Even investment in name of partners would provide section 54EC relief to partnership firm

CHAKRABARTY MEDICAL CENTRE V. TRO - (2015) 56 taxmann.com 76 (Pune - Tribunal)

Facts:

• Partners of assessee-firm introduced land and building as their capital contribution to firm.
• The firm carried out its operation from such land and building after its formation. Subsequently, firm sold said land and building and earned capital gain. 
• Sale consideration of property was credited directly to bank account of partners of firm and bonds specified under Section 54EC were also purchased in names of those partners.

The issues that arose before the Tribunal were as under:-

• Whether capital asset introduced by partners could be said to be the property of the firm and, thus, capital gain arising on sale of such building was taxable in hands of firm?
• Whether a firm could claim exemption under section 54EC where specified bonds were purchased in name of partners?

On the first issue the Tribunal held that:
 

By relying upon the judgment of Allahabad High court in the case of K. D. Pandey v. CWT (1977) 108 ITR 214, it was held that where partners of firm introduced land and building as their capital contribution to firm, said land and building would become property of firm and, therefore, capital gain arising on sale of said property was taxable in hands of firm.

On the second issue the Tribunal held that:

• Partnership is not a legal entity in strict sense and in all the movable and immovable assets which are held by the partnership, there is an interest of every partner, though not specifically defined in terms of their shares.
• It was not disputed that the sale consideration was directly credited to the Bank accounts of the partners and firm was immediately dissolved subsequently. Therefore, whatever amount was invested by the partners in specified bonds in their individual names was, in fact, from the funds of the firm. 
• Hence, benefit of section 54EC could not be denied to the assessee-firm,even though the bonds were purchased in the name of partners.

RBI fixes USD 2,50,000 for remittances by individual for aggregate of certain current account transactions

The Reserve Bank of India ('RBI') has notified amendment to the Foreign Exchange Management (Current Account Transactions) Rules to specify an aggregate limit of USD 2,50,000 for remittance in foreign currency for certain current account transactions, inter-alia, for private visits to any country (except Nepal and Bhutan), gifts or donations, going abroad for employment, emigration, business travels, or medical treatment abroad, etc.

Remittances in foreign currency by an individual for the following current account transactions shall be made within limit of USD 2,50,000:

• Holiday/Private Visits abroad
• Business trip
• Gifts/Donation
• Employment or education
• Remittance for Maintenance of a close relative abroad
• Medical treatment abroad
• Emigration facilities

Further, it is provided that an individual can avail of foreign exchange facility of an amount exceeding the limits as prescribed above under the Liberalized Remittance Scheme ('LRS') for the purpose of emigration, education, business travel, medical treatment, etc.

However, the amount so remitted by individual under the LRS shall be reduced from the USD 250,000 by the amount so remitted.

Black Money Law enacted

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, as assented by the Hon’ble President on 26th May 2015 and as published in the Official Gazette, is available for download. Click here.

The Act makes provisions to deal with the problem of the Black money that is undisclosed foreign income and assets, the procedure for dealing with such income and assets and to provide for imposition of tax on any undisclosed foreign income and asset held outside India and for matters connected therewith or incidental thereto.

No Transfer Pricing addition for variation between actual price and ALP of fixed asset but depreciation to be re-computed on ALP

HONDA MOTORCYCLE & SCOOTERS INDIA (P.) LTD. V. ACIT - (2015) 56 taxmann.com 237 (Delhi - Tribunal)

The international transaction of purchase of fixed assets is required to be bench-marked as per the most appropriate method. An increase in the value of the fixed assets after application of ALP, being a capital transaction in itself, will not give rise to any addition towards transfer pricing adjustment, but the depreciation on such assets, being a revenue offshoot of the capital transaction, will be required to be recomputed on such revised value.

Facts:

• Assessee had made international transaction of purchase of fixed asset from its AE.
• TPO made addition on the value of international transaction of the purchase of fixed assets. The counsel of assessee contended that the TPO was not justified in proposing the transfer pricing adjusting w.r.t. the value of purchase of fixed assets. It was argued that only the depreciation element of such adjusted value of the international transaction of purchase of fixed assets would call for adjustment to the operating profits. 
• Aggrieved-assessee filed the instant appeal

The Tribunal held in favour of assessee as under:

