amount was not taxable u/s. 41(1) of the Act.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
“i) As per the scheme the assessee was allowed to retain the sales tax as determined by the competent authority and pay the tax 15 years thereafter. The tax collected was deemed to have been paid and, therefore, the tax so collected could not be construed as income in the hands of the assessee.
ii) The tax so retained by the assessee was in the nature of a loan given by the Government as an incentive for setting up the industrial unit in a rural area. The loan had to be repaid after 15 years. Again, it is an incentive.
iii) However, by a subsequent scheme, a provision was made for premature payment. When the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the amount equal to the net present value of the deferred tax was determined at Rs. 4,25,79,684/- and on such payment the entire liability to pay tax/loan stood discharged. Again, it is not a benefit conferred on the assessee. Therefore, section 41(1) of the Act was not attracted.”
CIT vs. Sambhaji Nagar Coop. Hsg. Society Ltd (Bom); ITA No. 1356 of 2012 dated 11/12/2014: www.itatonline.org:
In this case, the Tribunal held that the gains on sale of TDR received as additional FSI as per D. C. Regulations has no cost of acquisition and accordingly is not chargeable to capital gains tax.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
i) Only an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head “Capital gains” as opposed to assets in the acquisition of which no cost at all can be conceived. In the present case as well, the situation was that the FSI/ TDR was generated by the plot itself. There was no cost of acquisition, which has been determined and on the basis of which the Assessing Officer could have proceeded to levy and assess the gains derived as capital gains.
ii) It may be that subsection (2) of s. 55 clause (a) having been amended, there is a stipulation with regard to the tenancy rights. In the present case, additional FSI/TDR is generated by change in the D. C. Rules. A specific insertion would therefore be necessary so as to ascertain its cost for computing the capital gains.
iii) Therefore, the Tribunal was in no error in concluding that the TDR which was generated by the plot/property/ land and came to be transferred under a document in favour of the purchaser would not result in the gains being assessed to capital gains.”
In the A. Y. 2009-10, the assessee had sold a immovable property for a consideration of Rs. 25,60,000/- as distress sale. For computing the capital gain the Assessing Officer applied section 50C and treated the guideline value of Rs. 39,63,900/- as the full value of consideration. In the objection letter, the assessee specifically pointed out that the sale was more in the nature of a distress sale and requested to take the actual sale consideration for working out capital gain. The Assessing Officer rejected the claim u/s. 50C of the Act. The Tribunal confirmed the order of the Assessing Officer holding that there was nothing on record to show that the assessee had disputed the sale consideration of Rs. 39,63,900/- adopted for the purpose of stamp duty taken as basis under the Act and that the Assessing Officer had not rightly invoked section 50C.
On appeal by the assessee the Madras High Court reversed the decision of the Tribunal and held as under:
“i) The Assessing Officer’s order showed that having found such an objection, he committed a serious error in not invoking section 50C(2), that the error continued through out before every appellate forum and that there was no justification in the order of the Tribunal for taking the view that there was nothing on record to show that the assessee had disputed the sale consideration of Rs. 39,63,900/- adopted for the purpose of stamp duty for the purpose of working out capital gains.
ii) Hence the matter was restored to the files of the Assessing Officer to work out long-term capital gains by invoking section 50C(2).”
Note: Also see Appadurai Vijayaraghavan vs. JCIT; 369 ITR 486 (Mad)
For the A. Ys. 2005-06 to 2009-10, the assessee had claimed that the rent received from letting out buildings along with other amenities in a software technology park as income from business. The Assessing Officer assessed it as income from house property. The Tribunal held that it constituted business income and accepted the assessee’s claim.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
“The assessee was engaged in the business of developing, operation and maintaining an industrial park and providing infrastructure facilities to different companies as its business. In view of that the lease rent was assessable as business income.”
The
Tribunal had to consider whether in view of the Special Bench verdict
in Merilyn Shipping & Transport 146 TTJ 1 (Vizag), a disallowance
u/s 40(a)(ia) could be made in respect of the amounts that have already
been paid during the year and are not “payable” as of 31st March. The
Tribunal held that as the department’s appeal against the said verdict
was pending in the High Court and as the High Court had granted an
interim suspension, the AO should decide the issue after the disposal of
the appeal in the case of Merilyn Shipping by the High Court.
On appeal by the Revenue, the Telangana and Andhra Pradesh High Court held as under:
“We
are of the view that until and unless the decision of the Special Bench
is upset by this Court, it binds smaller Bench and coordinate Bench of
the Tribunal. Under the circumstances, it is not open to the Tribunal to
remand on the ground of pendency on the same issue before this Court,
overlooking and overruling, by necessary implication, the decision of
the Special Bench. We simply say that it is not permissible under quasi
judicial discipline. Under the circumstances, we set aside the impugned
judgment and order, and restore the matter to the file of the Tribunal
which will decide the issue in accordance with law and it would be open
to the Tribunal either to follow the Special Bench decision or not to
follow. If the Special Bench decision is not followed, obviously remedy
lies elsewhere.”
For the A. Y. 2009-10, the Assessing Officer charged interest u/s. 234C for late payment of advance tax on the basis of date of clearing of the cheque. The CIT(A) and the Tribunal held that the interest has to be charged on the basis of the date of presentation of the cheque and not date of clearing.
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) The core issue to be considered in this case is whether interest u/s. 234C is to be calculated based on date of clearing of the cheque or date of presentation of the cheque.
ii) The issue raised in this appeal is no longer res integra in view of the decision of the Supreme Court in CIT vs. Ogale Glass Works Ltd. [1954] 25 ITR 529, where it is held that the position is that in one view of the matter an implied agreement under which the cheques were accepted unconditionally as payment and on another view, even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed, the payment related back to the dates of the receipt of the cheques and in law that dates of payments were the dates of the delivery of the cheques.
iii) It is not the case of the department that the cheque issued by the assessee was dishonoured. Once the cheque issued by the assessee is encahsed, in the light of the decisions referred (supra), the payment relates back to the date of receipt of the cheque.”
The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the United States of America on 19th December, 1963 and two deeds in the United Kingdom on 1st January, 1964.
Perusal of the deeds of settlements executed in the U.K. showed that one Mr. Robert Hampton Robertson McGill was designated as the trustee, referred to in the deeds as ‘the Original Trustee’. These trusts were created for the benefit of (a) the Settlor, (b) the children and remoter issue for the time being in existence of the Settlor and (c) any person for the time being in existence who is the wife or widow of the Settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the Settlor. The trust deeds defined the expression “the Trustees” to mean and include the Original Trustee or the other trustees for the time being appointed in terms of the deeds of settlement.
During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income. The said income was also included in the two returns filed by his son Jyotendrasinhiji for the assessment year 1970-71. Thereafter, it appears that the assessee – Jyotendrasinhiji took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the assessment years 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake.
Jyotendrasinhiji approached the Settlement Commission with an application for settlement relating to income from the U.K. and U.S. trusts. As regards to the U.K. trusts, the Settlement Commission observed as follows:-
“So far as the U.K. trusts are concerned, clause (3) did never come into operation inasmuch as no additional trustees were appointed as contemplated by it. If so, clause (4) sprang into operation whereunder the entire income under the settlements flowed to the settlor during his lifetime and on his death, to his elder son, the appellant herein. In other words, these settlements are in the nature of specific trusts. In any event, the entire income from these trusts was received by the settlor during his lifetime and after the settlor’s death, by the appellant. Therefore, the said income was rightly included in the total income of the settler and the assessee during the respective assessment years.”
The Settlement Commission, accordingly, computed the taxable income of the Settlor under both the sets of trusts – U.S. and U.K. – for the assessment years 1964-65 to 1970-71 (up to the date of the death of the Settlor) as also the income of Jyotendrasinhiji for the assessment years 1970-71 to 1982-83.
The above order of the Settlement Commission reached the Supreme Court in a group of appeals. The Supreme Court, by its judgment dated 2nd April, 1993, Jyotendrasinhji vs. S.I. Tripathi & Others, (1933) Supp. (3) SCC 389, with regard to U.K. trusts did not consider the arguments advanced on behalf of the assessee on merits. The Supreme Court, however, observed that the question urged on behalf of the assessee was academic in the facts and circumstances of the case.
Before the Supreme Court, a group of 17 Appeals came up for hearing, 8 arising from the Income-tax Act, 1961 and 9 arising from the Wealth Tax Act, 1957. Of the 9 Wealth Tax appeals, one appeal related to ‘protective assessment’ for 18 assessment years, i.e, 1970-71 to 1976-77, 1978-79 to1979-80, 1981-82 to 1989-90. The remaining 8 Wealth Tax appeals related to assessment years 1970-71, 1971-72, 1972-73, 1973-74, 1974-75, 1975-76, 1976-77 and 1978-79. In so far as 8 appeals arising from the assessment orders passed under the Income-tax Act, 1961 were concerned, they related to assessment years 1984-85, 1985-86, 1986-87, 1987-88, 1988-89, 1989-90, 1990-91and 1991-92.
From the copies of the returns and balance sheets relating to assessment years 1984-85 to 1991-92, the Supreme Court noted there from that there was an endorsement at the bottom of the statement of funds ending on 31st March of each previous year, ‘Net Income for the year retained.’
The Supreme Court observed that Clause 3 of the deeds of settlement executed in the U.K. left at the discretion of the trustees to disburse benefits to the beneficiaries. The endorsement made in the returns, as noted above, showed that income was retained by the trustees and not disbursed.
The Supreme Court noted that the Income-tax Appellate Tribunal, while considering Clause 3(2) and Clause 4 of the U.K. Trust Deeds referred to the findings of the Settlement Commission and observed that if the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts, among them from time to time, according to the objects of the trusts, however, the tell tale facts bring out the intention of the settlor to treat the trust property as his own. The settlor and after his death his son have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of Clause 3, one would have expected the state of affairs to have been different. Consequently, the Tribunal held that due to failure on the part of the Maharaja to appoint discretion exercisers as per clause 3(2), Clause 4 has become operative and the U.K. trusts have to be held to be specific trusts.
The Supreme Court further noted that the High court, however, did not agree with the Tribunal’s view on consideration of the relevant clauses of the U.K. Trust Deeds and various judgments of the Supreme Court as well as some High Courts and held that there were distinguishing features for assessment years under appeal and the previous order of the Settlement Commission and the earlier judgment of this Court. The High Court noted the following distinguishing features, viz., (i) the assessee has not admitted having received the income, (ii) the assessee has not received the said income and (iii) the assessee has not shown as taxable income in the returns of all the years under appeal. Having observed the above distinguishing features, the High Court was also of the view that on interpretation of the relevant clauses of the deeds of settlement executed in the U.K., character of the trusts appears to be discretionary and not specific.
The Supreme Court held that a discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour.
The Supreme Court having regard to the above legal position about the discretionary trust and the fact that the income has been retained and not disbursed to the beneficiaries, held that the view taken by the High Court could not be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts did not get altered.
In the opinion of Supreme Court the two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years.
The Supreme Court further held that the above position with regard to the discretionary trust was equally applicable to the controversy in appeals under the Wealth Tax Act. The High Court had taken a correct view that the value of the assets could not be assessed on the estate of the deceased Settlor.
The Supreme Court dismissed the appeals with no order as to costs.
The assessee is a promoter, claimed deduction u/s. 80- IB(10) of the Income-tax Act, 1961 on the housing project for the A. Y. 2004-05. The Assessing Officer denied the claim on two counts, viz., (i) that the assessee had not developed the flats, and (ii) that out of 66 flats constructed, the built up area of 25 flats exceeded the prescribed maximum limit of 1,500 sq. ft. if the car park area of 220 sq. ft. was included. The Commissioner (Appeals) allowed the deduction u/s. 80-IB(10) holding that the provisions of section 80-IB(10) did not warrant ownership of land. As regards car park area, he held that there was no definition for the term ‘common area” in the Act. He held that the car park area has to be treated as common area. Accordingly, he held that the assessee had not come under any of the disqualifications prescribed u/s. 80-IB(10). The Tribunal confirmed the order of the Commissioner (Appeals).
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) The assessee was entitled to the benefit of the claim u/s. 80-IB(10) even though the assessee was not a developer but only a builder.
ii) In the absence of any specific definition of the term “built-up area” during the relevant period, the reasoning of the Commissioner (Appeals), which was confirmed by the Tribunal was justified. Nevertheless, section 80-IB(10) speaks about the residential unit having a maximum built up area of 1,500 sq. ft. to claim deduction. Even u/s. 80-IB(14)(a), which comes into effect from April 1, 2005, “built-up area is defined as inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls, meaning thereby, the actual residential portion of the property. It clearly states that it will not include common areas shared with other residential units. Thus, there was no justification in including the car park in the definition of the built-up area of the residential unit for the purpose of determining the maximum built-up area.”
The assessee is a Mauritius based company. The Revenue proceeded against it on the footing that it is engaged in the business of telecasting of TV channels such as B4U Music, MCM, etc. It is the case of the Revenue that the income of the assessee from India consisted of collections from time slots given to advertisers from India through its agents. The assessee claimed that it did not have any permanent establishment in India and has no tax liability in India. The Assessing Officer did not accept this contention of the assessee and held that affiliated entities of the assessee are basically an extension in India and constitute a permanent establishment of the assessee within the meaning of Article 5 of the DTAA . The Commissioner of Income Tax (Appeals) Mumbai, partly allowed the appeal in some cases and held that the entity in India cannot be treated as an independent agent of the assessee. Alternatively, and assuming that it could be treated as such if a dependent agent is paid remuneration at arm’s length, further proceedings cannot be taxed in India. The Tribunal upheld the decision of the Commissioner (Appeals).
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“Assessee carried out entire activities from Mauritius and all contracts were concluded in Mauritius. It was also undisputed that only activity which was carried out in India was incidental or auxiliary/preparatory in nature which was carried out in a routine manner as per direction of assessee without application of mind. In aforesaid circumstances, assessee’s agent did not have any PE in India and, consequently, amount in question could not be brought to tax in India.”
The assessee had two divisions: a transformer division manufacturing power transformers, and a tap changer division. It entered into an agreement with a German Company to sell plant and machinery of its tap changer division. Under the agreement, it undertook not to engage either directly or indirectly in the manufacture of the existing range of products. For the A. Y. 1996- 97, the assessee received a sum of Rs. 6.89 crore as a consideration for cessation of manufacturing activity. The Assessing Officer held that the receipt should be attributed to transfer of goodwill and restrictive covenants. Accordingly, he brought to tax the capital gains on the transfer of goodwill to the extent of Rs. 403.89 lakh adopting the cost of acquisition at Nil. The Commissioner (Appeals) deleted the addition holding that there was no element of goodwill in the agreement entered into by the assessee with the German company and the entire receipt should be attributed to restrictive covenants/noncompete fee. The Tribunal confirmed the decision of the Commissioner (Appeals).
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) The assessee transferred the technical know-how and other advantages to the joint venture company consisting of the assessee and the German company and the assessee continued its business using its own logo, trade name, licenses, permits and approval under an agreement with another company. The Tribunal held that there was no intention to acquire the goodwill of the assessee and, therefore, the non-compete fee received by the assessee could not be treated as payment for goodwill taxable as income. Section 55(2) (a) of the Income-tax Act, 1961, came into effect in the year 1998-99, whereas the assessment year in question was 1996-97. Therefore, there was no basis to fall back on section 55(2). The non-compete fee received by the assessee was capital in nature.”
The assessee was engaged in the business of warehousing, handling and transport business. For the A.Ys. 2004-05, 2005-06, 2007-08 and 2009-10, the assessee showed the income from letting out of buildings and godowns as income from business. The Assessing Officer treated the income as income from house property. The assessee contended that its activity was not merely letting out of the warehouses but storage of goods with provision of several auxiliary services such as pest control, rodent control and preventive measures against decay of goods stored due to vagaries of moisture and temperature, fungus formation, etc., besides security and protection of the goods stored. The Commissioner (Appeals) allowed the assessee’s claim and held that the assessee carried out the activity in an organised business manner. These activities were more than mere letting out of the godowns for tenancy. The Department itself had accepted in the past that the income from warehousing was assessable as income from business. The Tribunal upheld the decision of the Commissioner (Appeals).
On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:
“i) T he Commissioner (Appeals) as well as the Tribunal had not only gone into the objects clauses of the memorandum of association of the assessee but also into individual aspects of the business to come to the conclusion that it was a case of warehousing business and, therefore, the income would fall under the head “Business income”.
ii) T hus, the income of the asessee from letting out its warehouses was chargeable under the head “Income from business” and not under the head “Income from house property”.
The assessee, in its annual return for the assessment years 1989-90 and 1991-92, showed a loss of Rs.1,94,13,40 and Rs. 1,80,22,480 respectively. By an assessment order dated 14th December, 1992, the Assessing Officer levied an additional tax u/s. 143(1A) of Rs. 5,62,490 and Rs. 8,09,290, respectively, for the two assessment years in question calculated in the manner provided in the section.
Being aggrieved by the order dated 14th December, 1992, the respondent filed two separate writ petitions to declare the provisions of section 143(1A) as ultra vires and, consequently, prayed for the quashing of the order dated 14th December, 1992. The learned single judge who heard the two petitions upheld section 143(1A) as amended in 1993 prospectively but held that in so far as it operated with effect from 1989 on losses made by companies, the section is arbitrary and unreasonable and would, therefore, have to be struck down. The Division Bench agreed with single judge and dismissed the two writ appeals before it.
The Supreme Court held that on a cursory reading of the provision, it was clear that the object of section 143(1A) was the prevention of evasion of tax. By the introduction of this provision, persons who has filed returns in which they have sought to evade the tax properly payable by them is meant to have a deterrent effect and a hefty amount of 20% as additional income-tax is payable on the difference between what is declared in the return and what is assessed to tax.
The Supreme Court observed that a plain reading of the provision as it originally stood referred to the total income. Further, it was settled law that the word “income” would include within it both profits as well as losses. The Supreme Court further held that even on a reading of section 143(1)(a) which is referred to in section 143(1A), a loss is envisaged as being declared in a return made u/s. 139. It was clear, therefore, that the retrospective amendment made in 1993 would only be clarificatory of the position that existed in 1989 itself.
According to the Supreme Court, all assessees were put on notice in 1989 itself that the expression “income” contained in section 143(1A) would be wide enough to include losses also. That being the case, on facts there was in fact no retrospective imposition of additional tax–such tax was imposable on losses as well from 1989 itself.
In the present case, the question that therefore arose before the Supreme Court also as to whether bona fide assesses are caught within the net of section 143(1A).
The Supreme Court after referring to its decisions in CIT vs. Hindustan Electric Graphites Ltd. (2000) 243 ITR 48(SC), Asst. CIT vs. J.K. Synthetics Ltd (2001) 251 ITR 200 (SC) and K. P. Varghese vs. ITO 131 ITR 579 (SC); held that section 143(1A) could only be invoked where it was found on facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to evade tax lawfully payable by the assessee. The burden of proving that the assessee had so attempted to evade tax was on the Revenue which could be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee had, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of section 143(1A), the Supreme Court upheld the retrospective clarificatory amendment of the said section and allowed the appeals.
1.1 Sizeable debt funds are being raised by the corporates through the issue of debentures. To make the issue of debentures attractive, such debentures are issued with different terms. Sometimes debentures are issued at a discount with nominal or lower rate of interest. At times, the debentures are issued at par for a fixed period with specified interest rate, but the option is also given to the debenture holders for upfront payment of present value of interest on debentures in the very first year for the entire period of debentures. In such cases, the accounting treatment of such interest is guided by the accounting principles, and generally the expenditure on interest is spread over the life of the debentures on an appropriate basis.
1.2 The expenditure of revenue nature incurred on issue of such debentures generally qualifies for deduction u/s. 37(1) of the Income-tax Act, 1961 (the Act). Section 36(1)(iii) of the Act grants deduction of interest on capital borrowed for business purpose. Accordingly, interest on such debentures should generally qualify for deduction u/s. 36(1)(iii) of the Act, subject to certain exceptions with which we are not concerned in this write-up.
1.3 In the past,for the assessees following mercantile system of accounting, the issue was under debate with regard to the year of deductibility of interest under the Act, in cases where the upfront payment of present value of interest on debenture is made in the very first year for the entire period of debentures and for accounting purpose, such interest is amortised over the redemption period of debentures in the books of account.
1.4 Earlier, the issue with regard to deductibility of discount on issue of debentures under the Act came up for consideration before the courts. Finally, the Apex Court in the case of Madras Industrial Investment Corporation Ltd [225 ITR 802 – Madras Industrial Investment’s case] settled the controversy with regard to deductibility of such discount and the year of its deductibility. In this case, the Apex Court, on the facts of that case, held that the discount on issue of debentures constitutes revenue expenditure. The Court further held that, although a liability of such expenditure has been incurred in the year of issue of debenture, this is a continuing liability which stretches over the period for which the debentures were issued and therefore, the liability spreads over such period. Accordingly, the deduction of such expenditure will also be spread over on a proportionate basis during the tenure of the debentures. The Court also noted that this view is in conformity with the accounting practice in which such discount is amortised over the redemption period of debentures. It may be noted that in this case, initially, the assessee itself had claimed deduction on proportionate basis and subsequently, changed it’s position in this respect. We had analysed this judgment in this column in the July, 1998 issue of the journal.
1.5 Recently, the issue with regard to the year of deductibility of upfront payment of interest in the first year of the tenure of debentures referred to in para 1.3 above came up for consideration before the Apex Court in the case of Taparia Tools Ltd. and the Court has decided this issue. Considering the importance and usefulness of this judgment, it is thought fit to consider the same in this column.
Taparia Tools Ltd. vs. JCIT – 260 ITR 102 [Bom.]
2.1 The issue referred to in para 1.3 above came up before the Bombay High Court in the above case. In this case, the brief facts were: the assessee was following mercantile system of accounting and it had issued non-convertible debentures of the face value of Rs. 100 each aggregating Rs. 600 lakh on a private placement basis. Under the terms of issue,effectively, as noted by the Court,the debenture holders were entitled to receive interest periodically on half yearly basis @ 18% p.a. for five years. Alternatively, the debenture holders had the option to receive one year upfront payment of Rs. 55 per debenture immediately on allotment. The debentures were redeemable at a premium of Rs. 10 per debenture in one installment any time after the end of fifth year from the date of allotment but, not later than the seventh year from that date.
2.1.1 The company made allotment of debentures to six parties on two different dates. On 29th March, 1996, the allotment was made to one party for which the company had received Rs. 495 lakh and on 19th June, 1996, the company had made an allotment to five parties for which the company had received Rs. 100 lakh from one party and Rs. 1.25 lakh each from the other four parties. Out of six parties, two lenders exercised the option to receive upfront payment. Accordingly, upfront payment of Rs. 2,72,25,000 became payable to one party (who was allotted debentures of the face value of Rs. 495 lakh) on 29th March, 1996 and Rs. 55 lakh became payable to another party (who was allotted debentures of the face value of Rs. 100 lakh)on 19th June, 1996. The other four debenture holders holding debentures of the aggregate face value of Rs. 5 lakh opted for payment of interest periodically as per the terms of issue of debentures. In the books of account, the assessee had shown the upfront payment of interest of both the years as ‘deferred revenue expenditure’ to be written off over a period of five years. Similarly, the premium of Rs. 60 lakh payable on redemption of debentures was also proportionately debited to each year’s profit and loss account and credited as reserve on the liability side of the balance sheet. Even for tax purpose, the claim by deduction of this premium payable on redemption was spread over the life of the debentures.
