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.