CBDT Revises Monetary Limit For Filing Appeals To ITAT, High Court And Supreme Court

The CBDT has issued Instruction No 5/2014 dated 10.07.2014 whereby, with a view to reducing litigation, the monetary limits for filing of appeals by the Department before Income Tax Appellate Tribunal, High Courts and Supreme Court, have been upwardly revised.

Henceforth appeals shall not be filed in cases where the tax effect does not exceed the monetary limits given hereunder: -

Appeals in Income-tax matters	Monetary Limit (in Rs)
Before Appellate Tribunal	4,00,000
U/s 260 A before High Court	10,00,000
Before Supreme Court	25,00,000

A definition of the term “tax effect” is given. Certain exceptions to the Instruction have also been stated. It is also made clear that the Instruction applies only to appeals filed on or after 10.07.2014 and that appeals filed before that date will be governed by the Instructions when then governed the matter.

Cost of improvement is allowable even if it’s sourced through general loan and through housing loan

K.K. Venugopalv. Dy. CIT [2014] 42 taxmann.com 389 (Cochin - Tribunal)

Merely because loan used by assessee in improvement of house was a general loan and not a housing loan, cost of improvement could not be disallowed.

Facts:

• The assessee had borrowed loan from a bank for improving the house property. He had sold said property and while computing capital gains, he had claimed cost of improvement.
• The Assessing Officer had disallowed the claim of assessee merely because the loan was classified as a general loan and not as a housing loan.

The Tribunal held as under:

• The assessee had claimed deduction of cost of improvement of property while computing capital gains during the assessment year 2006-07;
• The original construction of property was made in the year 1991-92, thus, there would have been some kind of improvement or maintenance after lapse of so many years. Therefore, the assessee’s claim could not be rejected in toto;
• The assessee would have spent considerable amount during the assessment year 2006-07 at least for maintenance of the building, if not on improvement of the original construction.
• Thus, cost of improvement could not be disallowed merely because it was sourced through general loan and not through housing loan.Therefore, rejecting the claim of the assessee in toto was not justified.

Income arising from sale of trees that were cut legally to get hindrance free cultivation was capital receipt

CIT v. Mahendra Karma Pooranchand Soni[2014] 42 taxmann.com 380 (Chhattisgarh)

Where trees were not of spontaneous growth and same could not be regenerated and gave benefit to assessee in near future, income earned out of sale of such trees could not be chargeable to tax in hands of assessee and was to be treated as capital receipts

Facts:

• The assessee had purchased a agricultural land on which teak trees were creating hindrance in undertaking cultivation on such land. He took permission of collector to cut those trees; 
• The Assessing Officer treated income earned out of sale of those trees as of revenue receipt, considering that it was sale of forest produce of wild spontaneous grown trees; 
• The CIT (A) held the income earned by assessee was capital receipt. The Tribunal upheld the view of the CIT (A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

• The assessee was an agriculturist and not found to be engaged in any business activity. The cutting and selling of the trees were made after obtaining prior permission from the competent authority; 
• The sale of the trees was made to the State and both cutting and selling were governed by the provisions of the Code and Rules framed thereunder which inter alia provided that no one could either cut or/ and sell any tree without obtaining prior permission of the competent authority; 
• Further, the price of the trees was determined by the State authorities in which the assessee had no role to play. Hence, there was no scope for any price negotiations; 
• The Rules provided that the trees had to be cut in a particular manner and the same was also done by the assesee. The certificate given by the Tahsildar stipulated that so far as the trees were concerned, they would not regenerate in near future because they do not belong to the categories of a species which have a spontaneous growth; 
• The land was put to use for cultivation by the assessee after cutting the trees. After looking to the nature of trees which were cut above the root, it did not result in its spontaneous growth and lastly, there was no evidence to show that any profit element in the transaction was noticed or that assessee earned any profit; 
• Thus, it was proved that the assessee did not intend to earn any profit out of the sale of such trees and nor his intention was to indulge in any profit making activity by sale of such trees. Therefore, impugned receipts were essentially in the nature of capital receipt.

No TDS to be deducted from salary paid to Non Resident working on a foreign ship for less than 90 days as it is exempt under section 10(6)(viii)

DIT v. Dolphin Drilling Ltd. [2014] 42 taxmann.com 264 (Uttarakhand)

Payments made to foreigner-crew member of ship who had worked for a period of less than 90 days in India, were not income of employees in India liable to TDS.

Facts:

• The assessee entered into a contract with ‘Alfa Crew’, under which Alfa Crew was entitled to receive a fixed fee; salary of crew to be provided by Alfa Crew and handling charge of 5 percent thereon.
• The assessee engaged the crew members as its employees. It withheld taxes on the fixed fees and handling charges yet, it did not withheld taxes on the amount of salary.
• The Assessing Officer did not allow deduction of salary by holding that the same was part of the fees for technical services, on which tax was deductible at source but same was not deducted; hence, said amount was specifically not deductible in terms of section 40(a)(i).
• Further, the CIT(A) held against the assessee. On appeal to the Tribunal, the assessee succeeded. Thus, aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

• The employees, being foreigners, had earned their salaries while working in India during a period less than 90 days, and those salaries, in view of section 10(6)(viii), were not income of the employees in India. Therefore, the assessee was not liable to deduct taxes on under section 192;
• Section 40(a)(i) would not be applicable in the instant case as the payments made were neither royalty nor fees for technical services;
• In view of section 10(6)(viii), the payment was not an income for the person, who received the same and, accordingly, was not chargeable under the head salaries.
• Section 192 was applicable only when there was an income chargeable under the head 'salaries' and, as aforesaid, the payment made by the assessee, in the instant case, and the income derived by recipient, was though regarded as salary but never regarded as salary chargeable under this Act. Thus, the salaries were outside the purview of section 192 by reason of section 10(6)(viii).