2.1.2 For the purpose of furnishing return of income for the assessment year 1996-97, the assessee claimed entire upfront payment of interest of Rs. 2,72,25,000 as deduction and similarly, in the Return of income from the assessment year 1997- 98, the full deduction of Rs. 55 lakh paid upfront was claimed as deduction. For both the years, the deduction was disallowed by the Assessing Officer (AO) on the ground that liability for the full amount regarding discounted interest paid upfront has not been incurred in the respective accounting years and the approximate income which the assessee would have earned by utilisation of Rs. 595 lakh (Rs. 495 lakh and Rs. 100 lakh) borrowed was not offered for taxation. Relying on the judgment of the Apex Court in Madras Industrial Investment’s case, the AO spread over the deduction of interest expenditure over a period of five years and worked out the amount of deduction of interest by applying appropriate discount rate for the assessment year 1996-97 [Rs. 74,250 – for three days (annual amount being Rs. 89,10,000) as against the claim of Rs. 2,72,25,000]. For the assessment year 1997-98 also, similar approach was adopted. It seems that in subsequent years, deduction was allowed on this basis. On first appeal, for the Assessment Year 1996-97, the Commissioner of Income-tax (Appeals) [CIT (A)] took the view that the entire scheme was made to avoid tax and the upfront payment was repayment of capital out of the total borrowing and accordingly, the actual borrowing for the assessment year 1996-97 was only Rs. 2,22,75,000 (and not Rs. 495 lakh). For this, the CIT(A) also relied on the judgment of the Apex Court in the case of McDowell & Company Ltd. [154 ITR 148 – McDowell’s case]. Based on this, the CIT(A) allowed deduction on this reduced amount of borrowing for three days. The Tribunal set aside the order of CIT(A) and restored the order of the AO.
2.2 It seems that similar views were taken for the assessment years 1997-98 and subsequent years. It also seems that appeals for three assessment years (1996-97 to 1998-99) were filed by the assessee as well as the revenue before the Bombay high Court. details of the other years are not available. Appeals of the Revenue were filed on the ground that the upfront payment represented repayment of borrowed capital and therefore, the assessee was entitled to deduction u/s. 36(1)(iii) only on the net amount of rs. 2,22,75,000.
2.3 On the above facts, the matters came-up before the Bombay high Court, and the high Court, it seems, dealt with the appeals by first taking the appeal for the assessment year 1996-97 as the base. It seems that in the assessee’s appeals, large number of questions were raised before the Court. however, the high Court framed the following substantial question of law for its decision [Page 107]:
“Whether, on the facts and circumstances of the case and in law, the tribunal was right in holding that, even though the liability of payment of interest stood liquidated in the first year itself, such liability had to be allowed on a spread over basis over the life of the debentures?”
2.4 On behalf of the assessee, it was, inter alia, contended that the upfront payment of Rs. 55 per debenture on 29th march, 1996 was on account of interest and the CIT(a) wrongly treated the payment of Rs. 55 per debenture on capital account. the terms of issue of debentures in this respect are very clear. for accounting purpose, the assessee has debited 1/5th of Rs. 55 for five years in profit and loss account but, for the purpose of determining deductibility of the amount under the act one has to go by the year in which the liability arises under the terms of issue of debentures, and for that purpose, the treatment in the books of account is irrelevant. The assessee is following mercantile system of accounting and under the terms of issue, the liability arose in the first year itself and therefore, deductibility thereof cannot be spread over the five years as erroneously done by the ao. It was further contended that it was not open to the revenue to tamper with the terms of issue and therefore, the ao was wrong in spreading the deduction over the five years. Such spreadover in five years amounts to altering the terms and conditions of the issue of debentures which was not permissible. It was also pointed out that, had the assessee not claimed the deduction in the very first year, the Revenue could have denied deduction in the second and subsequent years on the ground that no liability accrued in those years and no amount was also paid during those years. The method of determining the quantum for allowing the deduction on a spreadover basis adopted by the revenue was also questioned.
2.4.1 It was further contended that the judgment of the apex Court in the case of madras industrial investment’s case did not apply to the facts of the case of the assessee. this was distinguished on various grounds which, inter alia, include: in that case, the Court was concerned with the concept of premium payable at the time of redemption and in this case, although the assesse is liable to pay 10% premium at the time of redemption, that has been claimed on the basis of tests laid down in that case and,therefore, in this case, we are not concerned with the deductibility of such premium. Present case is concerned with the deductibility of upfront payment of interest which became payable in the very first year ending on 31st march, 1996. it was further pointed out that in madras industrial investment’s case, the premium amount was payable after five years and therefore, the apex Court has allowed amortisation whereas in this case, the liability to pay interest arose in the very first year and that is also discharged in the first year itself. Furthermore, in that case the liability was a continuing liability which is not the case in this case. From the judgment of the apex Court in that case, it would appear that the option was with the assessee to claim deduction in the very first year when it discharged the accrued liability or to spread it over for five years. As such, according to the learned counsel appearing on behalf of the assessee, the judgment of the Apex Court in the madras industrial investment’s case had no application to the facts of the present case. A reliance was also placed on the judgment of the Bombay high Court in the case of Buckau Wolf new india engineering Works Ltd. [157 ITR 751] in which case, the amount was payable in installments and yet, the high Court took the view that the deduction for the entire amount should be given in the first year because the liability was accrued in the first year.
2.4.2 It was also pointed out that @ 55 per debenture, the assessee was required to pay Rs. 4,45,50,000 interest in five years but by paying upfront amount of Rs. 2,72,25,000 it has been able to save a payment of interest to the extent of Rs. 1,73,25,000. While spreading over the deduction,even the revenue is ultimately allowing deduction of Rs. 4,45,50,000 as against the claim of deduction of Rs.2,72,25,000 made by the assessee. It was also contended that the Revenue has wrongly invoked the judgment of the apex Court in mcdowell’s case.
2.4.3 The learned counsel for the assessee further contended that under the terms of issue, the lenders were free to opt for interest on half yearly basis @ 18% per annum for five years (i.e. in aggregate Rs. 90 per debenture) or to receive upfront payment of Rs. 55 per debenture in the year of allotment itself. Therefore, the lenders had a right to receive discounted amount of interest in the first year under the second option. In other words, by making upfront payment of Rs. 55 per debenture, the assessee has brought the present value of rs. 90 to Rs. 55 which is nothing but discounted value of the interest otherwise payable in five years. Under the first option, the assessee would have paid Rs. 89,10,000 every year for a period of five years on this amount of borrowing. however, by making upfront payment of discounted value of interest amounting to Rs. 2,72,25,000,the assessee got rid of the annual liability of Rs. 89,10,000 for five years. It was also contended that the revenue has accepted that upfront payment of Rs. 55 per debenture was revenue expenditure and by spreading over the amount of deduction, the revenue allows deduction of rs. 89,10,000 per year for a period of five years aggregating the amount to Rs. 4,45,50,000 as against the assessee’s claim of deduction of Rs. 2,72,25,000 in the first year. Therefore, there is no loss to the revenue. As such, the only question which the ao was required to decide was whether the liability to pay interest was incurred in the first year itself or not, and if so, the assessee was entitled to obtain full deduction in the first year.
2.4.4 It was also pointed out that the tribunal has proceeded on the footing that the entire measure was adopted because the assessee had surplus income whereas the concerned lender had brought forward losses. In this respect, it was contended that the court should not take into account extraneous factors while deciding the claim of the assessee.
2.4.5 Referring to the judgment of the Apex Court in the case of tuticorin alkali Chemicals and fertilizers Ltd. [227 itr 172 – tuticorin’s case], it was further contended that the deduction of expenditure under the act does not depend on what the assessee debits in its accounts but, it depends on the provisions of the law. Therefore, in this case, the fact that the assessee has not debited the full amount to profit and loss account in the first year itself cannot be the ground for its disallowance in that year. The tax cannot be levied on the basis of entries made by an assessee in its books of account.
2.4.6 It was also contended that the tribunal has erred in introducing matching concept to the effect that the expenditure must relate to the income in the assessment year and the benefit was spread over for a period of five years and therefore, the expenditure must also be spread over. According to the learned counsel, since the liability in this case is incurred in the first year itself, the assesseee was entitled to full deduction in that year and, therefore, the question of co-relating the expenditure to income/ benefit for five years does not arise. For this, the reliance was placed on the judgment of the Apex Court in the case of Mysore Spinning and mfg. Co. Ltd. [61 itr 572].
2.5 On behalf of the revenue, it was, inter alia, contended that the option given to the lenders refers to upfront one-time payment and it does not speak of interest. the upfront payment of Rs. 55 per debenture, as against the amount of Rs. 90, was made to get the benefit of differential amount of Rs. 45 for a period of five years and therefore, the ao was right in spreading the expenses over that period. If the argument of the assessee for deduction of the full amount in the first year is accepted, then the computation of income will stand distorted, because the assesse got the benefit of Rs. 45 for five years. Upfront payment of Rs. 55 was on account of advance payment of interest in the first year for five years. As such, the principle laid down by the apex Court in the madras industrial investment’s case was squarely applicable to the facts of the case of the assessee. It was also contended that under both the options, the interest was payable every six months and therefore, the amortisation principle was applicable to both the options. Therefore, even Rs. 55 per debenture was payable by way of interest for five years which was paid by the assessee in the first year and therefore, the ao was right in applying the principle of amortisation in this case.
2.5.1 Supporting the appeals filed by the Revenue, the learned counsel appearing on behalf of the revenue, further contended that, as against the amount of Rs. 4,95,00,000 borrowed on 29th march, 1996, on the same day, an amount of Rs. 2,72,25,000 was repaid in the name of upfront payment of interest and therefore, the actual borrowed capital left with the assesse was only Rs. 2,22,75,000 which was used for the purpose of business. Since part of the borrowed capital was refunded to the subscribers on the same date, the actual borrowed capital remaining was the net amount and the tribunal has failed to appreciate this factual positon. as such, the assessee was entitled to claim deduction u/s. 36(1)(iii) for interest only on Rs. 2,22,75,000.
2.5.2.1 It was also contended that the entire scheme of issue of non-convertible debenture was devised to defeat the collection of tax revenue. In the present case, the assessee has not paid the discounted value of interest, but has repaid part of the face value of the debenture itself under the garb of upfront payment of interest at present value. therefore, the tribunal has erred in giving spread over and granting deduction of Rs. 4,45,50,000 @ 18% per annum for five years on the gross amount (i.e. Rs.4,95,00,000) of debentures.
2.6 After considering the contentions raised on behalf of both the sides, the Court proceeded to decide the question referred to in para 2.3. For this purpose, at the outset, the Court noted the following relevant terms of the issue of debentures [Page115]:
“3(a) Each debenture shall carry interest at the rate of 2%. Per annum above the prime lending rate and the interest shall be payable half-yearly.
(b) Each debenture shall carry interest at the rate of Rs. 55 per debenture, payable up-front within thirty days of the exercise of option or from the date of allotment, whichever is earlier”.
These terms were not accepted by the lenders.
The final terms of the issue were as follows:
“2. Terms of the issue:
(a) Up-front fee – the debenture shall carry up- front fee at the rate of Rs. 55 per debenture payable up-front immediately on allotment.
(b) Redemption period – the debenture shall be redeemed at a premium of 10 per cent, i.e., Rs.10 per debenture, in one instalment any time after the end of the fifth year from the date of allotment, but not later than the seventh year from the date of allotment.”
2.6.1 The Court then briefly referred to the facts of the present case and stated that the question which arises for determination in this case is whether Rs. 55 per debenture (total – Rs. 2,72,25,000) deductible in the first year of allotment or that expenditure was to be apportioned over the period of five years, which is the life of the debenture. The Court also noted that the assesse is following the mercantile system of accounting on the basis of which the assessee has made a claim for the full amount in the first year itself whereas the Revenue has treated this as deferred revenue expenditure (DRE) and apportioned the expenditure for five years. The Court then stated that for the purpose of deciding this issue, two concepts are required to be borne in mind, viz., matching and discount rate.
2.6.2 The Court then proceeded to consider the ‘matching concept’ referred to in above para. for this purpose, the Court noted that the mercantile system of accounting is based on accrual. under this system, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. the system postulates the taxation of monies that are due and payable by the parties to whom they are debited. explaining the effect of the ‘matching concept’ in the mercantile system of accounting, the Court observed as under [Page no. 116]:
“…….therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). under the mercantile system of accounting, this matching is required to be done on accrual basis. under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in- flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assesse is following the mercantile system of accounting. this matching concept is very relevant to compute taxable income particularly in cases involving dre. it has been recognised by numerous judgments… ”
2.6.2.1 The Court then referred to the judgment of the apex Court in the case of Calcutta Co. Ltd. [37 ITR 1] and stated that, in that case, the Court had held that the expression ‘profits or gains’ used in section 10(1) of the income-tax act, 1922 [similar to section 28(i) of the act] should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purpose of earning receipts is deducted therefrom. the Court then noted that in that case the apex Court had applied the ‘matching concept’ and allowed the deduction of an expenditure required to be incurred in subsequent period on an estimated basis which related to the income that was already accounted on the ground that otherwise it was not possible to compute profits and gains. The Court then stated that this concept is also applied by the apex Court in the case of madras industrial investment’s case and for that purpose the Court noted the following observations from the head notes of that case [Page 117]:
“Ordinarily, revenue expenditure which is incurred wholly and exclusively for thepurpose of business must be allowed in its entirety in the year in which, it is incurred. it cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. in fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assesse has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. the liability should, therefore, be spread over the period of the debentures”.
2.6.2.2 The Court then stated that the ‘matching concept’ is also covered by section 36(1)(iii) read with section 43(2), which defines the word ‘paid’ to include incurred according to the method of accounting. Both these sections are part of the provisions relating to computation of business income. Interest on monies borrowed for business purposes is an expenditure in the business, which is deductible under section 36(1)(iii). the Court then pointed out that for claiming deduction u/s. 36(1)(iii), the necessary conditions are: the capital must have been borrowed; it must have been borrowed for business purpose and the interest must have been paid i.e., actually paid or incurred in accordance with the method of accounting followed by the assessee.
2.6.2.3 Referring to the facts of the case of the assessee, the Court noted that the assessee got the benefit of the borrowed money for a period of five years and if the ‘matching concept’ is not applied, the profits get distorted. In this context the Court then observed as under [Page 118]:
“……for the year ending march 31, 1996, the assessee has submitted that it has incurred an expenditure amounting to rs. 2,72,25,000 as and by way of interest deductible under section 36(1)(iii) of the income-tax act. however, in the annual accounts, the said amount is not debited to the profit and loss account. It is interesting to note from the profit and loss account for the year ending March 31, 1996, that profit after tax was rs.1,86,34,016. now if the expenditure incurred was Rs. 2,72,25,000 as submitted by the assessee then the assessee could never have earned the said profit of Rs. 1,86,34,016. This is how the profit got distorted. In the annual report, the assessee has conceded that Rs. 2,72,25,000 was deferred revenue expenditure to be written off over five years. In his order, the Assessing Officer has recorded a finding of fact which categorically brings out the ‘matching concept’. he has stated that for the accounting year March 31, 1996, profit after tax increased to Rs. 1,86,34,016 from rs. 50 lakhs in the last year ending march 31, 1995. Therefore, the Assessing Officer was right in apportioning the expenditure at 18 per cent. per annum on Rs. 495 lakhs amounting to Rs.74,259 for three days because only then the estimated expenditure could match with income of Rs. 1,86,34,016… ”
2.6.2.4 Considering the above referred accounting treatment and the accounting profit for the year ending 31st march, 1996, the Court stated that the assessee has shown Rs. 2,72,25,000 as deferred revenue expenditure and according to the Court, this expenditure, though paid, was not incurred in the year ending 31st march, 1996 and the expenditure incurred in that year was Rs. 74,250. in this context, the Court further observed as under [Page 118]:
“… What we would like to emphasise is that, therefore, ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it is incurred. However, in a given case, like the present one, the facts may justify the Assessing Officer to spread the expenditure over the life of the debentures because allowing the entire expenditure in one year might give a distorted picture of the profit of a particular year… ”
2.6.2.5 Considering the overall facts of the assessee, the Court took the view that the assessee has received the borrowed funds for a period of five years and it is a continuing benefit to the business of the assessee over the entire period of debentures and therefore, the liability was required to be spread over the period of debentures. the Court also noted that the assessee itself has applied a ‘matching concept’ qua the claim of premium payable on redemption of debentures. As such, in this very case, the assessee has invoked the ‘matching concept’ qua premium but not for interest.
2.7 The Court then proceeded to consider the second concept, viz., discount rate. in this context, the Court noted that the ao had taken a view that the upfront payment made by the assessee had to be discounted as these payments represent present value of the interest liability and were deferred revenue expenditure. For this purpose, the ao applied 18% as the discount rate which was effectively based on one of the options available for payment of interest over a period of five years. On this basis, the ao determined the annual liability of interest at Rs. 89,10,000 in respect of borrowing of Rs. 495 lakh and Rs. 18 lakh in respect of borrowing of Rs. 100 lakh. on this basis, the ao allowed deduction of Rs. 74,250 for three days for the assessment year 1996-97 and Rs. 1,03,20,410 for the assessment year 1997-98 (i.e. Rs. 89,10,000 for the first set of debenture and Rs. 14,10,410 for the second set of debenture on a proportionate basis for part of the financial year 1996-97). in the subsequent years,it seems, the ao had allowed deduction on this basis for the full year. The assessee had questioned the discount rate applied by the ao for determining the amount of deduction. After considering the factual position, the Court did not find any defect in the method of determining the amount of deduction adopted by the ao.
2.8 After considering both the above concepts, viz., ‘matching concept’ and discount rate, the Court stated that if they are kept in mind, the matter stands resolved in law. For this purpose, the Court then analysed the annual accounts of three years under appeal and noted that in each of the years, the assessee has treated the upfront payments made in the first year as deferred expenditure and written off the same on that basis during the life of the debentures. After analysing these annual accounts for three years, the Court also noticed that even this method continued in the subsequent accounting years upto 31st march, 2001 and finally, the debentures were repaid during the accounting year 2001-02.
2.8.1 Based on the analysis of the above referred annual accounts, the Court noted that this analysis indicates two things. Firstly, in the accounts, the upfront payment has been written off over the period of debentures by creating an asset in respect thereof on the basis that interest for five years is paid in advance in the first year. Secondly, the accounts show that the premium payable by the assessee on redemption was Rs. 60 lakh and in each year, 20% thereof has been charged to the profit and loss account. On this basis, the Court felt that the acceptance of claim of deduction of the full amount in the first year would result into distortion.
2.9 The Court then noted the contention of the assessee that good accounting is not necessarily correct law. For this, on behalf of the assessee, apart from the other authorities, heavy reliance was placed on the judgment of the Apex Court in tuticorin’s case to contend that the deduction of expenses in computation of income under the act does not depend on its accounting treatment but depends on the provisions of the law. For this, the Court considered the relevant provisions contained in section 36(1)(iii) read with section 43(2) and stated that, from this, it would be clear that question of allowance permitted to be deducted under the head profits and gains would differ according to the system of accounting adopted by the assessee. For this purpose, one has to estimate the expenditure by applying the ‘matching concept’ and a proper discount rate. Referring to the judgment of the Apex Court in the case of A. Krishnaswamy Mudaliar [53 ITR 122], the Court stated that profits of the business should be determined according to the ordinary principles of commercial accounting so far as they are applicable. The Court then stated that there is no merit in the argument advanced on behalf of the assessee that good accounting is not necessarily good law.
2.10 Finally, explaining the effect of judgment in tuticorin’s case,the Court held as under [Page 125]:
“………one of the points which arose for determination was whether interest received by the assessee on short-term deposits during pre-commencement of business could be capitalised as accretion to capital and, therefore, nontaxable. Therefore, in the case, the issue was on the nature of the receipt. Hence, that case has no application. On the contrary, it has been held that the accounting principles are relevant for ascertainment of profits made by a company or for ascertainment of value of assets of the company but, not for determining the nature of receipt. Therefore, the said judgment supports the view which we have taken as in this case, we are concerned with computation of income.
It is important to note that the deferred revenue expenditure is of revenue nature but, because of its special features, it is spread over a number of years during which the benefit of expenditure is expected to arise to the business. on the facts, we hold that the liability was a continuing liability to pay interest spread over for a period of five years… ”
2.11 In view of the above, the Court took the view that the ao was right in spreading the deduction over the period of five years which was the life of the debentures. Accordingly, the Court decided the question referred to in para 2.2. above in favour of the revenue and against the assessee.
2.12 On the above basis, appeals of the assessee for all the three years were dismissed. the Court also noted that the three appeals preferred by the revenue, relate to the ground that upfront payments represented repayment of borrowed capital and therefore, the assessee was not entitled to deduction u/s. 36(1)(iii) in respect thereof. In this respect, the Court clarified that the AO has recorded the finding of fact that the upfront payments were on revenue account and that has been confirmed by the Tribunal and therefore, the Court has decided these matters on the basis of that finding of fact. Accordingly, on this basis, the Court preferred not to answer the questions raised in the three appeals filed by the Revenue.
The expenditure, though incurred for the purposes of business, shall be deemed to have not been incurred for the purposes of business, where the expenditure is incurred for a purpose which is an offence or which is prohibited by law. No deduction or allowance, therefore can be made in respect of such an expenditure by virtue of Explanation 1 to section 37(1) of the Act.
It is not uncommon for a businessman to make certain payments in the course of his business, the payment of which might be an offence or prohibited by law. Several cases of payments of fines and penalties for violation of law are the examples that immediately come to mind. Such payments largely would be the cases of expenditure that would be hit by the Explanation 1 to section 37(1) and would stand to be disallowed in computing the Total Income.
Cases often arise wherein a businessman, for the purposes of his safety or for safeguarding his business, is required to make certain payments to either the police or security guards or to the gangsters or even to the kidnappers. Such payments, when made to the police or security guards are known as “Security Charges”, when made to gangsters are known as “Protection Money” and as “Ransom” when paid to kidnappers.
Issue arises in the context of Allowance or Deduction when such payment, i.e., security charges or protection money or ransom is made. Whether such payments, though made for business purposes, would be liable for disallowance on the ground of it being construed as an expenditure incurred for a purpose which is an offence or is prohibited by law. Conflicting views of the High Courts highlight the controversial nature of the issue under consideration.
M. S. Swam inathan’s case
Before the Karnataka High Court in the case of CIT vs. M. S. Swaminathan, 236 CTR 559, the Revenue had raised the following question for consideration of the high court in an appeal filed by it – “ whether the payment made to local police and local rowdies can be an allowable expenditure as a business expenditure ?
