CIT(A) should adopt market rates in valuers directory/stamp duty reckoner in absence of sale instances in same area

PFIZER LTD. V. DCIT [2015] 56 taxmann.com 260 (Mumbai - Tribunal)

Where no sale instances were available of same area, Fair Market Value of land could be determined by relying upon rate mentioned in Indian Valuers Directory and Reference Book and Stamp Duty Ready Reckoner and by adopting annual rate of appreciation method

Facts

• The assessee-company sold its factory land. The assessee reported fair market value (FMV) of land as on 1-4-1981 at Rs. 14.12 crore on the basis of report of a registered valuer and, accordingly, it computed the capital gains;
• As no instances of sale of similar property in same area were available, registered valuer determined the value of property by presuming the value it would fetch if residential flats were constructed and sold on that land in 1981, utilising the maximum Floors Space Index (FSI);
• The Assessing Officer (AO) referred matter to Departmental Valuation Officer (DVO) who determined the value of land, taking into account rate of land in undeveloped industrial area as on 1-4-1981 as per Indian Valuers Dictionary and Reference Book (IVDRB), at Rs. 1.7 crore;
• The Commissioner (Appeals)rejected the valuation made by registered valueras he determined the value of land on the basis of some imaginary situations. He also did not agree with the DVO’s valuation as land was situated in a developed industrial area;
• The CIT(A) taking into account the rate quoted in IVDRB and Stamp Duty Ready Reckoner and by adopting annual rate of appreciation method worked out FMV at Rs. 2.78 crore;
• Aggrieved by the order of CIT(A), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of revenue as under:

• It is true that for valuation purposes some kind of assumption has to be taken especially if valuation is to be done in the year 2001 for the year 1981. But, assumption should have some basis. In the instant case, the very base adopted by the valuer was totally improper as concept of FSI was not prevalent in the year 1981;
• The value determined by DVO was also improper as land was situated in developed industrial area and not in under-developed industrial area;
• CIT(A) determined the value of property by referring to IVDRB and stamp duty Ready Reckoner and by adopting annual rate of appreciation method. So, the method adopted by him was a better 'guess work' than the guess work done by the registered valuer. His estimation was also very near to the valuation made by the DVO;
• Therefore, FMV adopted by the CIT(A) was more reasonable as compared to the FMV quoted by the registered valuer.

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.

Parking charges collected on vacant land were taxable even if developer was following project completion method

SUDHIR G. BORGAONKAR V. ACIT -(2015) 56 taxmann.com 188 (Bombay High Court)

Where assessee-developer was following project completion method for payment of taxes, parking charges collected by him on vacant land had nothing to do with the completion of his project; he was obliged to pay on parking charges in year of receipt of parking charges.

Facts:

• The assessee, being a builder and developer was following project completion method for purposes of paying taxes.
• He had generated income in assessment year 2000-01 on account of parking charges collected on the vacant land. Since assessee had not filed his return of income of AY 2000-01, a notice under section 148 was issued and income received from parking charges was assessed to tax.
• On appeal, the CIT (A) set-aside the order of AO on the ground that the amount earned by assessee by exploiting vacant land was an amount relatable to costs of the project and therefore, was taxable in subsequent years. Further the Tribunal set aside the order of the CIT(A).
• Consequently, AO charged interest u/s 234A and 234B in respect of default in payment of advance tax for the assessment year 2000-01. CIT (A) and Tribunal upheld AO action of AO. The aggrieved-assessee filed the instant appeal before High Court.

The High Court held in favour of revenue as under :

• The non-filing of return of income by assessee was on the ground that the income earned on parking charges would have to be returned when the project would be completed. This was not accepted as the amount received on account of parking charges was not a part of any project. Thus parking charges was brought to tax in Assessment Year 2000-01.
• It had been held by the Tribunal that the amount received on parking charges had nothing to do with the appellant's project and was assessable to tax in Assessment Year 2000-01. This has been accepted by the assessee. Thus, the assessee was obliged to pay advance tax and non-payment of the same would carry with it the further burden on interest under Section 234B of the Act.
• Therefore, the AO was right in charging interest in respect of default in payment of advance tax for the assessment year 2000-01.

