Wednesday, October 30, 2013

Converting a leasehold property into a freehold property improves title of asset; holding period reckoned from date of lease

Conversion of rights of lessee in property from leasehold right into freehold right only results in improvement of his or her rights over property and it would not have any effect on taxability of gain from such property, which is related to period over which property is held


1) The assessee purchased a property on leasehold basis in year 1984. She got said property converted into freehold property in year 2004 and thereupon sold it. . The capital gain arising therefrom was declared by assessee as long-term capital gain (‘LTCG’);

2) The Assessing Officer held that since the property was acquired by converting the leasehold right into freehold right and was sold within three years, gain arising thereform was taxable as short-term capital gain.

3) On appeal, the CIT(A) held that capital gain arising from sale of such property was to be taxed as LTCG. Further, the Tribunal upheld the order of the CIT (A). The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) The difference between the 'short-term capital asset' and 'long-term capital asset' was the period over which the property had been held by the assessee and not the nature of title over the property;

2) The conversion of the rights of the lessee in the property from having leasehold right into freehold right was only by way of improvement of her rights over the property and it would not have any effect on the taxability of gain arising from such property, which was related to the period over which the property was held by assessee;

3) In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on 31.3.2004, (i.e. after holding it for more than three years) after the leasehold rights were converted into freehold rights on the same property which was in her possession. Thus, gain arising from such property would be taxable as LTCG  -  CIT v. Smt. Rama Rani Kalia [2013] 38 176 (Allahabad)

Assessee needn’t be unemployed while going abroad for a job; only stay in India would determine his residential status

Where status of assessee was a non-resident, fact that assessee was already employed before leaving India should not affect his residential status


a) The assessee working in Whirlpool China filed his return of income and declared taxable income under the head 'salary'. During scrutiny assessment, he pleaded that he was out of India for 236 days and he was not liable to be taxed in India as he was non-resident during the relevant financial year;

b) The Assessing Officer did not accept the assessee's contention and made the assessment on ground that assessee was already employed in Whirlpool India prior to leaving India;

c) On appeal, the CIT (A) held that the assessee’s salary was not taxable in India. The aggrieved revenue filed the instant appeal.
The Tribunal held as in favour of assessee as under:

1) Section 6(1) read with the Explanation  provides that for an individual, who has left India for employment outside India, should be treated as resident of India only if he was in India during the relevant year for 182 days or more [Anurag Chaudhary, In re [2010] 190 Taxman 296 (AAR-New Delhi)];

2) A careful reading of such Explanation would show that the requirement of the Explanation is not leaving India for employment but it is leaving India for the purposes of employment outside India. For the purpose of the Explanation, an individual need not be an unemployed person who leaves India for employment outside India [British Gas India (P) Ltd. In re [2006] 155 Taxman 326 (AAR-New Delhi)]

3) During the relevant financial year, the assessee's stay in India was of less than 182 days and, thus,  his residential status was non-resident;

4) The assessee’s contention, that he was already employed in the Whirlpool India prior to the leaving India for working with Whirlpool China, would not affect his residential status. Therefore, the order of the CIT(A) stating that salary income of the assessee accrued and arose during his employment in China and was not taxable in India was to be upheld - ACIT v. Raj Jain [2013] 38 133 (Delhi- Trib.) 

Monday, October 28, 2013

Buyer should withhold tax from sum paid to a non-resident co-owner to acquire a house property

Where assessee purchased a property jointly owned by co-owners, in view of fact that one of co-owners of property was a non-resident, assessee was required to deduct tax at source under section 195 to extent sale-consideration paid to said co-owner.


a) The assessee purchased a property owned by two co-owners for a total consideration of 1.20 crores. One of the co-owner was a non-resident who had executed a General Power of Attorney in favour of other resident co-owner to execute sale agreement;

b) The AO opined that since one of co-owner was a non-resident, assessee was required to deduct tax at source under section 195 on entire sale consideration of Rs 1.20 crores. On assessee's failure to deduct tax at source, the AO treated the assessee as 'assessee-in-default';

c) On appeal, the CIT (A) held that assessee ought to have deducted tax at source on the share of the non-resident in the sales consideration. Aggrieved assessee filed the instant appeal.

