Details of assets reported in wealth-tax returns by loan defaulter to be shared by I-T Dept. with PSU Banks

Every Return of Wealth filed by the assessee is subject to assessment under the Wealth Tax Act (‘the WT Act’). The information contained therein qualifies for being supplied, provided that the CCWT/CWT is satisfied that supply of such information to Public Sector Banks (PSBs) would be in public interest.

The CBDT in this context has clarified that sharing of information on assets of loan defaulters to enable recovery of loans by PSBs from such defaulters would be in public interest. It has further clarified that such information may be provided in respect of the borrower/mortgager/guarantor of the loan only.

At the time of supply of such information a confidentiality clause may be included specifying that such information should be used only for the purpose of recovery of loan and will not be shared with any other person/agency.

To ensure that the tax dues of the Department against the defaulter (if any) are safeguarded, the PSBs are required to obtain a NOC from the jurisdictional CIT of the loan defaulter, information in respect of whom is shared by department. These guidelines are to be brought to the notice of all DGsIT, CCsIT and CsIT. – Letter No. F. No. 328/10/2014 – WT, dated 28-05-2014.

ITAT deals with ‘booking’ amount paid to acquire a new house; distinguishes between Ownership and Investment

Booking of two residential houses before the date of transfer would not provide ownership rights to assessee, thus, he could not be deemed to be owning two residential houses on date of transfer.

Investment in new house by payment of booking amount would be deemed as valid investment for purposes of Section 54F relief.

The issues that arose before the Tribunal were as follows:

a)Whether assessee could be deemed to own two residential houses on date of transfer if he had only booked two residential houses?

b)Whether booking of residential flats could be deemed as investments for purposes of exemption under section 54F?

The Tribunal held in favour of assessee as under:-

1)Proviso to Section 54F(1) provides that if assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset then he will not be entitled to exemption.

2)The meaning of term ‘owns’ used in proviso to section 54F has a different meaning. The owner here, means a legal owner who is entitled to receive income from the property in his own right. In the absence of possession, registration, title, etc., question of assessing ‘income from house property under section 22 of Income-tax Act (the Act) doesn’t arise.

3)When a flat is booked assessee has a ‘right to acquire’ and this right is not equivalent to ‘own’ a house. Therefore, by mere booking of flats, it could not be said that assessee had ownership of the flats. Thus, assessee did not own more than one residential house on the date of transfer of original asset.

4)With regard to purchase of new residential house, the provision does not lay down a condition that a new house should either be complete or it should be purchased as a complete habitable house. The aim is to direct the minds of the society towards purchasing new residential houses so that the menace of shortage of houses is tackled to some extent.

5)CBDT vide circular No. 471 dated 15/10/1986 and circular No. 672 dated 06/12/1993 had also clarified that the amount paid towards booking is to be treated for ‘construction’ for the purpose of section 54/54F.

6)Hence, owning of a residential house at the time of transfer of the original asset has different meaning and acquisition of new asset ‘which is equivalent to purchase of new residential house’ has entirely different meaning. The CIT(A) had misdirected himself in giving the same meaning to the residential house owned at the time of transfer of the original asset and the investment made out of the capital gain in the purchase or construction of new house, which has been defined as ‘new asset’ in the Act. Therefore, investment in new residential house by payment of booking amount only had to be allowed.- RAM PRAKASH MIYAN BAZAZ V. DY. CIT [2014] 45 taxmann.com 550 (Jaipur - Trib.)

vice-Presidents of ITAT is to be appointed on basis of merits without considering seniority of candidates

vice-President of ITAT is to be appointed on merits as per under Rule 7C of ITAT Members (Recruitment and conditions of service rules), 1963 rather on basis of seniority of candidates

Facts:

a)The Central government had appointed four vice-Presidents of ITAT on recommendation of Selection Committee.

b)The Committee selected the candidates on the basis merit by considering the Annual Confidential Report (ACRs) of the candidates.

c)Two senior judicial members of ITAT had filed appeal before Central Administrative Tribunal (CAT) contending that Selection Committee had overlooked their seniority while selecting candidates for the post of vice-President. The CAT had rejected their appeal, thus, they filed the instant writ.

