Where assessee had no tax incidence but otherwise was liable to tax in the UAE, benefits of India-UAE DTAA were applicable

ADIT V. SIMATECH SHIPPING FORWARDING LLC (Mumbai - Trib.)

In the instant case the assessee, a resident of the UAE, was engaged in the business of shipping. It claimed that Article 8 of the India-UAE treaty would be applicable to it. The AO, however, held that the assessee was not eligible for treaty benefit. He, therefore, invoked the provisions of section 44B and computed the presumptive profit on total receipt. On appeal, the CIT (A) deleted the order of the AO. Aggrieved revenue filed the instant appeal.

The Tribunal held as under:

• The revenue’s contention was that since the assessee had not paid taxes in the UAE, there could be no curtailment of tax liability, by pressing the treaty. The reason could being that DTAA applies on juridical double taxation, i.e., if income was not taxed in one State, then it would be taxed in full in the other, if it was otherwise taxable, without granting any benefit of the Treaty; 
• This argument couldn’t be sustained, because the assessee was 'otherwise liable to tax' in UAE. Simply because there was no tax incidence in the UAE, didn’t mean that the assessee ceased to be otherwise liable to tax as per Article 4 of India-UAE treaty; 
• Treaty becomes applicable once the assessee gets within the expression 'otherwise liable to tax' in Treaty. Therefore, the order of CIT (A) was to be set aside and the AO was to be directed to consider the nature of income in issue and, consequently, the availability of Article 8 of the India UAE Treaty.

School to apply sec. 194C and not sec. 194I on transport contract if transporter incurs running cost and keeps possession of vehicle

ACIT (TDS) V. DELHI PUBLIC SCHOOL (Delhi - Trib.)

Contract awarded by assessee-school to transporter for carrying students would be covered by sec. 194C and by not sec. 194I if bus remained in possession of transporter and all running and maintenance costs were incurred by him

In the instant case the assessee-school awarded contracts to various transporters for carrying its students from their homes to school and from school back to homes. It had deducted tax under section 194C for making payments to bus owners. The AO held that the assessee should have deducted tax under section 194I on such payments. On appeal, the CIT(A) reversed the order of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

• The object of the assessee to enter into such agreement was a simple activity of carrying its students from their homes to the school and similarly from school back to their homes; 
• The assessee had no responsibility whatsoever regarding the buses to be utilized for that purpose which was the sole responsibility of the transport contractor; 
• The transport contractor only was liable to keep and maintain the required number of buses for such activity at its own expenses with the specified standards; 
• Therefore, the said contract was purely in the nature of services rendered by the transport contractor to the assessee. The assessee was not having any responsibility whatsoever regarding the transport vehicles used in such activity; 
• The assessee itself had not utilized the buses but they were used by the transport contractor for fulfilling the obligations set out in the contract. Thus, the aforesaid payments were not covered in the definition of 'rent' which was defined in Explanation to section 194-I,; 
• Therefore, the provisions of section 194-I could not be applied in the instant case. The assessee had rightly deducted tax at source under the section 194C on the aforesaid payments.

IPL in FEMA violation; Special Director had to form an opinion before calling BCCI President for personal hearing

SHASHANK VYANKATESH MANOHAR V. UNION OF INDIA (Bombay)

Special Director was directed to first form his opinion whether to proceed against petitioner President of BCCI, for remittances in violation of FEMA before calling petitioner for personal hearing as per rule 4 of Adjudication Rules

Facts:

• The petitioner was President of BCCI during years 2008 to 2011. In 2009, after the second edition of IPL at South Africa, the Assistant Director, Directorate of Enforcement filed a complaint with Special Director alleging that the provisions of FEMA had been violated by the Board and its officers while conducting second edition of IPL; 
• On basis of the complaint, show-cause notices were issued to the Board and its office bearers calling upon the Board to show cause in respect of a particular conduct/transaction amounting to violation of the Act; 
• The petitioner was also called upon in each of the notices to show cause as to why penalty should not be imposed upon him in his capacity as the President of the Board in terms of section 42. Special Director issued notice to petitioner for personal hearing according to rule 4 of Adjudication Rules; 
• Petitioner filed writ petition contending that he had no role in remittances and receipts of foreign exchange in 2009 and a separate committee had been constituted to administer IPL with a separate bank account to be operated by Treasurer, BCCI.