“In the said case, a sum of Rs. 86,000 was claimed as expenditure for money paid to local police and local goons towards the maintenance of the two theatres run by the assessee, viz., Vinayaka Touring Talkies and Sri Krishna Theatre. The expenditure of Rs. 86,000 claimed was disallowed by the AO. The CIT(A), in an appeal filed by the assessee, concurred with the view expressed by the AO and dismissed his appeal. Aggrieved by the same, the assessee filed the second appeal before the tribunal, which allowed the appeal in part, by allowing deduction of Rs. 50,000 as against Rs. 86,000 claimed. Being aggrieved by the same, the appeal was filed by the Revenue before the High Court.
On hearing the rival contentions, the Karnataka High Court allowed the appeal of the Revenue for disallowing the claim of the expenditure by holding as under;
“If any payment is made towards the security, towards the business of the assessee, such amount is an allowable deduction, as the amount spent for the maintenance of peace and law and order in the business premises of the assessee as he was running two cinema theatres. But the amount spent in the instant case claimed by the assessee is towards payment made to the police and rowdies. If any payment is made to the police illegally, it amounts to bribe and such illegal gratification cannot be considered as an allowable deduction and similarly, if any amount is paid to a rowdy as a precautionary measure to see that he shall not cause any disturbance in the theatre run by the assessee, the same is also an amount paid illegally for which no deduction can be allowed by the Department. If the assessee had spent the money for the purpose of security, we would have to concur with the view of the Tribunal. However, in the instant case, the payment has been made to the police and rowdies to keep them away from the business premises which payment be held as illegal and such illegal payment cannot be an allowable deduction.”
Khemchand Motilal Jain, Tobacco Products (P.) Ltd.’s case
The issue arose in the case of CIT vs. Khemchand Motilal Jain, Tobacco Products (P.) Ltd. 340 ITR 99 (MP) before the Madhya Pradesh High Court. In that case, the assessee company was engaged in manufacturing and sale of bidis. One Mr. Sukhnandan Jain was a whole-time director of the assessee-company and was looking after the purchase, sales and manufacturing of bidis. During his business tour in August 1987 to Sagar for purchase of tendu leaves, he was kidnapped for ransom by a dacoit gang headed by Raju Bhatnagar. Immediately, a complaint and FIR were lodged with Sagar Police. The assessee company awaited the action of the police but the police was unsuccessful in getting Mr. Sukhnandan Jain released from the clutches of the dacoit. Ultimately after 20 days, a sum of Rs. 5,50,000 was paid by way of ransom for the release of Mr. Sukhnandan Jain. On the same day of payment of the ransom, Mr. Sukhnandan Jain was released by the dacoits.
The company claimed a deduction of the ransom amount as business expenditure. The AO disallowed the claim of the assessee company on the ground that the ransom money paid to the kidnappers was not an expenditure incidental to business. On appeal, the CIT (Appeals) allowed the claim of the assessee. The Tribunal confirmed the finding of the CIT (Appeals). On appeal, the Revenue contended that the amount of ransom could not have been claimed by way of expenditure as the Explanation to sub-section (1) of section 37 prohibits such expenditure. The Tribunal referred the following question to the Court :“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 5,50,000 paid as ransom money to the kidnappers of one of the Directors was an allowable deduction under section 37(1) of the Income-tax Act,1961?”
Before the High Court, the Revenue submitted that the amount of ransom could not have been claimed by way of expenditure as the Explanation of sub-section (1) of section 37 of the Income-tax Act, 1961 prohibited allowance of such an expenditure. It was submitted that the payment of any amount which was prohibited by law was not a business expenditure and it could not be allowed as an expenditure.
The amicus curiae, and the assessee company supported the orders passed by the appellate authorities and submitted that the payment of ransom was an allowable expenditure. It was pleaded that the amount was paid to the dacoits to get Mr. Sukhnandan Jain, who was on business tour and who was working as the director of the company, released from the dacoit. It was contended that the aforesaid amount was rightly claimed as an expenditure of business. It was insisted that at the relevant time, Mr. Sukhnandan Jain was on a business tour and was staying at a Government Rest House at Sagar, from where he was kidnapped.
The assessee company, in support of its claim, relied upon the judgments in cases of Sassoon J. David & Co. (P.) Ltd. vs. CIT, Bombay 118 ITR 261 and CIT West Bengal, Calcutta vs. Karam Chand Thapar and Brothers (P.) Ltd, 157 ITR 212(Cal.) and Addl. CIT vs. Kuber Singh Bhagwandas, 118 ITR 379(MP).
The madhya Pradesh high Court extensively quoted with approval the findings of the appellate authorities in respect of the contribution of Mr. Sukhnandan Jain to the business of the company, his need to travel for the purposes of business, the business exigency for payment of ransom money and the compulsion thereof. The court noted that from the perusal of the facts, it was apparent that Sukhnandan jain was conducting business tour for the company and was staying at a government rest house and the visit was to meet one Bihari Lal for the procurement of quality tendu leaves and it was during the business tour, that he was kidnapped. The court further noted that for a period of near about 20 days after lodging a report to the police, when all the efforts of the police were unsuccessful, the company made payment of ransom amount of Rs. 5,50,000 to the kidnappers and ultimately on the same day, Sukhnandan jain was released from the clutches of the dacoits and that both the appellate authorities had found that it was a business expenditure while allowing the claim.
The court referred to the provisions of explanation of sub-section (1) of section 37, for determining whether the expenditure could have been disallowed under that provision of the act. It also examined the provisions of section 364a of the indian Penal Code which provided that kidnapping a person for a ransom was a criminal offence. It noted that the aforesaid section 364A provided that kidnapping a person for ransom was an offence and any person doing so or compelling to pay, was liable for punishment as provided in the section, but nowhere it was provided that to save a life of the person if a ransom was paid, it would amount to an offence. No provision was brought to the notice of the court that the payment of ransom was prohibited by any law and in absence of it, the Explanation of sub-section (1) of section 37 was not applicable in the case of the assessee company.
The madhya Pradesh high Court, after analysing the decisions cited by the assessee company, observed that in the case before the court, Mr. Sukhnandan Jain was on business tour and was staying at a government rest house from where he was kidnapped and to get him released, the amount was paid to the dacoits as ransom money. It thereafter held as under; “If the respondents to save his life paid the aforesaid amount, then the aforesaid amount cannot be treated as an action which was prohibited under the law. No provision could be brought to our notice that payment of ransom is an offence. In absence of which, the contention of the petitioner that it is prohibited under Explanation of section 37(1) of the Income-tax Act has no substance. The entire tour of Sukhnandan Jain was for purchase of tendu leaves of quality and for this purpose he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid.”
The high Court accordingly held that the ransom amount was an allowable business expenditure.
Observations
The bitter reality of the day is that people do have to regularly cough up money, against their will, for securing the safety of their business or lives or both. in some cases. the payments are made to ensure continuity of the business. In many cases, the payments are not only involuntary but may not be authorised by the law, as well. Such payments are forced by the goons or the guardians of the law and at times by the framers of the law. Barring a very limited section of the society, no one cherishes such payments but are seen, nonetheless to be acquiescing to such extortions in the interest of survival. Cases are available wherein a citizen has to resort to imaginary ways to meet such demands by generating cash from one’s accounted funds. In most of the cases, even approaching the authorities, entrusted with the task of protecting and ensuring the safety of the citizens, involves an extra and additional cost. Therefore, it brings additional pains where such expenditure incurred against one’s will is not allowed as a deduction in computing the total income. On disallowance of the claim, it becomes a case of a double whammy for the businessman.
The Government, instead of ensuring that its citizens are not extorted to pay money against their will by securing their safety, by booking the extortionists, has, to add insult to the injury, legislated the said Explanation to section 37(1) for providing that such an expenditure is disallowable.
Section 37 of the income-tax act provides for allowance of an expenditure that has been wholly and exclusively incurred for the purposes of the business of the assessee. It is a settled position in law that the expression “wholly and exclusively” does not mean “necessarily”. An expenditure maybe incurred by than assessee without there being a dire necessity for incurring such an expenditure and such an expenditure will not be disallowed once it is shown that the same has been incurred for the purposes of business of the assessee. It is for the assessee to decide whether any expenditure should be incurred in the course of his business or not. Such an expenditure may be incurred voluntarily and without any necessity. Once an expenditure is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there is no compelling necessity to incur such expenditure.
In order to decide whether a payment of money or incurring of expenditure is for the purpose of the business and is an allowable expenditure or not, the test to be applied is that of ‘commercial expediency’. If the payment or expenditure is incurred to facilitate the carrying on of the business of the assessee and is supported by commercial expediency, it does not matter that the payment is voluntary or that it also enures to the benefit of a third party.
An expenditure otherwise allowable u/s. 37, in terms of the tests discussed above, would still be disallowed if the same is incurred for a purpose which is an offence or is prohibited by law, in which event the expenditure so incurred shall be deemed to be not for the purposes of business or profession. The purpose behind an expenditure assumes a great importance; where the purpose is an offence, the disallowance would take place.
An offence, as per the dictionary, in the context, is an illegal act; a transgression or misdemeanour. accordingly, an expenditure incurred for the purpose which is illegal cannot be allowed under the act. Similarly, an expenditure incurred for achieving a purpose that is prohibited by law would not be allowed a deduction. It appears that there is very little difference between a purpose which is an offence and a purpose which is prohibited by law. In the context of explanation to section37 (1), one is therefore required to examine whether the payment is being made for a purpose which is prohibited by law.
Ensuring security of the business or of the business personnel, is an essential function of any business and therefore, payment of security charges would neither be an offence nor prohibited by law. We are afraid that the objective of the payee or his purpose behind demanding, collecting or receiving the payment is an irrelevant factor while applying the test of explanation 1 to section 37(1), the application of which is qua the payer and is limited to his purpose, as long as the purpose behind his expenditure is not an offence or prohibited by law.
Taking this understanding to the second level of payment of protection money, to a gangster, such a payment should not be disallowed as long as paying such an amount is not an offence under the indian Penal Code or any other law. It is true that for a gangster, demanding protection money or extorting money for not causing any damage, is an offence that is punishable under the indian Penal Code. His offence, however, need not necessarily be the offence of the payer assessee. The objectives and the purposes are different and cannot be equated.
Likewise, payment of ransom for securing the release to a kidnapper is not an offence or is not prohibited under any law. So, however, demanding a ransom is a serious crime that is punishable in law. Accordingly, the payment of ransom shall not be liable for any disallowance, simply on application of explanation 1 to section 37(1).
At the same time, it is significant to note that a payment to a police officer is an offence and is also prohibited by law if the same amounts to bribing him. however, an official payment to the Police Department, for security, is not an offence and is not liable for disallowance. In Swaminathan’s case (supra), it is not clear that what was the nature of payment to the police. Was it a bribe? if yes, it was liable for disallowance.
Many years back, the mumbai tribunal in the case of Pranav Construction Company, 61 T1TJ 45, held that payments made by a builder of “protection money” to tapories and hawkers was allowable as deduction on being satisfied about the genuineness of the expenditure. The tribunal held that the builders engaged in construction activities were vulnerable to danger such as extortion, haftas, etc. and unless, they obliged, it would be impossible for them to conduct business.
The view of the madhya Pradesh high Court, in the case of Khemchand Motilal Jain’s case (supra), that payment of ransom for securing the release of the director was not an expenditure for a purpose that was an offence or was prohibited by law and was therefore not hit by the explanation 1 to section 37(1) is the correct view in law.
1.1 The Finance Minister, Shri Arun Jaitley, presented his second budget in the Lok Sabha on 28th February, 2015. After some discussions, both the houses of Parliament have passed the Finance bill with some amendments in the Finance Bill, 2015, and the same has received presidential assent on 14th May, 2015. There are 80 sections in the Finance Act dealing with amendments in direct tax provisions.
1.2 In Paras 96 to 98 of his budget speech he has referred to certain steps which the Government proposes to take in the field of Indirect Taxes and Corporate Taxation, in the coming years. These are
(a) Expediting the process to legislate Goods and Services Tax (GST)
(b) Reduce the corporate tax to 25% over the next four years and phase out exemptions and incentives.
1.3 I n Para 99 of his budget speech he has enumerated the themes adopted by him for his tax proposals as under;
“99. While finalizing my tax proposals, I have adopted certain broad themes, which include;
A Measures to curb black money;
B Job creation through revival of growth and investment and promotion of domestic manufacturing and ‘Make in India’.
C Minimum government and maximum governance to improve the ease of doing business;
D Benefits to middle class taxpayers;
E Improving the quality of life and public health through Swachch Bharat initiatives; and
F Stand alone proposals to maximize benefits to the economy”
1.4 It may be noted that another major step in this year’s budget is about abolition of wealth tax from A.Y. 2016-17. The justification for this is given in Para 113 of the budget speech as under;
“113. My next proposal is regarding minimum government and maximum governance with focus on ease of doing business and simplification of Tax Procedures without compromising on tax revenues. The total wealth tax collection in the country was Rs. 1,008 Crore in 2013-14. Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax? The rich and wealthy must pay more tax than the less affluent ones. I have therefore decided to abolish the wealth tax and replace it with an additional surcharge of 2% on the super-rich with a taxable income of over Rs. 1 Crore. This will lead to tax simplification and enable the Department to focus more on ensuring tax compliance and widening the tax base. As against a tax sacrifice of Rs. 1,008 Crore, through these measures the Department would be collecting about Rs. 9,000 Crore from the 2% additional surcharge. Further, to track the wealth held by individuals and entities, the information regarding the assets which are currently required to be furnished in wealth-tax return will be captured in the income tax returns. This will ensure that the abolition of wealth tax does not lead to escape of any income from the tax net”.
1.5 While concluding his budget speech, he has stated that the Direct Tax proposals will result in revenue loss of Rs. 8,315 Crore. As compared to this, his Indirect Tax proposals will yield estimated revenue of Rs. 23,383 Crore. Thus the net revenue gain will be about Rs. 15,068 Crore.
1.6 I n this article some of the important amendments made to the Income-tax Act by the Finance Act, 2015, have been discussed. It may be noted that the amendments, as in last year’s Finance Act, have only prospective effect i.e., will operate for assessment year 2016-17, unless specifically provided
2. Rates of Taxes
2.1 I n view of the changes in threshold limits made by the Finance (No.2) Act, 2014, the exemption limit for Individuals, HUF, AOP as well as the rates of tax remain unchanged.The rates of income tax in the case of corporate and non-corporate assessees in A.Y. 2015-16 and A.Y.: 2016-17 will be the same.
2.2 T herefore, in the case of an Individual, HUF, AOP, BOI etc., the rates of Income-tax for A.Y. 2015-16 and A.Y. 2016-17 will be as under:
Note: Rebate of Tax – A Resident Individual having total income not exceeding Rs. 5 lakh, will get Rebate upto Rs. 2,000/- or tax payable, whichever is less u/s. 87A.
2.3 A s stated earlier, due to abolition of wealth tax from A.Y. 2016-17, the rate of Surcharge on tax has been increased from 10% to 12% for Super Rich assessees. This increased surcharge will be charged as under from A.Y. 2016-17.
(i) I n the case of an Individual, HUF, AOP etc. the rate of surcharge on tax will be 12% if the total income of the assessee exceeds Rs.1 crore.
(ii) In the case of a firm, LLP, Co-operative Society and a Local Authority the rate of Surcharge on tax will be 12% if the total income exceeds Rs.1 crore.
(iii)In the case of a domestic company the rate of surcharge on tax will be as under:
(a) I f the total income exceeds Rs.1 crore but does not exceed Rs.10 crore the rate of surcharge will be 7%.
(b) I f the total income exceeds Rs.10 crore, the rate of surcharge will be 12%.
(iv) I n the case of a foreign company there is no increase in the rate of surcharge on tax. Hence, the existing rate which is 2% in respect of total income between Rs.1 crore and 10 crore and 5% in respect of total income exceeding Rs.10 crore will continue.
(v) T he rate of surcharge on Dividend Distribution Tax u/s. 115-0, Tax on Buy Back of shares u/s. 115 QA, Income Distribution Tax payable by Mutual Funds u/s. 115R, and Income Distribution Tax payable by Securitisation Trusts u/s. 115 TA will be 12%.
2.4 T he existing rate of 3% for Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and surcharge will continue in A.Y. 2016-17.
2.5 T he effective maximum marginal rate of tax (including Surcharge and Education Cess ) will be as under for A.Y. 2016 – 17.
3. Tax Deduction at Source:
3.1 Section 192: At present, the person responsible for paying salary has to depend upon the evidence and particulars furnished by the employee in respect of deduction, exemptions and set-off of loss claimed by the employee while deducting tax at source. There is no guidance available about the evidence or particulars to be collected. Therefore, s/s. (2D) is inserted from 1.6.2015 to provide that the person responsible for deduction of tax will have to get particulars, evidence etc. about the deduction claimed from the salary in the Form which will be prescribed in the Rules.
3.2 Section 192A: This is a new section inserted from 1.6.2015. In the case of an employee participating in a Recognised Provident Fund (RPF), the accumulated balance to his credit in his PF account is excluded from his total income if Rule 8 of Part A of Schedule IV is applicable. If this Rule does not apply, the trustees of RPF are required to deduct tax at source. The Trustees of P.F. sometimes find it difficult to determine the rate of tax for TDS. To resolve this issue, section 192A provides that, at the time of payment of the accumulated balance due to the employee, trustees shall deduct income-tax at the rate of ten per cent. If the employee fails to furnish his PAN to the trustees, tax shall be deducted at the maximum marginal rate. Tax is not deductible under this section where the aggregate amount of withdrawal is less than Rs. 30,000/- or where the employee furnishes a selfdeclaration in the prescribed Form 15G/15H that tax on his estimated total income would be nil.
3.3 Section 194A: This section has been amended from 1.6.2015. The effect of this amendment is as under:
(i) A co-operative Bank will have to deduct tax at source from interest paid or payable on time deposit made by its member. This deduction is to be made if the amount of the interest exceeds Rs.10,000/-. however, no such deduction will be required to be made on interest paid or payable on time deposit by a co-operative society. Similarly, a primary agricultural society, a primary credit society, a Co-operative land mortgage bank, or a Co-operative land development bank will not be required to deduct tax at source from interest payment. the amendment to section 194a(3)(v) sets at rest the controversy created by a recent decision of the Bombay high Court.
(ii) Hitherto, there was no tdS from interest paid by a Bank on recurring deposits. now, tax will be required to be deducted by the bank in respect of interest on recurring deposit also.( amendment to explantion 1 of section 194 a).
(iii) At present, the threshold limit of exemption from tdS provisions apply to interest credited or paid by a branch on an individual basis in the case of a bank, Co- operative bank or a public company engaged in long- term housing finance. It is now provided that the TDS provisions u/s. 194a with reference to interest credited or paid by such entities as a whole will apply if the entity has adopted core banking solutions. in other words, in such cases, total interest paid or payable by all branches will have to be considered for determining the threshold limit of exemption.
(iv) Interest paid on compensation amount awarded by the motor accident Claim tribunal (MACT) shall now be liable to TDS u/s. 194a only at the time of payment of interest, if the aggregate amount of such payment during the financial year exceeds Rs. 50,000/-. Hence, as per the amended provision, there will be no withholding of tax at the time when such interest is credited.
3.4 Section 194C: This section is amended from 1.6.2015. at present, payment to a transporter carrying on the business of plying, hiring, or leasing of goods carriages is not subject to TDS u/s. 194C if the transporter furnishes his Pan to the payer. Now, this exemption will be available only to such transporterwho owns ten or less goods carriages at any time during the previous year and also furnishes a declaration to that effect to the payer along with his Pan.
3.5 Section 194-I: This section is amended from 1.6.2015. It is now provided that tax will not be deducted u/s. 194-I from rent paid or payable to a Business trust (real estate investment trust) in respect of any real estate asset as referred to in section 10(23fCa) owned directly by such business trust.
3.6 Section 194 LBA: This section is amended from 1.6.2015. Section 194LBA was inserted by the finance (no.2) act, 2014, w.e.f. 1.10.2014 to provide for deduction of tax @10% from income referred to in section 115ua (i.e. interest income received by a Business trust from SPV) distributed to a resident unit holder. in the case of non-resident unit holder the rate of TDS was 5% plus applicable Surcharge and education Cess. By an amendment of this section, the scope of this TDS provision is extended to income of Business trust from renting, leasing or letting out any real estate asset owned by it distributed to its unit holder. it is now provided that, in the case of a resident unit holder the rate of TDS will be 10% and in the case of a non-resident unit holder, tax will be deductible at the applicable rate if the distribution of income is from income referred to in section 10 (23FCA) i.e., rental from the real estate asset.
3.7 Section 194 LBB: This is a new section inserted from1.6.2015. this section provides for deduction of tax @10% from income distributed to persons holding units issued by “investment fund” (refer section 115 uB) out of income other than that referred to in section 10(23fBB) (i.e. income of investment fund other than income from business or profession).
3.8 Section 194 LD: This section was inserted by the finance act, 2013, w.e.f. 1.6.2013. under this section, tax is required to be deducted at concessional rate of 5% from interest payable to foreign institutional investors or Qualified Foreign Investors on Government Securities or rupees denominated Bonds of any indian Company. This concessional rate was applicable on interest payable during the period 1.6.2013 to 1.6.2015. this will now continue in respect of interest payable till 1.7.2017.
3.9 Section 195: This section is amended from 1.6.2015. Section 195(1) requires any person responsible for paying to a non-resident any interest or other sum chargeable under the provisions of this act to deduct tax from such payment. At present, such person has to furnish the information relating to payment of any sum in form 15Ca. now, section 195(6) is amended to provide for furnishing of information, whether or not such remittances are chargeable to tax, in such form as may be prescribed. this will cast an onerous obligation on payers. Section 271-I has been introduced to provide for a penalty of Rs.1,00,000/-, if the person required to furnish information under this section fails to furnish such information or furnishes inaccurate particulars. this is a new provision for levy of penalty.
3.10 Section 197A: This section is amended from1.6.2015 to provide as under:
(i) Section 194da provides for deduction of tax at source at the rate of 2% from payments made under life insurance policy, which is chargeable to tax if the amount is rs. 1,00,000/- or more. it is now provided that tax shall not be deducted, if the recipient of the payment on which tax is deductible furnishes to the payer a self-declaration in the prescribed form no.15G/15h declaring that the tax on his estimated total income for the relevant previous year would be nil.
(ii) Similarly, as stated in Para 3.2 above, it is now provided that tax shall not be deducted u/s. 192a if a salaried employee withdrawing the accumulated balance from P.f. a/c gives a self-declaration in form no.15G/15h.
3.11 Section 203A: This section is amended from1.6.2015 to provide that the requirement of obtaining and quoting of TAN shall not apply to the persons as notified by the Central Government. This is in order to reduce the compliance burden for those individuals or huf who are not liable for audit u/s. 44aB or for one time transaction such as single transaction of acquisition of immovable property by an individual or huf, on which tax is deductible.
