Stocks

21 September 2012

High Court Fumes & Sends Dept’s Top Brass To Jail For “Gross Contempt”

The assessee’s truck loaded with betel nuts was seized by the customs authorities on the suspicion that the assessee was indulging in smuggling. The assessee filed a Writ Petition to challenge the seizure which was allowed by the High Court and the customs authorities were directed to unconditionally release the truck immediately. Despite the High Court’s verdict, the customs authorities issued a show-cause notice threatening confiscation. The assessee filed a contempt petition against the department. The department defended its stand and at the same time tendered an unconditional apology. HELD by the High Court:
Though the High Court’s order was communicated to the department directing a release of the truck without any conditions, the department wrongly demanded 100% cash security and 100% Bond for the said release. The act of issuing show cause notice to avoid giving release is in direct confrontation with the judicial order of the Court. The plea raised with respect to investigation and confiscation is “absolutely frivolous and ridiculous” and has been raised to save from punishment of contempt. Also, the act of justifying the action and simultaneously tendering unqualified apology is a “double faced stance” which is against the settled principle of law. The Asst/Dy Commissioner, Customs, being a senior officer, should have known his limits and by crossing those limits, he has committed gross contempt. He is accordingly punished with simple imprisonment of three months & fine of Rs. 2,000. Also, as the act may constitute “corrupt practice”, the CBEC may consider prosecuting him.


Birendra Kumar Singh vs. UOI (Patna High Court)

20 September 2012

S. 80IA: In absence of separate books, AO entitled to estimate eligible profits

The assessee manufactured yarn and also sold raw wool, wool waste and textile and knitting cloth. It claimed a deduction of 30% in respect of the profits of the “manufacturing activity”. As the assessee had not maintained accounts for manufacture of yarn actually produced as a part of industrial undertaking, the AO worked out the manufacturing account giving a bifurcation in terms of quantity of raw wool produced. The assessee challenged the preparation of separate trading account by the AO in respect of manufacturing and trading activities. The CIT(A) upheld the assessee’s claim though the Tribunal and High Court upheld the AO’s stand. On appeal by the assessee to the Supreme Court, HELD dismissing the appeal:
The findings given by ITAT and the High Court are findings of fact. We are not concerned with the interpretation of Section 80IA of the Act. On facts, we find that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year. If the assessee had maintained a separate account, then, in that event, a clear picture would have emerged which would have indicated the income accrued from the manufacturing activity and the income accrued on the sale of raw material. We do not know the reason why separate accounts were not maintained for the raw material sold and for the income derived from manufacture of yarn.


Arisudana Spinning Mills Ltd vs. CIT (Supreme Court)

19 September 2012

High Court Seethes With Fury At Dept For “Dirty Games” With Assessees

The assessee, a charitable institution whose income was exempt u/s 11, was granted a certificate of Nil TDS u/s 197 in the earlier years. For FY 2009-10, the assessee’s application for a s. 197 certificate was not processed and so the assessee filed a Writ Petition pursuant to which the Dept. agreed to consider the application and pass an order. The AO thereafter passed an order stating that since the FY 2009-10 had already lapsed, the s. 197 certificate for that FY could not be issued. The assessee filed a Writ Petition to challenge the rejection. The department filed an affidavit in which it claimed, for the first time, that the rejection was because there were demands outstanding against the assessee. HELD by the High Court:
The reason given in the affidavit regarding the arrears outstanding against the assessee is not correct because there were in fact no demands due pursuant to the Tribunal’s order. There is inordinate delay and serious laches on the part of the AO in dealing with the assessee’s application & there is no explanation why the application submitted on 22.06.2009 was taken up for the first time for consideration towards the fag end of FY 2009-10 and rejected on a wrong ground of non-payment of outstanding dues. Such action is in contravention of CBDT’s Circular No.F.No.20/23/67 IT(A-I) which states that application filed by charitable trusts for issuance of Nil/low TDS certificates should be expeditiously processed. The rejection is also in violation of the Court’s earlier order where the department did not raise the stand that the s. 197 certificate could not be issued as the FY was over and instead agreed to consider the issue of the certificate. Obviously the department’s action are not bona-fide and does not speak well of its attitude. Mala fides are writ large because new grounds supporting the rejection have been taken in the counter affidavit though such action is not permissible as per Mohinder Singh Gill vs. CEC AIR 1978 SC 851. The Department cannot take advantage of its own inaction and lapses and say that the certificate cannot be issued as the FY is over. Such action would lead to unnecessary complication for the assessee and the parties dealing with it. As held in Dabur India Ltd State of UP AIR 1990 SC 1814, the Govt. cannot be permitted to play “dirty games” with the citizens of the country to coerce them in making payments which the citizens were not legally obliged to make. If any money is due to the Govt., it should take appropriate steps, but it should not take extra legal steps or adopt the course of maneuvering. The Dept. has to be careful in future not to indulge in such avoidable circumstances which create an impression that the intention of the Department is not to help the assessee but to harass them. This matter needs to be inquired into by the concerned CCIT and appropriate action should be initiated against the erring officer.