The High Court held as under:

a)Rule 7C of ITAT Members (Recruitment and conditions of service rules), 1963 prescribes the constitution of Selection Committee to recommend person for appointment as President, senior vice-President and vice-President. It clearly provides for the appointment on basis of merit rather than on basis of seniority. As rule 7C was the sole guiding principle in the instant case, one could not be depart from it.

b)Selection of candidates on the basis of their ACRs was justified as Rule 7C mandatorily prescribes ‘merit’ as criteria for selection and Selection Committee had the discretion to decide what constituted ‘merit’ for the purpose of appointing individual to the post of vice-President.

c)Thus, Selection Committee had rightly made appointment of candidates to the post of vice-Presidents of ITAT on basis of merits without considering their seniority. d)Further, to allay any future apprehensions, the Central Government is required to frame certain guidelines applicable to future cases to make this decision making process fairer and reasonable-R.P. Tolani v. Union of India [2014] 45 taxmann.com 444 (Delhi)

Signing of development agreement couldn’t trigger capital gains tax unless developer discharged his obligations

Capital gains could not be brought to tax in year of signing of development agreement, as developer had not done anything to discharge obligations casted on it.

Facts:

1)During the relevant year, the assessee gave its land for development and received a refundable deposit from the developer. In terms of development agreement, the developer had to develop the property according to the approved plan and deliver to the assessee 38 per cent of the constructed area in the residential part.

2)The Assessing Officer opined that since the transfer had taken place during the year under appeal, in terms of the development agreement-cum-GPA, the assessee was liable to pay capital gain tax on the date of transfer.

3)The CIT (A) confirmed the order of Assessing Officer. The aggrieved-assessee filed the instant appeal.

The ITAT held in favour of assessee as under:

a)'Development Agreement-cum-General Power of Attorney' indicated that only a 'permissive possession' was handed over by assessee to the developer.

b)It was only upon receipt of consideration in the form of developed area by the assessee, the capital gain becomes assessable in the hands of the assessee.

c)Mere receipt of refundable deposit by assessee from developer could not be termed as receipt of consideration as no developmental activity was carried out on the land and even no approval for the construction of the building was obtained by developer.

d)While the assessee had fulfilled its part of the obligation under the development agreement, developer had not done anything to discharge the obligations cast on it under the development agreement, thus, capital gains could not be brought to tax in the year in which development agreement was signed by assessee- BINJUSARIA PROPERTIES (P.) LTD. V. ACIT [2014] 45 taxmann.com 115 (Hyderabad - Trib.)

Members of AOP couldn’t claim their share of loss when losses of AOP were wiped out due to late filing of return.

Where AOP did not file its return of loss in time and, thus, loss got forfeited, no member of said AOP could claim his share of loss against his individual income.

Facts:

a)The assessee, a member of Association of Persons (AOP), had entered into a joint venture to put up a wind energy generator. The AOP filed its return beyond the prescribed time-limit.

b)The assessee had claimed that his share of loss in the AOP could be set off against his individual income. The Assessing Officer (‘AO’) rejected the claim of assessee.

c)On appeal, the appellate authorities upheld the decision of AO. The assessee pointed out that section 80 makes no specific reference to section 67A, thus the question of rejecting his claim in respect of loss referable to AOP would not arise. The aggrieved-assessee filed the instant appeal.

The High Court held in favour of revenue as under:

1)Section 67A(2) specifies that the apportioning of the share of a member in the income or loss of the AOP under the various heads of income has to be in the same manner in which the income or loss of the AOP has been determined under each head of income.

2)The determination of loss or income at the hands of AOP leads to the determination of the same at the hands of the member in his assessment. Hence, the grant of relief under section 67A is dependent on the determination of the income at the hands of the AOP.

3)The assessee could not take advantage of the absence of reference of section 67A in section 80 when the AOP was under the legal obligation to file its return declaring loss or income, as the case may be, and had defaulted in filing the return within the time prescribed.

4)The relief that had to be considered for the purpose of section 67A was not dependent on section 80 and for that matter, section 80 had nothing to do with the computation to be done under section 67A by the assessee. Thus, the share of loss of assessee in the AOP could not to be set off against his individual income.- N. JAGADEESAN V. ACIT [2014] 45 taxmann.com 95 (Madras)

Sum paid to foreign co. for production of 2D and 3D animated films wasn’t fees for technical service

No element of any technical services was involved in production of animation films, thus, provisions of section 9(1)(vii), would not apply to payments made by assessee to foreign sub-contractors for production of animated films.

Facts:

a)The assessee was engaged in production of 2D and 3D animation films. It had outsourced part of its project on sub-contract to foreign sub-contractors.

b)The assessee had made payments to foreign companies as per agreement, named as 'Outsourcing Facilities Agreement'. The Assessing Officer (‘AO’) held that the payments made to foreign companies were 'fees for technical services' and, thus, said payments were taxable in India.

c)Since the assessee had not made TDS before making aforesaid payments, it was to be treated as assessee-in-default under section 201 and 201(1A). On appeal, the CIT(A), set aside the order of AO. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee:

1)There was no element of any technical services involved in the production of animation films to attract the provision of section 9(1)(vii), read with section 5(2)(b).