There is no requirement to issue a notice u/s 143(2) before making an assessment u/s 153A

Sumanlata Bansal vs. ACIT (ITAT Mumbai)

The Third Member had to consider whether the issue of a notice u/s 143(2) was mandatory for the completion of an assessment u/s 153A and whether the non-issue of such a notice rendered the s. 153A assessment null and void. HELD by the Third Member:

• There is no specific provision in the Act requiring the assessment made under section 153A to be after issue of notice under section 143(2) of the Act. Learned counsel for the assessee places heavy reliance on the judgment of the Hon‟ble Supreme Court in Hotel Blue Moon v. DCIT 321 ITR 362 (SC) wherein it was held that the where an assessment has to be completed under section 143(3) read with section 158BC, notice under section 143 (2) must be issued and omission to do so cannot be a procedural irregularity and the same is not curable. It is to be noted that the above said judgment was in the context of Section 158BC. Clause (b) of Section 158BC expressly provides that “the AO shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of Section 142, sub sections (2) and (3) of Section 143, Section 144 and Section 145 shall, so far as may be, apply. This is not the position under section 153A. The law laid down in Hotel Blue Moon, is thus not applicable to the facts of the present case. 
• It is also to be noted that Section 153A provides for the procedure for assessment in case of search or requisition. Sub section (1) starts with non-obstante clause stating that it was “notwithstanding” anything contained in sections 147, 148 and 149, etc. Clause (a) thereof provides for issuance of notice to the person searched under Section 132 or where documents etc are requisitioned under Section 132(A), to furnish a return of income. This clause nowhere prescribes for issuance of notice under Section 143(2). Learned counsel for the assessee/ appellant sought to contend that the words, “so far as may be applicable” made it mandatory for issuance of notice under Section 143(2) since the return filed in response to notice under Section 153A was to be treated as one under Section 139. The words “so far as may be” in clause (a) of sub section (1) of Section 153A could not be interpreted that the issue of notice under Section 143(2) was mandatory in case of assessment under Section 153A. The use of the words “so far as may be” cannot be stretched to the extent of mandatory issue of notice under Section 143(2). As is noted, a specific notice was required to be issued under Clause (a) of sub-section (1) of Section 153A calling upon the persons searched or requisitioned to file return. That being so, no further notice under Section 143(2) could be contemplated for assessment under Section 153A (Ashok Chaddha vs Income Tax Officer 337 ITR 399 (Del) followed, ACIT v. Geno Pharmaceuticals Ltd. (2013) 214 Taxman 83 (Bom.)(Mag.)(HC) distinguished)

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.

Gross

The total amount before anything is deducted. Many important accounting statistics use this method, such as gross earnings and gross profit

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 benchmarked 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 anyaddition towards transfer pricing adjustment, but the depreciation on such assets, being a revenue offshoot of the capital transaction, will be requiredto 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 benchmarked 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 anyaddition 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.

Where renting out properties is main business, then income is rightly taxed as Business Income

Chennai Properties & Investments Ltd. v. Commissioner of Income-tax, Central -III, Tamil Nadu [2015] 56 taxmann.com 456 (SUPREME COURT)


Where in terms of memorandum of association, main object of assessee-company was to acquire properties and earn income by letting out same, said income was to be brought to tax as business income and not as income from house property

FACTS

• The assessee-company was incorporated with main objective, as stated in the Memorandum of Association, to acquire the properties in the city and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business. 
• The Assessing Officer took a view that the rental income received by assessee was to be taxed as income from house property. 
• The Commissioner (Appeals) as well as the Tribunal accepted assessee's claim holding that amount in question was to be taxed as business income. 
• The High Court, however, restored order passed by the Assessing Officer. 

