TRANSFER PRICING - COMPUTATION OF ARM'S LENGTH PRICE

SECTION 92C

Comparables and adjustments/Adjustment - Service fee : Where in course of appellate proceedings, assessee brought voluminous documents on record in order to prove genuineness of professional service fee paid to AE, since Commissioner (Appeals) without taking into consideration said evidence, confirmed adjustment made by TPO, impugned order passed by him was to be set aside and, matter was to be remanded back for disposal afresh.

[2016] 73 taxmann.com 393 (Chennai - Tribunal)

ALLOWABILITY OF BUSINESS EXPENDITURE

SECTION 37(1)

Onus to prove : Where assessee failed to produce necessary evidence in support of expenditure claimed to have been incurred, such expenditure was to be disallowed. 

[2016] 73 taxmann.com 390 (Hyderabad - Tribunal)

CHARITABLE OR RELIGIOUS TRUST - DENIAL OF EXEMPTION

SECTION 13

Sub-section (2)(a) : Where Assessing Officer rejected assessee's claim for exemption of income under section 11 on ground that certain properties had been purchased in names of individual members of assessee-society out of funds belonging to society, since impugned order was passed without examining as to whether those members held properties in fiduciary capacity for benefit of society or whether any benefits were available to members regarding utilisation of properties in question, same deserved to be set aside

[2016] 73 taxmann.com 391 (Jaipur - Tribunal)

Reference to TPO not invalid even if AO doesn't supply satisfaction note before making reference

Facts:

• Assessee filed the instant petition before the High Court challenging the validity of reference made by AO to TPO to determine ALP of international transaction.
• The petition was filed on following grounds:
• In terms of the Instructions No. 3/2016 dated 10-3-2016, the requirement of passing reasoned order on the objections of assessee (regarding whether a transaction is an international transaction or not) and the service of the order upon the assessee is a condition precedent to the Assessing Officer making a reference to the TPO.
• Non-compliance with either or both the above mandatory conditions render the reference to the TPO void.

The High Court held as under:

• The satisfaction recorded by the AO in the instant case contained sufficient reasons. He had indicated the relationship between the assessee and the other parties. He had made a comparative chart and alleged that the sales were under invoiced. That would be sufficient to refer the matter to the TPO. Whether the allegations are true or not must be tested before the authorities under the Act and not in a writ petition under Article 226. The challenge on this ground was, therefore, unsustainable.
• Another submission made by the assessee was that the the order recording satisfaction must be served upon the assessee. The purpose of this exercise of granting the assessee an opportunity of raising objections and the requirement of the AO to furnish reasons for the satisfaction is inter-alia to enable the assessee firstly to meet the case and represent against it to the TPO before the Assessing Officer on the ground that there is no international transaction and secondly in the event of his objections being overruled, an opportunity of challenging the same before the Disputes Resolution Panel or the Commissioner (Appeals) as the case may be, and thereafter before the Appellate Tribunal.
• An assessee is not entitled as a matter of right to invoke the writ jurisdiction at the stage of reference by the Assessing Officer to the TPO. His grievances can be raised in a challenge to the draft assessment order before the Disputes Resolution Panel or the final assessment order before to the Commissioner (Appeals).
• The contention of the assessee that the reference was void ab initio on account of the satisfaction note not having been furnished to the assessee before the reference of the transaction by the Assessing Officer to the TPO was, therefore, rejected. The failure to supply the satisfaction note before the reference to the TPO is at the highest a mere irregularity and does not prejudice the assessee in any manner whatsoever. In view of the above findings the writ petition was to be dismissed.

[2016] 74 taxmann.com 89 (Punjab & Haryana High Court)

Activity of distribution of lottery isn't liable to service-tax

Future Gaming & Hotel Services (P.) Ltd. v. Union of India [2015] 62 taxmann.com 238 (Sikkim High Court)


Activity of buying and selling of lottery is not service. Department cannot demand service tax on said activity on basis of Rule 6(7C) of Service Tax Rules since it is an optional scheme of payment of tax and does not create a charge of service tax.

