SEBI norms and clause 35 of listing agreement don't require promoters to make disclosure of encumbered shares

GOLDEN TOBACCO LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA (2014) 51 taxmann.com 51 (SAT - MUMBAI)

Neither any regulation of SEBI nor clause 35 of the Listing Agreement casts an obligation on promoter to make disclosures of shares encumbered to listed company. SEBI was not justified in directing listed company to disclose details of shares to stock exchange which were 'otherwise encumbered' by promoter.

Facts:

• SEBI imposed penalty upon appellants under Section 23E of the Securities Contract Regulation Act and Section 15HA of the SEBI Act for allegedly violating clause 35 of the Listing Agreement and Regulations 3(d) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
• Issue raised in appeal was:

Whether a listed Company was required to disclose details of 'otherwise encumbered' shares held by the promoter under clause 35 of the Listing Agreement even though there was no obligation cast upon the promoter to make such disclosures to the listed Company?

The Securities Appellate Tribunal held as under:

• Since neither any regulation of SEBI nor clause 35 of the Listing Agreement would casts an obligation on the promoter to make disclosure of encumbered shares to the listed Company, and
• In the absence of such disclosure made by promoter, SEBI was not justified in directing the listed Company to disclose details of shares which were 'otherwise encumbered' by the promoter. Accordingly, penalty imposed by SEBI was to be set aside.

Perpetual transfer of satellite rights of a film for 99 years is a sale; excluded from definition of ‘royalty’

S.P.Alaguvel v. DY. CIT [2014] 52 taxmann.com 231 (Madras high Court)

Transfer of satellite right to assessee under an agreement for a period of 99 years is a sale and, therefore, excluded from definition of 'royalty' under clause (5) of Explanation 2 to section 9(1)(vi).

Facts:

• The assessee was dealings in film satellite rights by taking them on assignment basis and reassigning to channels.
• He did not deduct tax at source on purchase of copyright of film as he was of the view that such purchase was neither covered under section 194J nor under section 194C. However, the Assessing Officer held that the payments debited as purchase warranted TDS under section 194J and worked out disallowance under section 40(a)(ia).
• The CIT(A) allowed the appeal of assessee by holding that the consideration paid did not attract section 194J.
• On appeal, the Tribunal held that the payments made would fall within the definition of 'royalty' and as the assessee had failed to deduct tax under Section 194J rigour of section 40(a)(i) stood attracted. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

• Perusal of the facts and circumstances of the instant case and case of Mrs. K. Bhagyalakshmi v Dy.CIT [2013] 40 taxmann.com 350 (Madras) would show that the substantial question of law raised were the one and same in both the cases.
• The earlier division bench of this court in case of Mrs. K. Bhagyalakshmi (supra) after considering the perpetual transfer of rights for a period of 99 years [in terms of Section 26 of Copy Right Act and also the definition under clause (5) to Explanation 2 to section 9(1)] held that it was a sale and, therefore, excludible from definition of royalty.
• Following the decision rendered in the case of Mrs. K. Bagyalakshmi (supra) it was to be held that transfer of satellite right to assessee under an agreement for a period of 99 years would be a sale and excludible from definition of 'royalty'. Therefore, the Tribunal had erred in concluding that the payment made by the assessee was royalty and not sale.

Capital reduction scheme approved by majority of shareholders as it wasn't prejudicial to creditor’s rights

Comtec Components Ltd., In re [2014] 52 taxmann.com 173 (Madras High Court)

Where reduction of share capital was approved by majority of shareholders and did not involve any cash outflow to prejudice rights of creditors, same was to be confirmed

Facts:

• The petitioner filed petition under section 101(1) of the Companies Act, 1956 for confirming the reduction of share capital account.
• It was submitted that after the proposed reduction of the equity share capital by adjusting with debit balance and profit and loss account, financial statements of the company would exhibit realistic picture of the company's financial position.
• The company also had no secured or unsecured creditors and, hence, there was no question of interest of the company's creditors to be adversely affected.
• Further, the shareholders had unanimously passed the special resolution approving of the reduction of capital in extraordinary general body meeting. The petitioner also sought liberty of the Court for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956.

