ITAT deals with ‘booking’ amount paid to acquire a new house; distinguishes between Ownership and Investment

RAM PRAKASH MIYAN BAZAZ V. DY. CIT [2014] 45 taxmann.com 550 (Jaipur - Tribunal)

Booking of two residential houses before the date of transfer would not provide ownership rights to assessee, thus, he could not be deemed to be owning two residential houses on date of transfer.

Investment in new house by payment of booking amount would be deemed as valid investment for purposes of Section 54F relief.

The issues that arose before the Tribunal were as follows:

• Whether assessee could be deemed to own two residential houses on date of transfer if he had only booked two residential houses? 
• Whether booking of residential flats could be deemed as investments for purposes of exemption under section 54F?

The Tribunal held in favour of assessee as under:-

• Proviso to Section 54F(1) provides that if assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset then he will not be entitled to exemption. 
• The meaning of term ‘owns’ used in proviso to section 54F has a different meaning. The owner here, means a legal owner who is entitled to receive income from the property in his own right. In the absence of possession, registration, title, etc., question of assessing ‘income from house property under section 22 of Income-tax Act (the Act) doesn’t arise. 
• When a flat is booked assessee has a ‘right to acquire’ and this right is not equivalent to ‘own’ a house. Therefore, by mere booking of flats, it could not be said that assessee had ownership of the flats. Thus, assessee did not own more than one residential house on the date of transfer of original asset. 
• With regard to purchase of new residential house, the provision does not lay down a condition that a new house should either be complete or it should be purchased as a complete habitable house. The aim is to direct the minds of the society towards purchasing new residential houses so that the menace of shortage of houses is tackled to some extent. 
• CBDT vide circular No. 471 dated 15/10/1986 and circular No. 672 dated 06/12/1993 had also clarified that the amount paid towards booking is to be treated for ‘construction’ for the purpose of section 54/54F. 
• Hence, owning of a residential house at the time of transfer of the original asset has different meaning and acquisition of new asset ‘which is equivalent to purchase of new residential house’ has entirely different meaning. The CIT(A) had misdirected himself in giving the same meaning to the residential house owned at the time of transfer of the original asset and the investment made out of the capital gain in the purchase or construction of new house, which has been defined as ‘new asset’ in the Act. Therefore, investment in new residential house by payment of booking amount only had to be allowed.

Signing of development agreement couldn’t trigger capital gains tax unless developer discharged his obligations

BINJUSARIA PROPERTIES (P.) LTD. V. ACIT [2014] 45 taxmann.com 115 (Hyderabad - Tribunal)

Capital gains could not be brought to tax in year of signing of development agreement, as developer had not done anything to discharge obligations casted on it.

Facts:

• During the relevant year, the assessee gave its land for development and received a refundable deposit from the developer. In terms of development agreement, the developer had to develop the property according to the approved plan and deliver to the assessee 38 per cent of the constructed area in the residential part. 
• The Assessing Officer opined that since the transfer had taken place during the year under appeal, in terms of the development agreement-cum-GPA, the assessee was liable to pay capital gain tax on the date of transfer. 
• The CIT (A) confirmed the order of Assessing Officer. The aggrieved-assessee filed the instant appeal.

The ITAT held in favour of assessee as under:

• 'Development Agreement-cum-General Power of Attorney' indicated that only a 'permissive possession' was handed over by assessee to the developer. 
• It was only upon receipt of consideration in the form of developed area by the assessee, the capital gain becomes assessable in the hands of the assessee. 
• Mere receipt of refundable deposit by assessee from developer could not be termed as receipt of consideration as no developmental activity was carried out on the land and even no approval for the construction of the building was obtained by developer.
• While the assessee had fulfilled its part of the obligation under the development agreement, developer had not done anything to discharge the obligations cast on it under the development agreement, thus, capital gains could not be brought to tax in the year in which development agreement was signed by assessee.