4. Exemptions and Deductions:
In order to give certain benefits to middle class taxpayers and with a view to encourage savings and to promote health care among individual taxpayers, the following amendments are made in various sections of the income -tax act.
4.1 Section 80C: at present, section 80C (2) (vill) of the income-tax act provides that any subscription to a scheme notified by the Central Government will be eligible for deduction in the case of an individual or huf. By Notification No.9/2015 dated 21-1-2015, a scheme for the welfare of the girl child under the SukanyaSarmiddhi Account Rules, 2014, has been notified. In view of this, amendment is made in section 80Cfrom1-4-2015. under this amendment any deposit by any individual, in the name of girl child of that individual or by legal guardian of the girl child as specified in the scheme will be eligible for deduction u/s. 80C within the overall limit of Rs.1.50 lakh as provided in that section. an amendment is also made to provide u/s. 10(11A) to grant exemption to the individual in respect of interest on the deposit under the above scheme or for the amount withdrawn from such deposit. Since this amendment comes into effect from
a.y. 2015 – 16 any such deposit made on or before 31-3- 2015 will be eligible for this deduction.
4.2 Section 80CCC: This section provides for deduction in the case of an individual in respect of contribution to any annuity Plan of LiC or any other insurer for receiving pension from the fund set up under a pension scheme upto Rs.1 lakh. this limit is now raised to Rs. 1.50 lakh froma.y. 2016-17. it may be noted that u/s. 80CCe an overall cap of Rs. 1.50 lakh for such deduction is provided for contribution u/s. 80C, 80CCC and 80CCd(1). There is no amendment to raise this limit.
4.3 Section 80CCD: this section provides that an individual contributing to national Pension Scheme (NPS) can claim deduction upto 10% of salary, in the case of an employee or 10% of the gross total income in other cases subject to a cap of Rs.1 lakh u/s. 80CCD(1A). However, this deduction is subject to overall ceiling limit of Rs.1.50 lakh u/s. 80CCe. it is now provided from A.Y. 2016-17 that the cap of Rs.1 lakh u/s. 80CCD(1A) be removed.
With a view to encourage individuals to contribute towards NPS, it is now provided, by insertion of section 80CCD(1B), that an additional deduction upto Rs.50,000/- will be allowed if the individual contributes to NPS. this deduction will be allowed even if it exceeds 10% limit in respect of salary income (for employees) or gross total income (for others). Further, this deduction will be over and above the ceiling limit of Rs.1.50 lakh provided u/s. 80CCe relating to deduction u/s. 80C, 80CCC and 80CCD(1). therefore, with proper planning of investments in PF, PPF, LIP, savings certificates etc. (section 80C), annuity Plan of LIC or other insurers (section 80CCC) and contribution to NPS (section 80CCD) an assessee can claim deduction upto Rs.2 lakh under these sections.
4.4 Section 80D: this section provides for deduction for premium paid for mediclaim policies for self, family members and Parents of the individual. Similarly, similar deduction for premium paid by huf for mediclaim polices of members of huf is allowed. the present limits for such deduction is Rs.15,000/- and for Senior Citizens it is Rs. 20,000/-. these limits are now raised from A.Y. 2016- 17and a further provision is made for deduction of actual medical expenses under certain circumstances. the new provisions are as under.
(i) In view of continuous rise in the cost of medical expenditure, the limit of deduction is raised from Rs.15,000/- to Rs. 25,000/- in case of premium for mediclaim policy for individual and his family members. Similarly, in the case of huf such deduction for premium on mediclaim policies for members of huf is also raised from Rs.15,000/- to Rs. 25,000/-. In the case of a Senior Citizen the deduction for premium on mediclaim policies is raised from Rs.20,000/- to Rs. 30,000/-.
(ii) In the case of very Senior Citizens (i.e 80 years and above), it may not be possible to get a mediclaim policy and they cannot get benefit of the above deduction. therefore, as a welfare measure, it is now provided that deduction upto Rs.30,000/- will be allowed for medical expenditure in respect of very senior citizens if no mediclaim policy is taken out. The aggregate expenditure available for deduction in the case of an individual/huf for premium on mediclaim policy and expenditure on medical expenditure for parent or family member who is a very senior citizen shall not exceed Rs. 30,000/-.
4.5 Section 80 DDB:This section provides for deduction for expenditure incurred by a resident individual or huf for medical treatment of certain chronic and protracted diseases. It is provided that the expenditure in the case of individual should be in respect of medical treatment of himself or his dependant relative and in the case of huf it should for any member of HUF. The medical treatment should be for a disease specified in Rule 11DD and should be supported by a certificate from an authorised Doctor in a Govt. Hospital. at present, the deduction allowable is upto Rs. 60,000 if the medical treatment is of a Senior Citizen and in other cases deduction is allowed upto Rs. 40,000/-. In view of the difficulties experienced in obtaining certificate from a specialised doctor in a Govt. Hospital, the section is now amended to provide that the assessee should obtain prescription from a specialized doctor as may be prescribed. further, in the case of medical treatment of a very senior citizen the ceiling for deduction of expenditure is now raised from Rs. 60,000/- to Rs. 80,000/- from A.Y. 2016-17.
4.6 Section 80DD: This section provides that a resident individual or huf can claim deduction for (i) expenditure for medical treatment (including nursing), training and rehabilitation of a dependant relative suffering from specified disability or (ii) any amount paid to LIC or other insurer in respect of a scheme for the maintenance of a disabled dependant relative. At present, this deduction can be claimed upto Rs.50,000/- in the case of medical treatment for specified disability and upto rs.1 lakh in the case of medical treatment for severe disability as defined in the section. In view of rising costs of medical treatment, these limits have been raised, by amendment of this section, from A.Y. 2016-17 from Rs.50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).
4.7 Section 80U: this section provides for deduction of Rs.50,000/- in the case of a resident individual suffering from a specified Disability. If such individual is suffering from specified Severe Disability deduction of Rs.1 lakh is allowed. in view of rising costs of special needs of disabled persons, these limits are now raised from A.Y. 2016-17 from Rs. 50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).
4.8 Section 80G: this section provides for deduction of amounts contributed by way of donations to various institutions set up for charitable purposes. this section has been amended as under:-
(i) Two funds, namely, “Swachh Bharat Kosh” and “Clean Ganga fund” have been established by the Central Government. With a view to encourage people to participate in this national effort, section 80G is amended from A.Y. 2015-16 to provide that deduction of 100% of the donation to any of these funds will be allowed. Since this amendment has been made from A.Y. 2015-16, such donation made upto 31-3-2015 will be eligible for deduction under the amended section. it may be noted that such donation made by a company in pursuance of Corporate Social responsibility (CSR) expenditure u/s. 135(5) of the Companies act, 2013, will not qualify for this deduction. it may be noted that section 10(23C) has been amended from A.Y. 2015-16 to provide that income of “Swachh Bharat Kosh” and “Clean Ganga fund” will be exempt from income tax.
(ii) By another amendment to section 80G from a.y. 2016- 17 donation made to “the national fund for control of drug abuse” will now be eligible to 100% deduction.
4.9 Section 80 JJAA: This section is amended from A.Y. 2016-17. this section allows deduction to an indian Company deriving profit from manufacturing of goods in a factory. This benefit is now extended to non-corporate assessees also. The quantum of deduction allowed is equal to 30% of additional wages paid to new regular workmen employed by the assessee in such factory in the previous year. this deduction can be claimed for 3 assessment years. At present, additional wages for this purpose has been defined to mean wages paid to new regular workmen in excess of 100 workmen. This limit is now reduced to 50. It is also clarified that the above benefit will not be granted where factory is acquired by way of transfer from any other person or as a result of any business reorganisation.
5. Investment Fund:
a new Chapter XII – FB has been added in the income tax act from A.Y. 2016-17. Special provisions relating to tax on income of “investment funds” and income received from such funds are made in sections 115 UB, 10 (23 FBA) and 10 (23FFB) of the act. In brief, these provisions are as under:
5.1 “Investment fund” means any fund established or incorporated in india in the form of a trust, Company, LLP or a body corporate which has been granted certificate of registration as a Category I or a Category II alternate investment fund (AIF) and is regulated under SEBI (AIF) regulations, 2012.
5.2 In order to rationalise the taxation of Category –i and Category-ii AIFS (i.e. investment funds) section 115uB provides for a special tax regime. The taxation of income of such investment funds and their investors shall be in accordance with the provisions applicable to such funds irrespective of whether they are set up as a trust, company, or LLP etc. the salient features of these provisions are as under:
(i) Income of a person, being a unit holder of an investment fund, out of investments made by the investment fund shall be chargeable to income-tax in the same manner as if it was the income accruing or arising to, or received by, such unit holder.
(ii) Income in the hands of investment fund, other than income from profits and gains of business, shall be exempt from tax. The income in the nature of profits and gains of business or profession shall be taxable in the case of investment fund.
(iii) Income in the hands of investor which is of the same nature as income by way of profits and gain of business at investment fund level shall be exempt.
(iv) Where any income, other than income which is taxable at investment fund level, is payable to a unit holder by an investment fund, the fund shall deduct income-tax at the rate of 10%.
(v) The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as if it had been received by, or had accrued or arisen to, the investment fund.
(vi) If in any year there is a loss at the fund level either current loss or the loss which remained to be set off, the loss shall not be allowed to be passed through to the investors but would be carried over at fund level to be set off against income of the next year in accordance with the provisions of Chapter Vi of the income-tax act.
(vii) The provisions of Chapter Xii-d (dividend distribution tax) or Chapter Xii-e (tax on distributed income) shall not apply to the income paid by an investment fund to its unit holders.
(viii) The income received by the investment fund would be exempt from TDS requirement. this would be provided by issue of appropriate notification u/s. 197A(1F) of the act subsequently.
(ix) It shall be mandatory for the investment fund to file its return of income. The investment fund shall also provide to the prescribed income-tax authority and the investors, the details of various components of income, etc. for the purposes of the scheme.
6. Business Trusts:
6.1 This was a new concept introduced by the finance (no.2) act, 2014 w.e.f. A.Y. 2015-16. new chapter XII FA (Section 115 UA) was inserted in the income-tax Act, w.e.f. 1.10.2014. The definition of the term “Business trust” is now amended in section 2(13a) from a.y. 2016-17 to mean a trust registered as an “infrastructure investment trust” (inVitS) or a real estate investment trust” (reit), under the relevant SeBi regulations, the units of which are required to be listed on a recognised Stock exchange, in accordance with the SeBi regulations. in brief, at present the following is the taxation position of the trust.
Out any real estate asset owned directly by the reit, by granting exemption to the reit u/s. 10(23fCa) and taxing such income in the hands of the unit holder, by amending section 115ua(3) to provide that the distributed income, of the nature referred to in section 10(23fCa), received by a unit holder during the previous year shall be deemed to be the income of the unit holder and shall be charged to tax as his income of the previous year. Consequential amendments have been made in relation to tdS provisions in sections 1941 and 194LBa, which are effective from 1st june, 2015.
6.5 In view of the above amendments from A.Y. 2016- 17, the taxation structure of reit and its unit holders shall be as under:
(i) Any income of reit by way of renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt;
(ii) The distributed income or any part thereof, received by a unit holder from the reit, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such reit, shall be deemed to be income of such unit holder and shall be charged to tax.
6.2 Section 47(xvii) Currently provides that the
(iii) The reit shall effect tdS on rental income allowed to be passed through. in case of resident unit holder, tax shall be deducted @ 10%, and in case of distribution
Transfer of shares of a Special Purpose Vehicle (SPV) to a Business trust by a share holder (Sponsor) in exchange of units allotted by the trust to the share holder is not considered as a transfer for the purpose of capital gains in the hands of the share holder. Section 10(38) has now been amended to provide that the long term capital gain from transfer or such units will be exempt. Section 111a has also been amended to provide that short term capital gains arising on transfer of such units of a Business trust shall be charged to tax at the rate of fifteen per cent.
6.3 Therefore, units received by a ‘Sponsor’ in exchange of shares of a SPV, are now at par with other units of a Business trust. further, Stt is now chargeable on sale of unlisted units of a Business trust under an offer for Sale. therefore, Sale of such unit in an offer for sale will qualify for exemption u/s. 10(38) and the concessional rate of tax in respect of short term capital gains u/s. 111A.
6.4 reit has been granted pass through status also in respect of income by way of renting or leasing or letting
to non-resident unit holder, the tax shall be deducted at applicable rate.
(iv) No deduction of tax at source shall be made u/s. 194- 1 of the act, where the income by way of rent is credited or paid to such business trust, in respect of any real estate asset held directly by such reit (Business trust)
7. Charitable Trusts:
7.1 Section 2(15): The Definition of “charitable purpose” in the section has been amended from A/Y:2016- 17 as under:-
(i) “yoga” is now recognised as a charitable purpose. hence any charitable trust for promotion of “yoga” can now claim exemption u/s. 11 to 13 of the income tax act.
(ii) Under the existing provisions of section 2(15) if a charitable trust having “any other object of general public utility”, carries on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to the above for a consideration, will lose the exemption u/s. 11 if the total receipts from such activities is more than Rs. 25 lakh. By amendment of this section, it is now provided that such a trust will not lose its exemption if:
(a) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(b) The aggregate receipts from such activities, during the previous year, do not exceed 20% of the total receipts of the trust.
(c) This amendment will create a fresh round of litigation for charitable trusts. the limit of 20% will affect small charitable instituitions adversely.
7.2 Section 11 provides that a charitable trust should apply at least 85% of its income for charitable or religious purposes. if it is not possible to do so, it can apply the balance of unspent amount in the next year. for this purpose, the trust can write a simple letter to a.o. before the due date for filing the return u/s. 139(1). It is now provided from a/y: 2016-17 that the trust can exercise such option only by filing the prescribed from before the due date for filing the return of income.
7.3 Section 11 also provides that if a trust is not able to apply 85% of the income or any part of the same it can apply for accumulation of such unspent amount for 5 years. For this purpose the trustees have to file an accumulation application in Form No.10. No specific time limit is fixed in the Act. The Supreme Court in CIT vs. Nagpur Hotel Owners Association (247ITR201) held that Form 10 can be filed at any time before completion of the assessment. now, by amendment of section 11 from A.Y. :2016-17, it is provided that form no.10 should be filed before due date for filing Return u/s. 139(1). By amendment of section 13 it is also provided that if the return of income as well application in form 10 is not filed before the due date provided in section 139(1), the benefit of accumulation will not be available.
7.4 A university or educational institution, hospital or other Institution which is wholly or substantially financed by the Government and which is exempt u/s. 10(23C) (iiiab) or (iiiac) is not required to mandatorily file its return of income. By amendment of section 139(4C), it is now provided that these entities will have to mandatorily file return of income from A.Y. 2016-17.
7.5 Section 10(23C)(vi) and (via) provides that educational institutions or hospital specified in section 10(23C)(iiiab) to (iiiae) have to obtain approval from the prescribed authority. If this approval is denied there is at present no specific remedy. Section 253(1) is now amended from 1.6.2015 to provided that appeal to ITA Tribunal can be filed against any order for denying such approval.
8. Income from business or profession:
8.1 Income: The definition of “Income” in section 2(24) has now been widened by insertion of clause (xviii) in section 2(24) from A.Y 2016-17. Under this definition, any receipt from the central or state Government or any authority, body or agency in the form of any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement in cash or kind will be considered as income. however, if any subsidy, grant etc is required to be deducted from the cost of any asset under explanation (10) to section 43(1), the same will not be considered as income.
From the wording of the above definition it will be seen that no distinction has been made between Government Grants which are of a capital nature and which are in the nature of revenue grant. The Supreme Court and the various high Courts have held that subsidy received from Government as an incentive to set up an industry is a capital subsidy not liable to tax. In the case of Sahney Steel & Press Works Ltd vs. CIT (2281TR 253), the Supreme Court has held that subsidy given to set up the business or to complete a project will be considered as a Capital receipt not liable to tax. In view of the above amendment assessees will have to enter into fresh litigation about taxability of subsidy received from the Government.
8.2 Additional Depreciation : at present, additional depreciation of 20% is allowed in respect of new plant and machinery (other than ships and aircraft) installed by an assessee engaged in the business of manufacture or production or in the business of generation as well as generation and distribution of power u/s. 32(1) (iia). There was no clarity about deduction in the event of Plant & machinery installed and put to use for less than 180 days. By amendment of section 32(1) from A.Y. 2016-17 it is now provided that in such a case 10% of additional depreciation will be allowed in the year if the new plant & machinery is used for less than 180 days and the balance of 10% will be allowed in the subsequent year.
8.3 Backward Area Incentive: a special incentive is given by way of additional depreciation at the rate of 35% (instead of 20%) in respect of new plant & machinery (other than ships and aircraft) acquired and installed during the period 1.4.2015 to 31.3.2020. this incentive will be available to new plant & machinery installed in the notified backward area of Andhra Pradesh, Bihar, telangana and West Bengal. in this case also, if the new plant and machinery is used for less than 180 days, 17.5% additional depreciation will be allowed in the first year and balance 17.5% additional depreciation will be allowed in the next year.
8.4 Investment Allowance: A new section 32 ad has been inserted from a.y. 2016 – 17 providing for deduction of one time investment allowance in respect of newly established undertaking for manufacture or production in the notified backward areas of Andhra Pradesh, Bihar, telangana and West Bengal. This deduction will be at 15% of the actual cost of the new asset (other than office equipments, vehicles etc.) acquired and installed in the new undertaking during the period 1.4.2015 to 31.3.2020. this deduction is allowable in the year of installation of new plant and machinery and isin addition to depreciation (including additional depreciation) allowable u/s. 32 and investment allowance allowable u/s. 32AC. It is also provided that if the above plant and machinery is sold or transferred within 5 years from the date of installation, otherwise than in connection with amalgamation, demerger or business re-organisation (section 47 (xiii), (xiii b), or (xiv), the amount of deduction allowed u/s. 32ad shall be taxable as income of the year of sale or transfer.
8.5 Section 35(2AB): under this section a company can claim deduction of 200% of the expenditure on scientific research by way of in house research and development facility. For this purpose, the company has to comply with certain formalities. One of the requirements is to get the accounts maintained for this research facility audited. This requirement is now modified from A.Y. 2016-17 and its is provided that the company should fulfill such conditions with regard to maintenance of accounts and audit and furnishing the reports as may be prescribed by the rule.
8.6 Section 36: this section is amended from A.Y. 2016-17 as under
(i) Section 36(1) (iii) provides for deduction of interest paid on funds borrowed for the purposes of business.
It is provided in this section that interest paid in respect of amount borrowed for acquisition of asset for extension of existing business shall not be allowed. By amendment of this section the words “for extension of existing business or profession” have now been deleted. the effect of this amendment is that interest paid for acquisition of any asset for the business or profession from the date of purchase to the date it is put to use, will not be allowed. it appears that this amendment is made to bring this provision in line with income Computation and disclosure Standard (ICDS IX) relating to “Borrowing Costs”.
(ii) Section 36(1) (vii) dealing with allowance of Bad debits is also amended to provide that an amount of any debt or part thereof is considered as income under any ICDS issued u/s. 145(2) without recording in the books of accounts, it will be possible to claim deduction for such amount in the year in which such debt becomes irrecoverable. thus, if the a.o. makes any addition in the computation of income from business under ICDS IV dealing with “revenue recognition” and no entry is made in the books of accounts, deduction u/s. 36(1) (vii) can be claimed in any subsequent year when the debt representing such amount becomes irrecoverable.
(iii) Section 36(1)(xvii): this provision added in section 36(1) provides for deduction of expenditure incurred by a co-operative society engaged in the business of manufacturing of sugar for purchase of sugarcane at a price which is equal to or less than the price approved by the Government.
9. Income computation and disclosure standards (ICDS):
9.1 Section 145 of the income-tax act (act) dealing with “method of accounting” was amended by the finance act, 1995, effective from a.y. 1997- 98. the concept of Tax Accounting Standards was introduced for the first time by this amendment. this section has been amended by the finance (no.2) act, 2014, effective from 1.4.2015. By this amendment, the concept of computation of income from “Business or Profession” and “income from other Sources” are required to be computed in accordance with “income Computation and disclosure Standards” (ICDS) notified by the Central Government. In brief, section 145 is divided into three parts as under.
(i) Income under the heads “income from Business or Profession” and “income from other sources” shall be
computed in accordance with either (a) cash or (b) mercantile system of accounting regularly adopted by the assessee.
(ii) The Central Government shall notify ICDS to be followed by the assessee for computation of income from the above two sources.
(iii) The assessing officer (A.O) can make a best judgment assessment u/s. 144 of the act by estimating the income if the provisions of section 145 are not complied with by the assessee.
9.2 On 25.1.1996, the Central Government notified two accounting Standards viz. (i) disclosure of accounting Polices and (ii) disclosure of Prior period and extra ordinary items and Changes in accounting Policies”. these standards were required to be followed by the assessee while maintaining its books of account. These two standards were more or less on the same lines as AS-1 and AS-5 issued by the institute of Chartered accountants of india (ICAI). Thereafter, for about two decades, no information and make the adjustments while computing the taxable income from these two sources. If the required information is not furnished by the assessee, the A.O. can make the best judgment assessment u/s. 144 of the Act.
Accounting Standards were notified u/s. 145(2) of the Act.
9.3 CBDT has now notified 10 Accounting Standards u/s. 145(2) on 31/3/2015. this Standards are called “income Computation and disclosure Standards” (iCdS). The notification u/s. 145(2) states that ICDS will have to be followed by the assessee following mercantile system of accounting for the purpose of computing income chargeable to tax under the head “Profits and Gains of Business or Profession” and “income from other sources”. This Notification comes into force with effect from 1/4/2015 i.e. a/y:2016-17 (f.y:2015-16).
9.4 The Ten ICDS notified u/s. 145(2) of the Act and the corresponding aS issued by iCai and ind – aS as notified under the companies Act, 2013, are as under:
9.5 It may be noted that ICDS issued u/s 145(2) of the act only provide that income from Business/Profession or income from other sources should be computed in accordance with the standards ICDS. Therefore, the assessee will have to maintain its accounts in accordance with applicable AS issued by ICAI or IND – AS notified under the Companies act. if there is any difference between the accounting results and the requirements of applicable ICDS, the assessee will have to make adjustments while computing its taxable income from the above two sources while filing its Return of Income. If this is not done, the a.o. can call upon the assessee to furnish the required information and make the adjustments while computing the taxable income from these two sources. if the required information is not furnished by the assessee, the a.o. can make the best judgment assessment u/s. 144 of the Act.
9.7 In the preamble of all the ten ICDS it is stated that in case of conflict between the provisions of the income tax act and ICDS, the provisions of the act shall prevail to that extent. To take an example, if a provision for any tax, duty, cess or fee etc. is made and the same is in accordance with any ICDS, deduction will not be allowable unless actual payment is made as provided in section 43B of the act. Similar will be the position where provisions of section 40(a)(i) or 40 (a)(ia) are applicable.