Facts:

• Assessee was engaged in business of sale of paper and online lottery tickets organized by Government of Sikkim.
• Section 65B(44) defines service. It excludes transaction in money or actionable claim. An Explanation was inserted vide Finance Act, 2015 to restrict the meaning of transaction in money or actionable claim. Explanation excluded, from purview of transaction in money or actionable claim, activity carried out by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind.
• Section 66D provides negative list of services. Any service listed under Section 66D is outside the ambit of service tax net. An Explanation was inserted in Section 66D to exclude aforesaid activity from purview of negative list of services.
• The effect of aforesaid amendments was: said activities in relation to lottery became subjected to service tax. Department demanded service tax from assessee on the basis of aforesaid amendments.
• The assessee challenged said levy of service tax.

The High Court held in favour of assessee as under:

• Section 65B(44) defines service. Principal requirements of said provision is that the activity should be carried out by a person for another and that such activity should be for a consideration. Activity of assessee did not establish the relationship of principal and agent but rather that of a buyer and a seller on principal to principal basis. Nature of transaction being bulk purchase of the lottery tickets by the assessee from the State Government on full payment of price as a natural business transaction. There is no privity of contract between State and assessee. It was held in an earlier case of assessee and this position is not changed even after Finance Act, 2015.
• Department demanded service tax on the strength of Rule 6(7C) the Service Tax Rules, 1994. In earlier case of assessee it was held that Rule 6(7C) only provides an optional composition scheme for payment of service tax which by itself does not create a charge of service tax. This Rule is only a piece of subordinate legislation framed under the rule making power provided in the Finance Act, 1994 and, therefore, in view of the position of law that Subordinate Legislation cannot be override the statutory provisions, Rule 6(7C) cannot go beyond the provision of the Finance Act, 1994. This provision has not changed even now.
• Assessee in buying and selling the lottery tickets was not rendering service to the State and, therefore, their activity does not fall within the meaning of 'service' as provided under Section 65B(44) and, therefore, outside the purview of impugned Explanation as well.
• Hence levy of service tax on activities carried out by assessee is invalid.

Excess money refunded on cancellation of booking of flats couldn't be held as interest for purpose of section 194A TDS

Beacon Projects (P.) Ltd. v. CIT [2015] 62 taxmann.com 177 (Kerala High Court)

Builder could not be held liable to deduct tax on excess amount refunded to purchasers on cancellation of booking of apartments as such excess payment could not be qualify as interest as defined under section 2(28A)

Facts:

• Assessee-Builder entered into construction agreements with various customers.
• After entering into the agreements and making certain payments, some purchasers opted out of the agreement and, accordingly, assessee entered into fresh agreements with new buyers at prices that were higher than what was agreed with the old purchasers.
• Out of the receipts from the new buyers, the assessee refunded to the old purchasers the amount paid by them and a portion of the excess amount received from the new buyers.
• The Assessing Officer (AO) held that the excess amount so paid by the assessee to old purchasers had to be treated as interest paid on deposit and, hence, liable for TDS under section 194A and that having failed to do so, assessee was an assessee-in-default and, accordingly, assessment was completed under section201.
• The order of AO was set aside by the first appellate authority. However, the said order was reversed by the Tribunal.
• Aggrieved by the order of the tribunal, assessee filed the instant appeal before the High Court.

The High Court held in favour of assessee as under:

• Section 2(28A) which defines ‘interest’ can be attracted only in cases where there is debtor-creditor relationship and payments are made in discharge of a pre-existing obligation.
• The amount refunded to the purchasers represented the consideration the purchasers paid towards the undivided shares in the property agreed to be purchased and also the cost of construction of the apartment, which work was entrusted to the assessee-builder.
• Such a relationship between assessee and purchasers could not spell out a debtor-creditor relationship nor was the payment made by the assessee to the purchaser in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A).
• Further, there was no finding in the assessment order or in the order of the Tribunal that the amount paid by the purchasers, which was refunded, was accounted for as deposit or advance received from them or that there was any debtor-creditor relationship between the parties, obliging the assessee to pay the amount to the purchasers.
• There was also no case for the revenue that the excess amount paid by the assessee was based on any agreement between them or that it was quantified at rates that were already agreed between the parties.
• In such circumstances, the payments made would not qualify to be interest as defined in section 2(28A) of the Act and the assessee did not have the obligation to deduct tax at source as provided under section 194A nor could they be proceeded against under section 201A, treating them as assessee-in-default.