Resident assessee can claim losses incurred from house property located abroad in return filed in India

SUMIT AGGARWAL V. DY. CIT [2014] 45 taxmann.com 345 (Chandigarh - Tribunal)

An option is available to the resident-assessee to file return of income either under the Indian tax laws or under the treaty. If assessee files the return of global income in India, the Revenue is bound to give effect to such return. Therefore, losses from house property located abroad was to be included in the income of resident-assessee.

Facts:

• The assessee filed his return of income after including losses from house property located abroad. He purchased this property in Australia which was already on rent. He obtained a loan from ANZ Bank, Australia (‘ANZ’) to purchase the property. 
• The loss was computed under the head house property due to payment of interest to ANZ. 
• During appellate proceedings, the CIT(A) referred to the decision of Apex Court in case of CIT V. PVAL Kulandagan Chettiar [2004] 137 Taxman 460 (SC) and held that as far as rent income from Australia was concerned, the assessee was required to file the return in Australia and such income could not be included in Indian income. Therefore, negative income could not be assessed in India.

The Tribunal held in favour of assessee as under:

• In view of Section 5 of the Income-tax Act (‘the Act’) in case of a resident, income accruing or arising outside India had to be assessed in India. The Sec 90(2) of the Act clearly provides that wherever DTAA is applicable to assessee he has an option to apply either Indian Tax Laws or provisions of DTAA, whichever are more beneficial to him. 
• Therefore, the assessee had an option to file return of income under the Indian tax laws where DTAA was applicable. 
• In the instant case, the assessee had exercised the option of filing return under Indian laws, thus, the same could not have been refused simply because DTAA was applicable. 
• The decision in case of PVAL Kulandagan Chettiar (supra) was distinguishable because in that case the assessee was a resident of India and Malaysia. It was due to financial connection of the assessee with Malaysian property it was held that income from Malaysian rubber plantation was taxable only in Malaysia. 
• The assessee had right to file the return of global income in India and the Revenue was bound to give effect to such return. The CIT(A) was not correct in holding that income from house property in Australia was not assessable in India. Accordingly, the order of the CIT(A) was to be set aside and the Assessing officer was to be directed to include the loss from such house property in the hands of the assessee.

Survey & Search

Income tax survey and search are becoming increasingly common as businesses continue to grow. Most people including savvy professionals intermingle the terms – survey, search & scrutiny. Although scrutiny is carried out only during the time of on-going assessment and stands on a completely different trajectory, search and survey are the mechanisms that may be used by the department independent to the assessment proceedings.

A search is generally carried out when there is a continuous non-compliance on part of the assessee to attend to the summons received from the department or showing negligence towards the Income tax notices or where the authorities have a clue as to undisclosed income including possession of cash, bullion, jewellery or such other valuable articles.

A survey on the other hand is meant to discover assessees, who could have been in the limelight but have been managing to avoid so, by performing an on-site investigation so as to gather on-spot information including conducting inspection of stock and cash.

Following are the differences between the two:

• In a survey, the income tax authorities have a right to enter only those places which are deemed to be your place of business or profession, whereas in a search operation, they can search any place including your residential premises, vehicle, or any other place, without any restrictions of whatsoever nature, which they believe is required to be searched.

• During a survey, the authorities can only impound your books of accounts whereas in a search operation, the power of seizure can be exercised to seize not only the books of accounts but also money, bullion, jewellery or other valuable articles (there are some exceptions to it one of which is stock-in-trade)

• It should be noted a person cannot be physically searched during the course of a survey although physical inspection of all the members present at the premises, including the ones who are about to leave or about to enter, is permitted in a search

• The right of recording the statements made by the assessee is given to the officers in a survey In both the operations, the officers are authorized to record the statement of an assessee or any other relevant person; however, in the case of a search operation a statement made by the assessee can also be taken on oath which has severe implications. It may happen that even where the assessee has done something transparently and genuinely, his inadvertent remarks can create a situation for his own-self; therefore it is extremely advisable that the assessee acts in a bonafide manner and makes his statements consciously.

If you are a party to a survey or search investigation, you must know the following:

• Material conducted in a survey or search investigation is valid for other kinds of investigation even if it is subsequently proved that the department had conducted a bogus investigation. So even if you, as a victim, are capable of proving that the investigation was not demanded, still the material once gathered is legally usable by the department for other proceedings in your case. This sounds strange but it is true!

