No business income if shares held as investments were sold within short span for better returns

DY. CIT V. E-CAP PARTNERS [2014] 45 taxmann.com 342 (Mumbai - Tribunal)

Merely because assessee liquidated its investments within a short span, which had given better overall earning to assessee, it would not lead to conclusion that assessee had no intention to keep on funds as investment in equity shares, but was actually intending to trade in shares.

Facts:

• The assessee was engaged in the activity of investing in shares and showed the said shares as investments in the audited balance-sheet. Consequently, as and when the shares were sold, profit arising thereon was offered as capital gains.
• However, during the year under consideration, the Assessing Officer did not treat the gain on sale of investment as 'capital gains' and instead treated it as 'business income'.
• On appeal, the CIT(A) allowed assessee's claim. The Aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

• The treatment given by the assessee in its books of account was one of the decisive factors to find out whether the shares were held as investments or stock-in-trade. If the shares were bought with the intention of earning capital gains and dividend by keeping it as investment, the gain arising therefrom was to be treated as capital gains.
• On the other hand, if the shares were purchased with the intention to earn profit thereon and the same was treated as stock-in-trade in the books of account, the profit arising on their sales would be liable to be treated as business income.
• Merely because the assessee liquidated its investment within a short span of time, which had given better overall earning to the assessee, it would not lead to the conclusion that the assessee had no intention to keep them as investments.
• The assessee had been consistently investing in shares and income arising from transactions of sale and purchase of shares had been shown as capital gains. Analysis of balance sheet of assessee reflected holding of shares as investments.
• In the instant case, the assessee had made investment in shares with an intention to earn dividend income. Therefore, it could not be said that the assessee was doing business. Thus, resultant gains on sale of shares were to be taxed as capital gains instead of business income.

Even genuine transactions go through rigours of section 50C; provision applicable if stamp value exceeds actual price

ITO V. SMT. CHITTI PARVATHA VARDHANAMMA [2014] 45 taxmann.com 327 (Hyderabad - Tribunal)

Stamp duty value shall be deemed to be full value of consideration where consideration stated by assessee is less than stamp duty value and section 50C would operate, whatever may be the problems faced by an assessee.

Facts

• The assessee sold her property below the market value adopted by the Registration Authorities . By invoking provisions of Section 50C, the Assessing Officer (‘AO’) had brought the difference (i.e., difference between actual price of property and value adopted by registration authorities) to tax.
• The assessee substantiated her claim on the ground that the property was sold for lesser price on account of pending litigations with the tenants. On appeal, the CIT(A) deleted addition made by AO. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of revenue as under:

• Section 50C states that the stamp duty value shall be deemed to be the full value of the consideration where the consideration stated by the assessee is less than the stamp duty value. Being a deeming provision of Section 50C, it has to be strictly applied without widening its scope.
• If the assessee had not been satisfied with the value adopted for the stamp duty purposes, the assessee could request the Assessing Officer to refer the matter to the DVO for valuation but assessee had not done so.
• The misfortunes happened to the assessee or the difficulties faced by the assessee or the matter of distress sale, etc. could not be a ground to modify the valuation. If such extraneous factors were relied upon, the deeming provision of law stated in section 50C would be contravened.
• Being so, the Assessing Officer had to complete the assessment as per the provisions of section 50C and whatever problem might have been faced by assessee, in reality; those reasons could not be permitted to go beyond the scope of section 50C.

Sum paid to unrelated party via banking route after deduction of tax at source couldn’t be treated as bogus

CIT V. MUNDRA PORT AND SEZ LTD [2014] 45 taxmann.com 361 (Gujarat High Court )

The sums paid to unrelated parties could not be treated as bogus if they were paid through banking channel after deduction of tax thereon.

Facts:

• The Assessing Officer disallowed consultancy charges paid by assessee by treating them as bogus expenditure.
• He made the disallowance on ground that consultancy was not provided by parties, as no reply was received from them in respect of letters issued to them.
• On Appeal, the CIT (A) deleted such additions. Further, the Tribunal held in favour of assessee. The Aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

• The Tribunal, after taking into account substantiating material produced before it, rightly concluded that it was difficult to believe that any assessee would claim such bogus expenditure, when it was eligible for 100% deduction under section 80IA;
• In addition, even otherwise, the services rendered by Consultants were not found to be doubtful. The doubt was only with regard to the quantum of services rendered by them;
• However, when payment was made to unrelated parties through the baking channel after deduction of tax, the appellate authorities had rightly addressed the instant issue;
• Thus, the sums paid to unrelated parties could not be treated as bogus if it they were paid through banking channel after deducted of tax thereon.