On appeal to the Supreme Court:

HELD

• The Memorandum of Association of the assessee-company mentions that main object of the company is to acquire and hold the properties and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. It may further be noted that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order.
• In aforesaid circumstances, it is concluded that letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the head income from business. It cannot be treated as 'income from the house property'. Accordingly, instant appeal is allowed and order of the High Court is set aside.

Income determined on estimate basis, penalty u/s 271(1)(c) cannot be imposed

Rajiv Kumar Garg Vs. ITO Ward 2, Shamli. ITA No. 519/Del/2014

Facts:

• The assessee is engaged in trading of cement. The A.O., during the course of assessment proceedings, valued the closing stock on the basis of last purchase bill, the differential of stock amount between assessee’s and A.O.’s calculation being Rs. 2,40,381/-. The assessee agreed for the aforementioned addition.

• The A.O., in relation to the said addition, imposed penalty u/s 271(1)(c) of the Income Tax Act, 1961, amounting to Rs. 45,100/- @ 100% of tax sought to be evaded.

• The Ld. CIT(A) upheld the penalty.

Assessee's Contention:
No one appeared before the ITAT Bench for hearing on behalf of the assessee. Thus, the ITAT Bench disposed off the appeal ex parte qua the assessee.

Revenue's Contention:
The penalty u/s 271(1)(c) has been imposed on the basis of difference in value of stock shown by assessee and as estimated by A.O. by applying the rate of last purchase bill. Further, the assessee also accepted the addition. Thus, the inaccurate particulars of income had been furnished by the assessee and the penalty so levied is justified.

Court’s Order:

• There is nothing to show that the assessee has concealed his income or furnished inaccurate particulars of income. There can be several reasons for a different valuation. It is not necessary that all the cement bags are always of good quality. Some of the cement bags may have leaked, spoilt or fixed.

• Mere fact that the addition has been accepted or is confirmed in quantum proceedings cannot be conclusive of penalty imposition.

• The Hon’ble Calcutta High Court in case of Durga Kamal Rice Mills Vs. CIT (2004) 265 ITR 25 (Cal.) has held that quantum proceedings are different from penal proceedings. The Hon’ble Kerala High Court in CIT Vs. P.K. Narayanan (1999) 238 ITR 905 (Ker.) has held that despite the addition being confirmed by Tribunal in quantum proceedings, the penalty can still be deleted by the Tribunal, if the facts justify.

• The addition has been made only on the basis of estimate made by the A.O. It is settled legal position that when income is estimated, then there can be no question of imposing penalty u/s 271(1)(c) of the Act.

• The Hon’ble Delhi High Court in CIT Vs. Aero Traders Pvt. Ltd. (2010) 322 ITR 316 (Del.) has held that no penalty u/s 271(1)(c) can be imposed when income is determined on estimate basis. The similar view has been taken by:
• Hon’ble Punjab and Haryana High Court in Harigopal Singh Vs. CIT (2002) 258 ITR 85 (P&H)
• Hon’ble Gujarat High Court in CIT Vs. Subhash Trading Co. 221 ITR 110 (Guj.)

• It is apparent that the bedrock of instant penalty is the estimate of valuation of closing stock, the same cannot be sustained. The penalty is thus, ordered to be deleted.

Things to do to avoid getting an Income Tax Notice

Today, let’s see how you can follow certain things to avoid getting a notice!

With the Income Tax (I-T) department becoming net savvy and going online, it has become very easy for them to identify discrepancies in your papers and to keep a close eye on almost every financial transaction you do. Even the honest taxpayers have received notices and have come under scrutiny causing them to run around to prove their honesty. Hence it becomes very critical for everyone to maintain their papers and documentary evidence properly to safeguard their own interest.
You need to take the following actions to minimise your chances of receiving a notice:

• Always file your returns on time and correctly: 

This is the basic precaution you need to take to ensure 100% compliance with the law. Make sure you are filing the return correctly and all the details given by you while filling the return matches with the details available with the department.