• The investigation can only be commenced during normal working hours of the business although once commenced it can go round the clock

• You are entitled to call a Doctor if you need one. The officers cannot deny this right under any circumstances. Also, children are allowed to go to school. The woman of the house shall be inspected by a lady officer only and in certain religions where it is customary for women to not appear in front of public, i.e. in front of an unknown third person, then such women even where a search is on-going can legally walk away from that place. This is a special privilege because in normal circumstances people are neither allowed to enter nor allowed to leave the place till the time the entire investigation is completed.

• Try to attack the problem, and not the departmental officer. Always, keep yourself cool and conscious.

• Never give inaccurate details. If you don’t know something that belongs to previous years, you can always say let me verify before answering it to you. Take help of the books of account and other documents and give all the possible information, which is readily available.

• Assessee may insist that he will give answer only once he is in a mental state of mind fit enough to provide the information required. Investigations generally go round the clock, and it is common to find officers and accountants spending 24-36 hours together at a stretch at the business premises. Take rest.

• If stock verification is being conducted by the department, or if counting of cash or jewellery is being done, always verify the details once the exercise is complete. You should check the particulars recorded and ensure that the method adopted is appropriate; price / rates considered are in line with the market, and finally arithmetical accuracy. Errors, if any, should be immediately brought to the notice of the personnel.

• The owner of the premise need not be present for an investigation to begin. Some people have an apprehension that without me being personally present, who will answer and what if someone gives a wrong answer. But such an excuse is not tenable in the eyes of law and irrespective of which corner of the world you are sitting in, the process will still continue the way it should.

• In a survey, the departmental personnel are not authorized to break open any lock or door

• If anything unaccounted for is identified during the investigation, remember your taxability will be at a flat rate of 30%, over and above which a handsome penalty can also be levied depending on further facts of the case

• Last but not the least; never keep “irrelevant” data on your computer hard-disk. This is an advice better received sooner than later. In the author’s experience, it is not uncommon to find clients regretting the fact that some Sensitive data got confiscated along with the financial data. Remember, once the confiscation process starts, it is not permissible to ask the income tax officer to delete the client’s personal data and keep only official data on the hard disk taken under custody.

The powers and actions in a survey action are far milder than that in the course of a search operation. Many a times a survey is being converted, ex tempore, into a search operation. Thus, where a normal survey is being initiated, and if something fishy is found, or where the assessee doesn’t cooperate in good faith, then the income tax personnel may refer the case on the spot to the officers of the search department, thereby making the situation more difficult. Although it is the assessee himself who is accountable to the authorities for providing all the information as asked for, you are always permitted to call your tax professional which may make your task simple.

CBDT extended due date for filing of return to November 30, 2014; no extension to Companies/Firms not liable to tax audit

The CBDT, vide notification no. 33/2014 has revised the forms for filing tax audit report wef July 25, 2014. Further, the due date for filing of tax audit report (in respect of assessees who are not required to furnish report under Section 92E) has been extended to November 30, 2014 vide Order (F.No.133/24/2014-TPL), dated 20-8-2014.

After the extension of due date for filing report of tax audit, a number of representations has been received by the CBDT and writ petitions have also been filed in various High Courts for directing CBDT to extend due date for filing of return of income to November, 30, 2014.

Now, the CBDT has extended the due date of filing return from September 30, 2014 to November 30, 2014 for all purposes. However, the assessee shall be liable to interest under Sec. 234A for filing of return of income after September 30, 2014.

Further, the CBDT has clarified that the extended due date for filing of return will not be applicable to an assessee (other than working partner of a firm which is required to obtain and furnish tax audit report) who is required to file its return of income by September 30, 2014 but not required to obtain and furnish tax audit report.

Expenses on higher education of director’s son was deductible as he committed to continue his employment after education

KOSTUB INVESTMENT LTD. V. CIT [2014] 45 taxmann.com 123 (Delhi)

Where expenditure on higher education of employee had an intimate and direct connection with assessee's business, it would be deductible, even though such an employee was son of a director.