Conveyance allowance received by LIC employee to develop insurance business is exempt from tax

CIT V. MADAN GOPAL BANSAL [2014] 45 taxmann.com 301 (Rajasthan High Court)

Conveyance allowed paid by LIC to its Development Officer for performance of his duties and development of insurance business is exempt under section 10(14).

Facts:

• The assessee, a Development Officer of LIC, had received certain amount towards conveyance allowance from the LIC.
• Though the same was part of the salary certificate but the contention of the assessee was that the said amount had been incurred in development of LIC’s business to receive the premium on account of various policies and the said amount was entirely exempt under section 10(14).
• The AO rejected assessee's contention and made addition of impugned sum as income of the assessee. On appeal, the CIT(A) held in favour of assessee. Further, the Tribunal upheld the order of CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

• The conveyance allowance was paid to the Development Officers for meeting actual expenditure incurred by them in discharge of their field duties and, thus, necessarily and exclusively for meeting of such expenditure, the allowance was being exempt.
• The LIC was sanctioning conveyance allowance to the Development Officers considering the expenditure incurred by them for procuring the business and it was fixed by a general formula having reference to the parameters of the business. Thus, the impugned allowances were reimbursement of the actual expenditure incurred by the Development Officers on account of conveyance in relation to the performance of their duties.
• The said expenditure had a close nexus to the performance of the duties and development of the insurance business, inter alia, by way of meeting several persons, to enroll new life insurance agents, to meet the customers for encouraging them to take insurance policies etc. Thus, in such circumstances, expenditures had to be incurred towards conveyance. Therefore, the Tribunal was justified in upholding the exemption granted by the CIT(A).

Financing of Current Assets

Current assets of enterprises may be financed either by short-term sources or long-term sources or by combination of both. The main sources constituting long-term financing are shares, debentures, and debts form banks and financial institutions. The long term source of finance provides support for a small part of current assets requirements which is called the working capital margin. Working capital margin is used here to express the difference between current assets and current liabilities. Short-term financing of current assets includes sources of short-term credit, which a firm is mostly required to arrange in advance. Short-term bank loans, commercial papers etc. are a few of its components. Current liabilities like accruals and provisions, trade credit, short-term bank finance, short-term deposits and the like warranting the current assets are also referred to a short-term term sources of finance.Spontaneous financing can also finance current assets, which includes creditors, bills payable, and outstanding receipts. A product firm would always opt for utilizing spontaneous sources fully since it is free of cost. Every concerns that can no more be financed by spontaneous sources of financing has to decide between short-term and long-term source of finance along with relevant proportion of the two. 

There are three approaches of financing current assets that are popularly used. They are;

• Matching Approach 

  As the name itself suggests, a financing instrument would offset the current asset under consideration, bearing financing instrument bearing approximately same maturity. In simple words, under this approach a match is established between the expected lives of current asset to be financed with the source of fund raised to finance the current assets. For this, reason a firm would select long-term financing to finance or permanent current assets to finance temporary or variable current assets. Thus, a ten-year loan may be raised for financing machinery bearing expected life of ten years. Similarly, one-month stock can be financed by means of one-month bank loan. This is also termed as hedging approach.

• Conservative Approach 

  Conservative approach takes an edge over and above matching approach, as it is practically not possible to plan an exact match in all cases. A firm is said to be following conservative approach when it depends more on long-term financial sources for meeting its financial needs. Under this financing policy, the fixed assets, permanent current assets and even a part of temporary current assets is provided with long-term sources of finance and this make it less risky nature. Another advantage of following this approach is that in the absence of temporary current assets, a firm can invest surplus funds into marketable securities and store liquidity.