The Tribunal held partly in favour of assessee as under:

1) To the extent the sum was paid to non-resident co-owner, the provisions of section 195 were attracted and the assessee ought to have deducted tax at source while making payments to her;

2) Thus, the assessee could be considered as an 'assessee-in-default' only to the extent of sum paid to the non-resident - R. Prakash v. ITO [2013] 38 TAXMANN.COM 123 (Bangalore –Trib.)

Friday, October 25, 2013

SC on Radia Tapes – unscrupulous elements have used corrupt means to secure favours from Govt. officers

1) The first report submitted by Supreme Court on Nira Radia Tapes has pointed out seventeen matters of criminality or irregularity. Out of these matters, following eight matters are prima facie indicative of Deep-rooted malaise in system exploited by private enterprises in connivance with Govt. officers and others:

a) Supply of low floor buses by Tata Motors to Govt. of TN;

b) Appointment of Chairman of Pipeline Advisory Committee;

c) Allotment of coal blocks to ADAG group;

d) Allotment of iron ore mines to Tata Steel, favours shown to RIL by DG Hydrocarbons;

e) Fudging in subscriber base by Reliance Communication;

f) Touts and middlemen in aviation sector;

g) Market manipulation; and

h) Hammering of stocks of Unitech.

2) The conversations between Ms. Nira Radia and her associates suggests that unscrupulous elements have used corrupt means to secure favours from Govt. officers who appear to have acted for extraneous considerations;

3) CBI directed to make an inquiry on these eight matters and to submit a report within 2 months. Report based on conversations related to corruption or malpractice in judiciary (item No. 8 of the first report) should be referred to Chief Justice of India for consideration and an appropriate action;

4) In its second report, the SC has categorized suspected calls into six categories dealing with corruption in raid/survey by IT officials, CA working as tout of ITO, etc. CBI directed to make an inquiry on these matters also and to submit a report within 2 months. Team appointed by SC to scrutinize remaining Nira Radia tapes - Ratan N. Tata v.  Union of India [2013] 38 200 (SC)

Thursday, October 24, 2013

Urban land held as part of Industrial undertaking ceases to have its independent character for wealth tax purposes

Scope of section 2(ea) does not include 'urban land' but once land so held is part of industrial undertaking or factory, it ceases to have independent character as an urban land; it would be part of industrial undertaking

A. The revenue required the assessee to show cause as to why value of land, shown in the balance sheet won’t be to be included in his taxable wealth. The assessee explained that impugned land was not includible in taxable wealth as the same constituted integral part of factory;

B. The AO made addition of the value of impugned land in the net wealth of assessee by observing how could an assessee sell the land over which a factory building was situated or the land which was being used for business purposes;

C. The Commissioner of Wealth Tax (A) (CWT(A)) deleted the impugned addition. Aggrieved AO filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The scope of section 2(ea) does not include 'urban land' but once the land so held is part of the industrial undertaking or factory it ceases to have the independent character as an urban land. It would be part and parcel of the industrial undertaking or factory;

2) The mere fact that a part of land, which was held as factory, was sold by the assessee as a piece of land would not change the character of asset in the hands of the assessee;

3) There could be situations in which a part of factory land might be sold as 'land' but as long as it was a part of the factory, it couldn’t have any other character in the hands of the assessee than factory as such;

4) A vacant piece of land, even if it can be sold as 'land', as such, continues to be a business asset as long as vacant land is an integral part of factory. Therefore, the land sold was a part of the factory premises and order of CWT(A) was to be upheld – Dy.CIT v. HSIL Ltd. [2013] 38 45 (Kolkata - Trib.)

‘Equipment’ includes Ship and charter fees thereof is ‘royalty’; HC refers to Sec. 43(3) to define word ‘equipment’

‘Equipment' includes ship, fee paid for use of ship to be considered as royalty under sec. 9(1)(vi). Meaning of the word ‘plant’ as defined under Sec. 43(3) would be relevant to determine meaning of the word ‘equipment’.

