Wednesday, July 17, 2013

Subsidiary co. isn’t a ‘related person’ for section 40A(2); payment made by holding co. isn’t subject to disallowance

Subsidiary company is not a related person within meaning of section 40A(2)(b)(ii) and, thus, payment made by assessee to its subsidiary can’t be disallowed by invoking provisions of said section   

In the instant case the assessee-company had entered into an agreement with its subsidiary company for manufacturing of footwear soles. The manufacturing related jobs were done by subsidiary company for which the assessee paid certain sum which was claimed as business expenditure. The AO allowed 50% of the claim of the assessee and disallowed remaining amount under section 40A(2)(b). The CIT(A) confirmed the order of AO, which was further reversed by the Tribunal. Aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) To attract provisions of section 40A(2), assessee has to incur an expenditure for which a sum is paid or payable to a person as referred to in clause (b) of said Section. As the assessee was a company, the person to whom they had to make payment, in order to attract the said provision, was any director of the company or any relative of the director;

Admittedly, in the instant case, the payment was made to the subsidiary company and not to any director or any relative of the said director. Therefore, the requirement of the section was not fulfilled;

Merely because, a subsidiary company did not fulfill its obligations, that wouldn’t render the transaction illegal and consequently, it couldn’t be held that the expenditure laid out or incurred was not wholly for the business of the assessee-company;

4) These facts had not been properly appreciated by the assessing authority as well as the lower appellate authority. The Tribunal was therefore justified in directing the deletion of disallowance. Accordingly, the revenue's appeal was to be dismissed – CIT v Raman Boards Ltd [2013] 35 4 (Karnataka)

Registration to trust couldn’t be denied even if it breached Right to Education Act and generated profit

Registration under section 12A couldn’t be denied to assessee-trust merely on ground that it earned profits by charging substantial fees and had violated requirements of Right to Education Act

In the instant case the assessee, an educational society, filed application for registration under sections 12A. The CIT rejected application for registration on ground that the society was running its institution purely on commercial basis and earning profits by charging substantial fees from students. He also cited violation of requirements of Right to Education Act, 2009 (RTE Act) and non-furnishing of original instrument of establishment of society as reasons for rejection of application. Aggrieved assessee filed the instant appeal to the Tribunal.

The Tribunal held in favour of assessee as under:

1) It was found that the CIT didn’t raise any objection against the objects of assessee-society. Its main object was education, which undeniably was of charitable nature, in line with the provisions of section 2(15);

2) Further, it was not within the CIT's purview to take recourse to the RTE Act to reject assessee’s application. While considering an application for grant of registration under section 12A, the CIT was only required to see whether the object of the applicant was charitable and as to whether its activities were genuine, and no further. The jurisdiction and competence to examine an issue under the RTE Act lay before the authorities mentioned therein;

3) Where the purpose of a trust or institution is education, it would constitute 'charitable purpose', even if it incidentally involves carrying on of commercial activities. Mere charging of high fees was no ground for refusing it registration, where the CIT had not doubted the objects and genuineness of the assessee's activities;

4) Merely because the assessee had generated surplus income after meeting expenditure on its educational activities, such activities could not be regarded as trade and commerce, so as to invite cancellation of registration and that education was a charitable purpose in itself. Thus, in view of the above the order passed by the CIT was to be cancelled  and he was to be directed to grant registration to the society on verifying the original documents of establishment of assessee-society - Shri Gian Ganga Vocational & Educational Society v. CIT [2013] 35 17 (Delhi - Trib.)

Penalty on assessee having limited operations to be waived off if he had co-operated in proceedings with department

Where an assessee having limited operations had co-operated in proceedings and paid service tax alongwith interest, penalty was liable to be waived off under section 80

In the instant case assessee neither paid service tax nor filed the return in respect of Rent-a-Cab services provided by him. After show-cause notice was issued, he paid service tax alongwith interest, but sought waiver of penalties imposed on him under sections 76 & 77. He sought waiver on the ground that he was a small businessman, he had not collected service tax from service recipients and was passing through financial difficulties.

The Tribunal partly waived off penalty with following observations:-

Taking note of size of operations of assessee and fact that he had co-operated in proceedings and paid service tax alongwith interest, it was appropriate that penalties under section 76, which were almost equal to service tax liability, were required to be waived off by invoking provisions of Section 80. However, penalty imposed under section 77 was to be sustained. - Royal Travels v. Commissioner of Central Excise [2013] 35 19 (Ahmedabad - CESTAT)