The High Court of Madras held as under:

Since reduction of share capital was purely a commercial decision which was approved by majority of shareholders and reduction did not involve any cash out flow to prejudice rights of creditors with procedure laid down under section 100 of the Companies Act, 1956 having been fully complied with, reduction of share capital as resolved by company in its special resolution was to be confirmed and also the prayer for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956 was to be allowed.

Advertisement expense cannot be disallowed merely because same were exorbitant

CIT Vs. Discovery Communication India (Delhi High Court ), ITA 1297/2010

Advertisement expenditure was incurred in terms of the license agreement granting the distribution rights to the assessee by the associated enterprise, Discovery Asia Inc. Under this agreement, the respondent­ assessee had procured right to distribute the signals of Discovery Channel and Animal Planet Channel and right to collect revenue arising or generated from distribution. Accordingly, the assessee had received subscription revenue of Rs 23.46 crores, Rs. 37.49 crores and Rs. 39.89 crores from the cable operators in the three assessment years. The agreement mandated and required that the assessee to develop and expand viewership of the Discovery Channel and Animal Planet Channel, which had started with a status of a “free to air channel” and made transition to a “pay channel”. Increased viewership obviously meant increased subscription revenue and earnings. It was manifest and self-evident that the assessee would have undertaken publicity, advertisement and incurred expenditure on increasing awareness and greater market retention, penetration and expansion. Thus, the finding of the appellate authorities was that advertisement expenditure was related to and had direct nexus with the licence agreement for distributorship and subscription fee collection.

There was a separate agreement between the respondent­assessee and associate enterprises under which the assessee had acted as an advertisement sale representative. As an advertisement sale representative, the assessee was entitled to 15% of the gross receipts as its income for the services rendered and performed by them. The balance 85% was transferred to the associated enterprise abroad.

The Assessing Officer‟s enigmatic and equivocal pronouncement that the entire advertisement revenue should have been retained as income is mere an incantation. The programmes were prepared and aired in India by the foreign associate enterprise, which had incurred expenditure or paid for the software and airing them. The finding that the entire or 100% expenditure on advertisement expenses were incurred for higher and increased advertisement revenue, is fanciful and reflects a spirit of creativity than realism. Unintendedly, the Assessing officer, as noticed below, impeached and transgressed into the domain of international transaction price fixation, without realising that the Transfer Pricing officer had accepted the price. The Assessing Officer, as noticed below under section 37(1) of the Act, cannot go into the question of reasonableness of advertisement or any other expense.

The Assessing Officer, thus, fallaciously and wrongly held that the entire expenditure, on advertisement, incurred by the assessee related only to the advertisement sales commission or receipt and was not incurred to increase subscription fee by promoting the two channels. Noticeable, the entire subscription fee was retained by the assessee and nothing was repatriated or paid to the associated enterprises abroad.

Section 37 (1) of the Act
Under Section 37(1) of the Act any expenditure not being in the nature of expenditure described in Sections 30 to 36 of the Act, has to be allowed as a deduction in computing income chargeable under the head “Profit and Gains from Business and Profession”, if the following conditions are satisfied: (a) it is not capital expenditure; (b) it is not personal expenditure; and (c) it should be expended wholly and exclusively for the purpose of business.

The first two conditions are negative in nature, while the third condition or requirement is positive. It is not the case of the Revenue that the expenditure on advertisement was capital or personal in nature. The expression „expenditure‟denotes idea of spending or paying out. It is not the case of the Revenue that the expenditure was not incurred or was not genuine, but fictious. 10.2. The question raised is whether the expenditure was wholly and exclusively for the purpose of assessee‟s business. The words „wholly and exclusively‟though not synonymous, and are sufficiently wide, but are not restricted to expenditure solely incurred for the purpose of earning of profits. For an amount spent as an admissible expenditure under Section 37(1), the same should be for the purpose of business and not for the purpose of earning income. (see Sree Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC) and CIT vs. Birla Spinning and Weavings Ltd. (1971) 82 ITR 166 (SC). In CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), it has been observed :

“The expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business.”