Management Committee Paradeep Port vs. ITO (Orissa High Court)

18 September 2012

S. 145: Excise duty need not be included in closing stock

The assessee valued its closing stock without including excise duty. The AO held that excise duty had to be included in the closing stock though the CIT(A), Tribunal and High Court (267 ITR 600 (Mad)) upheld the assessee’s plea on the basis (following English Electric Co. 243 ITR 512 (Mad)) that the inclusion of excise duty in the valuation of closing stock was permissible only if the liability for that amount in the excise duty account was given a deduction and otherwise it would be anomalous. On appeal by the department to the Supreme Court, HELD dismissing the appeal:
The assessee has been following consistently the method of valuation of closing stock which is “cost or market price whichever is lower.” Also, while the AO revalued the closing stock, he did not make any adjustment to the opening stock. Excise duty is on the manufacture of the finished product though it is quantified and collected on the selling price. Valuation of unsold stock at the close of the accounting period is a necessary part of the process of determining the trading results of that period. It cannot be regarded as source of profits. The true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realized on the year’s trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the goods” (Chainrup Sampatram 24 ITR 481 (SC) & Hindustan Zinc Ltd 291 ITR 391 SC) followed.


CIT vs. Dynavision Limited (Supreme Court)

17 September 2012

S. 80HH & 80-I do not require maintenance of seperate books

S. 80HH & 80-I do not require maintenance of accounts unit wise and deduction can be claimed on the basis of consolidated accounts. To avoid litigation, the assessee should get the working of unit wise net profits certified by the Chartered Accountant.

CIT vs. Bongaigaon Refinery and Petrochemical Ltd (Supreme Court)

16 September 2012

Lumpsum technical know-how fees are deductible only u/s 35AB & not s. 37(1)

The assessee entered into a “Licence and Technical Assistance Agreement” with an American company pursuant to which the American company agreed to transfer technical know-how to the assessee in consideration of US $2,25,000 to be paid in three installments. The assessee paid the first installment amounting to Rs.17.49 lakhs. Subsequently, disputes arose between the contracting parties and the know-how was not transferred by the American company. The assessee claimed that as the technical know-how was not received, the amount paid was deductible u/s 37(1) and not under s. 35AB. The AO & CIT(A) rejected the claim though the Tribunal upheld it. The High Court reversed the Tribunal. On appeal by the assessee to the Supreme Court, HELD dismissing the appeal:
S. 35AB provides for the amortisation of any lump sum consideration for acquiring any know-how for use for the purposes of his business in 6 installments. Though because of certain disputes which arose between the parties, the balance amount was not paid by the assessee to the American company, the word “for” in s. 35AB, which is a preposition in English grammar, has to be emphasised while interpreting s. 35AB. S. 35AB says that the expenditure should have been incurred for the purposes of the business of the assessee. The Technical Assistance Agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once s. 35AB comes into play, then s. 37 of the Act has no application.


Drilcos (India) Pvt. Ltd vs. CIT (Supreme Court)

15 September 2012

"Contingent deposits" received from customers is "income"

It is now well settled that in determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt. The taxing authorities are bound to determine the true legal character of the transaction. "Contingent deposits" received from leasing/hire purchase customers with a view to protect from potential sales tax liability, which is credited to turnover, is assessable to income-tax (Bazpur Co-operative Sugar Factory (1988) 3 SCC 533 distinguished).

Sundaram Finance Ltd vs. ACIT (Supreme Court)

S. 234A to 234C is mandatory & can be levied even if assessment order is silent

As held in Anjum M.H. Ghaswala 252 ITR 1 (SC), interest u/s 234A to 234C is mandatory and interest under Section 234B/234C is mandatory in nature and there is no need for the AO to specifically recite in the assessment order that the said interest shall be levied. The Tribunal should consider whether the assessee is eligible for waiver of interest as per Notification No.F.No.400/234/95-IT(B), dated May 23, 1996

Karanvir Singh Gossal vs. CIT (Supreme Court)

13 September 2012

Tax planning, the right way...

Tax planning probably sounds a bit weird now, because the tax filing season just got over and nobody is really thinking about it or doing anything. Tax consultants are going on holiday this month. But smart people will realise how important it is to do tax planning right now. To save tax, you are better off starting now than later because you will have a lot more options now, time to think and make the right decision and no HR person sitting on your head to do the needful as soon as possible.