The High Court held as under:

1. The petitioner was not in charge of and responsible to BCCI for aforesaid matters, as far as opening and operating of bank account of IPL or obtaining permission of Reserve Bank of India for making remittances or receipts of foreign exchange was concerned; 
2. It would be necessary for adjudicating authority to form an opinion whether petitioner could at all be considered as covered by substantive part of section 42(1), since petitioner himself was not in charge for opening and operating bank accounts involving receipts and remittances of foreign exchange to parties outside India; 
3. That communication calling petitioner for personal hearing was to be set aside since adjudicating authority had not considered aforesaid aspects before forming an opinion to proceed further with inquiry under sub-rule (4) of rule 4 of Adjudication Rules; 
4. The Special Director was to be directed to first form his opinion, after recording reasons before proceeding against petitioner with regard to impugned show-cause notices in accordance with rule 4(3) of Adjudication Rules.

Depreciation available on imported cars acquired in M&A even if cars acquired by merged entity before 01-04-2001

CIT V. MIRA EXIM LTD. (Delhi)

Depreciation admissible to transferee-co on imported cars "acquired" under M&A scheme effective after 1-4-2001.

The High Court held as under:

M & A can be modes of "acquisition" of imported cars for the purposes of clause (a) of proviso to section 32(1). Transferee-company couldn’t be denied depreciation on imported motor cars acquired by it under scheme of merger effective from a date after 1-4-2001 on the ground that the imported motor cars were originally acquired by merged entities after 28-2-1975 but before 1-4-2001.

Software license for one year doesn’t confer any enduring benefit; licensing fee held as revenue expenditure

DY. CIT V. DANFOSS INDUSTRIES (P.) LTD. (Chennai - Trib.)

In the instant case the assessee had incurred expenses towards software license and claimed the same as revenue expenditure. The AO disallowed the claim of the assessee. On appeal, the CIT (A) reversed the order of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

• When the assessee had acquired the license to use the software and the license was valid only for one year, it might be useful to the assessee for various functions like sales, finance, logistics operations and use of ERP system and it might confer certain benefits to the assessee but it couldn’t be said that there was enduring benefit to the assessee; 
• Thus, respectfully following the decision of the Bombay High Court in the case of CIT v. Raychem RPG Ltd. (2012) and taking into consideration the facts of the case, it was to be held that the expense incurred by the assessee to acquire the software license was revenue expense.

Fiscal year

A 12-month period over which a company budgets its spending. A fiscal year does not always begin in January and end in December; it may run over any period of 12 months. The fiscal year is referred to by the date in which it ends. For example, if a company's fiscal year ends October 31, 2006, then everything between November 1, 2005 and October 31, 2006 would be referred to as FY 2006. Not using the actual calendar year gives many companies an advantage, allowing them to close their books at a time which is most convenient for them.

Non Resident can claim benefit of first proviso to Sec. 48 along with Sec. 112 concessional rate; High Court quashes Cairn India ruling

CAIRN UK DINGS LTD. V. DIRECTOR OF INCOME-TAX (Delhi)

Proviso to section 112(1) doesn’t deny benefit of lower tax rate of 10% to a non-resident investor availing benefit of exchange rate neutralization under first proviso to section 48. It is incorrect to say that 10% rate under proviso to section 112(1) applies only where indexation benefit under 2nd proviso to section 48 applies and still assessee opts to not avail it.

The High Court held as under:

• The proviso to Section 112(1) doesn’t state that an assessee, who had availed benefit of the first proviso to Section 48, was not entitled to benefit of lower rate of tax. The said benefit couldn’t be denied because the second proviso to Section 48 was not applicable;
• The stipulation for taking advantage of the proviso to Section 112(1) is that the aggregate of long term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48.;
• First proviso to Section 48 stipulates that on sale of the securities by the non-resident, the consideration received in Indian rupee should be reconverted into the same foreign currency;
• For a non-resident who has utilized foreign currency for purchase of securities in Indian rupee, inflation in India was immaterial and inconsequential. He is most concerned with exchange rate fluctuation and his true and actual gain should take into account the exchange rate fluctuation;
• The second proviso is applicable to all others including non-residents, who are not covered by the first proviso and they are entitled to benefit of cost of indexation which neutralize inflation;
• It is a misnomer and wrong to state that inflation alone contributes and is the determinative factor in exchange rate fluctuation. Inflation by itself cannot be the sole or even a primary factor in exchange rate depreciation. These are several others complex factors and parameters which can affect the foreign exchange rate fluctuation.
• The first and second proviso to section 48 cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective. Thus, it couldn’t be deemed that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose;
• Thus, it was to be held that assessee was taxable at concessional rate of 10% as per proviso to section 112(1).

Free cash flow

Operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends. Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments. While free cash flow doesn't receive as much media coverage as earnings do, it is considered by some experts to be a better indicator of a company's financial health.