Facts:

• The assessee, engaged in business of dealing in securities and investment, had incurred expenditure on higher education of 'D', an employee of the company, who happened to be the son of a director, for undertaking an MBA course in the UK.
• The Assessing Officer rejected the deduction under section 37(1). Further, the CIT(A) and the Tribunal upheld the disallowance. The aggrieved-assessee filed the instant appeal.

The High Court held in favour of assessee as under:

• As assessee was in business of investments and securities and expenditure was incurred on MBA course of D, it couldn’t be said that course was unconnected with the business of the assessee.
• The board of directors duly passed a resolution authorizing the disbursement of such expense. As assessee had secured a bond from ‘D’ by which he committed himself to work for a further five years period, after completing his MBA, such arrangement could not be regarded as a sham.
• The expenditure claimed by the assessee to fund the higher education of its employee had an intimate and direct connection with its business, i.e., dealing in security and investments. It was, therefore, deductible under section 37(1).

Composite contract of manufacture, supply and installation of lifts in buildings amounts to works contract

KONE ELEVATOR INDIA (P.) LTD. V. STATE OF TAMIL NADU [2014] 45 taxmann.com (Supreme Court)

Composite contract of manufacture, supply and installation of lifts in buildings (involving civil construction) amounts to works contract; however, if there are two contracts - purchase of components of lifts from a dealer and separate contract for installation, same would be 'sale' and 'labour and service' respectively. 

Facts:

The issue before the Supreme Court was:

Whether a contract for manufacture, supply and installation of lifts in buildings is a "contract for sale of goods" or a "works contract"?

The Supreme Court held as under:

• Lift is not a plant which is erected at site. It is basically comprised of components like lift car, motors, ropes, rails, etc., which have their own identity even prior to installation of lift. The Lifts cannot be functional without its installation because it is a permanent fixture in a building;
• Therefore, installation of a lift in a building could not be regarded as a transfer of a chattel or goods and it was to be deemed as composite contract;
• Thus, composite contract which required installation of lift in a building would be deemed as 'works contract' and liable to tax accordingly.
• However, if there was two contracts, namely, purchase of components of lift from a dealers, and separate contract for installation, they would be deemed as 'sale' and 'labour and service' respectively.

Section 54F doesn’t stipulate approval from Municipal Corporation for construction of residential house; says ITAT

B. SIVASUBRAMANIAN V. ITO [2014] 45 taxmann.com 74 (Chennai - Tribunal)

Provisions of section 54F mandate construction of a residential house within period specified, however, there is no condition that building plan of residential house should be approved by Municipal Corporation.

Facts:

• During relevant year, the assessee earned long-term capital gain on sale of shares. He claimed deduction under section 54F in respect of construction of a new residential property.
• The Assessing officer denied benefit under section 54F to assessee and made additions. On appeal, the CIT(A) upheld the order of AO on the ground that since there was no approval plan for new construction the assessee was not entitled to section 54F benefit.
• The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

• The provisions of section 54F mandate construction of a residential house within the period specified, however, there is no condition that the building plan of the residential house should be approved by the Municipal Corporation.
• If any person constructs a house without approval of building plan, he will be raising construction at his own risk and cost. As far as for availing of exemption under section 54F was concerned, approval of building plan was not necessary. The approved building plan, certificate of occupation, etc., are sought to substantiate the claim of new construction.
• In the instant case, the fact that the assessee had raised new construction was evident from the interim order issued by the Municipal Corporation. It was evident that the assessee had put up a new construction in place of old residential building; thus, he was entitled to claim exemption under section 54F.

Non-Resident’s capital gains are taxable at concessional rate under Proviso to sec. 112(1); Cairn’s judgment followed

PAN-ASIA IGATE SOLUTIONS, IN RE [2014] 45 taxmann.com 322 (AAR - New Delhi)

The first and second proviso to section 48 can't be said to be granting the same relief or benefit. Both provisos are neither identical nor they serve the same purpose. Hence, benefit of Proviso to section 112(1) is allowable to non-resident availing of benefit of first proviso to section 48.