Set-off of losses allowed despite change in shareholding if control over Company remains unchanged

CIT v. AMCO Power Systems Ltd. [2015] 62 taxmann.com 350 (Karnataka High Court)

Facts:

• Assessee-company (‘APSL’) was wholly owned subsidiary of AMCO Batteries Limited (‘ABL’).
• ABL transferred 45% and 49% of its shareholding to its subsidiary company (‘APIL’) and Tractors and Farm Equipments Limited (‘TAFE’), respectively.
• Consequently, ABL retained only 6% shares and 45% of shares held by its subsidiary, APIL. The remaining 49% shares were with TAFE.
• As shareholding of the ABL in APSL reduced to 6% in the relevant assessment year, meaning thereby, it was left with less than 51% shares. Thus, AO did not allow APSL to carry forward and set-off the business losses of that year as per section 79 of the Income-tax Act (‘Act’).
• On appeal, CIT(A) confirmed the order of AO. However, on further appeal, the Tribunal sets aside the order of AO.
• 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-

• Section 79 provides that where there is a change in shareholding of a Company, no losses (incurred in any year prior to the previous year) shall be carried forward and set-off against the income of the previous year, unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.
• The expression ''not less than 51% of voting power..."used in Section 79 indicates that only voting power is relevant and not the shareholding pattern.
• In the instant case, despite the transfer of shares, the holding-company (ABL) still holds effective control over the assessee-company (ABSL) as it holds 51% of shareholding along with its subsidiary (APIL).
• Section 79 was introduced to prevent misuse of carry forward of losses by the new owner. But, in the instant case, effective control over the assessee-company (APSL) remained unchanged even after the change in shareholding. Therefore, losses could be carry forward and set-off.

Land acquired under an agreement not to be held as compulsory acquisition under Section 194LA

Karnataka Industrial Area Development Board v. ITO [2015] 62 taxmann.com 393 (Bangalore - Tribunal)

The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.


The disputed issue is as under:


Whether acquisition of land under an agreement by Karnataka Industrial Area Development Board (a state Government Undertaking) with landowners under the Karnataka Industrial Areas Development Act, 1966 (‘KIA Act’) would be deemed as compulsory acquisition within the meaning of Sec.194LA?”


Held:

• Section 194LA applies only when there is a compulsory acquisition under law. Under compulsory acquisition, the seller has no option but to sell the land. He cannot even negotiate the price as same is fixed by statute itself.
• In the instant case, the land owners and a State Government Undertaking (i.e., assessee) entered into an agreement whereby they mutually agreed for the amount of compensation which was fixed in accordance with Section 29(2) of the KIA Act.
• The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.
• In the instant case, compensation was based on an agreement between State Government and owner of the land, and, therefore, it could not be said to be a case of compulsory acquisition. Thus, once the acquisition is not considered as compulsory, Sec.194LA of the IT Act will not be applicable.
• The matter was remanded back to AO for verification whether in all the cases payment was made under agreement only. Once it was found that the acquisition resulted through an agreement, it would not be considered as compulsory acquisition.

Foreign tax credit should be given on tax liability computed under MAT provisions

 Dy.CIT v. Subex Technology Ltd. [2015] 63 taxmann.com 124 (Bangalore - Tribunal)

 

The issue that was disputed in the instant case was as under:

“Whether relief under section 90 of Income-tax Act(‘the Act’) in respect of tax paid in a foreign country would be available while computing tax liability under as per provisions of MAT ?.”