Service Tax demand can't be made under a category not specified in the show cause notice

KALPATARU POWER TRANSMISSION LTD. V. COMMISSIONER OF CENTRAL EXCISE (Ahmedabad - CESTAT)
 
Where show cause notice sought classification under consulting engineering services but demand was confirmed under "Erection, Commissioning and Installation Services", demand was, prima facie, not maintainable

In the instant case the department issued a show-cause notice to the assessee for the period from 1997-98 to 9-9-2004 seeking payment of service tax under category of consulting engineering services. The adjudicating authority came to conclusion that services rendered by assessee were not 'consulting engineers' services but were taxable under Erection, Commissioning and Installation Services and confirmed demand accordingly. The assessee argued that demand was invalid as show-cause notice did not put them on notice as to that services would be classified under 'Erection, Commissioning and Installation Services'. Thus, this stay petition was filed by assessee for the waiver of pre-deposit requirement.

The Tribunal held as under:

• The assessee was not put to notice as regards the classification of its services under "Erection, Commissioning and Installation Services"; 
• The assessee had made out a prima facie case for the waiver of the pre-deposit requirement of the amounts involved, as the Board's circular dated 8-8-2007 specifically clarified that services provided by assessee would be classifiable under the category of Erection, Commissioning and Installation Services from 10-9-2004 only; 
• In view of this, the application filed by the assessee for the waiver of the pre-deposit requirement and stay of recovery was allowed.

Sum paid to acquire clients of another company is an intangible asset; eligible for depreciation

SKS MICRO FINANCE LTD. V. DY. CIT (Hyderabad - Trib.)

Where assessee-company had acquired entire business of an another company, which included acquisition of its existing clients, sum paid by assessee for acquisition of such clients was an intangible asset and, thus, eligible for depreciation

Facts:

• The assessee-company was engaged in the business of micro-financial lending services. It had acquired entire business of ‘S’, which was also engaged in similar business; 
• This acquisition included the acquisition of rights of existing clients of 'S'. Besides other payments, the assessee paid certain sum to 'S' for acquisition of its clients; 
• The assessee claimed depreciation on the aforesaid sums by contending that it was towards transfer of clients, which was an intangible asset and eligible for depreciation; 
• Such depreciation claim of assessee was disallowed by revenue. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1. It was not disputed that the assessee had acquired the entire business and commercial assets of 'S' on payment of lump sum consideration, which included the cost of acquisition of the existing customer base of 'S'; 
2. It was also a fact that the customer base acquired by the assessee had provided an impetus to the business of the assessee, as the customers acquired were with proven track record since they had already been trained, motivated, credit checked and risk filtered; 
3. They were source of assured economic benefit to the assessee and certainly were tools of the trade, which facilitated the assessee to carry out the business smoothly and effectively; 
4. Therefore, by acquiring the customer base the assessee had acquired business and commercial rights of similar nature as provided for in section 32(1)(ii). The client acquisition cost paid by the assessee was towards acquiring an intangible asset and, thus, was eligible for depreciation under section 32(1)(ii).

Execution of irrevocable power of attorney of a property in favour of land developers deemed as ‘transfer’

SMT. BINDER KHOKHER V. ACIT (Chandigarh - Trib.)
 
Where an irrevocable power of attorney was executed and registered by a housing society, leading to overall control of property in hands of developer, it constituted transfer under section 2(47)

In the instant case the assessee was a member of a housing society, which transferred certain land to developers under a Joint Development Agreement (‘JDA’), whereby each member was entitled to monetary consideration and a furnished flat. An irrevocable Special Power of Attorney (‘ISPOA’) was executed in favour of the developers which was deemed as a transfer under section 2(47) by the revenue. But assessee contended that handing over of possession of property was conditional in order to enable the builder to obtain necessary permission from the Governmental agencies, and there was no transfer as per section 2(47).

The Tribunal held in favour of revenue as under:

• Clauses of the ISPOA and JDA clearly showed that the developers were authorized to enter upon the property not only for the purpose of development but for other purposes also; 
• Developers were authorized to amalgamate the project with any other project in the adjacent area or adjoining area as per the special Power of Attorney. The position contemplated by clause (v) of section 2(47) need not be exclusive possession. What is required is that the transferee by virtue of possession should be able to exercise control for intended purposes; 
• In the instant case, the assessee had not given only a license as claimed by the ld. Counsel of assessee, but also the powers of selling, amalgamating, etc, mentioned in the JDA and ISPOA. Section 2(47)(vi) clearly shows that any transaction which has the effect of transferring or enabling enjoyment of any immovable property would be covered by the definition of transfer; 
• Where developers were vigorously pursuing issue of permission/sanction for executing agreement, requirement under section 53A of Transfer of Property Act, regarding willingness of transferee to perform contract, was also fulfilled; 
• Though it is a settled principle of law that notional income can’t be taxed yet in case of capital gain, rigour of tax in case of capital gain would come into play on the transfer of capital asset and total consideration arising on such transfer has to be taxed; 
• Therefore, capital gains tax had to be paid on the total consideration arising on transfer which would include the consideration which had been received as well as the consideration which had arisen and become due and might be received later on.