Rental income of godown constructed on an agricultural land couldn't be termed as agriculture income

New Jain Godowns v. ITO [2014] 42 taxmann.com 434 (Delhi - Tribunal)

Facts:

• The assessee, a partnership firm, was carrying on business of constructing godowns and renting them to parties for earning rental income. 
• It had constructed a godown on agricultural land belonging to its partners. The godown was given on rent and rental income so derived was declared by assessee as agricultural income. 
• The Assessing Officer had accepted assessee's claim of agricultural income. The CIT passed a revisional order to hold that the rental income from godown could not be treated as agricultural income within meaning of section 2(1A)(c). The agrrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

• The income in the instant case needed to be considered under section 2(1A)(c). The requirement of section 2(1A)(c) is that the income should be derived from any building owned and occupied by the receiver of the rent or revenue of the land; 
• In the instant case, neither the assessee was receiver of the rent or revenue of the land, nor was the building occupied by it; 
• Further, the requirement of this section is that the building must be occupied by the cultivator or the receiver of rent-in-kind of any land with respect to which or with respect to the produce of which, any process which is ordinarily employed by a cultivator or receiver of rent in kind, (so as to render the produce raised or received by him fit to be taken to the market)  is performed; 
• The assessee also failed to fulfill this requirement, as the godown building was occupied by 'K' and 'I', who were the assessee's tenants during the year under consideration and were not either cultivators, or receivers of rent in kind of any land.; 
• Further, it had also not been shown by the assessee that either the land beneath the godown building, or the produce thereof was subjected to any process ordinarily employed by a cultivator or receiver of rent in kind to render the produce raised or received by him fit to be taken to the market. Thus, the rental income from godown could not be treated as agricultural income.

Section 54 relief allowed as two houses were acquired instead of one big house to avoid disharmony among children

CIT v. Khoobchand M. Makhija[2014] 43 taxmann.com 143 (Karnataka)

Facts:

The assessee sold his house and invested the capital gains from sale of house in purchasing two independent residential houses for his two sons.

The issue for consideration of High Court was:

Whether exemption under section 54 would be available in respect of two separate residential houses acquired out of capital gains?

The High Court held in favour of assessee as under:

• It was open to the assessee to purchase a big residential house out of the sales consideration so as to accommodate his two sons and avail of exemption under section 54. Instead, he chose to purchase two small residential houses to avoid any litigation or disharmony;
• The context in which the expression "a residential house" is used in section 54 makes it clear that it was not the intention of the Legislature to convey the meaning that it referred to a single residential house;
• The singular 'a residential house' also permits use of plural by virtue of section 13(2) of the General Clauses Act. Therefore, the acquisition of two residential houses by the assessee out of the capital gains would fall within the phrase 'residential house' and, accordingly, the assessee would be entitled to the benefit undersec. 54(1);
• However, while interpreting this word, the authorities have to keep in mind the facts of the particular case. When we hold 'a' could not be read as singular, it also could not be read as multiples and so as to avoid paying taxes.

Partners not liable to pay taxes on share of profits received from firm even if such profits included exempted income

Vidya Investment & Trading Co. (P.) Ltd. v. Union of India [2014] 43 taxmann.com 1 (Karnataka)

 

Partners are entitled to claim exemption under section 10(2A), on the share of profit received from the firm even if it includes that income which was exempted in the hands of the firm under various provisions of section 10.

Facts:

• The assessee, a private Ltd. company, was partner in the partnership firm. Its case was selected for scrutiny and the show-cause notice was issued to it as to why exempt income of the firm would not be excluded while computing the exemption to the assessee under section 10(2A);
• Assessee challenged the explanation to section 10(2A) on the ground that it was discriminatory and in violation of Articles 14 and 265 of the Constitution.
• Further, a declaration was sought by the assessee that it was entitled to claim exemption under section 10(2A) in respect of its total share of profit received as partner of the firm which would include the income exempted from tax in the hands of the firm.

The High Court held as under:

• Although the dividends income and income derived from mutual funds were not includible in the taxable income of the firm yet they were nevertheless part of its profits;
• The expression total income of a firm in the Explanation to section 10(2A) would not mean taxable income of the firm but gross total income of a firm which included exempted income as well;
• The Assessing Officer had lost sight of this aspect and had held that ‘total income’for the purpose of Explanation to section 10(2A), as defined in section 2(45), would mean the total amount of income as referred to in section 5,computed in the manner laid down in the Act;
• Therefore, the Assessing Officer was not right in holding that the income which was excluded from the total income of the firm under section 10, would have to be taxed in the hands of the partners on the reasoning that only income which was taxed in the hands of the firm would be exempted from tax in the hands of the partner;
• The Explanation to section 10(2A) would not call for any striking down in the hands of this Court. The Explanation could not be given a literal interpretation, so as to defeat the object of the amendment made to the Act. The object of the amendment was to make it clear that the distribution of profits and gains of a firm in the hands of the individual partners shall not be considered to be income of the partners and therefore, not includable while computing the total income of the partner under the Act;
• Thus, the assessee was entitled to claim exemption under section10(2A), on the share of profit of the firm,inclusive of the income, which is exempted under sub-sections (34), (35) and (38) of section 10, as the total income referred to in section 10(2A), includes exempted income of the partnership firm.