• Section 92 is not a charging provision, but it is a procedural provision for recomputing the income arising from an international transaction having regard to its ALP. Before applying the mandate of this provision, it is of utmost importance that there should be some existing income chargeable to tax, which is sought to be recomputed having regard to its ALP.
• If there is an international transaction which in itself gives rise to income that is chargeable to tax, then its ALP shall constitute a basis for making of addition on account of difference between the assigned value and ALP of such international transaction as per the relevant provisions. But if there is an international transaction in the capital field, which does not otherwise give rise to any income in itself, then even though its ALP may be computed in consonance with the provisions, but no adjustment can be made for the difference between the declared value and the ALP of such international transaction. 
• It does not mean that the computation of the ALP of such an international transaction in the capital field is just a ritual and should not be embarked upon. In fact, such a computation is necessary because of the impact of such a transaction of capital nature on the transactions of its revenue offshoots. 
• In the instant case, the international transaction of purchase of fixed assets was required to be bench-marked as per the most appropriate method. The application of the ALP, if required, would give rise to the re-computation of the revised value of the purchase of fixed assets. Such an increase in the value of the fixed assets, being a capital transaction in itself, would not give rise to any addition towards transfer pricing adjustment, but depreciation on such assets would be required to be recomputed on such revised value. 
• Therefore, addition made by TPO due to the determination of the ALP of purchase of fixed assets was required to be set-aside and AO was directed to compute depreciation on such fixed assets on adjusted value.

Provisional booking of a house amounts to acquisition of 'capital asset'

CIT V. RAM GOPAL - (2015) 55 taxmann.com 536 (Delhi High Court)

Assessee would be entitled to exemption under Section 54 even on acquisition of house property by way of provisional booking.

Facts:

• Assessee earned capital gain on sale of residential house property. He made provisional booking of house property out of sale consideration and claimed exemption under section 54.
• The Assessing Officer disallowed Section 54 relief as he was of the view that in the absence of an agreement to sell, the rights acquired by the provisional booking of the property would not meet the requirements of section 54, i.e., acquisition of new capital asset. 
• Appellate authorities decided in favour of assessee. The aggrieved-revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under:

• In case of Gulshan Malik v. CIT (2014) 43 taxmann.com 200 (Delhi), it was held that 'capital asset' was defined in extremely wide terms and that a reference to section 2(47), and particularly its second Explanation to clauses (v) and (vi) made it clear that possession, enjoyment of property as well any interest in any of transferable capital asset would be included within the ambit of 'capital asset'
• Therefore, even booking rights or rights to purchase the apartment or to obtain its allotment letter was also capital asset. Hence, assessee would be entitled to Sec. 54 exemption even if property was acquired by way of provisional booking.

No disallowance of loss claimed in return filed u/s 153A after the due date prescribed under section 139(1)

MAITHANISPAT LTD. V. DEPUTY CIT - (2015) 55 taxmann.com 444 (Kolkata - Tribunal)

Where assessee did not file its return under section 139(1) as he was statutorily required to file its return under section 153A, loss claimed by assessee could not be disallowed on ground that return was filed after due date prescribed under Section 139(1).

Facts:

• A search and seizure operation was carried out by the department on assessee. Pursuant to the search, notice under Section 153A was served.
• Assessee had not filed any return of income under Section 139(1) for the reason that assessment proceedings had abated in view of the second proviso to section 153A(1). 
• The assessee had claimed loss in the return filed under Section 153A but such claim was disallowed by Assessing Officer ('AO') by observing that business loss was not allowed to be carried forward since the return was filed by assessee after the due date prescribed under Section 139(1). 
• On appeal, the CIT (A) upheld the order of the AO and the aggrieved assessee filed the instant appeal before Tribunal.

Tribunal held in favour of assessee as under:

• Section 153A provides that where a search is initiated under section 132, AO shall issue notice to assessee requiring him to furnish the return of income in respect of six assessment years.
• It is specifically prescribed that the provisions of Section 153A, so far as may be, apply accordingly as if such return was a return required to be furnished under section 139. 
• The second proviso to section 153A(1)(b) provides that if on the date of search or requisition under section 132 or 132A any assessment or re-assessment proceedings relating to that particular assessment year falling within the six assessment years is pending, then the pending proceedings for the regular assessment shall stand abated and fresh assessment can be done only under section 153A. 
• The legislature has particularly used the words 'shall abate' and specifically it is also mentioned that return has to be filed under section 153A(1)(a) and such return is to be treated as the return of income required to be furnished under section 139. 
• In such circumstances, assessee was not supposed to file its return of income under section 139(1) because he was statutorily required to file return of its income in response to notice under section 153A. 
• Therefore, loss claimed by assessee could not be disallowed on ground that return was filed after due date prescribed under sec. 139(1).