The aggrieved assessee appealed against order of Tribunal holding that the payment made for taking ship on time charter basis would constitute ‘royalty’ as defined under Section 9(1)(vi)(b) of the Income Tax Act (‘the I-T Act’). Assessee contended that the ship was not equipment and, consequently, there was no question of use or right to use of any equipment which could be construed as ‘royalty’.

The High Court held in favour of revenue as under:

1) The consideration paid for use of the industrial, commercial and scientific equipment is ‘royalty’ in view of clause (iva) of Explanation 2 to Section 9(1)(vi) of the I-T Act. The word ‘equipment’ is not defined under Section 9, however, the word ‘plant’ has been defined under Section 43(3). In view of Section 43(3), the word ‘plant’ is widely defined to include a ship;

2) In absence of any definition of ‘equipment’ under the I-T Act and considering the business of the foreign enterprise, the definition of ‘plant’, as including ‘ship’ would be appropriate for understanding the scope of the expression ‘equipment’;

3)  ‘Plant’ includes every tool, apparatus, equipment or machinery, not limited to machinery used in tool. Thus, with the inclusive definition of plant embracing within its fold so diverse a matter from a ship to a book, or medical equipment, every tool, apparatus, ‘plant’ includes all equipments used by an assessee for carrying on his business;

4) The word ‘equipment’ construed in the light of Section 9(1)(vi) extends the normal meaning of the word to cover even those specified categories of machinery or plant that would themselves not be construed within its plain and ordinary meaning. As rightly pointed out by the Revenue, the only limitation that one may read into the word ‘equipment’ would be that which is specifically excluded;

5) In context of Section 9(1)(vi)(b), the presence of the word ‘any’ preceding the word ‘equipment’, clearly points out the need for construing ‘equipment’ widely, so as to embrace every article employed by the employer for the purposes of his business. ‘Equipment’, by whatever name called either as an apparatus or as plant or machinery, so long as they are employed for the purposes of one’s income, the same shall stand covered by clause (iva) of Explanation 2;

6) Therefore, in absence of any word of limitation other than what was explicitly provided for, we do not find any legal necessity of reading a limitation on the word equipment. Thus, ship being a plant, an equipment with which the ship owner operates the business and commercially exploits it for earning the income from chartering of ship, the payment thereof would be clearly in nature of ‘royalty’ - Poompuhar Shipping Corporation Ltd. v.  ITO, International Taxation [2013] 38 150 (Madras)

ITAT devises formula for claiming lease equalization charges – gap of annual lease charges and depreciation as per Income-tax Act

While allowing deduction on account of lease equalization charges, only difference between annual lease charge of leased assets and depreciation allowed on said leased asset under the Income-tax (‘I-T’) Act should be taken into consideration

The Tribunal held as under:

1) The concept of lease equalization charge could also be followed for the purpose of computing the total income under the I-T Act. However, the same has to be done with proper care and caution, otherwise it might result in absurdity and give misleading result;

2) In the instant case the relevant transactions were treated as finance lease transaction and, the depreciation allowed as per the rates prescribed in the I-T Act could be more than the depreciation claimed by the assessee at the rate prescribed under the Companies Act;

3) For example, the assessee might be entitled to claim depreciation at 100 per cent on the leased assets in the first year itself under the I-T Act whereas in the books of account, it might have claimed depreciation on the said leased assets under the Companies Act at the rate of 10 per cent;

4) In such a case if the annual leasing charge was equivalent to 30 per cent of the value of leased assets, the assessee would debit its profit
and loss account by lease equalization charges to the extent of 20 per cent of the value of asset as per the guidance note issued by the ICAI;

5) If the lease equalization charges so debited were to be allowed as deduction while computing the total income of the assessee under the I-T Act in addition to 100 per cent depreciation already allowed, the assessee would get the deduction of 120 per cent of the value of asset in the first year itself and the very purpose of adopting the concept of lease equalization would be defeated. This would result in absurdity and give misleading results;

6) It was, therefore, necessary that while allowing deduction on account of lease equalization charges for the purpose of computing total income under the I-T Act, the difference between the annual lease charge of the leased assets and depreciation allowed on the said leased asset under the I-T Act should be taken into consideration - Infrastructure Leasing & Financial Services Ltd v. Dy.CIT [2013] 38 40 (Mumbai - Trib.)