The Tribunal held in favour of assessee as under:

• The Mumbai Tribunal in case of ACIT v. L&T Ltd. (in ITA No.4499/Mum/2008/ dated 22-04-2009) had held that once taxable income was determined either under the normal provisions of the Act or as per Sec 115JB, subsequent portion relating to rebate and set-off would be governed by the normal provision of the Act.
• There is no provision in the Act, debarring granting of credit for tax paid abroad in case income is computed under section 115JB. Thus, assessee could not be denied set off of tax relief under section 90 against the tax liability determined under section 115JB.

Booking rights of fictional property not to be deemed as transferable capital assets issue

S. NARENDRAKUMAR & CO. V. DCIT [2015] 63 taxmann.com 184 (Mumbai - Tribunal)

Whether booking of a property which was neither in existence nor its building plan or specifications were approved from the Municipal Corporation would be treated as transferable capital assets?

 

The tribunal held as under:-

• Rights in property could be considered as transferable capital asset. However, for that purpose, there should be a property in existence or there should be a property which is likely and apparently coming into existence, e.g., if the construction of the flat is started and the flat is likely to come in existence. However, when there is no property in existence nor any definite process for its creation has started, no one get a transferable right or interest into such a fictional property which itself cannot be said to be even a “property”.
• In the instant case payment was made to the builder when neither the property was in existence nor its building plan or specifications were approved from the Municipal Corporation and neither any construction activity nor commencement of the project had started. Therefore, any gain arising on transfer of booking rights in such fictional property should be taxed under the head ‘income from other sources’ and not as capital gains.

Supreme Court draws distinction between exempted goods and exempted units for allowing input tax credit

Commercial Taxes Officer v. A Infrastructure Ltd. [2015] 63 taxmann.com 307 (Supreme Court)

CST & VAT: Rajasthan VAT- Assessee could claim input tax credit of raw material used in manufacturing of Asbestos Cement Sheets when assessee was specifically exempted from paying VAT due to exemption notification.

Facts:

• Assessee was manufacturing Asbestos Cement Pressure Pipes and Asbestos Cement Sheets (A.C. Sheets). It had availed input tax credit (ITC) on purchase of raw material used in manufacturing of A.C. Sheets.
• Revenue disallowed such ITC on the ground that no tax was required to be paid by assessee due to exemption notification. However, the assessee was of the view that it was only exempted to pay duty by virtue of notification and goods manufactured by it were not exempted goods. Therefore, it was correct in claiming ITC.
• The High Court held in favour of assessee.Aggrieved-department filed the instant appeal.

The Apex Court held in favour of assessee as under:

• It was perceivable that the High Court had proceeded on foundation that there was distinction between the exempted units and exempted sales. If said distinction would be overlooked, it might lead to serious error in construction and application of taxing provisions.
• There is no doubt that distinction has to be drawn between exempted goods, which means complete exemption for the specified goods, and when the goods are taxable goods, but a transaction or a person is granted exemption.
• When goods are exempt, there would be no taxable transactions or exemption to a taxable person. In other cases, goods might be taxable, but exemption could be given in respect of a taxable event, i.e., exemption to specified transactions from liability of tax or exemption to a taxable person, though the goods are taxable. Exemption with reference to taxable events or taxable persons would not exempt the goods as such, for a subsequent transaction or when the goods are sold or purchased by a non-specified person, the subsequent transaction or the taxable person would be liable to pay tax.
• Therefore, the appellant though exempted from payment of tax, subsequent transactions of sale of asbestos cement sheets would be taxable. As a logical corollary it follows that the VAT would have to be paid on the taxable goods in a subsequent transaction by the purchasing dealer.
• The denial of credit to assessee would lead assessee to a disadvantageous position as if subsequent sale is made by non-exempted dealer then it would suffer tax on entire sale consideration. It would make its products uncompetitive in spite of exemption notification. Thus, assessee had correctly claimed ITC.

Valuation of DTA clearances of 'tea' by EOU to be valued as per Excise law

Commissioner of Central Excise v. Nestle India Ltd. [2015] 63 taxmann.com 312 (Supreme Court)

Central Excise: Where, as per exemption notification, DTA clearances by EOU are liable to excise duty equal to duty on clearances by non-EOUs, said DTA clearances are to be valued as per Central Excise Valuation rules.