10. Minimum Alternate Tax (MAT)
During the last over a year there has been an extensive debate aboutcertain provisions of section 115JB which levies tax on Book Profits. By amendment of this Section from A.Y. 2016-17, the Government has tried to deal with some of the issues in brief, these amendments are as under.
(i) Income accruing or arising to a foreign Company from (i) Capital Gains arising on transactions in securities or (ii) interest. royalty or fees for technical Services chargeable at the concessional rates specified in Chapter Xii, after deduction of expenses relatable to such income (i.e. net income), shall not form part of Book Profits u/s. 115 jB. this provision will apply if the tax payable on such net income is less than the tax payable at the rate specified u/s. 115JB
(ii) Share of a company in the income of aoP or Boi on which tax is payable u/s. 86, after deduction of expenditure relatable to such income, shall not be included in the computation of Book Profit u/s. 115JB. This will benefit companies which have entered into joint venture and income of the j.V. is taxed as AOP.
(iii) Notional Gain or notional loss on transfer of capital asset, being shares in SPV to a Business trust, in exchange of units allotted by such trust, as referred to in section 47 (xvii), shall not be considered in the computation of Book Profits u/s. 115JB. Similarly, notional gain or loss resulting from any change in carrying amount of the said units or gain or loss on transfer of units referred to in section 47(xvii) will be excluded from the computation of Book Profits u/s. 115JB. It may be noted that certain adjustments, as provided in the amended section for computation of cost of shares or units, have to be made in computing the notional gain or loss on such transfer of shares or units.
11. Capital Gains:
11.1 Sections 2(42a), 47 and 49 have been amended from a.y. 2016–17. The amendments in the sections provide that consolidation of two or more similar schemes of mutual funds under the process of consolidation of schemes of mutual funds in accordance with SEBI (mutual funds) regulations, 1996 will not be treated as a transfer. the consolidation should be of similar schemes i.e. two or more schemes of an equity oriented fund or two or more schemes of a non-equity oriented fund. Consequently, section 2 (42A) and section 49 relating to the period of holding and cost of acquisition, respectively, have been amended to provide that the cost of acquisition of the units of the consolidated scheme shall be the cost of the units in the consolidating scheme and the period of holding of the units of the consolidated scheme shall include the period for which the units in the consolidating scheme were held by the assessee.
11.2 The provisions of section 49 have been amended from A.Y. 2016-17 to provide that the cost of acquisition of a capital asset acquired by a resulting company in a scheme of demerger shall be the cost for which the demerged company acquired the asset as increased by the cost of improvement incurred by the demerged company. Consequently, the period of holding of the capital asset by the demerged company will be considered in the hands of the resulting company u/s. 2 (42a).
11.3 Section 49 has been amended from A.Y. 2016-
17 to provide that cost of acquisition of shares of a company acquired by a non-resident on redemption of Global depository receipts (GDR) referred to in section 115AC (1)(b) shall be the price of the shares quoted on the recognised Stock exchange on the date on which request for such redemption is made. A consequential amendment is made in section 2(42A) to provide that the period of holding of such shares shall be reckoned from the date on which such request for redemption of Gdr is made.
12. Domestic Transfer Pricing:
At present, section 92BA can be invoked only if the aggregate of transactions, to which the provision applies exceeds Rs.5 Crore. this limit is now increased to Rs. 20 Crore from a.y. 2016-17.
13. Deferment of applicability of general anti-avoidance rule (GAAR):
Sections 95 to 102 (chapter X-a) dealing with provisions of Gaar were to come into force from a.y. 2016-17 (i.e. accounting year 1-4-2015 to 31-3-2016 and onwards). in order to accelerate the momentum in investment (Para 109 of the speech of the finance minister) the applicability of Gaar has been postponed to a.y. 2018 – 19 (i.e from accounting year 1.4.2017 to 31.3.2018 and onwards).
14. Measures to curb black money:
14.1 One of the broad themes adopted by the finance minister in the finance Bill was to curb black money. Provisions of the income-tax act 1961, were felt to be inadequate as regards to achieve this objective. In the opinion of the finance minister it required stringent measures, which he summarised in in Paras 103 to 105 of his budget speech.
14.2 To achieve the above objective, the Parliament has passed the Black money“ undisclosed foreign income and assets (imposition of tax) act, 2015”. this act has come into force from 1.4.2015 (A.Y. 2016-17). Suitable amendments are also made in Prevention of money- laundering act, 2002, foreign exchange management act, 1999 and other relevant acts. Since the said act is an independent legislation, the same is being mentioned in this article and not analysed.
15. Furnishing of returns, assessment and reassessment:
15.1 Section 139 has been amended from a.y. 2016- 17 to provide that a resident (other than notordinarily resident in india) who is not required to furnish his return as his income is below taxable limit or for any other reasons will now be required to file his return of income mandatorily before the due date. this amended provision will apply if the assessee –
(i) Holds, as beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside india or has signing authority in any account loaded outside india, or,
(ii) Is a beneficiary of any asset (including any financial interest in any entity) located outside india.
It is also provided that if the assessee is a beneficiary of any asset located out of India, will not be required to file return under the above provision if income from such asset is includible in the income of the person referred to in (i) above under the provisions of the act.
15.2 In section 139, it is now provided that every “Investment Fund” shall file its return of income from A.Y. 2016-17.
15.3 In the form of return of income, from a.y. 2016- 17, the assessee will be required to give details of assets
of prescribed nature and value held by him as a beneficial owner or otherwise or as a beneficiary. This will mean that details of assets of a trust in which the assessee is a beneficiary will have to be disclosed.
15.4 Section 151 is amended to provide that notice u/s. 148 can be issued by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, only after the sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. In any other case, where Assessing Officer is below the rank of the Joint Commissioner, sanction of joint Commissioner is required.
16. Appeals and Revision:
16.1 A new procedure for non-filling an appeal by the Commissioner before the income tax appellate tribunal (itat)tribunal against the order of the CIT (a) for avoiding multiple litigation has been introduced from 1.6.2015 in section 158 aa.
This Procedure is as under:
(i) If a question of law decided by the CIT (a) is in favour of the assessee and the identical question of law is pending before the Supreme Court either by way of an appeal or by way of a Special Leave Petition in case of the same assessee for any other year and the Commissioner receives an acceptance from the assessee that the question of law is identical to the one which is pending before the Apex Court, he need not file before ITAT.
(ii) On receipt of the acceptance from the assessee, the Assessing Officer will apply to the ITAT stating that an appeal against the order of CIT (a) on a question of law may be filed within 60 days of receipt of the order of the Supreme Court.
(iii) If no acceptance is received from the assessee, the Commissioner will proceed to file an appeal before the ITAT.
(iv) If the order of the CIT(a) is not in conformity with Supreme Court order, the Commissioner will file an appeal against the CIT(a)’s order, within 60 days of receipt of Supreme Court order.
It may be noted that similar facility is already given to the assessee in section 158A.
16.2 As stated earlier any order rejecting the application for approval of an educational institution or hospital u/s. 10(23C) can be challenged in appeal before ita tribunal from 1/6/2015.
16.3 A single member bench of the itat can now dispose of any case where the income assessed by the Assessing Officer does not exceed Rs.15 lakh. Earlier this limit was Rs. 5 lakh. this amendment in section 255 from 1/6/2015.
16.4 At present, the CIT is empowered to revise u/s. 263 the order passed by the Assessing Officer, if it is erroneous and prejudicial to the interest of the revenue. The section does not provide for the meaning of the words ‘erroneous and prejudicial to the interest of the revenue’. Explanation 2 is added in section 263(1) from 1.6.2015 to provide that an order passed by the Assessing Officer shall be deemed to be erroneous and prejudicial to the interest of revenue, if in the opinion of the CIT:-
(i) The order is passed without making inquiries or verification which should have been made;
(ii) The order is passed allowing any relief without inquiring into the claim;
(iii) The order has not been made in accordance with any order, direction or instruction issued by the Board u/s. 119; or
(iv) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
From the above explanation, it will be noticed that very wide powers are given to CIT to revise the order passed by A.O. the extent of enquiry or verification is a very subjective matter. thus, any assessment order passed by the A.O. will not become final for 2 years during which it can be revised by CIT on any of the above grounds. CIT may try to revise the order of A.O if A.O is not able to reopen the assessment u/s. 147 on some technical or other ground.
17. Settlement Commission:
Chapter XIX-A deals with settlement of cases. Several amendments have been made in some of the sections in this Chapter from 1.6.2015. Consequential changes have also been made in a few other sections. The important amendments are as under:
(i) For an assessee to approach the Settlement Commission u/s. 245a, it was necessary that a notice u/s. 148 was received for every assessment year for which the application was to be made. this provision is amended to provide that where a notice u/s. 148 is issued for any assessment year, the assessee can approach the Settlement Commission for other assessment years even if notice u/s. 148 for such other assessment years has not been issued if return of income for such other assessment years has been furnished u/s. 139 of the act or in response to notice u/s. 142 of the act.
(ii) In Section 245A(b), the explanation is amended to provide that a proceeding for assessment or reassessment referred to in clause (i) or clause (iii) or clause (iiia) for any assessment year shall be deemed to have commenced from the date on which a return of income is furnished u/s. 139 or in response to notice u/s. 142 and concluded on the date on which the assessment is made or on the expiry of two years from the end of relevant assessment year, in a case where no assessment is made.
(iii) The provision for time limit for rectification of an order assed by the Settlement Commission has been revised.
(iv) Section 245h is amended to provide that while granting immunity to the applicant from prosecution, the Settlement Commission must record its reasons in writing.
(v) 245K is amended to ensure that in respect of an individual who has made an application to the Settlement Commission u/s. 245C, any entity controlled by such person is also barred from making an application to the Settlement Commission. Hitherto, only the concerned person was prevented from making another application to the Settlement Commission. Now, entities controlled by such a person will also be prevented. The situations when an entity will be considered to be controlled by the applicant are provided in the explanation inserted after section 245K(2).
(vi) Section 132B is amended to allow the assets seized from an assessee u/s. 132 or requisitioned u/s. 132a to be adjusted against the liability arising on an application made to the Settlement Commission u/s. 245C.
Sub-section (2A) is inserted in section 234B to levy interest on the shortfall, if any, that may arise in the advance tax on account of an application made u/s. 245C. The interest would be calculated from the 1st april of the assessment year and ending on the date of making the application. Similarly, interest would also be payable on the additional shortfall, if any, arising on the basis of an order passed u/s. 245d for the period from 1st day of april of the assessment year and ending on the date of the order.
18. Taxation of non-residents:
18.1 Section 6 of the income-tax act has been amended from A.Y. 2015–16 to provide that in the case of an individual who is a citizen of india and a member of a crew of a foreign bound ship leaving india, the period of stay in india shall be determined as prescribed in the rules. The earlier explanation (now renumbered as explanation 1 applied only to indian Ship.
18.2 Section 6 has been further amended from a.y. 2016-17. Under the existing provisions, a company is said to be resident in india in any previous year, if:
a) It is an indian company; or
b) During that year, the control and management of its affairs is situated wholly in india.
Therefore, currently, a foreign company which is partially or wholly controlled abroad is to be regarded as non- resident in india. now section 6, has introduced the concept of ‘Place of effective management’ (Poem), in substitution of the existing provisions of requiring the control and management of affairs to be situated wholly india. In view of the above, provisions of this section has been amended to provide that a company shall be said to be resident in india in any previous year, if;
a) It is an indian company; or
b) Its place of effective management, in that year, is in india. (it may be noted that in the finance Bill, 2015, the proposal was to provide that the company will be resident in india if Poem is “at any time” in that year is in india. the words “at any time” in india have been dropped while passing the finance act.)
Further, POEM 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. this is a far reaching amendment as a number of indian Companies have foreign subsidiaries and what would be considered as POEM in such cases will be a subject matter of litigation. if any foreign company becomes resident in india, it will have to comply with the various provisions of the income-tax Act such as filing return of income, getting accounts audited u/s. 44aB, complying with tdS provisions etc.
18.3 Explanation 5 to section 9(1) provides that an asset being any share or interest in a foreign company or entity shall be deemed to have been situated in india if it derives, directly or indirectly, its value substantially from assets located in india. The word “substantially” in the explanation was not defined. In order to clarify the position, new explanation (6) is added from A.Y. 2016-17 to provide as under
(i) If the value of assets (tangible on intangible) situated in india exceeds Rs.10 crore and represents at least 50% of the value of total assets of the foreign company as on valuation date (without deduction of any liabilities) it will be deemed that the interest in the foreign company is substantially from assets in india.
(ii) the valuation date shall be the last day of the accounting period preceding the date of transfer or the date of transfer in case the book value of assets on the date of transfer exceeds book value as on the last day of the accounting period by 15%.
(iii) The taxation of gains arising on transfer of share or interest deriving directly or indirectly its value substantially from assets located in india will be on proportional basis and the method for determination of such proportion shall be provided in the rules. To avoid hardship in genuine cases, exemption is available in certain transfers subject to fulfillment of prescribed conditions.
Moreover, to keep a track of such offshore transactions, an obligation has been cast on the indian concern to furnish information in respect of off-shore transactions resulting into modification of its control or ownership structure. any non-compliance in this regards by the india concern would attract penalty of Rs.5 lakhs or 2% of transaction value, as the case may be.
18.4 At present, income arising to foreign Portfolio investors (‘FPIS’) from transactions in securities is treated as capital gains. however, the provisions of the act did notadequately address the apprehension of fund managers, resulting in a large number of offshore funds choosing to locate their investment managers outside india. therefore, new section 9a is inserted in the income tax act from A.Y.2016-17 for providing clarity on issues relating to business connection/permanent establishment and residential status of offshore funds. in order to facilitate location of fund managers of off-shore funds in India, this section now provides that, subject to fulfillment of certain conditions by the fund and the fund manager:
(i) The tax liability in respect of income arising to the fund from investment in india would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of fund manager located in india;
(ii) Income of the fund from the investments outside india would not be taxable in india solely on the basis that the fund management activity in respect of such investments have been undertaken through a fund manager located in india;
(iii) In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in india of the said fund;
(iv) An eligible investment fund shall not be said to be resident in india merely because the eligible fund manager undertaking fund management activities on its behalf is located in India, subject to certain conditions.
(v) The term “Eligible Investment Fund” is defined in section 9a(3) and the term “eligible fund manager” is defined in section 9A(4).
Further, every eligible investment fund shall, in respect of its activities in financial year, furnish within ninety days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority containing information relating to the fulfillment of the conditions or any information or document which may be prescribed. In case of non-furnishing of the prescribed information or document or statement, penalty of Rs.5 lakh shall be leviable on the fund.
18.5 Under the provisions of Securities Contracts (regulation) (Stock exchanges and Clearing Corporations) Regulations, 2012 (SECC) notified by SEBI, the Clearing Corporations are mandated to establish a fund, called Core Settlement Guarantee fund (Core SGF) for each segment of each recognised stock exchange to guarantee the settlement of trades executed in respective segments of the exchange. under the existing provisions, income by way of contributions to the investor Protection fund set up by recognised stock exchanges in india, or by commodity exchanges in india or by a depository is exempt from taxation. on similar lines, the income of the Core SGF arising from contribution received and investment made by the fund and from the penalties imposed by the Clearing Corporation subject to similar conditions as provided in case of investor Protection fund set up by a recognised stock exchange or a commodity exchange or a depository will now be exempt u/s. 10(23ee) from A.Y. 2016-17.
However, where any amount standing to the credit of the fund and not charged to income-tax during any previous year is shared, either wholly or in part with the specified persons, the whole of the amount so shared shall be deemed to be the income of the previous year in which such amount is shared.
The specified person for this purpose is defined to mean any recognised clearing corporation which establishes and maintains the Core Settlement Guarantee fund and the recognised stock exchange being the shareholder of such clearing corporation.
18.6 The CBDT, in its Circular no.740 dated 17/4/1996 had clarified that branch of a foreign company in India is a separate entity for the purpose of taxation under the act and accordingly tdS provisions would apply along with separate taxation of interest paid to head office or other branches of the non-resident, which would be chargeable to tax in india.
Considering that there are several disputes on the issue which are pending and likely to arise in future, section 9 is amended form a.y. 2016-17 to provide that, in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in india of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside india shall be deemed to accrue or arise in india and shall be chargeable to tax in addition to any income attributable to the permanent establishment in india and the permanent establishment in india shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the act relating to computation of total income, determination of tax and collection and recovery would apply. Accordingly, the PE in india shall be obligated to deduct tax at source on any interest payable to either the head office or any other branch or PE, etc. of the non-resident outside india. Further, non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the act.
18.7 Section 115a (1)(b) has been amended from a.y. 2016-17 to provide that the rate of tax on royalty or fees for technical Services received by a non-resident or a foreign Company shall now be 10% instead of 25%.
19. Restrictions about Appointment Tax Auditors:
19.1 Assessees are, under various provisions of the act, required to obtain and/or furnish the reports and certificates from an ‘accountant’. At present, the term “accountant” is defined in theExplanation below section 288(2) to mean a chartered accountant within the meaning of the Chartered accountants act, 1949. From 1.6.2015 this definition has been amended. The amended definition defines the term ‘accountant’ to mean a chartered accountant as defined in section 2(1)(b) of the Chartered accountants act, 1949 who holds a valid certificate of practice u/s. 6(1) of that Act. The definition specifically excludes the following chartered Accountants for purposes of Tax Audit and certification.
(1) Where the assessee is a company – any person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of section 141(3) of the Companies act, 2013;
(2) Where the assessee is a person other than a company –
(i) Where the assessee is an individual, firm or association of persons or hindu undivided family – the assessee himself or any partner of the firm, or member of the association or the family;
(ii) Where the assessee is a trust or institution, any person referred to in clauses (a), (b), (c) and (cc) of section 13(3) of the act;
(iii) Where the assessee is any person other than those referred to in (i) and (ii) above any person who is competent to verify the return u/s. 139 in accordance with the provisions of section 140;
(iv) Any relative of any of the persons referred to in (i), (ii) and (iii) above;
(v) An officer or employee of the assessee;
(vi) An individual who is a partner, or who is in employment of an officer or employee of the assessee;
(vii) An individual who himself or his relative or his partner
(a) Is holding any security of or interest in, the assessee;
however, the relative may hold security or interest in the assessee of the face value up to Rs. 1,00,000/-.
(b) Is indebted to the assessee;
however, the relative may be indebted to the assessee for an amount upto Rs.1,00,000/-.
(c) Has given a guarantee or provided any security in connection with the indebtedness of any third party to the assessee;
However, the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount up to Rs.1,00,000/.
(viii) Any person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;
(ix) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.
19.2 For this purpose, the term ‘relative’ in relation to an individual is defined to mean (a) spouse of the individual;
(b) Brother or sister of the individual; (c) brother or sister of the spouse of the individual; (d) any lineal ascendant or descendant of the individual; (e) any lineal ascendant or descendant of the spouse of the individual; (f) spouse of the person referred to in clause (b), (c), (d) or (e) above; or
(g) Any lineal ascendant or descendant of a brother or sister of either the individual or of the spouse of the individual.
19.3 The above disqualification will apply only to professional assignment as tax auditor or assignment for Certification of financial statements for tax purposes. It may be noted that disqualification noted in Para 19.1 (2) above is on similar lines as provided in Section 141(3) of the Companies act, 2013. As the amended provisions come into force from 1.6.2015, many non-corporate assessees will have to change their tax auditors for auditing the accounts for the accounting year 2014-15 if the existing tax auditor is to be considered as disqualified under amended explanation as stated in Para 19.1 (2) above. It may be noted that the above disqualification does not apply to representation by a Chartered accountant before tax authorities.
19.4 Sub-section (4) of section 288 has been amended to provide that a person who has become insolvent or has been convicted by a court for an offence involving fraud, shall be disqualified to represent an assessee for a period of ten years from the date of conviction.
20. Penalties :
20.1 Section 271: (i) under the existing provisions of this section penalty for concealment of income or furnishing inaccurate particulars of income is levied on the “amount of tax sought to be evaded”, which has been defined, inter alia, as the difference between the tax due on the income assessed and the tax which would have been chargeable had such total income been reduced by the amount of concealed income.
(ii) There was no clarity on the computation of amount of tax sought to be evaded, where the concealment of income or furnishing inaccurate particulars of income occurred in the computation of income under the other provisions whereas the book profits u/s. 115JB remained unchanged. further, in the case of CIT vs. Nalwa Sons Investments Ltd. [327 ITR 543 (Del)], it was held that penalty u/s. 271(1)(c) cannot be levied in cases where the concealment of income occurred under the income computed under general provisions but the tax was paid under the provisions of sections 115JB, where there was no addition to the Book Profit. The SLP against the judgment of the Delhi High Court was dismissed by the Supreme Court.
(iii) In order to deal with such cases, it is now provided from A.Y. 2016-17 that the amount of tax sought to be evaded shall be the summation of tax sought to be evaded under the general provisions and the tax sought to be evaded under the provisions of section 115JB. However, if an addition on any issue is considered both under the general provisions and also u/s. 115JB, then such amount shall not be considered in computing tax sought to be evaded under provisions of section 115JB or 115JC. Further, in a case where the provisions of section 115 JB are not applicable, the computation of tax sought to be evaded under the provisions of section 115JB shall be ignored.
20.2 Sections 269SS/269T and 271D / 271E:
(i) Sections 269SS and 269t, at present, prohibit acceptance of loan or deposit in excess of Rs.20,000/- by any person or repayment of loan or deposit in excess of Rs.20,000/- by any person in cash. The scope of both these sections has been enlarged by amendments in these sections from 1.6.2015. This amendment in section 269SS extends its scope to specified items. In brief, this section will also apply to any sum of money received or receivable as advance or otherwise in relation to an immovable property, whether or not the transfer takes place. Similar amendment in section 269T prohibits repayment of advance in relation to transfer of an immovable property, whether or not the transfer takes place. With these amendments, any advance given or repaid in cash, where such advance exceeds Rs. 20,000/- in immovable property transactions will contravene the provisions of Section 269SS or 269T.
(ii) Section 271D and 271E levying penalty of a sum equivalent to the amount received or paid in cash in contravention of 269SS and 269T has now been extended to the above transactions relating to immovable properties from 1.6.2015.
20.3 Section 271 FAB: under new section 9A(5), an eligible investment fund is required to furnish a statement, information or document within the prescribed time. if this is not furnished, this new section inserted from A.Y. 2016- 17 provides for levy ofpenalty of Rs.5,00,000/-
20.4 Section 271 GA: new Section 285A provides for furnishing information/document by an indian Concern. if this is not done in accordance with the prescribed rules, penalty @ 2% of the value of the transaction as specified in the section can be levied under this new section from A.Y. 2016-17. in any other case of default u/s. 285 A, penalty of Rs.5,00,000/- can be levied.
20.5 Section 271 – I : This is a new section inserted from 1.6.2015. It provides for levy of penalty of Rs.1,00,000/- if the information required u/s. 195 (6) is not furnished or inaccurate information is furnished.