Proviso to sec. 206C providing for immunity on TCS default in tax neutral situation has retro effect, rules SB

Bharti Auto Products v. Commissioner of Income-tax -II, Rajkot (Rajkot - Trib.) (SB)

The first proviso to sec 206C(6A) introduced by the Finance Act, 2012 with effect from 1-7-2012 relieves the assessee from consequences of assessee-in-default for non-collection of TCS based on proof of “no loss to Revenue” in the form of a CA’s certificate certifying specified matters.

As the said proviso seeks to rationalize TCS provisions and is also beneficial in nature in the sense that it seeks to provide relief to collectors of taxes from consequences of short collecting TCS after ensuring that Revenue’s interest is well-protected. Said proviso shall apply retrospectively even to pending matters also, though it is expressed to be applicable with effect from 1-7-2012.

Financial Health

A description of the state of a person or company's finances. Someone with good financial health usually deals well with their finances, makes their payments on time, and knows how to manage their money. Someone in poor financial health usually owes a lot of money and isn't making their payments on time.

No TDS on sum paid to banks for utilization of credit card facilities; they are in nature of bank charges & not commission

ITO V. JET AIRWAYS (INDIA) LTD (Mumbai - Trib.)
 
Payments to banks for utilization of credit card facilities are in nature of bank charges, and not commission, and, therefore, no tax is deductible at source from said payments under section 194H

In the instant case the assessee-company was engaged in the business of aviation, i.e., transportation of passengers and cargo by air. During assessment the AO held that assessee ought to have deducted tax at source on amounts retained by the banks in respect of air tickets booked through credit cards. The AO further stated that as per the agreement between the banks and the assessee, the banks were supposed to provide the assessee with the facility of their credit card internet payment gateway to enable the assessee to collect the payments made by the customers. Therefore, such payments were squarely covered by the definition of "commission or brokerage" as contemplated by section 194H. The CIT(A) reversed the order of AO. The aggrieved revenue filed the instant appeal.

The Tribunal held as under:

• Section 194H is applicable where any commission has been paid by the principal to the commission agent. The charges paid to the bank were not in the nature of commission payment but it was a fees charged by the bank for the services. The banks did not advise the assessee to sell their goods to its customers then he would pay them commission;
• The provisions of section 194H of the Act were not applicable as the banks were making payments to the assessee after deducting certain fees as per the terms and conditions in the credit cards and it was not a commission but a fee deducted by the banks;
• Payments made to the banks on account of utilization of credit card facilities would be in the nature of bank charges and not in the nature of commission within the meaning of section 194H of the Act and, hence, no TDS was required to be deducted under section 194H of the Act. Thus, the order of CIT(A) was to be upheld.

Commercial Bank

An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses.

Tiny pen drive enough to pin you down – ITAT accepts pen drive as admissible evidence in IT proceedings

CHETAN GUPTA V. ACIT (Delhi - Trib.)

Pen drive and print outs taken from it constituted admissible evidence in income-tax proceedings and formed a basis for investigation and additions

In the instant case the assessee was arrested by Punjab Police and pen drive was recovered from him containing details of his dealings, which was forwarded by police to IT Department with the printouts. The Assessing Officer reopened the assessment and cited the pen drive and printouts in reasons recorded. On appeal, the CIT(A) upheld the additions made by Assessing Officer. Aggrieved-assessee appealed to the ITAT and contended that that the pen drive was not an admissible evidence for reopening assessment and that various provisions of Cr. P.C., IPC, Indian evidence Act and Cyber Laws had been violated by Punjab Police during search.

The Tribunal held in favour of revenue as under:

1. Assessee’s objections had no effect on recordings of reasons by Assessing Officer for forming a belief about escapement. It is trite law that technical rules of Evidence Act and Cr. P. C. were not applicable to these proceedings; 
2. From the record it had emerged that many of the entries mentioned in the pen drive belonged to various business concerns of the assessee in which he was associated with in the capacity of director or partner; 
3. They were explained by the assessee though on a prejudicial basis, but the fact remained that the entries had correlation with assessee’s activities. Thus, the contents of the pen drive would become admissible evidence in Income Tax proceedings and would form a basis for investigations and additions. 
4. Consequently, pen drive and printouts thereof constituted admissible evidences in those proceedings. The reasons for reopening were recorded on the basis of those contents; 
5. The reasons recorded for escapement of income and the material available on record with Assessing Officer had a live link with each other. Thus, the reasons for reopening the assessments were properly recorded by Assessing Officer.