Thus, any expenditure which is laid down for business which in the present case consisted of distribution of channels and earning of subscription revenue, advertisement agency commission etc. would be wholly and exclusively for the purpose of business and allowable.

Whether an expenditure was wholly and exclusively incurred or laid out for the purpose of business of profession, must be determined from the angle and as per the assessee s perspective and choice. It is subjective. What one assessee may want to incur, another may not like to incur the same or similar expenditure. The quantum may also differ and vary. Section 37(1) does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Expenditure incurred may be direct or may even indirectly benefit the business in form of increased turnover, better profit, growth etc. As long as the expenditure incurred is “wholly and exclusively’ for the purpose of business, the Assessing Officer cannot by applying of his own mind, disallow whole or a part of the expenditure. The Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee. However, exception can be created by a statutory provision like Section 40A(2), when the revenue as per the statutory mandate may have jurisdiction to examine the issue of price/consideration. For incurring advertisement expenditure, in the relevant years, there were no statutory stipulations.

When expenditure is incurred for assessee‟s own business, the mere fact that the expenditure would inure or benefits a third party or the third party incidentally obtains some advantage, would not affect or distract from the finding that the expenditure was wholly and exclusively was for assessee‟s business. For example, a retail trader may advertise different products which may incidentally benefit the manufacturers, but this does not mean that advertisement expenditure fails to meet the requirement of “wholly and exclusively”. Law in this regard is well settled. Relevant would be to refer to authoritative pronouncement of the Supreme Court in CIT v. Chandulal Keshavlal & Co., Petlad, [1960] 38 ITR 601, observing: -

“In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher’s Wiltshire Brewery Ltd. v. Bruce [6 Tax Cas 399]. Another test is whether the transaction is properly entered into as a part of the assessee’s legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. CIT [(1951)SCR594]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose of the assessee’s business and there is evidence to support this finding.”

In CIT v. Royal Calcutta Turf Club, [1961] 41 ITR 414, Supreme court followed the earlier judgment in Chandulal Keshavlal(supra) to hold : -

“The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking into consideration the circumstances of this case. The business of the respondent was to run race meetings on a commercial scale for which it is necessary to have races of as high an order as possible. For the popularity of the races run by the respondent and to make its business profitable it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys the running of race meetings would not be commercially profitable. It was for this purpose that the respondent started the school for training Indian jockeys Therefore any expenditure which was incurred for preventing the extinction of the respondent’s business would, in our opinion, be expenditure wholly and exclusively laid out for the purpose of the business of the assessee and would be an allowable deduction. This finds support from decided cases. In CIT v. Chandulal Keshavlal & Co. [(1951) SCR 594 ] this Court held that in order to justify a deduction the disbursement must be for reasons of commercial expediency; it may be voluntary but incurred for the assessee’s business; and if the expense is incurred for the purpose of the business of the assessee it does not matter that the payment also enures to the benefit of a third party.”

In Sassoon J. David and Co Pvt Ltd, Bombay v. CIT, Bombay, (1979) 3 SCC 524, the Supreme Court has held: -

“The next contention urged on behalf of the Department was that since Davids and Tatas were indirectly benefited by the retrenchment of the services of the employees of the Company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the Company. It has to be observed here that the expression “wholly and exclusively” used in Section 1 0(2)(xv) of the Act does not mean “necessarily”. Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of Section 37 of the Income Tax Act, 1961 which corresponds to Section 1 0(2)(xv) of the Act. An attempt was made in the Income Tax Bill of 1961 to lay down the „necessity‟ of the expenditure as a condition for claiming deduction under Section 37. Section 37(1) in the Bill read “any expenditure … laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed ….” The introduction of the word “necessarily” in the above section resulted in public protest. Consequently when Section 37 was finally enacted into law, the word „necessarily‟ came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law.”