20.6 Section 272A: this section is amended from 1.6.2015. under the existing provisions, Government deductors/collectors are allowed to pay TDS / TCS through book entry. rules 30 and rule 37CA of the income- tax Rules required the Paying Officer to furnish Form 24G detailing the deduction / collection and adjustment. There are no penal consequences for non-furnishing of the said information.
With a view to enforce compliance for reporting of payment through book entry of TDS/TCS, sections 200 (2a) and section 206(3a) are inserted requiring furnishing of the prescribed information for TDS / TCS by the Government dedicators / collectors concerned. Section 272a has been suitably amended to extend levy of penalty of Rs. 100/- for every day of delay in filing the requisite statement under section 200(2a) and 206(3a) in respect of tdS / tCS which shall not exceed the amount of tax.
21. Other Provisions
21.1 Interest payable u/s. 234B: in case of increase in the assessed income on reassessment u/s. 147 or 153A, currently interest u/s. 234B is chargeable from the date of the regular assessment up to the date of reassessment. Section 234B has now been amended from 1/6/2015to provide that such interest would be chargeable from 1st april of the relevant assessment year up to the date of reassessment on the additional tax liability.
21.2 Section 285A: this is a new section inserted from a.y. 2016-17. It is provided in this section that where any share of or interest in a foreign company or entity, derives directly or indirectly, its value substantially from assets located in india (refer section 9(1)(i) explanation 5, the indian concern owning such assets shall furnish such information as may be prescribed within the prescribed time limit.
21.3 Wealth Tax Act: Section 3 of the wealth – tax has been amended. it is provided there in that net Wealth shall not be changed to wealth-tax with effect from a.y. 2016-17. Thus, assessees will have to file return of wealth tax in respect of net Wealth as at 31.3.2015 and no such return will be required to be filed from next year.
22. To sum up:
22.1 From the above discussion it is evident that the finance minister has lived upto his promise made last year that all major amendments in the Income tax Act will be only prospective. This year one major step taken for tax reforms relates to Goods and Service tax (GST). The necessary legislation, as a first step, is passed in the Lok Sabha. It is expected to be cleared in the Rajya Sabha during the year. Let us hope that GSt is implemented from 1/4/2016 as promised by the Government.
22.2 In the last year’s Budget Speech an assurance was given that direct tax Code Bill, 2010, which lapsed, will be revived after consultation with the stakeholders. It is surprising that in this year’s budget speech the finance minister has stated in Para 129 of his Speech that now there is no need for revival of dtC.
In view of this, we will have to live with the present income-tax act with so many sections, sub-sections, clauses, provisos, explanations etc. and many different interpretations leading to unending litigation.
22.3 Another important step taken by the finance minister is to address the burning issue about Black money. he has listed steps taken and proposed to be taken in Para 103 of his Budget Speech. in order to tackle the issue relating to Black money stacked in foreign Countries Black money “undisclosed foreign income and assets (imposition of tax) act, 2015”, has been passed. Harsh penalty and prosecution provisions are made in this legislation. if this act was made applicable to persons holding foreign assets exceeding rs.1 crore small assesses would not have been put to any hardship.
22.4 The finance minister has tried to show some sympathy so far as personal taxation is concerned. he has also given some benefit to the salaried employees by increasing the exemption limit for the transport allowance from Rs.800/- per month to Rs.1,600/- per month. However, if we consider the other procedural provisions of the income-tax act, very wide powers are given to assessing officers and commissioners. This will be evident from the amendments relating to taxation of charitable trusts where compliance cost to trusts will increase and the responsibility of trustees, who generally render honorary service, will increase. further, amendments in section 263 will give wide powers to Commissioners to revise the orders of the assessing officers. Thus, cases in which the assessments cannot be reopened by the assessing officers will be reopened through this route. again, the finance minister, while abolishing the Wealth tax act, has stated that to track the wealth held by individuals and entities, information regarding the assets which are currently required to be furnished in wealth tax return will be captured in the income tax return. This will show that compliance cost of getting valuation of assets, which were subject to wealth tax, will not reduce. Further, this information will have to be given by firms, AOP, etc. who were outside the wealth tax provision. Let us hope that this requirement of disclosing assets in the income tax return is introduced only in cases where the value of such assets exceed the specified limit and is restricted to only those who were otherwise liable to the wealth tax. If this is not done, all taxpayers, whether small or big, will have to get valuation of assets done for disclosing in the income tax return.
22.5 The concept of minimum alternative tax (mat) was introduced for the first time by the Finance Act, 1987 effective from A/Y:1988-89. The finance minister at that time explained that many Companies were not paying any tax or paying nominal tax but were showing large profits in the published accounts and paying dividend to shareholders. This was because they were availing of tax incentives and reducing taxable profits as compared to book profits. For this reason, tax on Book Profits (MAT) was introduced. It was always understood that these provisions (sections 115J, 115JA or 115JB) applied to domestic Companies. In last couple of years, the tax department has started applying mat provisions to foreign Companies (in particular FIIS) although they are not required to prepare accounts under the Companies act, 1956. in view of the loud protest by foreign Companies, the finance act has made only halfhearted attempt to amend section 115JB from A/Y :2016-17. Earlier year’s issues, involving huge tax demands which are under litigation, are now being considered by an expert Committee. The ideal way of handling the issue was to declare that section 115JB does not apply to foreign Companies which have no P.E. in india.
22.6 One disturbing feature relates to notification issued u/s. 145(2) requiring assesses carrying on business or profession or having income from other sources to comply with “income Computation and disclosure Standards” (iCdS) from A/Y:2016-17. Since accounts are required to be prepared according to Accounting Standards notified by the Government under the Companies and ICDS notified u/s. 145(2) are different in some important areas there will be lot of confusion while computing taxable income. This will lead to unending litigation.
22.7 Another area of concern is about the provisions relating to disclosure of foreign income and foreign assets in the return of income. These provisions also apply to residents who have no taxable income. This new provision read with the new legislation Black money “undisclosed foreign income and assets (imposition of tax) act, 2015” which has come into force from A/Y:2016-17 will create lot of confusion and hardships. Some asessees who are not aware of these provisions will suffer harsh penalty and prosecution proceedings.
22.8 The finance minister has assured that the amendments made in the act will not put small assesses to any hardship. While concluding his speech he has stated as under:-
“To conclude, it is no secret that expectations of this Budget have been high. . In this speech, I think I have clearly outlined not only what we are going to do immediately, but also a roadmap for the future.
I think I can genuinely stake, for our Government, a claim of intellectual honesty. We have been consistent in what we have said, and what we are doing. We are committed, to achieving what we have been voted to power for: Change, growth, jobs and genuine, effective upliftment of the poor and the under-privileged. This will be in the spirit of the Upanishad-inspired mantra:
(OM! May All Be Happy, May All Be Free From Illness, May All See What is Beneficial, May No One Suffer)”
Let us hope, the present Government is able to achieve its goal and make our life happier.
Considering the scope of section 43B the Karnataka High cOurt held as under:
“The employees’ contribution made to the provident fund and employees’ State insurance by the assessee on or before the due date for filing the return u/s. 139(1) of the Income-tax Act, 1961, would be eligible for the benefit conferred u/s. 43B(b).”
The appellant, a company, was incorporated under the Companies Act, 1956 for the purpose of setting up a 235 MW Gas based power project at Jegurupadu, Rajahmundry, Andhra Pradesh at an estimated cost of Rs. 839 crore. The main object of the appellant company is to generate and sell electricity.
With the intention to utilie the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie up the required loan, it sought the services of a consultant and eventually entered into an agreement with ABB – Projects & Trade Finance International Ltd., Zurich, Switzerland, (hereinafter referred to as “Non-Resident Company/NRC”).
The NRC, having regard to the requirements of the appellant-company offered its services as financial advisor to its project from 8th July, 1993. Those services included, inter alia, financial structure and security package to be offered to the lender, making an assessment of export credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant in loan negotiations and documentation with lenders and structuring, negotiating and closing the financing for the project in a coordinated and expeditious manner. For its services the NRC was to be paid, what is termed as, “success fee” at the rate of 0.75% of the total debt financing. The said proposal was placed before the Board meeting of the company on 21st August, 1993 and the Board of Directors approved the appointment of the NRC and advised that it be involved in the proposed public issue of share by the company. The NRC rendered professional services from Zurich by correspondence as to how to execute the documents for sanction of loan by the financial institutions within and outside the country. With advice of NRC the appellant-company approached the Indian Financial Institutions with the Industrial Development Bank of India (IDBI) acting as the Lead Financier for its Rupee loan requirement and for a part of its foreign currency loan requirement it approached International Finance Corporation (IFC), Washington DC, USA. After successful rendering of services the NRC sent invoice to the appellant-company for payment of success fee amount i.e., $.17,15,476.16 (Rs. 5.4 Crore).
After the receipt of the said invoice the appellant-company approached the concerned income tax officer, the first respondent herein, for issuing a ‘No Objection Certificate’ to remit the said sum duly pointing out that the NRC had no place of business in India; that all the services rendered by it were from outside India; and that no part of success fee could be said to arise or accrue or deemed to arise or accrue in India attracting the liability under the Income-tax Act, 1961 (for brevity, ‘the Act’) by the NRC. It was also stated as the NRC had no business connection section 9(1)(i) is not attracted and further as NRC had rendered no technical services section 9(1)(vii) is also no attracted. The first respondent scanning the application filed by the company refused to issue ‘No Objection Certificate’ by his order dated 27th September, 1994.
Being dissatisfied with the said order passed by the first respondent the appellant-company preferred a revision petition before the Commissioner of Income-tax, Hyderabad, u/s. 264 of the Act. On 21st March, 1995 the Commissioner permitted the appellant-company to remit the said sum to the NRC by furnishing a bank guarantee for the amount of tax. The company took steps to comply with the said order but afterwards on 25th October,1995 the revisional authority revoked the earlier order and directed the company to deduct tax and pay the same to the credit of the Central Government as a condition precedent for issuance of the ‘No Objection Certificate’. Thus, the order passed by the first respondent was affirmed and resultantly the revision petition was dismissed.
The non-success in revision compelled the company to approach the High Court for issue of writ of certiorari for quashing of the orders passed by the Income-tax officer and that of by the revisional authority.
The High Court framed the following two issues for consideration:
“(1) Whether ‘success fee’ payable by the petitionercompany to the NRC or any portion thereof is chargeable under the provisions the Act; and
(2) Whether the petitioner-company is entitled to ‘No Objection Certificate’.”
The High Court referring to the contents of the correspondence, the nature and extent of services which the NRC had undertaken under the agreement, the resolution passed by the Board of Directors which had perused the letter dated 8th July, 1993 addressed by the NRC stipulating the scope of services to be undertaken by NRC; the decisions of the Board to pay a fee to NRC and came to hold thus:
“On a careful reading of the letter of proposal of the NRC and the extract of resolution of the Board of Directors of the petitioner-company, it is clear to us that it was no part of the services to be provided by the NRC to manage public issue in India to correspond with various agencies to secure loan for the petitionercompany, to negotiate the terms on which loan should be obtained or to draft document for it. The NRC has only to develop a comprehensive financial model, tie up the rupee/foreign currency loan requirements of the project, assess export credit agencies worldwide and obtain commercial bank support, assist the petitionercompany in loan negotiations and documentation with the lender. It appears to us that the service to be rendered by the NRC is analogous to draw up a plan for the petitioner-company to reach the required destination indicating roads and highways, the curves and the turns; it does not contemplate taking the petitioner-company to the destination by the NRC. Once the NRC has prepared the scheme and given necessary advice and assistance to the petitionercompany for obtaining loan, the responsibility of the NRC is over. It is for the petitioner-company to proceed on the suggested lines and obtain loan from Indian or foreign agencies. On the petitionercompany obtaining loan, the NRC becomes entitled to ‘success fees’.”
The High Court scanned the letters with due consideration and opined that the business connection between the petitioner company and the NRC had not been established. Thereafter, the writ court adverted to the proposition whether success fee could fall within clause (vii) (b) of section 9(1) of the Act. Interpreting the said provision, the High Court opined that:
“Thus from a combined reading of clause (vii) (b) Explanation (2) it becomes clear that any consideration, whether lump sum or otherwise, paid by a person who is a resident in India to a non-resident for running any managerial or technical or consultancy service, would be the income by way of fees for technical service and would, therefore, be within the ambit of “income deemed to accrue or arise in India”. If this be the net of taxation under Section 9 (1) (vii) (b), then ‘success fee’, which is payable by the petitioner company to the NRC as fee for technical service would be chargeable to income tax thereunder. The Income-tax officer, in the impugned order, held that the services offered by the NRC fell within the ambit of both managerial and consultancy services. That order of Income-tax officer found favour by the Commissioner in revision. In the view we have expressed above, we are inclined to confirm the impugned order.”
A contention was advanced before the high Court by the assessee that the nrC did not render any technical or consultancy service to the company but only rendered advise in connection with payment of loan by it and hence, it would not amount to technical or consultancy service within the meaning of section 9(1)(vii)(b) of the act. While not accepting the said submission, the high Court observed that for the purposes of attracting the said provision, the business of the company cannot be divided into water-tight compartments like fire, generation of power, plant and machinery, management, etc. and to hold that managerial and technical and consultancy service relate to management, generation of power and plant and machinery, but not to finance. Elaborating further, the high Court observed that advice given to procure loan to strengthen finances may come within the compartment of technical or consultancy service and “success fee” would thereby come within the scope of technical service within the ambit of section 9(1)(vii)(b) of the act. Being of this view, the high Court opined the assessee was not entitled to the “No Objection Certificate”.
Being aggrieved, the appellant approached the Supreme Court. according to the Supreme Court, the crux of the matter was whether, in the obtaining factual matrix, the High Court was justified in concurring with the view expressed by the revisional authority that the assessee- company was not entitled to “No Objection Certificate” under the act as it was under the obligation to deduct the tax at source pertaining to payment to the nrC as the character of success fee was substantiated by the revenue to put in the ambit and sweep of section 9(1)(vii)
(b)of the act.
The Supreme Court observed that NRC was a non- resident Company and it did not have a place of business in india. The revenue has not advanced a case that the income had actually arisen or received by the NRC in india. The high Court has recorded the payment or receipt paid by the appellant to the NRC as success fee would not be taxable u/s. 9(1)(i) of the act as the transaction/ activity did not have any business connection. that being the position, the singular question that remained to be answered was whether the payment or receipt paid by the appellant to NRC as success fee would be deemed to be taxable in india u/s. 9(1)(vii) of the act. As the factual matrix would show, the appellant had not invoked double taxation avoidance agreement between india and Switzerland. that being not there, the Supreme Court was only concerned with as to whether the “success fee” as termed by the appellant was “fee for technical service” as enjoined u/s. 9(1)(vii) of the act.
According to the Supreme Court, the principal provision is Clause (b) of section 9(1)(vii) of the act. the said provision carves out an exception. the exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for business or profession carried out by an indian payer outside india or for the purpose of making or earning of income by the indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside india.
The Supreme Court held that on a studied scrutiny of the said Clause, it becomes clear that it lays down the principle what is basically known as the “source rule”, that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. the Clause further mandates and requires that the services should be utilised in india.
The two principles, namely, “Situs of residence” and “Situs of source of income” have witnessed divergence and difference in the field of international taxation. The principle “residence State taxation” gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The “Source State taxation” rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, the source State seeks to tax the transaction or capital within its territory even when the income benefits belongs to a non residence person, that is, a person resident in another country. The aforesaid principle sometimes is given a different name, that is, the territorial principle. It is apt to state here that the residence based taxation is perceived as benefiting the developed or capital exporting countries whereas the source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes the principle of nexus, for the nexus of the right to tax is in the source rule. It is founded on the right of a country to tax the income earned from a source located in the said State, irrespective of the country of the residence of the recipient. It is well settled that the source based taxation is accepted and applied in international taxation law.
The two principles that have been mentioned hereinabove, are also applied in domestic law in various countries. the source rule is in consonance with the nexus theory and does not fall foul of the said doctrine on the ground of extra-territorial operation. The doctrine of source rule has been explained as a country where the income or wealth is physically or economically produced.
Appreciating the aforesaid principle, it would apply where business activity is wholly or partly performed in a source State, as a logical corollary, the State concept would also justifiably include the country where the commercial need for the product originated, that is, for example, where the consultancy is utilised. From the aforesaid, it is quite vivid that the concept of income source is multifaceted and has the potentiality to take different forms. The said rule has been justified on the ground that profits of business enterprise are mainly the yield of an activity, for capital is profitable to the extent that it is actively utilised in a profitable manner. To this extent, neither the activity of business enterprise nor the capital made, depends on residence.
The purpose of adverting to these aspects is only to highlight that the source rule has been accepted in the un Commentaries and the organisation of economic Corporation and development (OECD) Commentaries. It is well known that what is prohibited by international taxation law is imposition of sovereign act of a State on a sovereign territory. This principle of formal territoriality applies in particular, to acts intended to enforce internal legal provisions abroad. Therefore, deduction of tax at source when made applicable, it has to be ensured that this principle is not violated.
The Supreme Court adverting to the instant case, held that, it was evident that fee which had been named as “success fee” by the appellant had been paid to the NRC. It had to be seen whether the payment made to the non- resident would be covered under the expression “fee for technical service” as contained in explanation (2) to section 9(1)(vii) of the act. The said expression means any consideration, whether lumpsum or periodical in rendering managerial, technical or consultancy services. It excludes consideration paid for any construction, assembling, mining or like projects undertaken by the non-resident that is the recipient or consideration which would be taxable in the hands of the non- recipient or non-resident under the head “salaries”. In the case at hand, the said exceptions were not attracted. What was required to be scrutinised was that the appellant had intended and desired to utilise expert services of qualified and experience professional who could prepare a scheme for raising requisite finances and tie-up loans for the power projects. As the company did not find any professional in India, it had approached the consultant NRC located in Switzerland, who offered their services. Their services rendered included, inter alia, financial structure and security package to be offered to the lender, study of various lending alternatives for the local and foreign borrowings, making assessment of expert credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant company in loan negotiations and documentations with the lenders, structuring, negotiating and closing financing for the project in a coordinated and expeditious manner.
The Supreme Court held that from the letter dated 8.7.1993 addressed by the NRC and resolution passed by the Board on 21st august, 1993, it was clear as crystal that the obligation of the NRC was to:
“(i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.
(ii) assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms.
(iii) assist the appellant company in loan negotiations and documentation with the lenders.”
Pursuant to the aforesaid exercises carried out by the NRC, the company was successful in availing loan/financial assistance in India from the Industrial development Bank of india (IDBI) which acted as a lead financier for the rupee loan requirement. For foreign currency loan requirement, the appellant approached international finance Corporation, Washington D.C., USA and was successful. in this backdrop, “success fee” of Rs. 5.4 crore was paid to the NRC.
According to the Supreme Court, it was in this factual score, that the expression, managerial, technical or consultancy service, were to be appreciated. The said expressions have not been defined in the Act, and, therefore, it was obligatory on the part of the Supreme Court to examine how the said expressions are used and understood by the persons engaged in business. The general and common usage of the said words has to be understood at common parlance.
The Supreme Court held that in the case at hand, it was concerned with the expression “consultancy services” and in this regard, a reference to the decision by the authority for advance ruling In Re.P.No. 28 of 1999 (1999) 242 itr 280, would be applicable. The observations therein read as follows:
“By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.”
In this context, according to the Supreme Court, a reference to the decision in C.I.T. vs. Bharti Cellular Limited and others (2009) 319 ITR 139, was also apposite. In the said case, while dealing with the concept of “consultancy services”, the high Court of delhi has observed thus:
“Similarly, the word “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action”. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.”
The Supreme Court, in this context, referred to the dictionary meaning of ‘consultation’ in Black’s law dictionary, eighth edition. The word ‘consultation’ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice.
The Supreme Court held that as the factual matrix in the case at hand, would exposit the nrC had acted as a consultant. It had the skill, acumen and knowledge in the specialised field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of service referred by the nrC, can be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ and, therefore, it had been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable as ‘fees for technical service’. once the tax is payable the grant of ‘no Objection Certificate’ was not legally permissible. Ergo, the judgment and order passed by the high Court was absolutely impregnable.
The Supreme Court dismissed the appeal, being devoid of merit.
A question that often arises in such circumstances is about the taxability of notional income under the head ‘Income from House Property’ in respect of the flats held as stock-intrade of business from which no rental income is received during the year. Whether the notional income in such cases is taxable at all and if yes, under the head “Income from business or profession” or “Income from house property”. Could it be said that even otherwise the notional income was not taxable on the ground that the unsold flats are occupied for the purposes of business. Further issue is whether rental income from such flats is taxable under the head ‘Income from House Property’ or ‘Profits and Gains of Business or Profession’. While the Delhi High Court has taken the view that notional income is to be taxed under the head “Income from House Property”, the Gujarat high court has held that the rental income in respect of the flats held as stock-in-trade should be taxed under the head ‘Profits and Gains of Business and Profession’ .
Ansal Housing Finance and Leasing Co’s case
The issue came up before the Delhi High Court in the case of CIT vs. Ansal Housing Finance and Leasing Co Ltd., 354 ITR 180. In this case, the assessee was engaged in the business of development of mini townships, construction of house property, commercial and shopping complexes, etc. It had certain unsold flats, out of the flats that it had constructed.
During the course of assessment proceedings, the assessing officer proposed to assess the annual letting value of flats which the assessee had constructed, but which were lying unsold, on notional basis u/s. 22, under the head “Income from House Property”. The assessee contended that the flats were its stock in trade, were lying vacant, and therefore the annual letting value of the flats could not be brought to tax under the head “Income from House Property”. The assessing officer did not accept the assessee’s stand, and added the notional letting value of the unsold flats to the total income of the assessee.
The Commissioner(Appeals) set aside the addition made by the assessing officer. The appeal to the Tribunal by the revenue was also dismissed.
Before the High Court, it was argued on behalf of the revenue that regardless of whether income was on from the vacant flats, the assessee in its capacity as owner, had to pay tax on the annual letting value. It was argued that tax incidence did not depend on whether the assessee actually rented out the premises or not, but on the mere fact of ownership. Reliance was placed on behalf of the revenue on the Calcutta High Court decision in the case of Azimganj Estate (P) Ltd 206 Taxman 308, where , the builder had flats which were let out, the Court held that the rental income was assessable not under the head of profits or income from business, but under the head income from house property. It was argued before the Delhi high court that so long as the assessee continued to be the owner of the vacant flats, it had to be assessed under the head of income from house property. Since there was no letting out, the basis of assessment had to be annual letting value, which was rational and scientific.
On behalf of the assessee, it was argued that unlike in the case before the Calcutta High Court, in the present case, the assessee did not actually let out the vacant flats. It was not even in the business of renting out its flats. Letting out vacant or other properties was not part of the business objectives of the assessee, and since it did not derive any income as a result of letting out, that judgment did not apply. It was argued that income tax was a levy on income received, and not only on an amount derived on notional calculations. In the alternative, it was argued that the flats could not be taxed on the basis of their notional annual letting value, because the owner was an occupant, and such occupation was in the course of and for the purpose of business as a builder. It was explained to the court that section 22 saved the case of flat occupied, for the purposes of business, from taxation.