• Submit ITR V to Centralized Processing Centre (CPC) Bangalore: 

Your filing of taxes would get complete only when your ITR V reaches the CPC. Just uploading returns online is not enough; make sure you get confirmation of its receipt from the CPC. Please follow the Dos & Don’ts of sending ITRV to CPC.

• Check your Form 26AS (Tax Credit Statement): 

“26AS” gives the details of the “TDS” deposited on your behalf. You should check all the TDS payments duly credited to you or get it rectified otherwise. It can be viewed though NSDL or I-T department’s site and even through the bank’s online portal.

• Mismatch in Income & Expenses/investments: 

If your income was Rs10 lakh and you invested Rs25 lakh, you need to justify the source of used funds and the same applies to expenses also.

• Gifts/Money credited to your account: 

If you have funds credited to your account out of gifts or loan from relatives/ friends, you need to keep the documentary evidence for the same. You may also need to report these transactions in a few instances.

• Declaring “Exempt” Income: 

Even though some incomes are exempt from tax, you still need to declare this while filing your return.

• Updating PAN details: 

Keep updating any changes in your Pan data like address/surname change after marriage etc.

• Pay Advance Tax: 

if you are liable to pay advance tax, then you have to pay it as per its schedule & deadline.

• Form 15H or 15G: 

Use Form 15H/15G instead of claiming refund, submit this at all the financial institutions like banks to prevent them from deducting TDS on your investments with them; in case your Income is below the taxable limit.

• Avoid high value transactions: 

The department gets information for all your high value transactions from the institution concerned and chances of you coming under scrutiny increases. Avoid these transactions wherever possible and plan it carefully and legally.

Long-term Capital Loss On Tax Exempt Shares Can Be Set-Off Against Taxable Gains

Raptakos Brett & Co. Ltd vs. DCIT (ITAT Mumbai)

Though the LTCG on sale of equity shares (subject to STT) is exempt from tax u/s 10(38), the long-term capital loss on sale of such shares can be set-off against the taxable LTCG on sale of another asset. 

• The main issue is whether Long term capital loss on sale of equity shares can be set off against Long term capital gain arising on sale of land or not, as the income from Long term capital gain on sale of such shares are exempt u/s. 10(38). The nature of income here in this case is from sale of Long term capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, Long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines “Capital asset” and various exceptions and exclusions have been provided which are not treated as capital asset. Section 45 is the charging section for any profits or gain arising from a transfer of a capital asset in the previous year i.e. taxability of capital gains. Section 47 enlists various exceptions and transactions which are not treated as transfer for the purpose of capital gain u/s. 45. The mode of computation to arrive at capital gain or loss has been enumerated from sections 48 to 55. Further sub section (3) of section 70 and section 71 provides for set off of loss in respect of capital gain.

• The whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular “provision” of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. In our view, the concept of income including loss will apply only when the entire source is exempt and not in the cases where only one particular stream of income falling within a source is falling within exempt provisions.

• Section 10(38) provides exemption of income only from transfer of Long term equity shares and equity oriented fund and not only that, there are certain conditions stipulated for exempting such income i.e. payment of security transaction tax and whether the transaction on sale of such equity share or unit is entered into on or after the date on which chapter VII of Finance (No.2) Act 2004 comes into force. If such conditions are not fulfilled then exemption is not given. Thus, the income contemplated in section 10(38) is only a part of the source of capital gain on shares and only a limited portion of source is treated as exempt and not the entire capital gain (on sale of shares). If an equity share is sold within the period of twelve months then it is chargeable to tax and only if it falls within the definition of Long term capital asset and, further fulfils the conditions mentioned in subsection (38) of section 10 then only such portion of income is treated as exempt. There are further instances like debt oriented securities and equity shares where STT is not paid, then gain or profit from such shares are taxable.