As per the findings recorded by the Tribunal and the Commissioner of Income Tax (Appeals), the respondent assessee was engaged in the business of distribution of television channels and had retained 100% of the subscription As per the agreement between the respondent assessee and the associated enterprise, it was the obligation and the duty of the respondent assessee to advertise and promote the channels. Similarly, the assessing was acting as a selling agent for advertisements to be aired on the channels. It was entitled to retain 15% of the gross-receipts as income and pass on or transfer 85% of the gross receipts to the foreign enterprises.

Thus, one of the functions being performed by the assessee was to advertise and promote the channels and to earn subscription revenue. Another function was to secure/procure advertisements. The assessee earned 15% commission for the last mentioned function. The assessee was earning revenue in view of the said functions being performed. Expenditure incurred on advertisement was clearly relateable and laid out for the purpose of business of the respondent assessee and was not extraneous or unconnected with the same. Consequently, it could not have been disallowed as was done by the Assessing Officer on the ground that it was not laid or incurred wholly or exclusively for the purpose of business.

Service tax on services of advocate/arbitral tribunal is constitutional

P.C. Joshi v. Union of India [2014] 52 taxmann.com 311 (Bombay High Court)

 

Levy of service tax on services provided by advocates and arbitral tribunal is constitutionally valid and not violative of Article 19(1)(g); further, exemption to services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs is based on intelligible differentia and not violative of Article 14.

Facts:

The petitioner, a practicing advocate, filed writ petition for declaration that section 65(105) (zzzzm) of the Finance Act, 1994 as inserted by the Finance Act, 2011 providing for service tax on services by advocates is null and void and ultra vires the Constitution of India.

The High Court held in favour of revenue as under:

• There is no basis or foundation in the complaint by petitioner inasmuch as imposition of such levy does not burden the litigant or the consumer of justice. There is no substance in the complaint that the profession of advocates and legal profession itself has been treated on par with commercial or trading activities or dealings in goods and other services. Merely because of the role of the advocate, it does not mean that his position as an officer of the Court and part and parcel of administration of justice is in any way undermined, leave alone interfered with.
• The Advocates and legal practitioners are known to pay professional taxes and taxes on their income. They are also brought within the purview of service tax because their activities in legal field are expanding in the age of globalization, liberalization and privatization. They are not only catering to individuals but business entities too. If it is found that the advocates are catering to affluent and rich class of litigants and recipients of legal services, then, the tax on the services rendered to them is definitely within the permissive sphere of legislation. That cannot be faulted.
• Hence, activities carried out by advocates for consideration by way of fees, etc., amounts to 'service' and can be charged to service tax. Similarly, arbitration is also carried out for hefty fees and levy of service tax on services by arbitral tribunal is not invalid.
• Levy of service tax is not violative of Article 19(1)(g) of Constitution, as it is a reasonable restriction and similar to income-tax and professional tax being paid by advocates. Since services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs stands exempted, it does not deny justice to poor and needy. Further, such exemption to individuals and small businessmen does not transgress doctrine of equality under Article 14 of Constitution of India, as such exemption is based on intelligible differentia/classification.
• Moreover, since service tax on non-exempt services provided by advocates/arbitral tribunal is payable by service recipients under reverse charge on and from 1-7-2012, such advocates/arbitral tribunal can no longer complain of levy of service tax. Even for period prior thereto when there was no reverse charge, levy of service tax could not be regarded as invalid and arguments that 'reverse charge be treated as retrospective' was to be set aside.

“Stake money” or “prize money” paid by race clubs to horse owners won’t attract TDS under Section 194B

Bangalore Turf Club Ltd. v. Union of India [2014] 52 taxmann.com 290 (Karnataka High Court)

 

The issue that arose before the High Court was:

Whether the assessee was liable to deduct tax at source under Section 194B on making payment of ‘stake money’ to the owners of the horses?