Section 11 relief available to Indian Medical Association if it was endorsing health products to promote public health

ADIT V. INDIAN MEDICAL ASSOCIATION - (2015) 56 taxmann.com 271 (Delhi - Tribunal)

Where assessee, Indian Medical Association, engaged in promoting public health, endorsed products of various companies due to their health and nutritional benefits, said activity could not be regarded as violative of provisions of section 2(15) and, thus, assessee's claim for exemption of income was to be allowed.

Facts:

• The assessee-society was formed to promote public health and medical education in India.
• The Assessing Officer (AO) noticed that assessee had received endorsement money for making endorsement of products of various corporate entities. Thus, he took the view that assessee society failed to comply with requirements of section 2(15) and rejected its exemption claim.
• The CIT (A) opined that assessee had been able to demonstrate that it was engaged in promotion and advancement of the public health. Hence, its activities fell within the meaning of section 2(15). 
• The Aggrieved-revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of assessee as under :

• It was not the case of revenue that endorsement of healthy nutrition wasn't medically/scientifically incorrect. The assessee as per the mandate of its objects had endorsed products due to their health and nutritional benefits.
• Therefore, activities of assessee to promote public health by endorsing products of various companies due to their health and nutritional benefits could not be said as violative of provisions of section 2(15). 
• Accordingly, assessee's claim for exemption of income was to be allowed.

Cash award received by editor for excellence in journalism is tax-free as it is a capital receipt

AROONPURIE V. COMMISSIONER OF INCOME-TAX (2015) 56 taxmann.com 80 (Delhi High Court)
 
Rs. 1 lakh received by the assessee as an award from B.D. Goenka Trust for excellence in Journalism would be a capital receipt and, hence, not taxable.

Facts:

• Appellant-assessee was editor-in-chief of a reputed English magazine and derived income from salary, interest, dividend and property. 
• He claimed exemption of Rs.1 lakh received by him as an award from B.D. Goenka Trust for excellence in Journalism. 
• The Assessing Officer ('AO') disallowed claim for exemption on the ground that it didn't satisfy conditions of section 10(17A) which exempts from tax awards instituted by Central/State Govt in public interest.
• On appeal, the CIT(A) allowed claim of assessee but same was reversed by ITAT. Aggreived-assessee filed the instant appeal before High Court.

The High Court held in favour of assessee as under:

• The primary reason of giving award in the assessee's case was not directly related to the carrying on of vocation as a journalist or publisher.The award for excellence in Journalism was directly linked with the personal achievements and personality of the assessee. Further, payment in the instant case was not of a periodical or repetitive nature. 
• The payment had been made by a third person and not made by an employer, who was not concerned with the activities or associated with the "vocation" of the appellant. 
• It being a payment of a personal nature, should be treated as capital payment, being akin to or like a gift, which does not have any element of quid pro quo. The impugned prize money was paid to the assessee on a voluntary basis and was purely gratis. 
• Hence, cash award of one lakh received from B.D. Goenka Trust for Excellence in Journalism would be a capital receipt and would not be taxable under Income Tax Act.

Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities

(The Council of the Institute of Chartered Accountants of India (ICAI) has issued this Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities which comes into effect from the date of its issuance. Pending finalisation of the Guidance Note, as it was under discussion with the relevant authorities, the Corporate Laws & Corporate Governance Committee had issued ‘Frequently Asked Questions on the provisions of Corporate Social Responsibility under Section 135 of the Companies Act 2013 and Rules thereon’ which, inter alia, provided an interim guidance with regard to certain accounting issues. On issuance of this Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities, the FAQs related to areas covered by the Guidance Note stand withdrawn.)

Introduction

• Section 135 of the Companies Act, 2013 (the Act), requires the Board of Directors of every company having a net worth of Rupees 500 crore or more, or turnover of Rupees 1,000 crore or more or a net profit of Rupees 5 crore or more, during any financial year, to ensure that the company spends in every financial year atleast 2% of the average net profits of the company made during the three immediately preceding financial years on Corporate Social Responsibility (CSR) in pursuance of its policy in this regard. The Act requires such companies to constitute a Corporate Social Responsibility Committee which shall formulate and recommend to the Board a Corporate Social Responsibility Policy which shall indicate the CSR activities to be undertaken by the company as specified in Schedule VII to the Act.

Objective

• The objective of this Guidance Note is to provide guidance on recognition, measurement, presentation and disclosure of expenditure on activities relating to corporate social responsibility.

Scope

• What constitutes CSR activities is specified in Schedule VII to the Act.