Admissions made during survey are not conclusive unless supported by convincing evidences

ACIT V. MAYA TRADING CO. (Agra - Trib.)

Addition on the basis of seized material was unjustified if assessee was able to show that the admissions made during survey were incorrect

In the instant case, during search and seizure operation on assessee-firm, the survey party worked out the certain value of excess stock by preparing a provisional trading account. The partners of assessee-firm, not being able to explain the excess stock, surrendered the same and agreed to pay tax on the value of excess stock. The excess cash found during survey was declared by the partners as income of firm other than regular income. The return filed after survey didn’t disclose the excess stock and excess cash found during survey. Consequently, the AO made addition for excess stock under section 69 and on account of excess cash under section 69A. The CIT(A), substantially reduced the addition made by the AO. Aggrieved by the order of CIT(A), revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1. It is a well-settled law that admissions are not conclusive proof of the matter. They may be shown to be untrue or having been made under mistake of fact or law. Circumstances have to be seen under which same are made;
2. Admissions could be withdrawn unless it was conclusive. The Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18, had held that the assessee was to be given opportunity to show that admission was incorrect or didn’t show correct state of facts. The Punjab & Haryana High Court in the case of Kishan Lal Shiv Chand Rai v. CIT [1973] 88 ITR 293, had held that it was an established principle of law that a party was entitled to show and prove that admission made by it, was, in fact, not correct and true;
3. The sole basis of making addition, i.e., provisional trading account was not found to have correct figures of purchase and sales. Whatever items had been declared by the assessee on account of excess stock were correctly considered by the CIT(A). Since the figures of the sales and purchases were based on factual figures, it was a case of factual mistake committed by the Survey party as well as by the AO, which had been rightly corrected by the CIT (A);
4. Thus, the assessee on the basis of seized material had been able to show that the admission made at the time of survey, surrendering the additional income on account of excess stock was not correct and did not show correct state of facts. The CIT(A) correctly deleted the addition as no addition could be made against the assessee on the basis of mere admission. Therefore, the departmental appeal was to be dismissed.

Government Shutdown

The closure of all operations and services that are not considered essential by the US government. This occurs when a spending plan for the fiscal year cannot be agreed upon by the House of Representatives and the Senate. A shutdown causes many civilian federal employees to be furloughed until a funding bill is negotiated.

ITAT disallows sec. 54F exemption to the extent sum invested in construction before transfer of original asset

SMT. NIMMAGADDA SRIDEVI V. DY.CIT (Hyderabad - Trib.)

Investment made by assessee in new residential property was not entitled to deduction under section 54F to extent same was made before the sale of existing property

In the instant case, the assessee had filed its return for the relevant assessment year and had claimed deduction under section 54F in respect of amount invested in construction of a residential house property. During assessment, AO was of the view that the assessee was not entitled to deduction, as construction of house was substantially completed before the sale of capital asset. Therefore, the moot question that arose for consideration of the Tribunal was as under:

Whether the cost of construction incurred by the assessee after the sale of capital asset was entitled to deduction under section 54F, even if, the construction was commenced before the sale of capital asset and was completed within two years from the sale of capital asset?

The Tribunal held as under:

1. As per the ratio laid down by Karnataka High Court in the case of CIT v. J.R. Subrahmanya Bhatt [1986] 28 Taxman 578, the assessee was entitled to deduction under section 54F of the Act, though the assessee has commenced construction before the sale but completed the construction within two years after the sale. The commencement of construction prior to the sale of capital asset was immaterial and the assessee was entitled to deduction under section 54F of the Act;
2. In the case of Chandru L. Raheja v. ITO [1988] 27 ITD 551 (Bom.), it was held that when the assessee had already purchased land, started construction of a building then only that part of the investment in new house that was made out of the sale proceeds received after the transfer of the old house would qualify for exemption under section 54 of the Act;
3. The investment in residential house which had taken place after the sale of existing capital asset was to be considered only for deduction under section 54F;
4. Thus, whatever investment was made by the assessee in construction of new property within the period stipulated under section 54F, after the sale of existing property, would be entitled to deduction, but, the assessee was not entitled to deduction under sec. 54F in respect of the investment made in new property to the extent of investment made before the sale of existing property. Thus, the appeal of the assessee was partly allowed.