Monday, October 21, 2013

Advance Ruling binding on both revenue and assessee; CBEC’s circular holding otherwise is invalid

Advance ruling is binding on Department as well as assessee; CBEC clarification holding contrary view and issued later in point of time, cannot annul advance ruling pronounced in favour of assessee

In the instant case the advance ruling was pronounced in assessee's favour, which was not challenged and became final. Later, on clarification being sought by some other person from CBEC, it issued a Circular holding a view contrary to order of Authority for Advance Ruling. The Department argued that view expressed in CBEC Circular was applicable to the assessee.

The High court held in favour of assessee with following observation:

1) In the instant case, the assessee himself had not sought any clarification from CBEC. A clarification sought for by some other person couldn’t bind the assessee for whom advance ruling was binding;

2) CBEC clarification, issued later in point of time, did not and could not have annulled advance ruling in view of provisions of section 96D(2) read with section 96E - Gras Impex (P.) Ltd. v. Commissioner of Commercial Taxes [2013] 38 65 (Karnataka)

Friday, October 18, 2013

Worried over rising prices of CNG – Complain to Petroleum Regulatory Board rather than Competition Commission

Commission would not proceed with complaint regarding pricing of PNG when Petroleum & Natural Gas Regulatory Board was looking into grievances of consumers and pricing of CNG/PNG


a) The complainant, a consumer of Piped Natural Gas (PNG) supplied by Indraprastha Gas Limited (‘IGL’), sent a complaint to the Chairman, MRTPC as regards price charged by IGL;

b) The complainant submitted that the respondent was exploiting its monopoly in the capital city of Delhi by not passing on the benefits of APM Gas to the domestic consumer and was charging a much higher rate than the Gujarat Gas and MG;

c) The complainant contended that the Commission should issue cease and desist order against the IGL from misusing its monopoly position and profiteering at the cost of its consumers and that the order should specify that IGL should start charging not more than Rs. 9.25 per scm for PNG.

The Competition Appellate Tribunal held as under:

1) The Commission doesn’t find it necessary to proceed with this matter particularly because the grievance of the consumers generally was being
looked into by the Petroleum & Natural Gas Regulatory Board (‘PNGRB’) who has taken up the exercise to decide and to enquire into the price structure of CNG/PNG by all the entities engaged in the business which would include the supplies made in Mumbai, Gujarat and Calcutta, etc.;

2) If the PNGRB was already doing that exercise, there would be no need for the Commission to go into the further state of affairs particularly in view of the absence of total evidence except the balance sheet of IGL suggesting that IGL had made some profits and statistics before the Commission;

3)  Thus, it was not deemed fit to proceed in the matter particularly in the absence of the evidence and also because a body like PNGRB with all the necessary statistics was enquiring into the matter – DG (I & R) v. Indraprastha Gas Service [2013] 38 59 (CAT - New Delhi)

Thursday, October 17, 2013

In absence of an agreement, transfer of land by assessee to his AOP won’t be deemed as transfer

Where assessee contended that he formed an AOP and transferred a land to it, but no agreement between assessee and AOP was found, transaction would not amount to transfer

In the instant case, the assessee had an agricultural land which was declared as industrial estate. He and other landowners within that industrial estate formed an AOP and transferred this land to it. The CIT (A) held that the land stood transferred in terms of section 2(47) to AOP. He, therefore, directed the AO to assess capital gain on each member of the AOP on account of transfer of capital asset. On appeal, the Tribunal refused to interfere.  Aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) For the purpose of income tax, a capital asset may be transferred to an AOP as is provided in section 2(47);

2) However, when the capital asset is an immovable property by reason of the provisions contained in the Transfer of Property Act, read with the Registration Act, transfer of an immovable property of the nature dealt with herein requires an instrument which is also required to be registered;

3) Thus, transfer will take effect in a situation as provided in section 53A of the Transfer of Property Act, namely, when there is an agreement to transfer and, in part performance thereof, the transferee is in possession of the immovable property agreed to be transferred;