Reference is also invited to the circular issued by the Ministry of Corporate Affairs (MCA) No. 21/2014 dated October 24, 2014. Accordingly, the Guidance Note does not deal with identification of activities that constitute CSR activities but only provides guidance on accounting for expenditure on CSR activities in line with the requirements of the generally accepted accounting principles including the applicable Accounting Standards.

Definitions

• For the purpose of this Guidance Note, the definitions mentioned at sl. nos. (a) to (f) are reproduced from the Companies Act, 2013, and the Companies (Corporate Social Responsibility Policy) Rules, 2014 and in the event of any change in the Act or the Rules made thereunder, these definitions shall stand automatically revised/modified to that extent:

(a) Any financial year: “any financial year” referred under sub-section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’. (Clarification vide MCA General Circular No. 21/2014)

(b) Average Net Profit: Average Net Profit is the amount as calculated in accordance with the provisions of Section 198 of the Companies Act, 2013.

(c) Financial Year: “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;

(d) Net Profit: “net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:-

(i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

(ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act:

Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956) shall not be required to be recalculated in accordance with the provisions of the Act:

Provided further that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381 read with section 198 of the Act.

(e) Net worth: “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;

(f) Turnover: “turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year;

(g) Spend: The term ‘spend’ in accounting parlance generally means the liabilities incurred during the relevant accounting period.

• Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that the CSR activities that shall be undertaken by the companies for the purpose of Section 135 of the Act shall exclude activities undertaken in pursuance of its ‘normal course of business’. The Rules also specify that CSR projects or programmes or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with the requirements of the Act. Such programmes or projects or activities, that are carried out as a pre-condition for setting up a business, or as part of a contractual obligation undertaken by the company or in accordance with any other Act, or as a part of the requirement in this regard by the relevant authorities cannot be considered as a CSR activity within the meaning of the Act. Similarly, the requirements under relevant regulations or otherwise prescribed by the concerned regulators as a necessary part of running of the business, would be considered to be the activities undertaken in the ‘normal course of business’ of the company and, therefore, would not be considered CSR activities.

Recognition and Measurement of CSR Expenditure in Financial Statements

Whether Provision for Unspent Amount required to be created?

• Section 135 (5) of the Companies Act, 2013, requires that the Board of every eligible company, “shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”. A proviso to this Section states that “if the company fails to spend such amount, the Board shall, in its report … specify the reasons for not spending the amount”.
• Further, Rule 8(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, prescribes that the Board Report of a company under these Rules shall include an annual report on CSR, containing particulars specified in the Annexure to the said Rules, which provide a Format in this regard. 
• The above provisions of the Act clearly lay down that the expenditure on CSR activities is to be disclosed only in the Board’s Report in accordance with the Rules made thereunder. In view of this, no provision for the amount which is not spent, i.e., any shortfall in the amount that was expected to be spent as per the provisions of the Act on CSR activities and the amount actually spent at the end of a reporting period, may be made in the financial statements. The proviso to section 135 (5) of the Act, makes it clear that if the specified amount is not spent by the company during the year, the Directors’ Report should disclose the reasons for not spending the amount. However, if a company has already undertaken certain CSR activity for which a liability has been incurred by entering into a contractual obligation, then in accordance with the generally accepted principles of accounting, a provision for the amount representing the extent to which the CSR activity was completed during the year, needs to be recognised in the financial statements. 
• Where a company spends more than that required under law, a question arises as to whether the excess amount ‘spent’ can be carried forward to be adjusted against amounts to be spent on CSR activities in future period. Since ‘2% of average net profits of immediately preceding three years’ is the minimum amount which is required to be spent under section 135 (5) of the Act, the excess amount cannot be carried forward for set off against the CSR expenditure required to be spent in future.

Other Considerations in Recognition and Measurement

• A company may decide to undertake its CSR activities approved by the CSR Committee with a view to discharge its CSR obligation as arising under section 135 of the Act in the following three ways:

(a) making a contribution to the funds as specified in Schedule VII to the Act; or

(b) through a registered trust or a registered society or a company established under section 8 of the Act (or section 25 of the Companies Act, 1956) by the company, either singly or along with its holding or subsidiary or associate company or along with any other company or holding or subsidiary or associate company of such other company, or otherwise; or

(c) in any other way in accordance with the Companies (Corporate Social Responsibility Policy) Rules, 2014, e.g. on its own.

• In case a contribution is made to a fund specified in Schedule VII to the Act, the same would be treated as an expense for the year and charged to the statement of profit and loss. In case the amount is spent in the manner as specified in paragraph10 (b) above the same will also be treated as expense for the year by charging off to the statement of profit and loss. The accounting for expenditure incurred by the company otherwise e.g. on its own would be accounted for in accordance with the principles of accounting as explained hereinafter.