• Section 10 provides that certain income are not to be included while computing the total income of the assessee and in such a case the profit or loss resulting from such a source of income do not enter into computation at all. However, a distinction has been drawn where the entire source of income is exempt or only a part of source is exempt. Here it needs to be seen whether section 10(38) is source of income which does not enter into computation at all or is a part of the source, the income in respect of which is excluded in the computation of total income. For instance, if the assessee has income from Short term capital gain on sale of shares; Long term capital gain on debt funds; and Long term capital gain from sale of equity shares, then while computing the taxable income, the whole of income would be computed in the total income and only the portion of Long term capital gain on sale of equity shares would be removed from the taxable income as the same is exempt u/s 10(38). This precise issue had come up for consideration before the Hon’ble Calcutta High Court in Royal Calcutta Turf Club v. CIT (1983) 144 ITR 709 (Cal).

• Though in CIT vs. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118 (SC), the Supreme Court opined that if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the purpose of carry forward, the ratio and the principle laid down by the Apex Court would not apply here in this case, because the concept of income includes loss will apply only when entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon’ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon’ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon’ble Supreme Court and held that the same will not apply in such cases.

• Thus, we hold that section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accordance with section 70(3) (Schrader Duncan Ltd (2012) 50 SOT 68 distinguished; Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR 261 (Guj) not followed)

Interest paid on refundable deposits of tenants is allowable u/s 24 if deposits are used to repay housing loan

ITO V. STRUCTMAST RELATOR (MUMBAI) (P.) LTD. [2015] 56 taxmann.com 107 (Mumbai - Tribunal)

Interest paid on refundable security deposits received from tenants is allowable under section 24(b) if deposits are used to repay loan taken for purchase of house property.

Facts: 

• The assessee had purchased immovable property after utilizing the unsecured loan taken from Reliance Industries ltd.
• Thereafter, properties were let out and in terms of agreement refundable security deposits were received from tenants. These deposits were interest bearing where the assessee had to pay interest @ 6%. These deposits were utilized for the repayment of loan taken form the Reliance industries.
• Assessee claimed deduction under Section 24(b) for interest paid on refundable deposits received from tenants on the ground that it was borrowed capital utilized for the repayment of old loan.
• The Assessing Officer disallowed interest under section 24(b) but the CIT(A) allowed the claim of assessee. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

• In order to decide issue of allowance under Section 24(b) it had to be decided as to whether refundable deposits received from tenants could be reckoned as "borrowed capital" within the meaning of section 24(b)?. The word "borrow" as defined in Law lexicon (2nd edition) means to take or receive from another person as a loan or on trust money or other article of value with the intention of returning or giving an equivalent for.
• A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and are to be refunded back, then debt is created on the assessee which is liable to be discharged in future.
• Here the concept of debt had to be understood as per the terms of the parties. If the deposits had been security deposits simplicitor to cover the damage of the property or lapses on part of the tenant either for non-payment of rent or other charges, then such a deposit could not be equated with the borrowed money, because then there was no debt on the assessee.
• The moment a deposit is accepted on interest, then it partakes the character of borrowed money. It was an undisputed fact that these interest bearing deposits had been utilized for repayment of borrowed capital. Thus, interest paid on refundable deposits would be deductible under Section 24(b).

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).

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 assesseebut 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 paymenthad been made by a third person andnot 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.

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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 the favour 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, Loka Shikshana 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).

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 percent/8 percent.
• 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.

Finance Minister approves the formation of 2 Committees for facilitating implementation of Goods and Services Tax from 1.4.2016

Finance Minister has approved the formation of 2 Committees for facilitating implementation of Goods and Services Tax from 1.4.2016. 