• Aggressive Approach 

  As against conservative approach, a firm is said to be following aggressive financing policy when depends relatively more on short-term sources than warranted by the matching plan. Under this approach the firm finance not only its temporary current assets but also a part of permanent current assets with short-term sources of finance.In nutshell, it may be concluded that for financing of current assets, a firm should decide upon two important constraints; firstly, the type of financing policy to be selected (whether short-term or long term and secondly, the relative proportion of modes of financing. This decision is totally based on trade-off between risk and return. As short-term financing is less costly but risky, long-term financing is less risky but costly.

No revocation of registration of trust working for welfare of cows if it made profit from sale of milk

SHREE NASHIK PANCHVATI PANJARPOLE V. DIT (E) [2014] 45 taxmann.com 220 (Mumbai - Tribunal)

Where assessee-trust was established for purpose of cow breeding and protection of cows and oxen, incidental income earned by it from sale of milk could not be regarded as carrying on activity of trade or commerce within meaning of proviso to section 2(15).

Facts:

• The assessee-trust was established for cow breeding, protection of cows and oxen. It got registration under section 12AA.
• The DIT(E) found that income of assessee from sale of milk was far in excess of prescribed limit under proviso to section 2(15).
• He, thus, opined that assessee was doing regular activities which were in the nature of business by way of sale of milk and was directly hit by the proviso to section 2(15). He, accordingly, cancelled the registration of trust. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

•  The dominant purpose of the trust was to provide asylum for old, sick, weak, disabled and stray animals and birds, more particularly cows and other cattle and to bring about improvement in breeding of cattle for the beneficial promotion, upkeep, maintenance and propagation of cows.
• It could not be denied that milk needs to be procured from cows, otherwise it will be detrimental if the milk is not procured from time-to-time. The milk so procured was distributed free of charge to children, hospitals, schools, etc., and, thereafter, the remaining milk was distributed to public at large at a very nominal rate. This activity could not be deemed as business, trade or commerce.
• The assessee-trust was engaged in multifarious activities of diverse nature but the primary and the dominant activity was “panjrapole”. This predominant object had been held as charitable purpose by the Gujarat High Court in case of CIT v. Swastik Textile Trading Co. (P.) Ltd. [1978] 113 ITR 852 (Guj.)
• The assessee-trust would not loose its character of charitable purpose merely because some profits arose from the activity of the sale of milk. Such activity could not be carried on in such a manner that it would not result in any profit.
• There was no material available on record, which could suggest that the assessee-trust was conducting its affairs solely on commercial lines with a motive to earn profit only. The proviso to section 2(15) was not applicable to the instant case and the assessee deserved continuance of registration under section 12AA. Accordingly, the order of the DIT(E) was to be set aside.

SAT affirmed penalty as appellant failed to make public announcement of acquisition of equity in excess of 5%

MS. SANGEETA SETHIA V. SEBI (2014) 46 taxmann.com 164 (SAT - Mumbai)

Where appellants-promoters acquired shareholding of target company beyond 5 per cent limit prescribed under regulation 11 of Takeover Regulations but failed to make public announcement, appellants were liable to pay interest.

Facts:

• Appellant-promoters had acquired shareholding of target company which exceeded shareholding limit of 5 per cent prescribed under regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
• After conducting enquiry, SEBI found the appellants guilty of having violated regulation 11(1) as appellants failed to make public announcement to shareholders of company.
• SEBI directed appellants to make public announcement and to pay interest on offer price from date when appellants had acquired shares of target company. The aggrieved-appellant filed the instant appeal.

The Securities Appellate Tribunal held as under:

• The acquisition of shares of the target company by each appellant was effected at the instance of appellant who was admittedly, the promoter and Managing Director of the target company. The appellants failed to make public announcement on acquiring shareholding beyond 5 per cent, and, thus, appellants were liable to pay interest.
• In view of clear violation of the mandate of Takeover Regulations, there was no substance in the present case to take a lenient view in relation to making public announcement by altering the impugned order.
• Thus, it was not found appropriate to interfere with the impugned order in exercise of powers conferred under section 15T(4) of the SEBI Act, 1992. 

50% of additional depreciation allowable in first year and balance in next year on usage of asset for less than 180 days

APOLLO TYRES LTD. V. ACIT [2014] 45 taxmann.com 337 (Cochin - Tribunal)

In terms of section 32(1)(iia), there is no restriction on assessee to carry forward additional depreciation. Thus, where only 50 per cent of additional depreciation was allowable in year of purchase of machinery, as it was put to use for less than 180 days during said year, balance additional depreciation could be claimed in subsequent assessment year.