CSR activities carried out by the company covered under paragraph 10 (c)

• In cases, where an expenditure of revenue nature is incurred on any of the activities mentioned in Schedule VII to the Act by the company on its own, the same should be charged as an expense to the statement of profit and loss. In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’, a question may arise as to whether such an ‘asset’ should be recognised by the company in its balance sheet. In this context, it would be relevant to note the definition of the term ‘asset’ as per the Framework for Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India. As per the Framework, an ‘asset’ is a “resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise”. Hence, in cases where the control of the ‘asset’ is transferred by the company, e.g., a school building is transferred to a Gram Panchayat for running and maintaining the school, it should not be recognised as ‘asset’ in its books and such expenditure would need to be charged to the statement of profit and loss as and when incurred. In other cases, where the company retains the control of the ‘asset’ then it would need to be examined whether any future economic benefits accrue to the company. Invariably future economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from CSR cannot be included by the company in business profits in view of Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.
• In some cases, a company may supply goods manufactured by it or render services as CSR activities. In such cases, the expenditure incurred should be recognised when the control on the goods manufactured by it is transferred or the allowable services are rendered by the employees. The goods manufactured by the company should be valued in accordance with the principles prescribed in Accounting Standard (AS) 2, Valuation of Inventories. The services rendered should be measured at cost.. Indirect taxes (like excise duty, service tax, VAT or other applicable taxes) on the goods and services so contributed will also form part of the CSR expenditure. 
• Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.

Recognition of Income Earned from CSR Projects/Programmes or During the Course of Conduct of CSR Activities 

• Rule 6 (2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that “the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company”. The term ‘surplus’ ordinarily means excess of income over expenditure pertaining to an entity or an activity. Thus, in respect of a CSR project or programme or activity, it needs to be determined whether any surplus is arising therefrom. A question would arise as to whether such surplus should be recognised in the statement of profit and loss of the company. It may be noted that paragraph 5 of Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, inter alia, requires that all items of income which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise. As to whether the surplus from CSR activities can be considered as ‘income’, the Framework for Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India, defines ‘income’ as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”. Since the surplus arising from CSR activities is not arising from a transaction with the owners, it would be considered as ‘income’ for accounting purposes. In view of the aforesaid requirement any surplus arising out of CSR project or programme or activities shall be recognised in the statement of profit and loss and since this surplus can not be a part of business profits of the company, the same should immediately be recognised as liability for CSR expenditure in the balance sheet and recognised as a charge to the statement of profit and loss. Accordingly, such surplus would not form part of the minimum 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy.

Presentation and Disclosure in Financial Statements

• Item 5 (A)(k) of the General Instructions for Preparation of Statement of Profit and Loss under Schedule III to the Companies Act, 2013, requires that in case of companies covered under Section 135, the amount of expenditure incurred on ‘Corporate Social Responsibility Activities’ shall be disclosed by way of a note to the statement of profit and loss. . From the perspective of better financial reporting and in line with the requirements of Schedule III in this regard, it is recommended that all expenditure on CSR activities, that qualify to be recognised as expense in accordance with paragraphs 10-14 above should be recognised as a separate line item as ‘CSR expenditure’ in the statement of profit and loss. Further, the relevant note should disclose the break-up of various heads of expenses included in the line item ‘CSR expenditure’.
• The notes to accounts relating to CSR expenditure should also contain the following:

(a) Gross amount required to be spent by the company during the year.

(b) Amount spent during the year on:

 

		In cash	Yet to be paid in cash	Total
(i)	Construction/acquisition of any asset
(ii)	On purposes other than (i) above

The above disclosure, to the extent relevant, may also be made in the notes to the cash flow statement, where applicable.

(c) Details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per Accounting Standard (AS) 18, Related Party Disclosures.

(d) Where a provision is made in accordance with paragraph 8 above the same should be presented as per the requirements of Schedule III to the Companies Act, 2013. Further, movements in the provision during the year should be shown separately.