4) In the instant case, there was no conveyance by the appellant in favour of AOP, nor there any agreement between them and AOP also didn’t contend that in pursuance of that agreement and in part performance thereof, it was in possession of the property in question. Therefore, the impugned transaction wouldn’t be deemed as transfer - Rajesh Kumar Agarwal v. ITO [2013] 37 442 (Uttarakhand)

Wednesday, October 16, 2013

Payment of one time lease premium to acquire a leashold land isn’t subject to tax deduction under sec. 194-I

Where payment of lease premium was not made on periodical basis but it was one-time payment to acquire land with right to construct a commercial complex thereon, section 194-I had no application on deposit of such lease premium

In the instant case the Mumbai Development Authority offered certain land on lease to assessee for a period of 80 years for certain consideration comprising of lease premium. The assessee paid said premium in two installments. The AO held that the assessee was liable to deduct tax at source on lease premium under section 194-I.The CIT (A) held in favour of assessee. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) In Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC), the Supreme Court held that the onus was on the Revenue to demonstrate that premium has been camouflaged as advance rent and the AO, in the instant case has not brought on record any material to indicate that the rent has been suppressed and the premium has been inflated.

2) Thus, undoubtedly premium in relation to leased land was on capital account not liable to be classified as revenue outgoing;

3) Since the payment of lease premium was not to be made on periodical basis but it was one- time payment to acquire land with right to construct a commercial complex thereon, section 194-I was not applicable

4) Therefore, the impugned sum does not constitute advance rent, but it was to be classified as lease premium for capital expenditure not falling within the operative realm of section 194-I -  ITO v. Indian Newspapers Society [2013] 37 401 (Delhi - Trib.)

Tuesday, October 15, 2013

No tax on FTS if service utilized for business carried abroad; upgradation of existing website is revenue exp.

In the instant case, two moot questions were raised before the ITAT which were as under:

A. Whether website development charges were deductible as revenue expenditure?

B. Liability of tax deduction on overseas commission

On first issue, it held in favour of assessee as under:

1) Commission paid to non-residents for services rendered outside India does not accrue or arise in India;

2) Hence, no TDS was deductible from such commission and such commission couldn’t be disallowed under section 40(a)(i);

3) Even if services rendered by the non-resident did fall within the definition of "fees for technical services, the commission paid would not
be taxable in India as clause(b) of section 9(1)(vii) would save the assessee.

On second issue, it held in favour of assessee as under:

1) Expenses incurred for upgradation of an existing website ought to be distinguished from expenses for development of a new website;

2) The former was revenue expenditure and the latter was capital expenditure, resulting in creation of an intangible asset;

3) Expenditure on upgradation of existing website was equivalent to maintenance of an existing asset. Thus, it was revenue expenditure - Mahindra Holidays & Resorts India Ltd. v. JCIT (LTU) [2013] 38 207 (Chennai - Trib.)

Hollow rooms with basic amenities can’t be said to be an habitable house; not eligible for sec. 54F relief

Where house constructed by assessee was not found to be habitable, deduction under section 54F could not be allowed

In the instant case the assessee claimed deduction under section 54F on ground that she had purchased a house. When the AO carried enquiry, he found that there was no construction as mentioned in the sale deed. Instead, there was a small construction consisting of two rooms made of hollow bricks. Accordingly, the claim of deduction was disallowed by AO. Further, the CIT (A) upheld the order of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) The assessee had not placed necessary evidence in support of his claim to show that the said construction was in habitable condition. A construction in inhabitable position couldn’t be equated with a residential house;

If a person cannot live in premises, then such premises cannot be considered as a residential house. Investment in the construction would be complete as a house only when such house becomes habitable;

3) The evidence brought on record by the AO clearly shows that the property purchased by the assessee would not fall within the description of residential house. Thus, the claim of the assessee couldn’t be allowed under section 54F - Smt. Usharani Kalidindi v. ITO [2013] 37 360 (Hyderabad - Trib.)