Facts:

• The assessee claimed additional depreciation in respect of new machinery and plant acquired after 30-9-2005. The Assessing Officer (‘AO’) allowed 10 per cent of the additional depreciation for the assessment year 2006-07. The assessee claimed the remaining 10 per cent of the depreciation during the year under consideration.
• The Assessing Officer rejected the claim of the assessee on the ground that there was no provision for carry forward of any additional depreciation. The DRP confirmed order of Assessing Officer.
• The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

• Section 32(1)(iia) provides that in case a new machinery or plant is acquired and installed by an assessee, who is engaged in the business of manufacture or production of an article or thing, then a sum equal to 20 per cent of the actual cost of the machinery and plant shall be allowed as a deduction.
• The assessee had already claimed 10 per cent of additional depreciation in the earlier assessment year since the machinery was used for less than 180 days and the balance 10 per cent was claimed in the year under consideration.
• Section 32(1)(iia) does not prescribe the year in which the additional depreciation has to be allowed. It simply provides that the assessee is eligible for additional depreciation at 20 % of the cost of the machinery, provided the machinery is acquired and installed after 31-3-2005.
• As per proviso to section 32(1)(iia) if the machinery is put to use for the purpose of business for less than 180 days, the assessee is entitled to 50 per cent of the prescribed rate of additional depreciation. The Act is silent on the allowance of the balance additional depreciation in the subsequent year;
• This issue was considered by the Delhi Bench of this Tribunal in the case of Dy. CIT v.Cosmo Films Ltd. [2012] 24 taxmann.com 189 (Trib.), wherein it was decided that when there was no restriction in the Act to deny the benefit of balance 50 per cent, the assessee was entitled to balance additional depreciation in the subsequent assessment year.
• Thus, in view of the decision in case of Cosmo Films (supra), balance 50 per cent of the depreciation had to be allowed in the subsequent year. Therefore, the orders of the lower authorities on this issue were to be set aside.

Room rent and food/beverage charges aren’t includible in value of convention services, if they are raised separately

CHOKHIDHANI RESORTS (P.) LTD. V. CCE [2014] 46 taxmann.com 20 (New Delhi – CESTAT)

Bills of room rent, food and beverages raised separately in a convention service cannot be included in value of convention service.

Facts:

• The assessee, a provider of convention services, was paying service tax under that category. Participants of such convention normally book rooms for lodging purpose.
• The department was of the view that room rent and charges for food provided to participants were required to be included in value of convention services.
• Since the assessee did not pay tax on such charges, revenue initiated proceedings for recovery of tax short paid and confirmed demand.

On appeal, the CESTAT held in favour of assessee as under:

• In case of Ram Bagh Palace Hotels (P.) Ltd. v. CCE [Final Order No. ST/A/18/1012-Cus, dated 21-12-2011], it was held that renting of hotel rooms could not be held to be covered by the definition of ' Mandap Keeper' as the hotel had an identity, personality and function quite distinguishable from that of a Mandap.
• It was also held that definition of Mandap Keeper nowhere covers the temporary occupation of hotel rooms for the purpose of boarding and temporary residence. Since bills of room rent, food and beverages were raised separately, they could not be held to be a part of value of convention service.
• Thus, the case decided (Supra) on issue of Mandap Keeper’s Service was equally applicable to convention service. Hence, if bills were raised separately against room rent and food supply charges then they could not be included in value of convention service.

Delay in filing of appeal due to resignation of key employee dealing with case was condonable

BAJAJ BHAVAN OWNERS PREMISES CO-OP. SOCIETY LTD. V. ITAT [2014] 45 taxmann.com 231 (Bombay High Court)

 

Where assessee directed its CA to file appeal before Tribunal but its manager resigned at crucial stage and CA delayed filing of appeal, delay could not be said to be entirely on account of assessee and, hence, was to be condoned

Facts:

• The AO made assessment on assessee under section 143(3) and made additions to its income. On appeal, the CIT(A) confirmed the additions.
• Further, the Tribunal rejected appeal of assessee against the order of the CIT(A) on the ground that there was delay of forty five days in filing the appeal. The aggrieved-assessee filed the instant writ.