Institute providing coaching to students appearing for competitive exams is eligible for section 10(23C) relief

ADIT V. HYDERABAD STUDY CIRCLE - (2015) 55 taxmann.com 379 (Hyderabad - Tribunal)
 

A coaching institute imparting coaching to students for various competitive examinations is eligible for exemption under section 10(23C)(iiiad)

Facts:

• The assessee-society was registered under section 12A with the object of providing coaching and training to students appearing in competitive examinations.
• It claimed exemption under Section 10(23C)(iiiad) which was rejected by the Assessing Officer ('AO').
• The AO opined that assessee-society could not be classified as a charitable institution as it was not created for imparting a systematic education.
• On appeal, the CIT (A) held that the activities of the assessee were covered under the realm of 'education' and it was eligible for exemption under section 10(23C)(iiiad). The aggrieved-revenue filed the instant appeal before Tribunal

The Tribunal held in thefavour of assessee as under:

• On examination of the definition of 'charitable purpose' under section 2(15), it is clear that education is one of the activities coming within the meaning of charitable purpose. It is a fact that the Supreme Court in case of Sole Trustee, LokaShikshana Trust v. CIT (1975) 101 ITR 234 observed that 'education' as used in section 2(15) could not be interpreted in a manner to mean that the expression 'education' envisaged under section 2(15) had to be given a restricted meaning and would only mean the education as imparted in schools and colleges.
• If education was considered to mean training and developing the skill, knowledge, mind and character of students, then the activity of the assessee could be termed to be coming within the expression 'education' as used in section 2(15). \
• The provision contained under section 10(23C)(iiiad) uses the words 'Any University or other Educational Institution' solely for educational purpose and not for the purpose of profit. Thus, if the activities of the assessee' society had to be considered, it would be considered as other educational institution existing solely for educational purpose and without profit motive. 
• Thus, the coaching institute providing coaching to students appearing for competitive exams would be eligible for exemption under section 10(23C)(iiiad).

Non-furnishing of PAN by Non-Resident doesn't attract higher TDS rate of 20% u/s 206AA if tax rate under DTAA is beneficial

DEPUTY DIRECTOR OF INCOME-TAX v. SERUM INSTITUTE OF INDIA LTD - (2015) 56 taxmann.com 1 (Pune - Tribunal)

Where payment has been made to non-residents who did not have PAN and tax has been deducted on the strength of the provisions of DTAA's, the provisions of section 206AA could not be invoked by the AO to insist on the tax deduction at 20% having regard to overriding nature of Section 90(2).

Facts:

• Assessee made payment of royalty and fee for technical services to non-residents after deducting tax at source in accordance with the rates provided under DTAA's.
• It was noted by the AO that on account of payment of royalty and fee for technical services in case of some of the non-residents, the recipients did not have PANs. As a consequence, AO treated such payments, as cases of 'short deduction' of tax in terms of the provisions of section 206AA of the Income-tax Act ('the Act'). 
• The AO contended that assessee was under an obligation to deduct tax at higher rate of 20% following the provisions of section 206AA, hence he raised demand relatable to the difference between 20% and the actual tax rate provided under the DTAAs. 
• On appeal, the CIT(A) deleted the demand as he was of the view that Section 206AA would not be applicable in case of non-residents as the DTAA overrides the Act. The aggrieved-revenue filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

• Section 206AA of the Act prescribes that where PAN is not furnished by recipient of income on which tax is deductible the payer would be required to deduct tax at the higher of the following rates:
  • At the rate prescribed in the relevant provisions of the Act; or
  • At the rate/rates in force; or 
  • At the rate of 20%

• Further, Section 90(2) of the Act provides that the provisions of the DTAAs would override the provisions of the Act in cases where the provisions of DTAAs are more beneficial to the assessee.
• Thus, there could not be any doubt to the proposition that in case of non-residents, tax liability in India is liable to be determined in accordance with the provisions of the Act or the DTAA between India and the relevant country, whichever is more beneficial to the assessee, having regard to the provisions of section 90(2) of the Act.For the said reason, assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation. 
• It would be incorrect to say that though the charging section 4 and section 5 of the Act are subordinate to the principle enshrined in section 90(2) of the Act but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2) of the Act. Notably, section 206AA of the Act is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source. 
• Therefore, where the tax has been deducted on the strength of the beneficial provisions of section DTAAs, the provisions of section 206AA of the Act could not be invoked by the AO to insist on the tax deduction at 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act.

Marker and highlighter are 'pens' and exempt under Rajasthan Sales Tax Act, 1994; eraser and carbon paper are stationery and taxable

Assistant Commissioner, Anti Evasion, Rajasthan-I v. Camlin Ltd. (2015) 55 taxmann.com 369 (Rajasthan High Court)

• The assessee was engaged in the business of manufacturing (i) Marker or highlighter, (ii) Carbon paper, (iii) Stamp pad and ink of stamp pad (iv) Covert (eraser).
• The assessing authority held that 
• Marker or highlighter would fall in the category of stationery, liable to be taxed at the rate of 4 per cent.
• Carbon paper, Stamp pad, ink of stamp pad and Covert (eraser) would fall in the general category and liable to be taxed at the rate of 10 per cent.