A Steering Committee been formed under the Co-Chairmanship of Additional Secretary, Department of Revenue and Member Secretary, Empowered Committee of State Finance Ministers. This Committee has Members from Department of Revenue, Central Board of Excise & Customs, Goods and Services Tax Network (GSTN) and representatives of State Governments. This Committee shall monitor the progress of IT preparedness of GSTN/CBEC/Tax authorities, finalisation of reports of all the Sub-Committees constituted on different aspects relating to the mechanics of GST and drafting of CGST, IGST and SGST laws/rules. The Committee shall also monitor the progress on consultations with various stakeholders like trade and industry and training of officers. 

Another Committee has been formed under the Chairmanship of the Chief Economic Advisor, Ministry of Finance to recommend possible tax rates under GST that would be consistent with the present level of revenue collection of Centre and States. While making recommendations, this Committee would take into account expected levels of growth of economy, different levels of compliance and broadening of tax base under GST. The Committee would also analyse the Sector-wise and State-wise impact of GST on the economy. The Committee is expected to give its report within two months. 

Meanwhile, progress is underway to finalise various aspects of GST design like business processes, payment systems, matters relating to dual control, threshold, exemptions, place of supply rules and also making of model GST, SGST and IGST laws and rules. This task is being undertaken through various Sub-Committees formed by the Empowered Committee which has officers from Government of India as well as State Governments as Members. 

Goods and Services Tax Network (GSTN) is taking steps for preparing the IT infrastructure for roll out of GST. The IT infrastructure shall enable online registration, filing of returns and getting refunds. Various State Governments are also preparing the necessary back end IT infrastructure for implementation of GST which shall relate to aspects like assessments and audit. 

Periodic reviews are being held in the Department of Revenue to monitor the progress of all the above activities.

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 DTAAs, 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 DTAAs.
• 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 206AAof 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.

Discount allowed by ONGC to Oil Marketing Companies for sale of petroleum products would not form part of sale price

ONGC Ltd. v. State of Gujarat - (2015) 55 taxmann.com 297 (Gujarat High Court)

Gujarat VAT - Where assessee for first quarter of April, 2014 to June, 2014 had given discount to Oil Marketing Companies on sale of its petroleum products by way of credit note, amount of discount would not form part of sale price as directed by Government of India

• The assessee was engaged in exploration, development and production of the petroleum products. It was obliged to act as an instrument to implement the policy of the Central Government subject to such directives as might have been issued by the President from time-to-time with a view to exercise control over strategic areas of economy and to serve public interest.
• For the first quarter of April, 2004 to June, 2004, the assessee had given discount to the Oil Marketing Companies (OMCs) on the sale of its petroleum products as directed by the Government of India in its letter dated 27-8-2004 by way of a credit note dated 13-9-2004. It claimed that the amount of such discount would not form part of taxable turnover.
• The assessing authority held that the discount given by the assessee to the OMCs on the sale of petroleum products was not an admissible deduction. The assessee was required to pay the tax inclusive of such discount.
• Both, the First Appellate Authority and the Tribunal upheld the order of the Assessing Authority.

High Court held in favour of assessee as under: 

• The assessee could charge only such rate from the OMCs as Government of India directed.The broad formula adopted for such purpose was the crude price in international market minus the last discount which would prevail for a quarter. At the end of the quarter after, taking into consideration all the relevant factors, the Government of India would declare the final price.
• Since for the petroleum products already supplied by the assessee to the OMCs during such quarter the invoices would have been raised on the basis of provisional discount, the adjustment would have to be done on the basis of final discount declared by the Government of India. Though in most of the cases, the final discount might have been higher than the provisional discount earlier declared, it was entirely possible that in some cases such final discount might have been lower than the provisional price. The assessee would eventually adjust its accounts with the OMCs by raising either the debit note or credit note, as might be required.
• Perhaps it is a misnomer, though consistently so referred to by the Government of India as well as by the assessee, to term this component as discount. A discount is reduction in catalogue price for any reason recognised by the trade. In the instant case, there was no prefixed price which as per the trade practice was reduced by a discount given by the seller to the purchaser. It was a case where under a price control regime under the directives of Government of India, the assessee was obliged to sell its products at lesser than the market price. These terms were determined even before the sale. Initial invoices at the time of actual supply of petroleum products by the assessee were merely provisional. They were based on provisional price fixation by the Government. They were never meant to reflect final sale consideration for the goods sold. They were always subject to adjustment once the Government of India finally declared the reduced rate of specified petroleum products. Comparing the invoiced price with the finalised price after adjustment was a complete fallacy. Even invoiced price whenever based on provisional price fixed by the Government was always below the market price which the assessee could have fetched. 
• Therefore, the amount of discount given by the assessee to the OMCs on sale of its products would not form part of sale price. The assessee was not required to pay tax on such discount.