The Delhi High Court held that the levy of income tax in the case of a person holding house property was premised not on whether the assessee carried on business as landlord, but on the ownership. The incidence of charge was because of the fact of ownership.
The High Court further observed that in every case, the Court had to discern the intention of the assessee, and that in the case before it, the intention of the assessee was to hold the properties till they were sold. According to the Court, the capacity of being an owner was not diminished one whit because the assessee carried on the business of developing, building and selling flats in housing estates. It negated the assessee’s argument that since income tax was levied not on the actual receipt but on a notional basis, i.e. Annual Letting Value, it was therefore not sanctioned by law. According to the Court, Annual Letting Value was a method to arrive at a figure on the basis of which the impost was to be effectuated. The existence of an artificial method itself would not mean that levy was impermissible. Parliament had resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Application of Annual Letting Value to determine the tax was regardless of whether actual income was received; it was premised on what constituted a reasonable letting value, if the property were to be leased out in the marketplace.
Addressing the alternative argument that the assessee itself was the occupier, because it held the property till it was sold, the Court held that there was no merit in that submission. According to the Court, while there could be no quarrel with the proposition that ‘occupation’ could be synonymous with physical possession, in law, when Parliament intended a property occupied by one who was carrying on business, to be exempted from the levy of income tax was that such property should be used for the purpose of business. The intention of the lawmakers, in other words, was that occupation of one’s own property, in the course of business, and for the purpose of business, i.e., an active use of the property, (instead of mere passive possession) qualified as ‘own’ occupation for business purpose.
The Delhi High Court therefore held that the annual letting value of the unsold flats was taxable, as the income was taxable under the head “Income from House Property”.
Neha Builders’ case
The issue about the head of income came up for consideration before the Gujarat High Court in the case of CIT vs. Neha Builders (P) Ltd. 207 CTR 231.
The assessing officer was of the view that since the expenses on maintenance of the property were debited to the profit and loss account, and the building was also shown as stock in trade, the property would partake the character of stock. According to the assessing officer, any income derived from stock could not be taken to be income from property. the Commissioner(appeals) upheld the view of the assessing officer. The Tribunal allowed the assessee’s appeal, observing that any dividend received on shares held as stock-in-trade was taxable under the head ‘income from other sources’ by virtue of statutory provision, and therefore, any income derived as rent would be taxable under the head ‘income from house property’.
Before the Gujarat high Court, on behalf of the revenue, it was argued that if the property was used as a property, then any income therefrom would be an income from house property, but if the property was used as stock, than any income from such stock would not be an income from house property.
The Gujarat high Court noted that the case of the assessee was that the company was incorporated with the main objects of purchasing, taking on lease, acquiring by sale or letting out the buildings constructed by the company. development of land or property was also one of the businesses for which the company was incorporated.
The high Court noted that income derived from property would always be termed as income from the property, but if the property was used as stock in trade, then the property would partake the character of the stock, and any income derived from the stock would be income from the business, and not income from the property. The court observed that if the business of the assessee was to construct the property and sell it or to construct and let out the same, then that would be business, and the business stocks, which would include movable and immovable properties, would be taken to be stock in trade, and any income derived from such stocks could not be termed as income from property.
The high Court further held that , there was a distinction between “income from business” and “income from property” on one side, and “income from other sources” on the other. in the opinion of the Court, the tribunal was not justified in comparing rental income with dividend income on shares or interest income on deposits. The court observed that this comparison was not raised before the subordinate authorities, and the tribunal on its own supplied the said analogy.
The high Court noted that from the statement of the assessee, it was clear that it was treating the property as stock in trade. From the records, it was also clear that except for the ground floor, which had been let out by the assessee, all other portions of the property constructed had been sold out. That being the case, right from the beginning, the property was held as stock-in-trade.
The Gujarat high Court therefore held that the income from property held as stock-in-trade was to be assessed as business income.
Observations
There are three issues involved here; the taxation of notional income of unsold flats held as stock-in-trade, claim that such flats so held are occupied for the purposes of business and the head of income especially in cases where real income is received on letting of such flats. The related questions could be the allowability of the claims for vacancy allowance and that of the taxes and interest in full. A reasonable certainty that prevailed in relation to taxation of income under the head ‘income from house property,’ where the rental income is received on letting of such flats, is disturbed by the above referred decision of the Gujarat high court in the case of neha Builders. The court in this case held that the rental income of such flats, in the hands of a builder, can be taxed under the head ‘Profits and Gains of Business’, dismissing the claim of the assessee that the same should be taxed as ‘income from house property’. In that case, it was the income tax department that claimed that the income in question should be taxed as the business income. The reasoning of the court that income from flats held as stock-in-trade of a business, should be taxed as the business income, is appealing and is not to be dismissed summarily for the added reason that the court distinguished the decisions delivered in the context of dividend and interest income relating to the business under the head ‘Profits and Gains of Business’, to consciously hold that there was a difference between the two heads of income. With this, there at least arises the need for refreshing the debate on the issue.
The case of the unsold flats not let out and remaining vacant is otherwise also on a better pedestal. it is a case where no income whatsoever is received. there is no real income is received here, actual or otherwise. in the circumstances, no question should arise about deciding the head of income. The Gujarat high court decision can be applied here with the greater force to contend that the question of deciding the head, as is in the case of the business related dividend income, does not arise at all where there is no income. Independently, the rule that the income from ownership of the property shall always be taxed under the head ‘income from house property’ is not something that is written in stone; an exception is made by section 56(2)(iii) that provides for taxation of such income which is inseparable from letting of other assets. The case for not taxing the flats held as stock-in-trade is also supported by the fact that such flats are exempted from levy of the wealth tax under the Wealth tax act which in turn indicates the intention of the legislature to keep away such flats from the impost of taxation.
There is also a good case to hold that even the notional income is saved from taxation by the express provision of section 22 which excludes the income from the property occupied for the purposes of business. It is true that the delhi high court in the ansal housing finance’s case explained where a person could be said to be occupying the property for business purposes.With respect, it seems that a contrary view is not ruled out. A businessman holding an unsold flat for the purposes of sale can surely be said to have occupied such a flat for the purposes of his business which business is to keep such flat ready for sale and exhibit it to persons desirous of purchasing it . All this is a part of the business and is possible only where it is occupied by him.
There is also a good case for him in such a case to claim vacancy allowance u/s 23(1)(c) of the act. the deeming fiction of section 22 is to be applied by determination of annual Value as per section 23 of the act which provision requires due consideration of the fact that the property in question had remained vacant during the year.
It appears that the CBDT also has two conflicting views on the subject which has been evident by the fact that in the case before the Gujarat high court, it sought to contend that the income in question should be taxed under the head “Profits and Gains of Business”.
The history of the income tax act is replete with stories of cases revolving simply around the heads of taxation. the enormous litigation arises simply on account of the schedular system of taxation which requires the income to be pegged under a specific pigeon hole. This is most evident in the cases involving transactions in securities that has flooded the courts. It is high time that the parliament takes note of unwarranted litigation and does away with the system of head wise taxation, once for all.
Position under Transfer of Property Act, 1882:
Before
discussing the position under the Income-tax Act, it would be
imperative to understand the implications under the General Law i.e.
Transfer of Property Act. Section 54 of Transfer of Property Act
provides that ‘A contract for the salel of immovable property is a
contract that a sale of such property shall take place on terms settled
between the parties. It does not, of itself, create any interest in or
charge on such property.’ As the section expressly provides, an
agreement to sell is merely a contract for sale on agreed terms and the
agreement itself does not create any right or interest in the property.
It is therefore considered as a contract between the parties with
ensuing respective contractual obligations. In so far as the property is
concerned, no right in the property is affected. The parties to the
contract however get a right of specific performance of contract under
Specific Relief Act. This right of specific performance is a right
independent of the right in the property. This right is also construed
as right to obtain conveyance.
Further, section 40 of Transfer
of Property Act provides that where a third person is entitled to the
benefit of an obligation arising out of contract, and annexed to the
ownership of immovable property, but not amounting to an interest
therein or easement thereon, such right or obligation may be enforced
against a transferee with notice thereof or a gratuitous transferee of
the property affected thereby, but not against a transferee for
consideration and without notice of the right or obligation, nor against
such property. E.g., A sells Sultanpur to C. C has notice of the fact
that there is a contract of sale between A and B. B may enforce the
contract against C who is a third person and stranger to contract just
as he could enforce it against A. This provision is based on equity.
Accordingly, although a contract for sale does not create any interest
in land or charge upon it yet, it does create an obligation annexed to
ownership of property. However, it is to be seen that this obligation is
not enforceable against a transferee for consideration who had no
notice of the earlier contract.
Part Performance:
It
would also be necessary to appreciate the provisions of Part Performance
u/s. 53A of the Transfer of Property Act. As the provisions of section
53A where any person contracts to transfer for consideration any
immovable property by writing signed by him or on his behalf from which
the terms necessary to constitute the transfer can be ascertained with
reasonable certainty, and the transferee has, in part performance of the
contract taken possession of the property or part thereof, or the
transferee, being already in possession, continues in possession in part
performance of the contract and has done some act in furtherance of the
contract and the transferee has performed or willing to perform his
part of the contract, then notwithstanding that the contract, though
required to be registered, has not been registered, or, where there is
an instrument of transfer, that the transfer has not been completed in
the manner prescribed therefore by the law for the time being in force,
the transferor or any person claiming under him shall be debarred from
enforcing against the transferee and persons claiming under him any
right in respect of the property of which the transferee has taken or
continued in possession, other than a right expressly provided by the
terms of the contract:
Provided that nothing in this section
shall affect the rights of a transferee for consideration who has no
notice of the contract or the part performance thereof.
This
doctrine is a step subsequent to the execution of agreement to sell. It
applies where the transferee is in possession of the property in
pursuance of agreement for transfer of the property and he is willing to
perform his obligation under the agreement, then transferor is debarred
from claiming any right against the transferee. This doctrine gives a
right to the transferee to protect his possession and does not create a
title in the property. This right can be used as a shield but not as a
sword. This is based on the principle of equity However, the proviso to
section 53A further makes it clear that the right under this section
does not affect the right of a transferee who is different than the one
with whom the agreement to sell is made.
Thus it can be seen
that under both the situations above, there is no transfer of any right
in the property to the transferee but they give some other rights in
different forms. In case of Agreement to sell, the purchaser gets right
of specific performance of the agreement and in case of part
performance, the purchaser is entitled to protect his possession. The
transferor can transfer the property to third person and the new
transferee for a consideration who has no notice of such earlier
agreement gets proper title.
Position under Income-tax Act:
The right arising fromthe agreement to sell has been explained in various decisions. Since, the agreement to sell does not create rights in the assets, there have been instances where the assessee claimed specific performance of the contract and in that process, the amount received by assigning the right of specific performance was claimed to be capital receipt. While dealing with such question, the hon. Bombay high Court in case of CIT vs. Tata Services 122 ITR 594 held a contract of salel of land is capable of specific performance. It is also assignable. therefore, such right to obtain conveyance was ‘property’.
As contemplated by section 2(14). in that case, the assessee entered into an agreement with Seth Anandji Haridas for purchase of 5,000 sq. yards of land situated at Bombay, @ Rs. 175 per sq. yard and paid earnest money of Rs. 90,000. the vendor was to obtain requisite permission from municipal and other authorities at his cost. the agreement of purchase was to be completed within 6 months of its execution. if the permission was not obtained on any account whatsoever, the vendor was entitled to cancel the agreement and the earnest money was to be refunded. the vendor could not obtain requisite permission and wanted to cancel the agreement. this was not accepted by the assessee. finally, a tripartite agreement was entered into among Seth anandji haridas, the assessee and m/s advani & Batra. in consideration, the assessee received a sum of Rs. 5,90,000 from m/s. advani & Batra, consisting of rs. 5 lakh as consideration for transfer and assigning its rights, etc., and Rs. 90,000, being the earnest money paid to Seth anandji haridas. the tribunal held that it was a case of transfer of a capital asset. the case of the assessee was that the agreement for sell did not create any interest or right in land in favour of the assessee as per section 54 of the transfer of property act. the amount of Rs. 5,90,000 was merely compensation and not consideration of transfer of any right, etc. in the land as the assessee did not own any asset as contemplated by section 2(14) of the act. the hon’ble Court pointed out that as per section 54 of the transfer of property act, a contract for sell of immovable property does not by itself create any interest in such property. However, it was difficult to see how the aforesaid provisions were applicable to the facts of the case. It was nobody’s case that the aforesaid agreement gave rise to a right in the land which was agreed to be sold by Seth anandji haridas and purchased by the assessee. the case of the revenue was that under the agreement to sell, the assessee had a right to obtain a conveyance of the immovable property. This right of conveyance either get extinguished or was assigned in favour of m/s. advani & Batra for a consideration, of rs. 5,90,000. the hon’ble Court referred to the definition of ‘capital asset’ given in section 2(14) of the act and pointed out that it has a wide ambit. The hon’ble Court also referred to the provisions of section 2(47) of the Act, which defines the term ‘transfer’ to include the sell, exchange, relinquishment of asset or extinguishments of any right therein, etc. It was also pointed out that a contract of sell of land is capable of specific performance. It is also assignable. Therefore, such right to obtain conveyance was ‘property’ as contemplated by section 2(14). This right was assigned in favour of m/s. advani & Batra and, therefore, it amounted to transfer of right by way of extinguishment of any right therein. a similar view has been taken in the following cases–
CIT vs. Vijay Flexible containers 186 ITR 693 Bom,
K. R. Shrinath vs. ACIT 268 ITR 436 Mad CIT vs. H. Anil Kumar 237 CTR 537 Kar
The above decisions imply that the right acquired under agreement to Sell is a right which is a capital asset since the definition of Capital asset u/s. 2(14) provides property of any kind. it further implies that this right is different than the property itself. The agreement to Sell gives rise to a right which is separate and independent right than the right in the property itself. Applying this principle of law, in cases where the assessee enters into agreement to sell with the intention to purchase a flat to be constructed in a scheme by a builder, and if the rights are sold before possession and conveyance, the capital gains are chargeable on account of transfer of rights arising out of the agreement to sell.
Right to sue:
The right to obtain specific performance or right to obtain conveyance is further distinguished from right to sue. in a given case, if after agreement to sell, one of the party refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages. there is no other right flowing from the contract except the right to complain about breach and sue for damages or specific performance of the contract with or without injunction as well as restitution of the benefit which the defaulting party has received from the injured party. Once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefor, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee’s rights therein since such a transfer would be hit by section 6(e) of the transfer of property act. Section 6(e) provides for exceptions to property that can be transferred. it provides in clause (e) that a mere right to sue cannot be transferred. in such situation, the amount received an account of damages would not be chargeable under the head capital gains. Gujrat high Court in case of Baroda Cement & Chemical Ltd vs. CIT 158 ITR 636 has adopted this line of proposition. In order to find out the exact nature of amount received by the assessee as to whether it is from assignment of right attracting capital gains or purely damages for breach of contract to be treated as capital receipt, it would be essential to refer to the agreement minutely and determine the exact transaction.
Period of holding:
The next question is as to the period of holding. for the purpose of determining the nature of capital gains as to long term or short term, the period of holding is relevant. the question arises as to which date, the capital asset was acquired, the date of agreement to sell or the date of possession or actual conveyance. Section 2(42a) defines short term capital asset as a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. as per this section, the period for which the asset was held by the assessee is to be seen. the interpretation of the word ‘held’ requires attention. the term can be understood to mean held as a legal owner in which case the date of acquiring the legal title would be relevant or the term ‘held’ can be interpreted to include beneficial ownership as well without the legal title. the Bombay high Court in case of CIT vs. R. R. Sood 161 ITR 92 held that it is well-settled in law that a mere agreement to purchase a land does not convey any title to the said land or create any interest in the said land. all that the intended purchaser acquires under such an agreement is an equity to obtain specific performance. the fact that she was put in possession of the said plot does not in any way confer on the assessee a title to the land in question. at best, such possession might give the assessee a right to claim the benefit of part performance, but it is clear that the fact of being put in possession in part performance of the agreement cannot confer any title on the assessee to the land in question. It was only on the execution of the conveyance that the assessee acquired title to the said plot and it was only from the date of conveyance that it can be said that the assessee held the said plot as the owner thereof. However, the punjab & haryana high Court in case of CIT vs. Ved Parkash & Sons (HUF) 207 ITR 148 has taken a different view on the question. in the case before the punjab & haryana high Court, the assessee entered into an agreement for sell and was put into possession on the same day. the consideration was to be paid in installments. When the last installment was paid, the same day the property was sold. the capital gains was assessed as short term by ao. the high Court held that from the bare reading of section 2(42A) of the act, word `owner’ has designedly not been used by the legislature. The word `held’ as per dictionary meaning means to possess, be the owner, holder or tenant of (property, stock, land. ). Thus, person can be said to be holding the property as an owner, as a lessee, as a mortgagee or on account of part performance of agreement, etc. Conversely, all such other persons who may be termed as lessees, mortgagees with possession or persons in possession as part performance of the contract would not, in strict parlance, come within the purview of an `owner’. As per Shorter oxford dictionary, edition 1985, `owner’ means one who owns or holds something; one who has the right to claim or title to a thing. the assessee in terms of agreement to sell having been put in possession, remained in its occupation as of right and thus for all intents and purposes was its beneficial owner from the start. the capital gain was a long-term capital gain. the meaning of beneficial ownership was also adopted in case of decision of itat in A. Suresh Rao vs. ITO 144 ITD 677 (Bang). The decision of the Bombay high Court in case of r. r. Sood was before the amendment to Section 2(47) by which the concept of part performance u/s. 53a of transfer of property act was recognised for the purpose of transfer. The meaning of beneficial ownership may be possible and if the assessee is in possession of the property as a beneficial owner and is beneficially enjoying it, such date can be suitably adopted for computing the period of holding. Other relevant and supporting factors for claiming beneficial ownership could be the municipal bill, the electricity connection or income from the property if assessed in his hands. On the other hand, if the rights to obtain conveyance are transferred, the date of agreement would be the date relevant for computing period of holding as held in Gulshan Malik vs. CIT 102 DTR 354 (Del) in which case the booking rights were transferred.
Nature of Transaction of sale: The transaction of sale of property may involve two stages. first, the stage of agreement to sell. if the agreement is entered into and thereafter it becomes matured for conveyance by fulfillment of the respective obligations from both sides, it would be a transaction of sell of property i.e land or building. the agreement to sell gives rise to right of specific performance but if the conditions are fulfilled, the right thereafter gets merged or converted into ownership after the purchase of the property. if however, the terms are not fulfilled; either party has option to use their right of specific performance under Specific Relief Act. The suit for specific performance may have various outcomes. The Court may direct for specific performance in a given case or the parties may arrive at the settlement involving assignment of this right to someone else or the party may accept pure damages. in such cases where the right is assigned, it would be a transfer of right to obtain specific performance liable for capital gains u/s.
45. It is essential to carefully identify in a given situation as to whether is it transaction of sale of property itself or transfer of right of obtaining conveyance in pursuance of agreement to sell.
Transfer u/s. 2(47):
In both the situations, the point at which the transfer u/s. 2(47) needs to be determined. In the case where the right is surrendered, the transfer u/s. 2(47) would arise at a time when the agreement for surrender of such right is entered into. in other case where the agreement to sell is to be acted upon by fulfilling the obligations, section 53A would be applicable. Section 2(47) was amended in 1987 which enlarged the scope of transfer to transaction contemplated u/s. 53A of transfer of property act. the CBDT’s Circular no. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] provides an insight into the background and objective of the said clauses :
“11.1 The existing definition of the word ‘transfer’ in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or aop or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. transactions, of the nature referred to above are not required to be registered under the registration act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi- storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in sectiosssssn 53A of the transfer of property act, 1882. now sub-cls. (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.”
The above amendment makes it clear that earlier, there was no transfer unless conveyance deed was executed. To prevent avoidance of capital gains liability to indefinite period, the scope of transfer was widened and the event of transfer was preponed to the stage of contemplated under part performance u/s. 53a of transfer of property act. This goes to show that the mere execution of agreement to sell did not trigger transfer u/s. 2(47) of the property. Specifically in the context of purchase of property, the transfer has to be seen with reference to clause (v) of section 2(47) dealing with part performance. The necessary event would therefore be the obtaining of possession by the transferee in pursuance of agreement to sell.
Decision of The supreme court in The case of Sanjeev Lal:
in the case before the Supreme Court, the agreement to sell was made in 2002. the assessee received Rs. 15 lakh out of total consideration of rs 1.32 crore. the assessee purchased new house on 30-4-2003. thereafter, there were suits filed challenging the will document by which the assessee had acquired the property. Because of the interim order of the court of civil suit restraining the parties to deal with the property, the sell deed could not be executed. the dispute was resolved and then the sell deed was executed on 24-9-2004. The assessee claimed the capital gains to be exempt since the gain was invested in new house. the claim was rejected on the ground that the transfer took place in 2004. Since the new house was purchased before one year prior to the date of transfer, the exemption was held to be not allowable by the learned ao. the matter reached upto the Supreme Court. in dealing with the question of transfer the Supreme Court held that-
1. An agreement to sell gives rise to a right in personam in favour of transferee. It gives right of specific performance if vendor is not executing sell deed.
2. Some right in respect of capital asset had been transferred in favour of vendee which got extinguished because after agreement to sell as it was not open to the appellants to sell the property to some one else in accordance with law. There was a transfer u/s. 2(47) on agreement to sell.
3. Purposive interpretation should be given while considering a claim of exemption. Since the amount was invested in new house, the assessee was entitled to exemption u/s. 54.
The immediate question that is raised in one’s mind is that does it lay down the law that transfer of property u/s. 2(47) gets triggered on agreement to sell. As discussed earlier considering the provisions of section 2(47), the amendment in 1987 so as to insert clause (v) thereby encompassing the situation of part performance within the meaning of transfer, the reading of the decision to that effect may not be appear to be in consonance with the existing or prevailing provisions of the act. The provisions of transfer of property also do not provide for any express bar for the transferor to sell the property to third person. the agreement to sell gives rise to independent right of Specific Performance without affecting the title of the owner or transferor. Even the obligation attached to the property in view of section 40 of the transfer of property act does not bind the third person is he has no knowledge of the contract.
In view of this inconsistency between the above interpretation of the decision and the prevailing law, the decision could not be understood to be laying down the law on transfer u/s. 2(47) for agreement to sell in general. the Supreme Court’s verdict was on the whole question as to the transfer of property u/s. 2(47) as also the exemption u/s. 54. Since the assessee had invested the capital gain in new asset, the Supreme Court proceeds to adopt purposive interpretation and did not hesitate to hold that the transfer was effected u/s. 2(47) on agreement to sell appreciating that ultimately the legislature did not want to burden the tax payer if he invested in prescribed asset. If one looks at the decision as a whole question, it can be said that the decision is in the specific context of facts and law before them. The obvious reason for such view is that the Supreme Court decides not to go into the law on transfer in general but restricts itself to question of exemption rws transfer u/s. 2(47). In the context of general law, the Supreme Court makes a categoric observation in para 20 of the decision that the question as to whether the entire property can be said to have been sold at the time when agreement to sell is entered into, in normal circumstances has to be answered in the negative. The entire discussion of the Supreme Court in connection with transfer u/s. 2(47) is in the background of exemption u/s. 54 which appears expressly in the judgement.