• The first appellate authority held that
• Marker or highlighter would fall within the definition of a pen and, therefore, no tax was leviable thereon. 
• Other three items would fall within the category of stationery and were liable to be taxed at the rate of 4 per cent/8 per cent.

• The Rajasthan Tax Board sustained the order of the first appellate authority.
• Revenue argued that marker/highlighter was only for the purpose of highlighting a portion or marking a portion for the benefit of a reader; one could not write words or figures with marker/highlighter as a pen could do and therefore, it could not fall within the category of 'pen'.

High Court held in favour of assessee as under:

• Earlier, the category for classification of goods under Rajasthan Sales Tax Act, 1994 was 'all types of fountain pens, ball pens and accessories thereof' and afterwards it was exchanged to 'all types of pens including parts and accessories thereof, drawing materials and poster colours'. Therefore, the scope of pen was enlarged and marker or highlighter fell within the meaning of a pen. By highlighter or marker one could certainly write. Though the flow by writing from marker or highlighter might not be to that extent, but it was definitely instrument of writing. The Apex Court in the assessee's own case, titled as Camlin Ltd. v. CCE 2009 (11) VAT 28, observed that the fountain pens, marker pens, croquill lettering pens, sketch pens, etc. were definitely the instruments of writing.
• The other category was 'all kinds of paper, stationery, greeting/wedding and other printed cards'. Therefore, the other three items, namely, Carbon paper, Stamp pad and ink of stamp pad and Covert (eraser) would fall within the category of stationery. The sales tax enactment was one which touched the common man and his everyday life. Therefore, the terms in the said enactment must be in the manner in which the common man would understand them. 
• In common parlance (i) Carbon paper, (ii) Stamp pad and ink of stamp pad and (iii) Covert (eraser) could certainly be called to be the items of stationery. These items would be available in a stationery shop alone. If one had to purchase such items, one would have to go to a shop of stationery only to get those items rather than from a textile or a grocery shop. Therefore, all these items formed part of stationery items and could not be termed as failing within the general category. 
• In view of the aforesaid, the order of the Tax Board deserved to be upheld.

Immunity against penalty

R. W. Promotions P. Ltd. vs. ITAT (Bombay High Court) 

Immunity against penalty under Explanation 5 is available even if return is not filed provided a statement is made during the search, explaining the manner of deriving the income and due tax & interest thereon is paid

In order to get the benefit of immunity under clause (2) of explanation 5 to section 271(1)(c) of the Income-tax Act, it is not necessary to file the return before the due date provided that the assessee had made a statement, during the search and explained the manner in which the surrendered amount was derived, and paid tax as well as interest on the surrendered amount.

Market interest rate applicable to currency in which loan is repayable to AE has to be used to compute ALP of interest

CIT v. COTTON NATURALS (I) (P.) LTD. (2015) 55 taxmann.com 523 (Delhi High Court)

 

The arm's length interest rate for loan to overseas subsidiary should be computed on basis of market rate of interest applicable to the currency in which the loan has to be repaid.

Facts:

• Assessee (an Indian Company) gave loan to its US subsidiary at interest rate of 4%.
• TPO made upward adjustment to the assessee's income as he was of the view that the rate of interest charged by assessee was not equivalent to rate of interest prevailing in Indian market.
• On objections filed by assessee with DRP, it directed TPO to take arm's length rate of interest as Prime Lending Rate ('PLR') fixed by the RBI. 
• Aggrieved by the order passed in pursuance of DRP's directions, assessee filed appeal before the Tribunal who passed its order in favour of assessee. Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under:

• Interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e., the rate of interest.
• In the instant case, the loan was given in foreign currency, i.e., US dollar and such loan was to be repaid in the same currency. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate. Thus, Arm's length price of interest has to be determined on basis of market rate of interest applicable to loan taken in US dollar.

Draft scheme of the proposed rules for computation of Arm’s Length Price (ALP) of an International Transaction or Specified Domestic Transaction undertaken on or after 01.04.2014.

The Finance (No. 2) Act, 2014 had amended the provision of Income-tax Act relating to transfer pricing regime. The purpose of amendment of section 92C (2) of the Act was to facilitate introduction of “range” concept for determination of Arm’s Length Price of an international transaction or a specified domestic transaction. Further, use of multiple year data for comparability analysis for the purpose of transfer pricing was also to be incorporated.

The use of multiple year data and “range” concept in transfer pricing regime is proposed to be incorporated through amendments to be made to Income-tax Rules, 1962.