Facts:

• 'P', a Mauritian Company ('applicant'), purchased listed shares of an Indian company from 'I' (a US based Company). 
• The applicant sought advance ruling on the issue whether tax had to be deducted at 10% under section 195 on long-term capital gain arising to such non-resident as per proviso to section 112(1)?

The Authority held as under:

• The observations of the High Court in case of Cairn UK Holdings Ltd. v. DIT [2013] 38 taxmann.com 179 (Delhi provided as under: 
• Proviso to section 112(1) gives an option to assessee to tax long-term capital gain at lower rate of 10% (without giving benefit of indexation as per second proviso to section 48) in case of transfer of listed securities, units or zero coupon bonds. 
• The first proviso to section 48 ensues that non-resident would be given benefit to adjust fluctuation in foreign exchange while computing capital gain. 
• The second proviso to section 48, which provides for cost inflation index, is applicable to all assessees including non-residents, if such non-residents are not covered by the first proviso. 
• The two provisos to Section 48 cannot be equated as granting same relief or benefit. They operate independently and have different purposes and objectives. 
• It is difficult to state that benefits under the first proviso and second proviso to section 48 are identical or serve the same purpose. 
• Thus, the legislative intent was to allow benefit of Proviso to section 112(1) to non-residents as well who are claiming benefit of first proviso to section 48.

• Following the order of High Court (supra), the Mauritian Company was directed to deduct tax at source at the rate of 10% under proviso to section 112(1).

Postal ballot voting can't completely serves as substitute for actual meeting; doesn't apply to court-convened meetings

WADALA COMMODITIES LTD., IN RE [2014] 45 taxmann.com 245 (Bombay)

 

Provisions for compulsory voting by postal ballot and by electronic voting to the exclusion of an actual meeting cannot and do not apply to court-convened meetings.

Facts:

The issue before the High Court was:

Whether in view of the provisions of Section 110 of the Companies Act, 2013, a resolution for approval of amalgamation Scheme can be passed by a majority of the shareholders casting their votes by postal ballot, which includes voting by electronic means, which would eliminate need for an actual meeting?

The High Court held as under:

• Provisions for compulsory voting by postal ballot and by electronic voting to the exclusion of an actual meeting could not and do not apply to court-convened meetings;
• At such meetings, provision ought to be made for postal ballots and electronic voting, in addition to an actual meeting. Electronic-voting would also be made available at the venue of the meeting; 
• Any shareholder who has cast his vote by postal ballot or by electronic voting from a remote location (other than the venue of the meeting) would not be entitled to vote at the meeting. He or she might attend the meeting and participate in those proceedings.

Notice is required while contemplating attachment of bank account and not for initiating action for such attachment

ANIL KUMAR BANERJEE V. UNION OF INDIA [2014] 44 taxmann.com 465 (Calcutta)

 

No notice is required for initiating action for attaching account of tax defaulter; notice required when such act is contemplated.

Facts:

• The assessee filed an application for stay before the assessing authority when the matter was pending before the CIT (A). The Assessing Officer did not dispose of the stay application without any explanation for nearly two years. 
• During the pendency of that application, the authorities passed an order for attachment of bank account of assessee under section 226(3) in haste without giving any prior notice. 
• The aggrieved-assessee filed the instant writ petition. One of the issues for consideration of High Court was:

Whether before taking recourse to section 226(3), the authorities should have issued a prior notice to the assessee?

The High Court held as under:

• In Golam Momen v. Asstt. CIT [2003] 132 Taxman 826 (Cal.), it was held that mere filing of an appeal does not tantamount to stay of the recovery proceedings. Section 226(3) contemplates the notice to be issued to the assessee but it does not prescribe issuing of prior notice to assessee before taking course to the aforesaid provision. 
• The section does not postulate that before an action is set into motion, a notice is required to be served on the assessee but what is held is that if such an action is contemplated, the notice should also be served to the assessee. Therefore, the judgment rendered in the case of Golam Momen (supra) depicted the correct proposition of law.