Dividend paid by Foreign Company abroad for shares deriving substantial value from Indian assets not taxable: CBDT

The existing provisions of Section 9 of the Act deal with cases of income which are deemed to accrue or arise in India. Sub-section (1) of the said section creates a legal fiction that certain incomes shall be deemed to accrue or arise in India. Clause (i) of said sub-section provides that all income accruing or arising, whether directly or indirectly, through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India.

The Finance Act, 2012 inserted an Explanation 5 to section 9(1)(i) to clarify that an asset or capital asset, being any share or interest in a company or entity registered outside India, shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.Further, the Finance Bill, 2015 clarified the meaning of the term "substantially", thereby putting to rest the never ending controversy and providing a stable taxation regime. However, apprehensions have been expressed about the applicability of the Explanation 5 to the transactions not resulting in any transfer, directly or indirectly of assets situated in India. It has been pointed out that such an extended application of the provisions of the Explanation 5 may result in taxation of dividend income declared by foreign company outside India, in respect of shares deriving substantial value from assets located in India. This may cause unintended double taxation and would be contrary to the object and purpose of amendment made by the Finance Act, 2012.

The Explanation 5 sought to clarify the source rule of taxation in respect of income arising from indirect transfer of assets situated in India.Thus, declaration of dividend by foreign company outside India does not have the effect of transfer of any underlying assets located in India. Therefore, CBDT has clarified that dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets located in India would not be deemed to be income accruing or arising in India by virtue of provisions of the Explanation 5 to Section 9(1)(i).

ITAT unsettles the settled law; allows set-off of long term capital loss arising from sale of STT paid equity shares

RAPTAKOS BRETT & CO. LTD. V. DCIT (2015) 58 taxmann.com 115 (Mumbai - Tribunal)

Facts:

• Assessee filed its return of income wherein it claimed set-off of long term capital loss arising from sale of shares (STT paid) against the long term capital gain arising from sale of land.
• The Assessing Officer (AO) denied setting off of such loss by relying upon the verdict of Apex Court in case of CIT vs. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118. He was of the view that income includes loss and, therefore, if the long-term capital gain arising from sale of shares (STT paid) does not form part of the total income as per section 10(38), then the loss arising from such shares would also not form part of the total income.
• The CIT(A) confirmed the order of the AO. Aggrieved by the order of CIT(A), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour as assessee as under:

• The ratio and the principle laid down by the Hon'ble Apex Court in the case of Hariprasad (Supra) would not apply in the instant case, as the concept that 'income will include loss' would apply only when entire source is exempt from tax and not when only one of the income falling within such source is exempt.
• Section 10(38) provides for exemption from capital gains only on transfer of Long term equity shares with certain conditions, wherein one of conditions of exemption was payment of security transaction tax (STT). Thus, the income contemplated under section 10(38) is only a part of the source of capital gain and only a limited portion of such source is treated as exempt.
• From the conjoint reading and plain understanding of sections 2(14), 45, 47, 70 and 71 it can be seen that,
• Firstly, shares in the company are treated as capital asset and no exception has been carved out in section 2(14), for excluding the equity shares and unit of equity oriented funds that they are not treated as capital asset;
• Secondly, any gains arising from transfer of Long term capital asset is treated as capital gain which is chargeable u/s. 45;
• Thirdly, section 47 does not enlist any such exception that transfer of long term equity shares/funds are not treated as transfer;
• Lastly, section 70 & 71 elaborates the mechanism for set off of capital gain. Nowhere, any exception has been made/ carved out with regard to Long term capital gain arising on sale of equity shares.