Myths and reality

Many people still have this notion that tax planning is wrong and responsible citizens should pay their taxes and not cheat. Tax planning is not tax evasion or tax avoidance. Tax evasion or tax avoidance is illegal where the letter and spirit of the law are broken. Tax planning is done well within the framework of the law and the government actually encourages you to plan your taxes by seeking investment in tax saving bonds, giving benefits under various sections etc.

Another misconception about tax planning is that it is all about investing in 80C.

People ask which is better, PPF or ELSS for tax planning? Tax planning is much more than 80C investments. It requires thoughtful planning of how your income is accounted, how you spend and invest your money and a few more nitty gritties. It is also a myth that tax planning is cumbersome and quite tricky for an average person to comprehend. Of course the tax laws are complex and dynamic, but what is applicable to the normal common person is rather simple.

Tax planning has to be integrated with your overall financial plan. In everything you do, you have to find a tax efficient way of doing it. For eg: You can invest in liquid funds or short term debt funds for emergency needs. But depending on your tax bracket, the short term funds can be more advantageous than the liquid funds or vice versa.

How to save tax?

Invest your surplus savings or use your income in any of the following ways and your total taxable income will come down to that extent, subject to a maximum of Rs 1 lakh.

Repay your home loan – the principal portion can be claimed for deduction

Pay tuition fees for children's education (maximum 2 children)

Pay life insurance premium

Invest in national saving certificate.

Invest in public provident fund

Invest in equity linked savings schemes (ELSS)

Invest in banks and post office fixed deposits of five years.

You can claim tax exemption on house rent allowance received as part of your salary if you are staying in a rented house.

Home loan
If it is a self occupied property, you can claim upto R1.5 lakh paid as interest as loss on house property. That will bring down your overall taxable income. If your property is rented out, on one side you will have to add the rent with your other income and pay tax, meanwhile you can deduct all the interest amount (without any limit) from your overall income and bring down taxable income.

Education loan
The interest paid on an education loan taken for higher education of self, spouse or children can be deducted under Section 80E and thereby your total taxable income can come down.

Protect your health
If you pay premium for a medical insurance policy for self or spouse or dependent children/ parents you can claim tax rebate under Section 80D. And from the current year, a sum of R 5,000 can be claimed if you or your dependants do a preventive health check up.

Social cause
Under Section 80G donations to particular institutions/ funds get tax benefits. While it is true that tax planning is a critical activity, a financial decision to buy a house or make an investment should not be motivated by tax saving. It is the financial plan that should tell you what to do with your money, but within the options, you should choose the most tax efficient one to get the best benefits

11 September 2012

Benefit of indexation available for redeemable preference shares

The Bombay High Court in the case of CIT vs. Enam Securities (P.) Ltd., reported
in 208 Taxman 54 held that, redemption of preference shares amounts to transfer
within the meaning of Section 2(47) of the Act. The High Court further held that,
redeemable preference shares are not bonds or debentures and therefore, at the
time of redemption of those shares, the assessee would be entitled to benefit of
indexation u/s.48 of the Act.

10 September 2012

Two flats situated on different floors cannot constitute one house for purpose of benefit of exemption under section 54 where there was no unity of co