The High Court held in favour of assessee as under:

• The assessee could not be held entirely responsible for the delay. It had engaged a firm of Chartered Accountants to represent it. It had prosecuted the appeals for the other three years duly and diligently and, in fact, successfully. 
• It instructed the CA to file the said appeal prior to the last date for filing the same. Even if there was any delay, it was not on account and certainly not on account of the assessee. The assessee's manager had resigned at a crucial stage was another factor in its favour.
• The assessee had been put to incur considerable expenses and effort merely to obtain a hearing on merits. The assessee could, by no stretch of imagination, be said to have waived off its rights. This was clear from the fact that the assessee had duly and diligently prosecuted the appeals in respect of the three other assessment years.
• But for the unfortunate circumstances, this appeal would also have been heard on merits in the normal course. The assessee was not entirely at fault for the delay and negligence in prosecuting the fourth appeal. Thus, there was no justification in denying the assessee an opportunity of having its appeal considered on merits. Even assuming that there was some negligence on its part, the same had caused the revenue no prejudice whatsoever.

Common Issues in Computing Salary

What is consider in salary income?

A salary is a form of periodic payment from an employer to an employee. It is specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.

Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals

 

What is considered as salary income?

Section 17(1)​ of the Income-tax Act defines the term ‘salary’. However, not going into the technical definition, generally whatever is received by an employee from an employer in cash, kind or as a facility is considered as salary.​

 

What are allowances? Are all allowances taxable?

​ Allowances are fixed periodic amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. There are generally three types of allowances for the purpose of Income-tax – taxable allowances, fully exempted allowances and partially exempted allowances.

​

My employer reimburses to me all my expenses on grocery and children’s education. Would these be considered as my income?

​Yes, these are in the nature of perquisites and should be valued as per the rules prescribed in this behalf.​​

 

During the year I had worked with three different employers and none of them deducted any tax from salary paid to me. If all these amounts are clubbed together, my income will exceed the basic exemption limit. Do I have to pay taxes on my own?

​Yes, you will have to pay self-assessment tax and file the return of income.​​

 

Even if no taxes have been deducted from salary, is there any need for my employer to issue Form-16 to me?

​Form-16 is a certificate of TDS. In your case it will not apply. However, your employer must issue a salary statement.​​

 

Is pension income taxed as salary income?

​Yes. However, pension received from the United Nations Organisation is exempt.​

 

​Is Family pension taxed as salary income?

​No, it is taxable as income from other sources.​

 

If I receive my pension through a bank who will issue Form-16 or pension statement to me- the bank or my former employer?

​The bank.​​

 

Are retirement benefits like PF and Gratuity taxable?

​In the hands of a Government employee Gratuity and PF receipts on retirement are exempt from tax.

In the hands of non-Government employee, gratuity is exempt subject to the limits prescribed in this regard and PF receipts are exempt from tax, if the same are received from a recognised PF after rendering continuous service of not less than 5 years.​​

 

Are arrears of salary taxable?

​Yes. However, the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief u/s 89 of the Income-tax Act.​​

 

Can my employer consider relief u/s 89 for the purposes of calculating the TDS from salary?

​ Yes, if you are a Government employee or an employee of a PSU or company or co-operative society or local authority or university or institution or association or body. In such a case you need to furnish Form No. 10E to your employer. ​​

 

My income from let out house property is negative. Can I ask my employer to consider this loss against my salary income while computing the TDS on my salary?

​Yes, however, losses other than house property loss cannot be considered while determining the TDS from salary.​

 

​Is leave encashment taxable as salary?

​ It is taxable if received while in service. Leave encashment received at the time of retirement is exempt in the hands of the Government employee. In the hands of non-Government employee leave encashment will be exempt subject to the limit prescribed in this behalf under the Income-tax Law.​

​

Are receipts from life insurance policies on maturity along with bonus taxable?​

​​​As per section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax. Following points should be noted in this regard:

• Exemption is available only in respect of amount received from life insurance policy.
• Exemption under section 10(10D)​ is unconditionally available in respect of sum received for a policy which is issued on or before March 31, 2003.