In the context of general law, section 52 of transfer of property act is based on a doctrine called “Lis Pendens” meaning during the pendency of any suit regarding title of a property, any new interest in respect of that property should not be created. in essence, the provision prohibits transfer of property pending litigation. This aspect though crucial in general law could not prevail the mind of the Supreme Court as it did not find relevant for deciding the question before them.
Similar situation arose before Supreme Court in case of CIT vs. Sun Engineering Works P. Ltd. 198 ITR 297 in which the Supreme Court had to interpret the judgement of Supreme Court in case of V. Jaganmohan Rao vs. CIT reported in 75 ITR 373. it was urged before the Supreme Court that in case of jaganmohan rao, the Supreme Court has taken a view that in reassessment proceedings, the entire assessment is reopened and the original assessment is wiped off. The Supreme Court in case of Sun engineering held that to read the judgment in V. jaganmohan rao’s case (supra), as laying down that reassessment wipes out the original assessment and the reassessment is not only confined to “escaped assessment” or “underassessment” but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to re-agitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of section 147 of the act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete “law” declared by this Court. the judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. in Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned :”it is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.” The above observations thus help us in interpretation of the decision in Sanjeev lal’s case.
Conclusion:
Agreement to sell in the literal as also in legal sense means, a contract or agreement to transfer property on agreed terms. It needs to be perceived as a contractual arrangement to be fulfilled in future. The taxability on transfer of property may not be guided by the agreement to sell. The verdict of Supreme Court needs to be interpreted being restricted to the question before it in light of the discussion above. However, the agreement to sell is an essential document to find out and determine the exact nature of property that is transferred and its chargeablity to capital gains.
Facts:
The
assessee, an investment management consultant, filed its return of
income for assessment year 2009-10 returning a total income of Rs. Nil.
In the course of assessment proceedings, the Assessing Officer (AO)
noticed that the assessee has claimed a loss of Rs. 93,63,235 on account
of foreign currency futures. The AO disallowed the loss of Rs.
93,63,235 by considering it to be a speculative transaction in view of
the provisions of section 43(5) r.w.s. 2(ac) of the Securities Contracts
(Regulation) Act, 1956.
Aggrieved, the assessee preferred an
appeal to the CIT(A) who observed that the assessee is not in the
manufacturing and merchanting business, and is also not a dealer or
investor in stocks and shares and therefore the loss on foreign currency
futures is not in the nature of hedging loss and that such loss was not
incurred in the course of guarding against loss through future price
fluctuation in respect of contract for actual delivery of goods
manufactured or in respect of stock of shares entered into by a dealer.
He held that the provisions of clause (d) of the proviso to section
43(5) were not applicable. He, accordingly, confirmed the order passed
by the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The
Tribunal considered the provisions of section 43(5) of the Act and
observed that clause (d) of the proviso to section 43(5) excludes the
transaction of trading in derivatives referred to in section 2(ac) of
the Securities Contracts (Regulation) Act, 1956 carried out on a
recognised stock exchange from the purview of the definition of the term
`speculative transaction’. Considering the definition of the term
`derivative’ in section 2(ac) of the Securities Contracts (Regulation)
Act, 1956, it observed that derivatives also includes securities. It
noted that the Madras High Court has in the case of Rajashree Sugar
& Chemicals Ltd. vs. Axis Bank Ltd. AIR (2011), Mad 144 has defined
the term derivative to include foreign currency as underlying security
of the derivative. It also noted the meaning of the term `derivative’ as
explained in the section `Frequently Asked Questions’ on the website of
SEBI. On going through the copies of the contract notes, it found that
the assessee had entered into either a call option or a put option and
on the settlement day, the transaction has been settled by delivery.
Either the assessee has paid US Dollar on the settlement day or has
taken delivery of the US Dollar.
The Tribunal held that there
remains no doubt that the transaction of the assessee cannot be treated
as a speculative transaction. Derivatives include foreign currency and
call/put option are transactions of derivative markets and cannot be
termed as speculative in nature. The Tribunal held that the transactions
entered into by the assessee were not speculative transaction and
therefore, the loss incurred had to be allowed.
The Tribunal allowed the appeal filed by the assessee.
FACTS
The assessee, a registered society, applied for registration u/s. 12AA.
The DIT (Exemption) mentioned that the provisions of section 12AA stipulates the following conditions for registration u/s. 12A of the Income-tax Act, 1961 :
(i) The objects of the society should be of charitable in nature;
(ii) The activities of the society should be genuine. The DIT (Exemption) noticed that life members and general members had not paid admission fee to assessee till date, the assessee had not been able to raise funds from public nor from amongst themselves and that no activities had been started yet by assessee.
The DIT (Exemption) thus observed that applicant had not done any charitable activity, and the genuineness of the activities could not be established. Therefore, one of the conditions for granting registration u/s. 12AA is also not satisfied.
Accordingly, the application filed by the applicant for grant of registration u/s. 12AA was rejected.
On appeal:
HELD
From the DIT (Exemptions)’s order, it emerges that no dispute has been raised about the charitable nature of the objectives of the trust as per the memorandum. The adverse inference has been drawn on possible intention, activities, i.e., the issues, which are not germane at the time of grant of registration of trust u/s. 12A , more so when the assessee’s objects are not held to be non-charitable.
Apropos the income and expenditure, it has been accepted by the assessee that it had created a website for the trust which also is one of the activities to promote the objects of the trust, the fact which is not denied by the DIT (Exemptions) or the Departmental representative. Therefore, the adverse inference has nothing to reflect on this aspect. Apropos time to raise the funds and donations it is the discretion of the society that can be undertaken in due course, may be the issue of section 80G registration which is consequent to section 12A registration may be important.
Thus mere non-carrying on of the vigorous activities of trust at the time of registration per se cannot be detrimental for registration of the trust u/s. 12A when the objects are charitable and there is no adverse comment about them.
Thus, the order of the DIT (Exemptions) is reversed and the assessee is held to be eligible for registration u/s. 12A.
In the course of assessment, the Assessing Officer made addition to assessee’s income in respect of amount received on redemption of Stock Appreciation Rights received under ESOP as a perquisite u/s. 17(2)(iii). The Tribunal held that stock options were capital assets and gain therefrom was liable to capital gain tax.
On appeal by the Revenue the Gujarat High Court held as under:
“i) In the case of CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204, it is held by the Supreme Court that the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount ‘paid’ by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable.
ii) In view of the above, the Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite u/s. 17(2)(iii) and in treating the amount received on exercising the option of Employee’s Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains.
iii) However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. Tax Appeals stand disposed of accordingly”
The assessee
was trading in mobile hand sets, other electronic items and accessories.
For the purpose of business it had incurred expenditure of Rs.11,51,40,004 on advertisement. The Assessing Officer treated the
expenditure as deffered revenue expenditure and allowed 25% thereof
observing that the balance amount would be allowed in the next three
years. The Tribunal allowed the full claim.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i)
In the previous assessment year 2008-09 the Tribunal in the case of the
assessee allowed the advertisement expenditure as the expenditure of
revenue in nature. No information was available whether the Revenue has
preferred an appeal against the findings recorded by the Tribunal in the
assessee’s case for the A.Y. 2008-09. The reasoning given by the
Tribunal deserved affirmation.
ii) The Tribunal had rightly held
that the Assessing Officer could not treat the revenue expenditure as
deferred revenue expenditure because the Act itself does not have any
concept of differed revenue expenditure. Even otherwise, advertisement
expenditure normally is and should be treated as revenue in nature
because advertisements do not have long lasting effect and once the
advertisements stop, the effect thereof on the general public and
customer would diminish and vanish soon thereafter. Advertisement
expense is a day-to-day expense incurred for running the business and
improving sales.
iii) Keeping in view the nature and character
of the assessee’s business, every year expenditure has to be incurred to
make and keep the public informed and remain in the limelight. It is an
expenditure of trading nature. Therefore, the order of the Tribunal did
not call for interference.”
Before the Supreme Court the issue in a batch of appeals was whether the assessment of agricultural income received by a firm after it was dissolved in so far as the income of the firm pertained to actual cash receipts after the firm was dissolved but relating to income earned prior to dissolution.
The Supreme Court noted that in L.P. Cardoza vs. Agricultural ITO [1997] 227 ITR 421 (Karn.), the question involved was as to whether a dissolved firm could be assessed to agricultural income-tax after the date of its dissolution in respect of income received for supply of goods made by the firm prior to its dissolution. This question arose in the light of section 26(4) and section 27 as they then stood, that is, as they stood in 1987.
The Karnataka High Court had held that there was nothing in section 26(4), as it then stood or section 27, to indicate that where the firm is dissolved and income is received after dissolution in respect of agricultural produce supplied by the firm before dissolution, the firm itself could be assessed in the year of receipt of income notwithstanding its dissolution.
Faced with this decision of the Karnataka High Court, the Legislature amended section 26(4) retrospectively, that is, with effect from, 1st April, 1975. The amended provision as follows:
“26. (4) Where any business through which agricultural income is received by a company, firm or association of persons is discontinued or any such firm or association is dissolved in any year, any sum received after the discontinuance or dissolution shall be deemed to be income of the recipient and charged to tax accordingly in the year of receipt, if such would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance or dissolution.
Explanation – For the removal of doubts, it is hereby declared that where before the discontinuance of such business or dissolution of a firm or association hitherto assessed as a firm or association, or as the case may be, on the company, the crop is harvested and disposed of, but full payment has not been received for such crop, or the crop is harvested and not disposed of, the income from such crop shall, notwithstanding the discontinuance or dissolution be deemed to be the income of the company, firm or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as the income of the company, firm or association according to the method of accounting regulatory employed by it immediately before such discontinuance or dissolution.”
The said amendment was the subject matter of challenge before a learned single judge of the Karnataka High Court. The single judge repelled the challenge basically on the ground that the Explanation only clarified the main provision and, therefore, did not go beyond the main provision. Equally, since the Legislature has the right to amend both prospectively and retrospectively, all that was done in the present case was an exercise of the legislative power retrospectively and, therefore, no question arose of any discrimination on this count. The single judge, therefore, dismissed the writ petitions before him.
In appeal before the Division Bench, the Division Bench set out all the aforesaid provisions and ultimately found, following the judgment in D. Cawasji & Co. vs. State of Mysore [1984] (Suppl.) SCC 490/ 150 ITR 648, that the Amending Act of 1997 suffered from the vice that was found in Cawasji’s case, namely, that it interfered directly with the judgment of the High Court and would, therefore, have to be struck down as unconstitutional on this score alone. This the Division Bench found because, according to the Division Bench, in the Statement of Objects and Reasons for the 1997 amendment, it was held that the object of the amendment was to undo the judgment of the High Court of Karnataka in Cardoza’s case.
The Supreme Court was thus concerned with the validity of Explanation added retrospectively to section 26(4) of the Karnataka Agricultural Income-tax Act (hereinafter referred to as “the Act”).
The Supreme Court noticed that in the amended section 26(4), two changes were made. Whereas in the original provision, no express reference was made to companies or association of persons, and no reference whatsoever was made to a dissolved firm, both were added. By the Explanation, which is for the removal of doubts, he Legislature declared that where before dissolution of a firm, full payment was not received in respect of income that has been earned pre-dissolution, then notwithstanding such dissolution, the said income would be deemed to be the income of the firm in the year in which it was received or receivable and the firm would be deemed to be in existence for such year for the purposes of assessment. By this amendment, the basis of the law as it stood when Cardoza’s case was decided had been changed.
The Supreme Court held that all that had been done in the present case was to remove the basis of the law as it stood in 1987 which was interpreted in Cardoza’s case as leading to a particular result. All that the Legislature has done in the present case is to say that with effect from 1st April, 1975, dissolved firms will by legal fiction, continue to be assessed, for the purposes of levy and collection of agricultural income-tax, in so far as they receive income post-dissolution but relating to transactions pre-dissolution. In no manner has the Legislature in the present case sought to directly nullify the judgment in Cardoza’s case. All that had happened was that the legal foundation on which the Cardoza’s case was built was retrospectively removed, something which was well within the legislative competence of the Legislature.
The Supreme Court further held that the judicial decision in Cardoza’s case had been rendered ineffective by enacting a valid law on a topic within the legislative field which fundamentally alters or change the character of legislation retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court if those conditions had existed at the time of declaring the law as invalid. The Legislature had not directly overruled the decision of any court but has only rendered, as has been stated above, such decision ineffective by removing the basis on which the decision was arrived at.
The Supreme Court set aside the impugned judgment of the Division Bench of the High Court, and allowed the appeals.
Considering the scope of proviso to section 2(15) of the Income-tax Act, 1961, the Delhi High Court has held as under:
“i) The correct interpretation of the proviso to section 2(15) of the Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen.
ii) If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable purpose’.
iii) On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes.”
For the A. Y. 2000-01 the assessee had claimed that the lump sum payment made for acquiring technical knowhow for a period of six years as revenue expenditure. The Assessing Officer and the Tribunal held the expenditure is capital expenditure and therefore disallowed the claim..
On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:
“i) The fact was that the payment made by the assessee was on account of licence fee. By making such payment, the assessee had got permission to use the technology. The money paid was irrecoverable. If the business of the assessee stopped for some reason or the other, no benefit from such payment was likely to accrue to assessee.
ii) The licence was not transferrable. Therefore, it could not be said with any amount of certainty that there had been an accretion to the capital asset of the assessee. If the assessee continued to do business and continued to exploit the technology for the agreed period of time, the assessee would be entitled to take the benefit thereof. But if it did not do so, the payment made was irrecoverable.
iii) Therefore, the one-time lump sum payment made by the assessee for acquiring technical know-how for a period of six years was revenue expenditure.”
Assessee
sold a property for a consideration of Rs. 3,46,50,000/- and invested
Rs. 1 crore out of the sale proceeds in capital gains bonds in two
financial years 2007-08 and 2008-09 Rs. 50 lakh each within the
prescribed time limit of six months. For the A. Y. 2008- 09 the
Assessing Officer held that the assessee could take the benefit of
investment in specified bonds upto a maximum of Rs. 50 lakh only u/s.
54EC(1) of the Incometax Act, 1961. The Tribunal held that the exemption
granted under the proviso to section 54EC(1) should be construed not
transaction-wise but financial year-wise. If an assessee was able to
invest a sum of Rs. 50 lakh each in two different financial years,
within the period of six months from the dated of transfer of the
capital asset, it could not be said to be inadmissible. Accordingly, 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:
“The
assessee was entitled to exemption of Rs. 1 crore u/s. 54EC, in respect
of investment of Rs. 50 lakh each made in two different financial
years”
Assessee had entered into agreements with Dart Manufacturing India Private Ltd (‘DMI’) and Innosoft Technology Ltd (‘ITL’) to manufacture products to be sold under its brand name. It had imported moulds on hire basis from overseas group companies. These moulds were given on ‘free of cost basis’ to DMI and ITL. The Assessing Officer relied upon the order of SetCom passed under the Central Excise Act, 1944, holding that manufacturing cost would include rent paid for the moulds. Accordingly, he disallowed expenditure on plastic moulds on the ground that it should have been claimed by DMI and ITL, who were contract manufacturers of the assessee. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) How and in what context the finding recorded by the SetCom relating to valuation of good for levy of excise duty would be relevant for deciding whether rent paid for the moulds could be allowed as deduction u/s. 37(1)?
ii) The valuation or cost of manufacture would include cost of raw material as an expenditure but it would not mean that the assessee could not treat the price of raw material as an expenditure.
iii) In case the aforesaid two contract manufacturers had paid hire charges for the moulds, it would have resulted in increase in the purchase price in hands of assessee.
iv) Thus, assessee was entitled to deduction of hire charges paid for moulds. Disallowance made by Assessing Officer could not be sustained.”
Assessee was engaged in the business of trading in garments. HDFC provided swiping machine to assessee. Amount punched in swiping machine credited to the account of retailer by bank. Bank providing banking services in form of payment and subsequently collecting payment. For the A. Y. 2009-10 the Assessing Officer held that the amount earned by the HDFC was in the nature of commission and should have been subjected to deduction of tax at source u/s. 194H of the Income-tax Act, 1961. Since tax was not deducted at source, he disallowed an amount of Rs. 44,65,654/- u/s. 40(a)(ia) of the Act. The Tribunal held that the assessee had not violated section 194H and accordingly 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) HDFC was not acting as an agent of the assessee. Once the payment was made by HDFC, it was received and credited to the account of the assessee. In the process a small fee was deducted by HDFC. HDFC realized and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on “behalf” of the assessee. The relationship between HDFC and the assessee was not of an agency but that of two independent parties on principal to principal basis. Therefore, section 194H would not be attracted.
ii) Another reason why section 40(a)(ia) should not have been invoked was the principle of doubtful penalisation which required strict construction of penal provisions. The principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. HDFC would necessarily have acted as per law and it was not the case of the Revenue that HDFC had not paid taxes on its income. It was not a case of a loss of revenue as such or a case where the recipient did not pay its taxes.
iii) We do not find any merit in the present appeal and the same is dismissed.”
The respondent assessee is a third party who was issued notice u/s. 158BD, pursuant to search proceedings in case of M group. The satisfaction note was record almost a year after the assessment proceedings in the case of M group ware completed. The Tribunal held that notice u/s. 158BD was not valid.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) Revenue has to be vigilant in issuing notice to the third party u/s. 158BD, immediately after completion of assessment of the person in respect of whom search was conducted.
ii) Notice was not issued in conformity with the requirements of section 158BD and were unduly delayed. Tax appeal is dismissed.”
For the A. Ys. 2003-04 to 2008-09 the assessment was made in the name of the amalgamating company instead of the amalgamated company. The assessee contended that it had ceased to exist from 07-12-2009 by virtue of amalgamation with another company u/s. 391(2) and 394 of the Companies Act, 1956.However, the assessment orders were made. The Tribunal held that the assessment orders were not valid.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal dismissed the appeal and held that the orders of assessment were invalid.
On July 13, 2001, the petitioner entered into memorandum of understanding with a third party, Dosti Associates, for the transfer of development rights in certain land for a consideration of Rs. 39 crore. Following this a development agreement was entered into on 31st October, 2001. Finally, a supplemental agreement was entered into on 15th December, 2003, by which in consideration of the total agreed of Rs. 39 crore paid by the developer to the petitioner, the petitioner recognised the acquisition by the developer of the absolute right to develop the property. Clause 5 of the agreement stipulated that with effect from 15th December, 2003, the developer had been placed in absolute and complete possession of the property. The petitioner filed a return of income for the assessment year 2004-05. In the computation of assessable income, profits on the sale of land amounting to Rs. 38.75 crore were considered separately.
The petitioner annexed a working of the taxable long-term capital gains. The total long-term capital gains were computed at Rs. 23.19 crore. The petitioner claimed an exemption u/s. 54EC of the Income-tax Act, 1961, stating that a total amount of Rs. 23.24 crore had been invested in specified bonds of the National Highway Authority of India (Rs. 2 crore), the Rural Electrification Corporation of India (Rs.14.44 crore) and the National Housing Bank (Rs. 6.80 crore). The computation of capital gains in the amount of Rs. 23.19 crore, as stated earlier, was based on the total consideration of Rs. 39 crore received for the sale of development rights under the conveyance executed on 31st December, 2003; from which an amount of Rs.15.80 crore was deducted representing the value of the land as on 1st April, 1981.
During the assessment proceedings, the Assessing Officer asked for a copy of the agreements with the purchaser and other details which the assessee furnished. A copy of each of the section 54EC bonds (which gave the dates of investments) was also furnished. The Assessing Officer passed an order of assessment u/s. 143(3) on 27th November, 2006 allowing the deduction as claimed.
A notice was issued to the Petitioner by the Assessing Officer after an audit query was raised on 4th June, 2007. As per the audit query the Petitioner was entitled to deduction u/s. 54EC only in respect of the amount of Rs. 6.80 crore which was invested within six months from the date of sale deed. The remaining amounts had been invested between 1st February, 2002 and 30th June, 2002, prior to date of transfer, that is, 15th December, 2003.
A notice for reopening assessment was issued on 29th March, 2011, u/s. 148. As per the reasons recorded deduction u/s. 54EC was not admissible on the investments made prior to the date of transfer.
The petitioner filed a Writ Petition to challenge the reopening on the ground that there was no failure on its part to make a full and true disclosure of material facts.
The High Court (348 ITR 439) held that the Petitioner, in the return of income that was originally filed, submitted a computation of taxable long-term capital gains. After computing the long-term capital gains at Rs. 23.19 crore, the Petitioner sought to deduct therefrom an amount of Rs. 23.24 crore investment u/s. 54EC. The statement, however, was silent on the date on which the amounts were invested. The Asessing Officer did during the course of the assessment proceedings raise a query on 14th July, 2006, seeking an explanation of an amount of Rs. 38.75 crore credited from the sale of certain property. The Assessing Officer called upon the Petitioner to furnish a copy of the sale deed together with the details of the property sold; valuation reports for determination of the fair market value as on 1st April, 1981, and a detailed working of capital gains arising out of the sale of the property. The Petitioner disclosed the sale agreements and furnished a working of capital gains which was in terms of what was submitted with the return of income. The High Court noted that, neither in the return of income nor in the disclosures that were made in response to the query of the Assessing Officer did the Petitioner make any reference to the dates on which amounts were invested in bonds of the National Highway Authority of India, Rural Electrification Corporation of India and National Housing Bank. The petitioner did enclose copies of the certificates which did bear the date of allotment. According to the High Court it was evident that the Assessing Officer had clearly not applied his mind to the question as to whether the petitioner had fulfilled the conditions specified in section 54EC for availing of an exemption. Also, the petitioner was required to make a full and true disclosure of materials facts which did not appear either from the computation of taxable long-term capital gains in the original return of income or in the computation that was submitted in response to the query of the Assessing Officer. In both the sets of computation there was a complete silence in regard to the dates on which the amounts were invested. The assessment order did not deal with this aspect. In the circumstances, the High Court held that there was no full and proper disclosure by the petitioner of all the material facts necessary for the assessment.
The Petitioner challenged the order of the High Court before the Supreme Court but later the learned counsel for the petitioner sought permission to withdraw the Special Leave Petition in view of the fact that petitioner’s appeal, bearing No. IT No.63/2012-2013 was pending before Commissioner of Income Tax (Appeals) against the Order of re-assessment dated 29th May, 2012. The Supreme Court while permitting the Petitioner to do so, however, clarified that on the issue of validity of Notice u/s. 148 of the Income-tax Act, 1961, it would be open to the petitioner as well as Department to put forth their respective contentions before the Appellate Authority and the Appellate Authority would decide this issue also along with other issues without being influenced by the observation made by the High Court in the its order.