The High Court held as under:

• A cursory look of the Finance Act, 2001 introduced with effect from 01.04.2002 and particularly section 194B would indicate that it was introduced to tax deduction at source on winning from ‘card games and other games of any sort’. Explanation to Section 224)(ix) was simultaneously introduced along with the words inserted in section 194B where under the card games and other games of any sort was introduced with the ambit of tax deduction along with lotteries and cross-word puzzles.
• Game show involving prize money being telecast through electronic media and said prize money had not found its place in the definition of clause “income” under the income-tax Act (I-T Act’). The Legislature had introduced Explanation (i) and (ii) to Section 2(24)(ix) so as include such prize money also under definition of “income”, since in those events people would compete with each other to win prizes. This position would become clear from budget speech of the Finance Minister herein below: “Winnings from lotteries, crossword puzzles etc., are currently taxed at 40%. As the marginal personal income-tax rates have now stabilized at 30%. Television game shows are very popular these days. I wish the winners well. At the same time, I propose that income-tax at the rate of 30% will be deducted at source from the winnings of these and all similar game shows”
• Thus, amendment brought by the Finance Act, 2001 to Section 2(24) and section 194B would have no bearing on the income earned from ‘owning and maintaining horses’. The term ‘any other similar game’ found in Explanation (ii) to Section 2(24)(ix) is inclusive definition and has to be read ejusdem generis and as such, activity of owning and maintaining horses cannot by any stretch of imagination fall in the definition of ‘card game or other game of any sort’ found in section 194B.
• Therefore, the “stake money” or “prize money” paid by race clubs to horse owners would not attract the provisions of Section 194B of the IT Act.

Section 80-IB relief available even if buyer can convert flats into duplexes in excess of built-up limit after acquisition

Poddar & Ashish Developers v. ITO [2014] 51 taxmann.com 505 (Mumbai - Tribunal)

 

Where supplying design to merge flats into a duplex in excess of limit of built-up area constituted only a marketing strategy to boost sale of flats and assessee constructed flats in accordance with plan approved by authorities it was entitled to deduction under section 80-IB.

Facts:

• The assessee had formed an AOP for developing a property with two wings and each wing was to have 96 flats. All the flats were approved to be with the built up area of less than 1000 sq. ft. as prescribed in clause (c) of Explanation to section 80-IB(10).
• There was a survey action under section 133A and the officers noted that flats were constructed in such a way that the said flats could be conveniently combined with the lower 1-BHK flats vertically in order to generate spacious duplex flats.
• The built up area of each of the said duplex flat exceeded the stipulated area. Accordingly, the revenue officers opined that the assessee intended to sell 1 BHK flats as duplex flats. Thus, the AO held that the assessee was not eligible for Section 80-IB relief as it had violated the condition relating to the maximum stipulated area of the flat. Further, the CIT(A) upheld the opinion of AO.

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

• Impounding of the brochure with details of method of merger of 1-BHK flats into a duplex, could not be used against the assessee as it only provided the design of merger. The fact was that the assessee got the approval for constructing impugned flats from the authorities and completed the construction as per the approved plans. In the instant case, from the approval stage till the stage of issuance of the completion certificate, there was no violation by the developer.
• There was no evidence to suggest that it was the developer who had planned and generated duplex flats out of the 1-BHK flats and, then sold as such to the buyers.
• The AO undertook the exercise of verification under section 133(6) and all the flat buyers responded to the said queries. Not even a single flat owner stated that the developer (‘assessee’) constructed those duplex flats.
• The discrepancy of mere providing a hole for intended staircase for flat buyers and supplying of the design to merge flats into a duplex flat constituted a marketing strategy to boost the sale of the 1-BHK.
• Thus, such a marketing strategy would not come in the way of granting deduction under Section 80-IB. Therefore, the assessee was entitled to deduction in respect of the profits attributable to all the 1-BHK flats of the projects.