However, in respect of policies issued on or after April 1st, 2003, the exemption is available only if the amount of premium paid on such policy in any financial year does not exceed 20% (10% in respect of policy taken on or after 1st April, 2012) of the actual capital sum assured.

Amount received on the death of the person will continue to be exempt without any condition.

Assessing Officer is to abide by Settlement Commission's order; he can only raise consequential demand to give effect to same

MAHAVIR ROLLING MILL (P.) LTD. V. ITO [2014] 45 taxmann.com 431 (Gujarat High Court)

The Assessing Officer cannot go beyond order passed by Settlement Commission and he could only raise a consequential demand while giving effect to order passed by Settlement Commission.

Facts:

• The assessee-company filed the Settlement application. The Settlement Commission (‘SetCom’) passed the final order on the issues raised by the assessee.
• The Assessing Officer (‘AO’) had calculated tax and interest payable by assessee after giving effect to the order passed by the SetCom. The assessee disputed period of interest under section 220(2) and submitted the miscellaneous application before SetCom which was rejected by it.
• Thereafter, the assessee submitted the application under section 154 before the AO which was dismissed by him.
• Further, the appeal filed before the CIT(A) and ITAT were dismissed. The aggrieved-assessee filed the instant appeal.

The High Court held in favour of revenue as under:

• It was not in dispute that the Assessing Officer originally passed the order considering the order passed by the Settlement Commission under section 245D(4). Therefore, as such the Assessing Officer had given effect to the order passed by the SetCom.
• The AO could not go beyond the order passed by the SetCom and he could only raise a consequential demand after giving effect to the order passed by the SetCom under section 245D(4).
• Thus, no substantial question of law arose in the instant case. Hence, the instant case was to be dismissed.

Temporary transfer of copyright in films doesn’t amount to sales; levy of Service Tax on it is constitutionally valid

AGS ENTERTAINMENT (P.) LTD. V. UNION OF INDIA [2014] 46 taxmann.com 92 (Madras High Court)

Variant modes of business transactions between producer and distributor, distributor and sub-distributor or area distributor or exhibitor (theatre owner) are not "sale or deemed sale of goods" and, therefore, levy of service tax on Temporary transfer of copyright in film under section 65(105)(zzzzt) is constitutionally valid.

Facts:

• The assessee challenged the vires of Section 65(105)(zzzzt) of the Finance Act, 1994 on ground that ‘temporary transfer of copyright’ amounted to 'sale' or 'deemed sale' of goods.
• The assessee argued that temporary transfer of copyright was a "transfer of right to use goods" which was to be deemed as sale in terms of Article 366(29A), read with Entry 54 of List II of the Constitution and, therefore, it was not a service.
• The revenue argued that clause (29A) of Article 366 of the Constitution was inserted to give extended meaning to the definition of sale and that Parliament had not divested its power to levy service tax.
• The issue before the High Court was: Whether section 65(105)(zzzzt) levying service tax on the temporary transfer or permitting the use or enjoyment of copyright was ultra vires the Constitution?

The High Court held in favour of revenue as under:

• Variant modes of business transactions between producer and distributor, distributor and sub-distributor or area distributor or exhibitor (theatre owner) were not "sale of goods" to fall under Entry 54 List II or Entry 92A List I;
• By resorting to Entry 97 of List I Residuary Entry to levy service tax, Parliament was within its legislative competence to levy service-tax on residual items and Section 65(105)(zzzzt) was not ultra vires the Constitution;
• Temporary transactions of copyrights or permission to use or enjoyment of copyright could not be brought either under Entry 54 of List II or Entry 92A of List I;
• In case producer of films grants a few prints of film to distributor for exhibition purposes and distributor is not free to use prints for other purposes, viz., satellite, TV, etc., then, there is temporary transfer of copyright in films, which is a service; it does not amount to sale or deemed sale under 'transfer of right to use goods';
• Temporary transfer of copyright in film amounted to rendering of service, thus, levy of service tax on it under section 65(105)(zzzzt) was constitutionally valid.