Facts:

• Assessee was a 100% EOU engaged in manufacture of instant tea. It cleared tea manufactured wholly out of indigenous raw materials, to its sister concerns in EOU.
• Since, as per Notifications 8/97 and 23/2003, said clearance of tea was liable duty equal to ‘excise duty’ and any excess was exempted, assessee valued said tea as per rule 8 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
• Department argued that since DTA clearances by EOU are liable to excise duty equal to ‘customs duty leviable’, tea was to be valued as per customs law.
• Tribunal decided in favour of assessee and aggrieved department filed civil appeal in Apex Court.

Apex Court decided in favour of Assessee as under:

• There is no doubt that the duty of excise leviable under Section 3 would be on the basis of the value of like goods produced or manufactured outside India as determinable in accordance with the provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975. However, the notification states that duty calculated on the said basis would only be payable to the extent of like goods manufactured in India by persons other than 100% EOUs.
• It is clear that in the absence of actual sales in the wholesale market, when goods are captively consumed and not sold, Rule 8 of the Central Excise Rules would have to be followed to determine what would be the amount equal to the duty of excise leviable on like goods.
• It is also clear that the said notification has been framed by the Central Government, in its wisdom, to levy only what is levied by way of excise duty on similar goods manufactured in India, on goods produced and sold by 100% EOUs in the domestic tariff area if they are produced from indigenous raw materials.
• Therefore, DTA clearances by assessee are rightly valued as per Central Excise Valuation rules. Appeal is, accordingly, dismissed.

Indirect Tax Collections up to September, 2016 show an increase of 25.9%

The figures for indirect tax collections (Central Excise, Service Tax and Customs) up to September 2016 in the current Financial Year 2016-17 show that net revenue collections are at Rs 4.08 lakh crore which is 25.9% more than the net collections for the corresponding period last year i.e. 2015-16. Till September 2016, 52.5% of the Budget Estimates of indirect taxes for Financial Year 2016-17 has been achieved.

As regards Central Excise, net tax collections stood at Rs.1.83 lakh crore during April-September, 2016 as compared to Rs.1.25 lakh crore during the corresponding period in the previous Financial Year, thereby registering a growth of 46.3%.

Net Tax collections on account of Service Tax during April-September, 2016 stood at Rs. 1,16,975 crore as compared to Rs. 95,780 crore during the corresponding period in the previous Financial Year, thereby registering a growth of 22.1%.

Net Tax collections on account of Customs during April-September 2016 stood at Rs. 1.08 lakh crore as compared to Rs. 1.03 lakh crore during the same period in the previous Financial Year, thereby registering a growth of 4.8%.

CASH CREDIT

CASH CREDIT 

[2016] 74 taxmann.com 16 (Gujarat)

Accommodation entries: Where Assessing Officer had no material to suggest that assessee company had received accommodation entries against cash receipts, notice for reopening assessment based on such reasons was completely wrong and had to be set aside.

No need to deposit in Capital Gain Scheme if house is purchased within time limit of section 54F

Ashok Kapasiawala v. ITO [2015] 63 taxmann.com 284 (Ahmedabad - Tribunal)
Issue:
 

Whether exemption under Section 54F could be denied to assessee who had purchased a new residential house within 2 years from the date of transfer of original asset on ground that he had not deposited the amount in capital gain account scheme before the due date of filing of return under section 139(1)