Monday, October 14, 2013

Share issue exp. remains a capital expenditure even if SEBI disapproves of issue of shares; no sec. 37(1) allowance

Share issue expenses cannot be allowed as revenue expenditure even when shares could not be issued due to non-approval by SEBI

In the instant case the assessee incurred expenditure for issuing shares. However, on account of non-clearance from the SEBI, shares could not be issued. It claimed deduction for share issue expenses as revenue expenditure by contending that since the expenditure did not yield any desired result, the character of the expenditure had to be decided on the basis of the result that would yield benefit in assessee's business. The AO and the CIT (A) disallowed such expenses. The Tribunal also affirmed the view of the AO. Aggrieved assessee filed the instant appeal.

The High Court held in favour of revenue as under:

1) The impugned expenses were incurred by the assessee for the purpose of widening its capital base. The assessee, admittedly, took steps to go
in for public issue and after incurring expenditure, just before the public issue, by reason of the orders from the SEBI, the assessee could not go in for public issue. Thus, the efforts were aborted;

2) There was no justifiable ground to accept the plea of the assessee that on account of the abortive efforts, the expenditure incurred would lose its character as capital expenditure for the purpose of allowing it as a revenue expenditure - Mascon Technical Services Ltd. v. CIT [2013] 37 253 (Madras)

NR can claim benefit of first proviso to Sec. 48 along with Sec. 112 concessional rate; HC quashes Cairn India ruling

Proviso to section 112(1) doesn’t deny benefit of lower tax rate of 10% to a non-resident investor availing benefit of exchange rate neutralization under first proviso to section 48. It is incorrect to say that 10% rate under proviso to section 112(1) applies only where indexation benefit under 2nd proviso to section 48 applies and still assessee opts to not avail it.

The High Court held as under:

1) The proviso to Section 112(1) doesn’t state that an assessee, who had availed benefit of the first proviso to Section 48, was not entitled to benefit of lower rate of tax. The said benefit couldn’t be denied because the second proviso to Section 48 was not applicable;

2) The stipulation for taking advantage of the proviso to Section 112(1) is that the aggregate of long term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48.;

3) First proviso to Section 48 stipulates that on sale of the securities by the non-resident, the consideration received in Indian rupee should be reconverted into the same foreign currency;

4) For a non-resident who has utilized foreign currency for purchase of securities in Indian rupee, inflation in India was immaterial and inconsequential. He is most concerned with exchange rate fluctuation and his true and actual gain should take into account the exchange rate fluctuation;

5) The second proviso is applicable to all others including non-residents, who are not covered by the first proviso and they are entitled to benefit of cost of indexation which neutralize inflation;

6) It is a misnomer and wrong to state that inflation alone contributes and is the determinative factor in exchange rate fluctuation. Inflation by itself cannot be the sole or even a primary factor in exchange rate depreciation. These are several others complex factors and parameters which can affect the foreign exchange rate fluctuation.

7) The first and second proviso to section 48 cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective. Thus, it couldn’t be deemed that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose;

8) Thus, it was to be held that assessee was taxable at concessional rate of 10% as per proviso to section 112(1) - Cairn UK Holdings Ltd. v. DIT [2013] 38 179 (Delhi)

Thursday, October 10, 2013

Software license for one year doesn’t confer any enduring benefit; licensing fee held as revenue expenditure

In the instant case the assessee had incurred expenses towards software license and claimed the same as revenue expenditure. The AO disallowed the claim of the assessee. On appeal, the CIT (A) reversed the order of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) When the assessee had acquired the license to use the software and the license was valid only for one year, it might be useful to the assessee for various functions like sales, finance, logistics operations and use of ERP system and it might confer certain benefits to the assessee but it couldn’t be said that there was enduring benefit to the assessee;

2) Thus, respectfully following the decision of the Bombay High Court in the case of CIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 507 and taking into consideration the facts of the case, it was to be held that the expense incurred by the assessee to acquire the software license was revenue expense – Dy. CIT v. Danfoss Industries (P.) Ltd. [2013] 37 240 (Chennai - Trib.)