In this regard draft outlines of the new regime to be incorporated in the rules has been formulated and has been uploaded on the Finance Ministry website (www.finmin.nic.in) and website of the Income-tax Department (www.incometaxindia.gov.in) for comments from stakeholders and general
public.
 

The comments and suggestions on the draft regime may be submitted by 31st May, 2015 at the email address (dirtpl1@nic.in) or by post at the following address with “Comments on draft transfer pricing rules“ written on the envelope:
 

Director (Tax Policy & Legislation)-I
Central Board of Direct Taxes,
Room No. 147-D,

North Block,
New Delhi–110001

FAQs on Gold Monetization Scheme

The Government has released the draft Gold Monetization Scheme (GMS). The main objective of the Scheme is to mobilize gold held by the households in lieu of interest and to make it available to the gems and jewellery sector as raw material on loan. This scheme aims at reducing reliance on import of gold to meet the domestic demand.

The draft guidelines have been released nearly three months after announcing the scheme by the Finance Minister Mr. Arun Jaitley in the Union Budget 2015.

Q. How much gold can be deposited in the scheme?

The minimum quantity of gold that a customer can deposit is proposed to be 30 grams. The gold can be in any form, i.e., bullion or jewellery.

Q. How to check the purity of gold to be deposited in the scheme?

Customer interested in depositing the gold shall get its purity tested, which shall be done at Purity Testing Centre through a XRF machine.

If customers agree with amount of pure gold determined after the purity testing, he shall fill-up a Bank/KYC form and give his consent for melting the gold.

Q. What is Purity Testing Centre?

There are 350 BIS certified Hallmarking Centres which are spread across various parts of the Country. Since these Hallmarking Centers are equipped to conduct a test of purity of jewellery in a short span of time, they shall act as 'Purity Testing Centers' for the scheme.

Q. In which cities Gold Monetization Scheme will be launched?

Initially the scheme is proposed to be launched in selected cities only. However, if the requirement arises the scheme shall be extended to other cities. Currently, it is proposed to open 331 such centers across India.

Q. How gold shall be melted?

The gold ornaments so collected from the customers shall be cleaned of its dirt, studs, meena, etc., which shall be handed-over to the customer only.

Net weight of the jewellery shall be taken after such removal. Thereafter, right in front of the customer the jewellery will be melted and through a fire assay, its purity will be ascertained.

Q. How to deposit the gold?

After determining the purity of gold by fire assay, the customer can chose to refuse to deposit the gold. In that case, hecan take back the melted gold in the form of gold bars, after paying a nominal fee.

If the customer agrees to deposit the gold, he will be given a certificate by the collection centre certifying the amount and purity of the deposited gold. In this case, the melting charges shall be borne by the bank.

Q. How to open the gold saving account?

When the customer produces the certificate of gold deposited at the Purity Testing Centre, the bank will open a 'Gold Savings Account' for the customer and credit the 'quantity' of gold into the customer's account. Simultaneously, the Purity Verification Centre will also inform the bank about the deposit made.

Q. Is Interest payable on gold deposited in gold saving account?

Yes, banks will pay interest on 'Gold Savings Account' after 30/60 days of account opening. The rate of interest is proposed to be decided by banks directly. Both principal and interest to be paid to the depositor shall be valued in terms of gold.

Q. How to withdraw from gold saving account?

Customer will have the option of redemption from gold saving account either in cash or in gold. Such an option will have to be exercised at the time of making the deposit. The tenure of the deposit will be minimum of 1 year and with a roll out in multiples of one year.

Q. Do any capital gains arise from such transaction?

In the Gold Deposit Scheme (1999), the customers received exemption from capital gains tax. So, tax exemptions are likely to be made available for this scheme as well.

Amount earned from "Gold Saving Account" under this scheme is likely to be exempted under Income-tax Act after due examination.

Q. How gold so deposited shall be used by the Banks?

The banks may be permitted to utilize the gold in the following ways:

a) Deposit the mobilized gold as part of their CRR/SLR requirements with RBI;

b) Sell the deposited gold to generate foreign currency;

c) Gold can be converted in gold coins for further sale to customers;

d) Lending to the jewellers.

Q. How gold can be lent to the jewellers?

When a gold loan is sanctioned, the jewellers will receive physical delivery of gold. The banks will, in turn, make the requisite entry in the Jewellers' Gold Loan Account. It is proposed that the interest to be charged from the jeweller shall cover the following:

a) Interest rate paid to the depositors of gold

b) Fee paid to the refiners and Purity Verification Centres.

c) Profit margin of the banks