A bare perusal of clause (a) of section 55A indicates that theAssessing Officer is empowered to make a reference to a Valuation Officer forvaluing the capital asset if he is of the opinion that the value claimed by theassessee is otherwise in accordance with the estimate made by the registeredvaluer, but such value is less than its fair market value. Obviously, thisprovision is not applicable to the facts of the instant case inasmuch as theestimate of value made by the registered valuer was, in the opinion of theAssessing Officer, on a lower side. If he had been satisfied with the valueestimated by the registered valuer, there was no point in making reference tothe DVO. The only purpose of the AO in making reference to the DVO was to lowerthe fair market value of the property as on 1-4-1981 so that the cost ofacquisition may be reduced and, resultantly, the amount of capital gain may beenhanced.
Now turning to clause (b) of section55A, it is noted that the Assessing Officer is empowered to make a reference tothe Valuation Officer where he is of the opinion that the fair market value ofthe capital asset exceeds the value of asset as claimed by the assessee by morethan such percentage of the value of the asset as so claimed or by more thansuch amount as may be prescribed. Rule 111AA provides percentage of value ofasset, at 15 per cent and the amount, at Rs. 25,000. Sub-clause (i) of clause(b) is not applicable in this case, as the Assessing Officer was inclined toreduce the estimate of fair market value as declared by the assessee and not toenhance it, which is otherwise the prescription of this provision. Thus, theapplicability of sub-clause (i) of clause (b) of section 55B is also ruled out.
Then comes sub-clause (ii) of clause(b) of section 55A, which is in the nature of residual provision for makingreference to a valuation officer where 'in the opinion of the AssessingOfficer', it is necessary to do so, having regard to the nature of the assetand the relevant circumstances. The mandate of this provision, for making areference to the DVO, is activated where the Assessing Officer is of theopinion that 'it is necessary so to do'. Before making a reference undersection 55A(b)(ii), it is necessary for the Assessing Officer to record the relevantcircumstances on the basis of which he forms the opinion that reference to theValuation Officer is called for. From the assessment order, it is manifest thatthere is no reference to any material on record prompting the Assessing Officerto from an opinion that reference to the DVO for ascertaining the fair marketvalue of asset was necessary having regard to the nature of the asset and otherrelevant circumstances. It is manifest from the Rajasthan High Court decisionin CIT v. HotelJoshi [2000] 242 ITR 478/108Taxman 199, and from the decision of Gujarat High Court in Hiaben Jayantilal Shah v. ITO [2009] 310 ITR 31/181 Taxman 191(Guj.), that unless the Assessing Officer has formed an opinion on the basis ofmaterial on record that reference to the DVO was necessary for ascertainingfair market value of the capital asset, such a reference under section55A(b)(ii) is invalid. In the instant case as, admittedly, the fair marketvalue of the property declared by the assessee as on 1-4-1981 is duly supportedby the report of the registered valuer and further there is no reference to anyfact in the assessment order as to the necessity of making a reference to theDVO, the Commissioner (Appeals) was not justified in adopting fair market valueas on 1-4-1981 of Rs. 6,85,800 as worked out by the DVO. The impugned order isset aside to this extent and it is directed that the fair market value of thefull property as on 1-4-1981 as shown by the assessee at Rs. 24.00 lacs, whichis backed by the report of the registered valuer should be adopted.
The other controversy is as towhether exemption under section 54 is available in respect of one house or morethan one house. In the instant case, the assessee was allotted two flats on twodifferent stories which he claimed as eligible for exemption under section 54.Admittedly there is no unity of construction between such flats. The SpecialBench of the Tribunal in the case of ITO v. SushilaM. Jhaveri[2007] 107 ITD 321/14 SOT 394 (Mum.) (SB), has categorically heldthat the exemption under section 54 is available only in respect of one houseand not more than one. It is not the case of the assessee that both the flatson different floors were used as one residential house. Naturally it could nothave been so for the reason that these two flats situated on different storiescannot constitute one house. Thus, the Commissioner (Appeals) was justified inrestricting the benefit of exemption under section 54 only in respect of oneflat.
In the result, the appeal is partly allowed.

RefCase:
ITAT MUMBAI BENCH 'B'
Smt. Myrtle D'Souza
v.
Income-tax Officer, Ward19(3)(4), Mumbai



No levy of capital gains tax on consideration received by a partner for reduction of his share in partnership firm on inclusion of new partners.

The Karnataka High Court in the case of CIT vs. P. N. Panjawani, reported in 208
Taxman 22, held that, there is no provision in the Act for levying capital gains tax
on consideration received by a partner for reduction of his share in partnership
firm on inclusion of new partners. In the said case on reconstitution of firm, new
partners were inducted, who contributed cash as their capital contribution and
erstwhile partners withdrew money brought in by incoming partners as drawings.
However, they continued to be the partners of the firm. Only their share got
reduced by almost 50%.

5 September 2012

Section 54 exemption would not be available if House Property does not have the basis amenities


 
A perusal of the provision of section 54 shows that the exemption under the said section is available on transfer of a long term capital asset in respect of residential house and land or building appurtenant thereto to an assessee who is either individual or Hindu undivided family. It is also essential that the income of the same is chargeable under the head 'Income from house property'. Further requirement under this provision is that the assessee within a period of one year before or two years after that date purchases or within a period of three years after that date constructs a residential house.
In order to examine the entitlement of the assessee for exemption under section 54, it is to be seen whether the assessee had constructed residential house within three years of the transfer of his property. For doing so, the meaning of the term 'house' is to be explored. The term 'house' has not been given any statutory definition and, thus, has to be assigned meaning as understood in common parlance. As per dictionary, it means abode, a dwelling place or building for human habitation. A building, in order to be habitable by a human being, is ordinarily required to have minimum facilities of washroom, kitchen, electricity, sewerage, etc.
The lower authorities had come to the conclusion that only one room had been built with bricks and mud. There were no amenities like boundary wall, kitchen, toilet, electricity, water and sewerage connection, etc. Further, the residential plot was situated in Janta Enclave, a colony approved by PUDA. As per bye-laws of PUDA, no construction could be made without getting the map and drawings approved from PUDA, which had not been done. Still further no source of investment had been established.
In view of the above, the house in question was not a residential house and, therefore, the assessee was not entitled to the benefit under section 54.

Ref Case:

HIGH COURT OF PUNJAB AND HARYANA

Ashok Syal
v.
Commissioner of Income-tax, Central Circle, Jalandar

04.05.2012