The tribunal held in favour of assessee as under-

• A combined reading of sections 54F(1) and 54F(4), makes it clear that the assessee would be entitled to exemption under section 54F in the event he purchases new asset within two years from the date of transfer of original asset or the amount is utilized before the date of furnishing the return under section 139. In a case it is not utilized for the purpose of aforesaid and within the period aforementioned, section 54F(4) mandates the assessee to deposit such amount in capital gain account scheme before due date of filing of return under section 139(1).
• Therefore, there is no ambiguity in the provision; so far deposit of the unutilized amount is concerned, it has to be deposited in a specified capital gain account before the due date of filing of return under section 139(1).
• In the instant case, the return was filed by assessee in response to a notice issued under Section 148 and not under section 139(1). Therefore, the contention of the assessee was that he should be allowed exemption under section 54F even if had not deposited the amount in capital account scheme.
• The Karnataka High Court in the case of CIT v. K. Ramachandra Rao [2015] 56 taxmann.com 163 held that when the assessee had invested the entire sale consideration in construction of a residential house within the three years from the date of transfer, he could not be denied exemption under section 54F on the ground that he did not deposit the said amount in capital gain account scheme before the due date prescribed under section 139(1).
• Under section 54F (1), the exemption would be available if the assessee purchased the residential house within two years after the date when transfer took place. Hence, as per judgment of Karnataka High Court, the provisions of section 54F(4) would not be attracted if assessee has purchased or constructed the residential house within period prescribed under section 54F(1).
• In the instant case, there was no dispute with regard to the fact that the assessee had purchased a new asset within two years from the date of transfer of the original asset. Therefore, following the ratio laid down by the Karnataka High Court in the case of K. Ramachandra Rao (supra), the court directed Assessing Officer to re-compute the assessed income after granting the benefit of section 54F to the assessee.

ALLOWANCE/RATE OF DEPRECIATION

SECTION 32

[2016] 74 taxmann.com 14 (Madras) 

Computerised machines : Where machineries for which depreciation was claimed represented plant and machinery eligible for 15 per cent depreciation, assessee could not have invented its own nomenclature and added word computer which was not there in invoice and then proceeded to claim depreciation at 60 per cent with argument that they were computers.

Simplified Proforma for Incorporating Company Electronically

The Ministry of Corporate Affairs has taken another bold initiative in Government Process Re-engineering (GPR) and launched Simplified Proforma for Incorporating Company Electronically (SPICe) e-Form, on the occasion of Gandhi Jayanthi 2016, with the specific objective of providing speedy incorporation related services within stipulated time frames which are in line with international best practices.

SPICe’s USP is as follows:

• Simplified and completely Digital form for Company Incorporation 
• Standard format of e-Memorandum of Association as per Companies Act, 2013
• Standard format of e-Articles of Association as per Companies Act, 2013
• Memorandum and Articles will now be filed as linked e-forms (except for Section 8 companies) 
• Provision to apply for Company Incorporation with a pre-approved Company Name
• Mandatory DSCs of Subscribers and Witnesses (max 7+1) in SPICe MOA and SPICe AOA
•  Back Office productivity gains due to faster review of e-MOA and e-AOA by approving authorities.

Existing INC-29 and INC-7 will be phased out and SPICe will be the Sole, Simplified & Versatile form available for incorporation of a company in India. 

Ban on circulation of trading tips via social media

The SEBI has issued consultation paper proposing amendments or clarifications to the investment adviser regulations. The objective of the consultation paper is to specify uniform standards across all the intermediaries/persons engaged in providing investment advisory services irrespective of whether such activity is incidental to their primary activity or not and to address the gaps or overlaps in legal or regulatory standards.

The highlights of consultative papers are as under:

• Ban on circulation of trading tips via social media platform: SEBI has proposed to curb the practice of providing trading tips (containing buy or sell recommendation on securities) to the general public through any social media platform such as SMS, Email, Telephonic call, Whatsapp, ChatOn, Wechat, Twitter, Facebook, etc.
• Restrictions on mutual fund distributors: Under the existing norms, a mutual fund distributor can sell mutual fund products and he can also provide basic advice on mutual fund products and in executing the transactions. It has been proposed that only corporate entities registered as investment advisers should offer execution or distribution services. Further, mutual fund distributors should be registered as investment advisors if they want to engage themselves in providing incidental or basic investment advisory services on mutual fund products.
• No exemption for professionals: Under the existing norms Chartered Accountants, Company Secretaries, Portfolio investors, stock brokers, etc., are exempted from registration to act as investment advisors. But now SEBI has proposed that all the persons engaged in financial planning services shall mandatorily be required to register themselves as investment advisors.
• Ban on schemes, games, and competitions: It is observed that various entities are offering schemes, competitions, games, leagues, etc., related to securities market. Such Schemes are generally based on predicting the price movement of securities and they are neither approved nor endorsed by SEBI. In order to protect the interest of the investors in the securities market and to curb such practice of offering schemes, etc., it is proposed to add new provision to restrict such activities.
• Compliance Audit: An investment adviser shall conduct yearly audit in respect of compliance with regulations from a CA or CS. Now it has been proposed that the compliance audit shall be completed within 3 months after the end of financial year and adverse observances or comments shall be brought to the notice of market regulator SEBI.
• Mode of acceptance of fee: Under the existing norms an investment advisor can accept fees in any mode including cash. Now SEBI has proposed that an investment adviser shall accept fees strictly by account by payee crossed cheque/demand draft or by NEFT/ RTGS/IMPS or any other mode allowed by RBI.
• Uniform advertisement code: Under the existing framework, there are no guidelines prescribed for issuing advertisement on mutual funds. Now SEBI has proposed uniform guidelines for issuing advertisement on mutual funds.
• Details of website: Many investment advisers are providing investment advisory services through websites without disclosing their details in a proper manner and thereby creating confusion to the investors with regard to authenticity of their registration. To clear the ambiguity, it has been proposed that all investment advisers shall display following details more prominently -
• Their name as registered with SEBI,
• Registration number, validity of registration, own logo, if any, and
• Complete address with telephone numbers on its portal /website, if any,
• Notice/display boards, advertisements, publications, know your client forms, client agreements and correspondences with the clients

High Court rejects Section. 292C presumption for treating seized documents as true/correct; disallows expenses.

Harish Textile Engrs. Ltd. v. DCIT [2015] 63 taxmann.com 66 (Bombay High Court)

Section 292C provides that where any document is found in possession or control of any person in the course of search, then it may be presumed that the contents of such documents are true and correct. However, in the instant case, the documents (in respect of alleged expenditure) found during the course of the search did not indicate the name of payee and payer. Therefore, even if the presumption of Section 292C is to be applied and the documents are accepted as true, it would not lead to the conclusion that payments have been made so as to claim the expenditure.

Facts:

• During the course of search, the search party came across with documents pertaining to alleged expenditure incurred by assessee.
• The assessee wants to claim deduction under Section 37(1) on basis of such seized documents. Assessee was of the view it was not required to prove that it had actually incurred alleged expenditure as any document found during search presumed to be true and correct as per Section 292C.
• Assessing Officer (AO) disallowed such expenditure on ground that complete evidence in support of payment was not provided.
• The third member bench of Tibunal affirmed the order of AO. Aggrieved by the order of Tribunal, assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under-

• Section 292C provides that where any document is found in possession or control of any person in the course of search, then it may be presumed that the contents of such documents are true and correct.
• The words 'may presume' as provided in Section 292C are in the nature of discretionary presumption. Therefore, invocation of such presumption is at discretion of the revenue authorities.
• An expenditure could be claimed under section 37(1) only when it has in fact been incurred and that too wholly and exclusively for the purposes of business.
• In the instant case, the documents found during the course of the search were inchoate. Document did not indicate the name of payee and payer. Therefore, even if the presumption is to be applied and the documents are accepted as true, it would not lead to the conclusion that payments have been made so as to claim the expenditure. Hence, AO was right in disallowing the expenditure.

Buy-back price to be disclosed even if promoter is exempt from public announcement under takeover code

A.R. DAHIYA v. Securities Exchange Board of India [2015] 63 taxmann.com 332 (Supreme Court)

SEBI: Where appellant-promotor bought back its shares from State Financial Institution, no public announcement was required as same is being protected under regulation 3 of the SEBI (SAST) Regulations, 1997, however, rate at which shares were bought back had to be disclosed.