MGT 14 - Approval of Financial statements of a Company

Approval of Financial statements of a Company for FY 2013-14 – Have You filed form MGT-14?

We are all in the process of finalising the accounts of Companies for the Financial Year 2013-14 or have already finalised such financial statements. But, do we know that the resolution with respect to approval of financial statements by the Board for the FY 2013-14 is to be filed with the Registrar of Companies.

As per the provisions of Companies Act’2013, the financial statements of a company along with the Directors’ report are to be approved by the Board of Directors of the company at a meeting of the Board of Directors. 

Let us take a look at the resolutions to be filed with the Registrar:

As per clause (g) of Section 117 (3) of the Companies Act’2013 the following resolutions are to be filed with the Registrar:

Resolutions passed in pursuance of sub-section (3) of section 179

Now let us look at the provisions of sub-section (3) of section 179:

Section 179(3):

The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:—

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorise buy-back of securities under section 68;

(c) to issue securities, including debentures, whether in or outside India;

(d) to borrow monies;

(e) to invest the funds of the company;

(f) to grant loans or give guarantee or provide security in respect of loans;

(g) to approve financial statement and the Board’s report;

(h) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or acquire a controlling or substantial stake in another company;

(k) any other matter which may be prescribed:

From the simultaneous reading of the above Sections 117 and Section 179 (3) of the Companies Act’2013, it is clear that unlike the previous years, the resolution with respect to approval of financial statements and the Board’s report for the FY 2013-14 onwards has to be separately filed with the Registrar of Companies.

Form MGT-14 has been prescribed for filing resolutions listed under section 117 of the Companies Act’2013.

What is the last date for filing the form MGT-14?

As per the provisions of Section 117 of the Companies Act’2013, every resolution listed under sub-section (3), has to be filed with the Registrar within thirty days of passing of such resolution.

Therefore, in order to avoid late fee under the provisions of the Companies Act’2013, the resolution approving the financial statements and the Board’s Report has to be filed within 30 days of such approval.

Now let us examine the latest date upto which the financial statements can be approved and Form MGT-14 could be filed.

As per the provisions of Section 96 of the Companies Act’2013, every company other than a one-person company shall hold in each year a general meeting as its Annual General Meeting within a period of six months, from the closing of the financial year.

Since, the accounting year of most of the companies is the financial year i.e period beginning from 1^st day of April of the preceding year and ending with the 31^st day of March of the subsequent year. 1^stApril’2013 to 31^st March’2014 in our case, therefore

The Annual General Meeting can be held latest by 30^th September’2014.

Section 101:

As per the provisions of Section 101 of the Companies Act’2013,

(1) A general meeting of a company may be called by giving not less than clear

Twenty one days’ notice either in writing or through electronic mode in such manner as may be prescribed:

Therefore, the notice of the meeting should reach the members latest by the 8^th of September’2014.

Since, the facility of internet is not available in everywhere in India, therefore we consider notice in writing to be sent by registered post. In that case we consider three clear days as the time lag between the posting of notices and the receipt of the notices by the members. Therefore the notices need to be posted by the 4^th of September’2014 for the AGM of FY 2013-14.

Since the notices are to be posted by the 4^th of September’2014, therefore the Board meeting approving the financial statements alongwith the Board’s Report and setting the Agenda for the AGM for FY 2013-14 should have taken place latest by the 3^rd of September’2014.

So, If 3^rd of September’2014 is taken as the date of Board meeting for approval of the financial statements then MGT-14 has to be filed latest by 2^nd of October’2014 in order to avoid late fee under section 403 of the Companies Act’2013.

Notes:

• In this situation, we have considered clear twenty days notice for the AGM. The AGM can be called at a shorter notice if consent is given in writing or by electronic mode by not less than ninety-five per cent of the members entitled to vote at such meeting. The situation may alter in that case.

• The notice of the meeting can also be called by electronic mode i.e E-mail, the notice in that case will be received on the day of mailing itself and the same can be done by the 7^th or 8^th of September’2014 and the meeting could be held on the seventh of September’2014 and MGT-14 can be filed latest by 6^th October’2014.