Thus, whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular "provision" of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. Hence, Long term capital loss on sale of shares could be set off against Long term capital gain on sale of land.

Private Companies will heave a sigh of relief as MCA has relaxed restrictive provisions of Companies Act, 2013

The Ministry of Corporate Affairs (‘MCA’) does away with certain restrictive provisions for private companies vide notification no. F.NO.2/11/2014-CL.V . The MCA has provided exemption to private companies from filing board resolution to Registrar of Companies. It further eased out provisions relating to related party transactions, loans to directors and norms on further issue of share capital. These amendments were much needed as many restrictive provisions were applicable on Private companies which rendered them helpless to carry on day-to-day business activities. The Key changes brought out for private companies are as under:

• Exemption from filing board resolutions: As per Section 179(3) of companies Act, 2013 companies are required to file certain items of Board Resolutions with the Registrar of Companies in the form called MGT 14. Now this requirement has been done away with for private companies. Thus, now private companies need to file form MGT 14 only in case of special resolutions. This has been one of the major relaxations provided by MCA for private companies.
• Loan to directors by private companies: Provision relating to loan to directory provides that no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

Under amended norms, a partial exemption has been granted to private companies giving a loan, providing a guarantee or offering a security in connection with a loan taken by a director. The partial exemption provides that: 

• There should not be any shareholding of body corporate in the lending/guaranteeing company;

• The lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is limited to lower of (i) 2 % (net worth) of company; or (ii) Rs 50 crores

• There is no pending default in repayment of such borrowings by the lending company. 

          It may be noted that the restriction on lending by private companies was not there under           the Act 1956

• Relaxation of ceiling on company audits: The ceiling of 20 audits will now exclude one person companies, dormant companies, small companies, and private companies having a paid up share capital of less than Rs. 100 crores. 
• Related Party transactions (RPTs): One of the special features of general meeting approval in case of RPTs is that the resolution has to be approved by a vote of the minority only. Related parties are not allowed to vote on such resolution. This provision has been removed for private companies.

Further, holding-subsidiary relationship and investor-associate relationships have been excluded from the definition of “Related Parties”. Such change will definitely ease the related party transactions.

• Further issue of shares: Now, issue of further shares to employees of private companies under scheme of Employee Stock Options (‘ESOPs’) can be done by passing an ‘ordinary resolution’ instead of ‘Special Resolution’. Requirement of sending the notice three days prior to opening of the issue by way of specified means under rights issue has now been exempted. Provision with regard to time period of offer in case of rights issue have also been exempted for private companies.
• Loans against its own securities: Section 67 prohibits companies from providing loans against its own shares. Now, private Companies have been exempted from the provision of section 67, subject to the following conditions:
• Where no other body corporate has invested any money.
• Borrowing from banks, FIs or body corporates is less than double of its paid up capital of Rs. 50 crore, whichever is lower.
• The above qualifying private company should not have defaulted in repayment of borrowings as may be existing on the date of the transaction under the section.
• Participation of interested director in board meeting: Section 184(2) provides that the directors of a private company should abstain themselves from participating in a board meeting where a matter in which they are interested is to be discussed. However, under the amended provisions, an interested director of a private company can participate in the board meeting after declaring his interest.
• Voting rights and kinds of share capital: Now the provisions relating to voting rights and Share Capital are not applicable to private companies unless their MoA or AoA provides for the same.
• Right of persons other than retiring directors to stand for directorship: Provisions of section 160 shall not apply in case of private companies. Similar was the position under section 257 of the Act 1956.