Tuesday, October 8, 2013

IPL in FEMA violation; Special Director had to form an opinion before calling BCCI President for personal hearing

Special Director was directed to first form his opinion whether to proceed against petitioner President of BCCI, for remittances in violation of FEMA before calling petitioner for personal hearing as per rule 4 of Adjudication Rules
  1. The petitioner was President of BCCI during years 2008 to 2011. In 2009, after the second edition of IPL at South Africa, the Assistant Director, Directorate of Enforcement filed a complaint with Special Director alleging that the provisions of FEMA had been violated by the Board and its officers while conducting second edition of IPL;
  2. On basis of the complaint, show-cause notices were issued to the Board and its office bearers calling upon the Board to show cause in respect of a particular conduct/transaction amounting to violation of the Act;
  3. The petitioner was also called upon in each of the notices to show cause as to why penalty should not be imposed upon him in his capacity as the President of the Board in terms of section 42. Special Director issued notice to petitioner for personal hearing according to rule 4 of Adjudication Rules;
  4. Petitioner filed writ petition contending that he had no role in remittances and receipts of foreign exchange in 2009 and a separate committee had been constituted to administer IPL with a separate bank account to be operated by Treasurer, BCCI.
The High Court held as under:
  1. The petitioner was not in charge of and responsible to BCCI for aforesaid matters, as far as opening and operating of bank account of IPL or obtaining permission of Reserve Bank of India for making remittances or receipts of foreign exchange was concerned;
  2. It would be necessary for adjudicating authority to form an opinion whether petitioner could at all be considered as covered by substantive part of section 42(1), since petitioner himself was not in charge for opening and operating bank accounts involving receipts and remittances of foreign exchange to parties outside India;
  3. That communication calling petitioner for personal hearing was to be set aside since adjudicating authority had not considered aforesaid aspects before forming an opinion to proceed further with inquiry under sub-rule (4) of rule 4 of Adjudication Rules;
  4. The Special Director was to be directed to first form his opinion, after recording reasons before proceeding against petitioner with regard to impugned show-cause notices in accordance with rule 4(3) of Adjudication Rules – Shashank Vyankatesh Manohar v. Union of India [2013] 37 151 (Bombay)

Institution-wise aid of about 45% entitles a society for sec. 10(23C) exemptions

For computing 'substantial government aid' so as to avail section 10(23C) exemption, receipts of individual institution are to be considered, not aggregate receipts of various institutions run by a society; 45 per cent government aid is substantial for such purpose

In the instant case two issues that came for consideration of the Tribunal were as under:

a) Whether the aggregate gross receipts of various institutions run by the assessee-society were to be considered for the purpose of section 10(23C)(iiiab) or the individual receipts of each institution run by the assessee are to be considered?

b) Whether the assessee had received substantial Govt. aids to be eligible for exemption under 10(23C)(iiiab)?
On first issue, it held as under:

For purpose of applying provisions of section 10(23C), receipts of individual institution are to be considered, and not aggregate gross receipts of various institutions run by assessee.

On second issue, it held as under:

1) The percentage of grant was within the range of 41% to 82% if considered individually for each institution. If the percentage was considered for the society as a whole even then the percentage was 44.52% and 45.15% in the two years;

2) The Hon'ble Court in case of CIT v. Deshiya Vidyashala  [I.T.A. No.1133 of 2008, dated 8.2.2011] has considered 34.33% as substantial aid for the purpose of eligibility under the above said sections;

3) In the instant case the percentage of grants in aid with respect to total receipts are more than 34.33%. Thus, following the case of Deshiya Vidyashala (supra) with respect to definition of substantial interest, aid of more than 34. 33% was to be considered as substantial aid.

Therefore, the assessee’s institutions were substantially aided by the Govt. and, hence, were eligible for exemption under section 10(23C)(iiiab) - Jat Education Society v. ITO [2013] 37 187 (Delhi - Trib.)

School to apply sec. 194C and not sec. 194I on transport contract if transporter incurs running cost and keeps possession of vehicle

Contract awarded by assessee-school to transporter for carrying students would be covered by sec. 194C and by not sec. 194I if bus remained in possession of transporter and all running and maintenance costs were incurred by him

In the instant case the assessee-school awarded contracts to various transporters for carrying its students from their homes to school and from school back to homes. It had deducted tax under section 194C for making payments to bus owners. The AO held that the assessee should have deducted tax under section 194I on such payments. On appeal, the CIT(A) reversed the order of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The object of the assessee to enter into such agreement was a simple activity of carrying its students from their homes to the school and similarly from school back to their homes;