Liability to pay interest under Income Tax Act remained intact even if assets of assessee were attached under other Act

CIT v. Cascade Holdings (P.) Ltd [2014] 45 taxmann.com 228 (Bombay High Court)

Even a notified person whose properties were attached under Special Court (Trial of Offences relating to Transaction in Securities) Act, 1992 would be liable to pay interest under sections 234A, 234B and 234C.

Facts

• The assessee was notified under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992. The assets and properties of the assessee were attached by operation of the statute. 
• Interest for default in making payment of advance tax was levied on the assessee. The assessee submitted that its assets and properties were statutorily attached and permission to deal with the same, sought from the Special Court, was rejected and, thus, it was prevented from discharging the liability to pay the advance tax. 
• The Tribunal held that the provisions of sections 234A, 234B and 234C were not applicable to the notified persons and therefore, they were exempted from the liability to pay interest.

On appeal, the High Court held in favour of assessee as under:

• The Tribunal had erred in taking a view that the assessee being a notified person under the Special Court (Trial of Offences relating to Transaction in Securities) Act, 1992 was not liable to pay interest under sections 234A, 234B and 234C. 
• Thus, merely because the assets and properties had been attached, it did not mean that the liability to pay interest would not arise.

Sums incurred on transfer of human skill and HR database from predecessor to successor company are allowable expenses

CIT V. IBM GLOBAL SERVICES INDIA (P.) LTD [2014] 46 taxmann.com 55 (Karnataka)

 

Where in pursuance of an agreement, a part of business being handled by erstwhile TATA IBM was handed over to assessee-company, expenditure incurred by assessee for use of domestic customer database and transfer of human skills in terms of said agreement, was to be allowed as business expenditure.

Facts

• A part of the business being handled by the erstwhile TATA IBM was handed over to the assessee-company in view of bifurcation of the software and hardware business.
• For the transfer of domestic customer database and the man power, the assessee paid certain amount to TATA IBM which was claimed as business expenditure.
• The AO taking a view that expenditure in question resulted in enduring benefit to assessee, disallowed assessee's claim. Further, the CIT(A) upheld the order of AO. The Tribunal, however, allowed assessee's claim. The aggrieved-revenue filed the instant appeal.

High Court held in favour of assessee as under:-

• In the instant case, insofar as payment for getting domestic customer database was concerned it was clear that assessee had only got the right to use that database. The company which had provided such database was not precluded from using such database. Hence, the expenditure was incurred for the use of database and not for acquisitions of such database.
• In respect of payment made towards transfer of human skill, it had been made towards the expenses incurred for training and on recruitment. Such expenses were under revenue field, and ,therefore, the payments had been made to save such revenue expenses as per the agreement.
• TATA IBM had spent lot of money to impart training to those employees who were transferred to the assessee-company. They were trained in the field of software.
• They had opted for employment with assessee-company and for their past services in TATA IBM, expenditure had been incurred. Hence, the expenditure incurred on transfer of human skill was also in nature of revenue expenditure.

NBFC couldn't take shelter of prudential norms to treat overdue interest as NPA if it didn't try to recover it

ITO V. TRADELINK SECURITIES LTD [2014] 46 taxmann.com 190 (Kolkata - Tribunal)

Overdue interest could not be treated as NPA by taking shelter of prudential norms of RBI prohibiting recognition of interest on loans, which remained overdue for more than six months if assessee had not taken any steps to recover it.

Facts

• The assessee, a company registered as NBFC, advanced term loans to two companies. In return of income, the assessee didn’t show interest income on the ground that prudential norms of RBI prohibited recognition of interest on loans which remained overdue for more than six months.
• The Assessing Officer (‘AO’) opined that assessee was bound to show the interest accrued on the loans as its income as it was following mercantile system of accounting. Further, he held that interest accrued on loans was chargeable to tax and consequently, made additions.
• On appeal, the CIT(A) deleted the additions made by AO. The aggrieved revenue filed the instant appeal. 