Facts:

• In respect of an acquisition which was in excess of 15% of the total shareholding of the Target Company, the appellant neither in the public announcement nor in the letter had disclosed the fact that he and his associates had already bought back the shares of the Haryana State Industrial Development Corporation Limited (‘HSIDC’).
• The appellant had vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulations 10, 11 and 12.
• Appellant had also issued post dated cheques towards the purchase consideration for the buy-back of equity of shares held by HSIDC in the Target company which were later on dishonoured.
• The appellant contended that the amount deposited with HSIDC via post-dated cheque was not in consideration for the buy-back of shares but were deposited by way of security for the buy-back obligation. Further, the appellant contented that cheques presented had been dishonoured on presentation, the transaction did not culminate in an acquisition.

The Supreme Court rules as under:

• Regulation 3 only protects a transaction between a co-promoter and a State financial institution to the extent that for such transaction a public announcement would not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be protected from the rigours of other Regulations provided for under the Act.
• Thus, the transaction between the Appellant and HSIDC would have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement.
• With regard to appellant’s contention on post-dated cheque, the Apex Court said the post-dated cheques amounted to a promise to pay and that promise would be fulfilled on the date mentioned on the cheque. Thus, this promise to pay amounted to a sale of shares/equity. The subsequent dishonouring of the post-dated cheque would have no bearing on the case.
• At the time of making the public announcement the Appellant had bought back the shares of HSIDC by making payment via the said post-dated cheques. Further, as the buy-back was in pursuance of an agreement, there was consensus ad idem. The Appellant had subsequently shirked his responsibility and had tried to slither away from honouring the agreement, which he could not be allowed to gain from, as is established by the legal maxim commodum ex injuri su non habere debet.
• Under Regulation 2 clause (1) Sub-clause (a)- ‘acquisition’ means directly or indirectly acquiring or agreeing to acquire shares or voting rights in, or control over, a Target Company. This definition clarifies that an acquisition takes place the moment the acquirer decides or agrees to acquire, irrespective of the time when the transfer stands completed in all respects. The definition clarifies that the actual transfer need not be contemporaneous with the intended transfer and can be in future.

BUSINESS DISALLOWANCE – CASH PAYMENT EXCEEDING PRESCRIBED LIMITS

SECTION 40A(3)

[2016] 74 taxmann.com 87 (Madras)

 

Where assessee did not offer any explanation as to why expenditure in cash had been incurred for first time during relevant year, while similar expenditure was not reflected at all in preceding four years, particularly, when there was no change in line of business activity of assessee, all these years, Assessing Officer rightly discredited expenditure incurred in cash -

During course of international voyage traffic between Indian ports deemed as 'international traffic'

CIT v. Taurus Shipping Services [2015] 64 taxmann.com 64 (Gujarat High Court)

Journey of a vessel between two Indian ports deemed as "international traffic" under Article 8 of India-Singapore DTAA as same was part of a larger journey between two foreign ports


Facts

• Assessee-company had acted as an agent of three vessels which had transported goods from Kandla Port to Vizag. The vessels had undertaken such freight transportation during the journey from Singapore to Dubai.
• The freight beneficiary was one M/s. Jaldhi Overseas Pte Limited, who claimed benefit under Article 8 of India-Singapore DTAA.
• The Assessing Officer (AO) contended that transportation between Kandla to Vizag cannot be considered as international traffic in terms of India-Singapore DTAA.
• The tribunal set aside the order of AO. 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-

• The word ‘international traffic' is defined in Article 3 of DTAA between India and Singapore as under:

"the term "international traffic" means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State."

• The term 'international traffic', as noted above, is defined to mean any transport by a ship or aircraft operated by an enterprise of a contracting state. This definition, however, has an exceptional clause which excludes the transport when the ship or aircraft is operated solely between the places in the other contracting state.
• Hence, it is only when a ship or aircraft is operating 'solely' between places in other contracting state that the transport is excluded from scope of "international traffic".
• In the instant case, the transportation between two Indian ports was undertaking during a larger journey of the vessels from Singapore to Dubai. Therefore, the requirement of such journey being solely between places in the other contracting state was not satisfied.
• Thus, journey of a vessel between two Indian ports would be deemed as "international traffic" under Article 8 of India-Singapore DTAA if the same was part of a larger journey between two foreign ports.