2) The assessee had no responsibility whatsoever regarding the buses to be utilized for that purpose which was the sole responsibility of the transport contractor;

3) The transport contractor only was liable to keep and maintain the required number of buses for such activity at its own expenses with the specified standards;

4) Therefore, the said contract was purely in the nature of services rendered by the transport contractor to the assessee. The assessee was not having any responsibility whatsoever regarding the transport vehicles used in such activity;

5) The assessee itself had not utilized the buses but they were used by the transport contractor for fulfilling the obligations set out in the contract. Thus, the aforesaid payments were not covered in the definition of 'rent' which was defined in Explanation to section 194-I,;

6) Therefore, the provisions of section 194-I could not be applied in the instant case. The assessee had rightly deducted tax at source under the section 194C on the aforesaid payments – ACIT (TDS) v. Delhi Public School [2013] 37 211 (Delhi - Trib.)

Tuesday, October 1, 2013

Transactions among Indian subsidiaries pursuant to contract with their parent co’s out of purview of TP

Assessee sold its medical imaging business to another Indian Co. namely, 'C' Ltd. in pursuance of a transaction whereby holding co. of assessee sold its imaging business to holding co. of 'C' on global basis. Both transactions were independent of each other, therefore, revenue authorities were not justified in making TP adjustment to such transaction.

In the instant case, assessee, an Indian company sold its medical imaging business to ‘C’, Indian company disclosing sale transaction as normal domestic transaction. On perusal of documents, AO concluded that such transaction was on global basis, wherein holding company of assessee sold its imaging business to C Inc. TPO proceeded to determine ALP based on worldwide revenue break up amongst countries submitted by assessee.

The Tribunal held as follows:

a) It was undisputed that the transaction involved two domestic companies who were individual and independent subsidiaries of their own and independent holding companies;

b) Transaction could only become international transaction, if either both of the associated enterprises (‘AE’) or one of the AEs was non-Resident.

c) As per the wordings of section 92B, there had to be an AE, with whom there existed international transaction, only then it could be examined as to whether international transaction with ‘such other person’ existed or not;

d) Transactions entered into by holding foreign companies and subsidiary Indian companies were independent of each other. Though the instant transaction was as a consequence of the global agreement entered into by the holding companies, yet the entire exercise of transfer of imaging segment was independently done on its own terms by the assessee and the other party, i.e, 'C' India.

No element of international transaction was involved in sale of imaging segment by assessee of its business to C and it was purely a domestic transaction.

f) Therefore, the impugned adjustment made by revenue authorities was to be set aside - Kodak India v. Addl.CIT [2013] 37 233(Mumbai –Trib.)

Where assessee had no tax incidence but otherwise was liable to tax in the UAE, benefits of India-UAE DTAA were applicable

In the instant case the assessee, a resident of the UAE, was engaged in the business of shipping.  It claimed that Article 8 of the India-UAE treaty would be applicable to it. The AO, however, held that the assessee was not eligible for treaty benefit. He, therefore, invoked the provisions of section 44B and computed the presumptive profit on total receipt. On appeal, the CIT (A) deleted the order of the AO. Aggrieved revenue filed the instant appeal.

The Tribunal held as under:

1) The revenue’s contention was that since the assessee had not paid taxes in the UAE, there could be no curtailment of tax liability, by pressing the treaty. The reason could being that DTAA applies on juridical double taxation, i.e., if income was not taxed in one State, then it would be taxed in full in the other, if it was otherwise taxable, without granting any benefit of the Treaty;

2) This argument couldn’t be sustained, because the assessee was 'otherwise liable to tax' in UAE. Simply because there was no tax incidence in the UAE, didn’t mean that the assessee ceased to be otherwise liable to tax as per Article 4 of India-UAE treaty;

3) Treaty becomes applicable once the assessee gets within the expression 'otherwise liable to tax' in Treaty. Therefore, the order of CIT (A) was to be set aside and the AO was to be directed to consider the nature of income in issue and, consequently, the availability of Article 8 of the India UAE Treaty – ADIT v. Simatech Shipping Forwarding LLC [2013] 37 232 (Mumbai - Trib.)