The Tribunal held in favour of revenue as under:

• Rule 3 of prudential norms states that income including interest/discount shall be recognized only when it is actually realised if a loan is considered as NPA. It further prescribes that a loan can be treated as NPA when it remained overdue for a period of six months or more. However, in the instant case, the assessee had been unable to produce any document to show that it had made any demand for return of the loan.
• As per section 5 of the income-tax Act, total income shall include all income from whatsoever source derived by such person, which accrues or arise to him in a given in previous year.
• In case of Southern Technologies Ltd. v. Jt. CIT [2010] 187 Taxman 346 (SC) it was held by the Supreme Court that prudential norms issued by the Reserve Bank of India could not override the provisions of the Act. Thus, by virtue of the application of the accrual principle, interest income had definitely accrued to the assessee.
• The concerned companies (i.e. borrowers) were charging interest in their respective accounts, deducting tax at source and also remitting such tax to the Government account. Hence, there was nothing on record to show that there was no possibility of realising the interest.
• Hence, one could not presume that interest income was illusory. Therefore, the CIT (A) had erred in deleting the addition made by the AO.

No concealment penalty if assessee opts to take route of presumptive taxation to escape section 40A(3) disallowance

Vatika Construction (P.) Ltd v. [2014] 45 taxmann.com 471 (Delhi)

Where at time of initiating penalty proceedings Assessing Officer (AO) did not have any material on record showing that payments made by assessee were bogus, he could not have concluded that assessee had provided inaccurate particulars and levy penalty merely on basis of assessee's offer to be taxed on presumptive basis,

Facts

• The assessee, a construction company, had issued large number of bearer cheques to small suppliers for delivering building material at construction site.
• The AO disallowed said payments by invoking Section 40A(3). In response, assessee had shown its income on presumptive basis under Section 44AD to stay away from unnecessary litigation. The AO accepted the contention of assessee and completed the assessment by applying presumptive taxation.
• After completing the assessment, the AO passed a penalty order under section 271(1)(C) and it was affirmed by the CIT (A). The Tribunal, however, set aside penalty order passed by CIT (A).The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

• Since at time of initiating penalty proceedings the AO did not have any material on record to show that payments made to suppliers were bogus, he could not have concluded that assessee had provided inaccurate particulars in its return merely on basis of assessee's offer to be taxed on estimate basis,
• Moreover, the course of action suggested by the Assessing Officer was, in fact, accepted by the assessee as reasonable. Thus, the imposition of penalty was not justified. Therefore, there was no infirmity in the impugned order of the Tribunal.

Rent receipts of property not taxable in hands of Company if shareholders are deemed owners of property under section 27

CIT V. MONARCH CITADEL (P.) LTD [2014] 45 taxmann.com 477 (Karnataka High Court)

 

Facts:

• The assessee-company owned a land. It had constructed a commercial building on the said land and later on, it allotted specific portion of the building to the shareholders.
• The assessee had distributed rent receipts proportionately to the shareholders after deducting maintenance cost and taxes. The shareholders had filed separate individual returns, in which they had disclosed income from the building allotted to them.
• The assessee-company had filed a nil return of income. The Asessessing Officer (AO) held that the rental income was attributable to the assessee and, accordingly, levied the tax. On appeal, the CIT (A) upheld the order of the AO. Further, the Tribunal set aside the orders of the lower authorities. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

• Provision of section 27(iii) provides that a company or a co-operative society can allot or lease a house building to its members. It further provides that a member, to whom building was allotted, would be construed as the owner of such building;
• In the instant case, the Memorandum of Association permitted the assessee to construct a building, sell or lease it. It also permitted it to distribute properties to its shareholders. The fact that the resolution had been made to allot a specific portion of the building to the shareholders even before its construction, was not a ground to hold that such an action was illegal;
• The consequence of resolution under the Companies Act may be different and the said aspects need not be imported while considering purport and implication of section 27(iii). Notwithstanding, the fact that allotment of building by society or company may not make the allottee owner of the building in the context of the Transfer of Property Act, but nonetheless, the Act otherwise construes such an allottee as the owner of property;
• The assessee-company had allotted a specific portion to the shareholders. Under the Act, shareholders are deemed to be the owners of the portion allotted to them and they would be liable for tax. However, the company, which owns the building, was an ostensible owner;
• Therefore, it could effect the lease and it was to be construed as one executed on behalf of the shareholders. Therefore, it was to be held that the shareholders were the owners of the specific portion of the building allotted to them and the assessee-company had not retained any part of rent amount or rent deposit.
• Thus, it could not be argued that the company would deemed to have derived the income from rental and rental deposit. Therefore, the order of the Tribunal was to be upheld.