2)It is possible that job undertaken by one party for the other party' of supply of any goods or services may involve utilization of the knowledge, information and expertise of the party undertaking the said job.

3)However, just because such expertise, knowledge, technology and experience are possessed by the said party and the same have been utilized for rendering the services, it cannot be said that the services so rendered are in the nature of technical and consultancy services without making any technology available to the other party.

4)Thus, the impugned payment made by the assessee could not be treated as 'fees for technical services'.

5)The foreign parties had not done any activity in India nor they had any permanent establishment in India. As there was no liability to deduct tax on the impugned payments under section 195, the AO was not justified in raising demand on assessee. Thus, the appeal of revenue was to be dismissed.- ADIT (INTERNATIONAL TAXATION) V. DQ ENTERTAINMENT (INTERNATIONAL) (P.) LTD [2014] 45 taxmann.com 17 (Hyderabad - Trib.)

Resident assessee can claim losses incurred from house property located abroad in return filed in India

An option is available to the resident-assessee to file return of income either under the Indian tax laws or under the treaty. If assessee files the return of global income in India, the Revenue is bound to give effect to such return. Therefore, losses from house property located abroad was to be included in the income of resident-assessee.

Facts:
a)The assessee filed his return of income after including losses from house property located abroad. He purchased this property in Australia which was already on rent. He obtained a loan from ANZ Bank, Australia (‘ANZ’) to purchase the property.

b)The loss was computed under the head house property due to payment of interest to ANZ.

c)During appellate proceedings, the CIT(A) referred to the decision of Apex Court in case of CIT V. PVAL Kulandagan Chettiar [2004] 137 Taxman 460 (SC) and held that as far as rent income from Australia was concerned, the assessee was required to file the return in Australia and such income could not be included in Indian income. Therefore, negative income could not be assessed in India.

The Tribunal held in favour of assessee as under:

1)In view of Section 5 of the Income-tax Act (‘the Act’) in case of a resident, income accruing or arising outside India had to be assessed in India. The Sec 90(2) of the Act clearly provides that wherever DTAA is applicable to assessee he has an option to apply either Indian Tax Laws or provisions of DTAA, whichever are more beneficial to him.

2)Therefore, the assessee had an option to file return of income under the Indian tax laws where DTAA was applicable.

3)In the instant case, the assessee had exercised the option of filing return under Indian laws, thus, the same could not have been refused simply because DTAA was applicable.

4)The decision in case of PVAL Kulandagan Chettiar (supra) was distinguishable because in that case the assessee was a resident of India and Malaysia. It was due to financial connection of the assessee with Malaysian property it was held that income from Malaysian rubber plantation was taxable only in Malaysia.

5)The assessee had right to file the return of global income in India and the Revenue was bound to give effect to such return. The CIT(A) was not correct in holding that income from house property in Australia was not assessable in India. Accordingly, the order of the CIT(A) was to be set aside and the Assessing officer was to be directed to include the loss from such house property in the hands of the assessee. - SUMIT AGGARWAL V. DY. CIT [2014] 45 taxmann.com 345 (Chandigarh - Trib.)

Exp. on higher education of director’s son was deductible as he committed to continue his employment after education

Where expenditure on higher education of employee had an intimate and direct connection with assessee's business, it would be deductible, even though such an employee was son of a director.
Facts:

a)The assessee, engaged in business of dealing in securities and investment, had incurred expenditure on higher education of 'D', an employee of the company, who happened to be the son of a director, for undertaking an MBA course in the UK.

b)The Assessing Officer rejected the deduction under section 37(1). Further, the CIT(A) and the Tribunal upheld the disallowance. The aggrieved-assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1)As assessee was in business of investments and securities and expenditure was incurred on MBA course of D, it couldn’t be said that course was unconnected with the business of the assessee.

2)The board of directors duly passed a resolution authorizing the disbursement of such expense. As assessee had secured a bond from ‘D’ by which he committed himself to work for a further five years period, after completing his MBA, such arrangement could not be regarded as a sham.

3)The expenditure claimed by the assessee to fund the higher education of its employee had an intimate and direct connection with its business, i.e., dealing in security and investments. It was, therefore, deductible under section 37(1). - KOSTUB INVESTMENT LTD. V. CIT [2014] 45 taxmann.com 123 (Delhi)

No I-T exemption on let out portion of palace as it won’t be deemed to be in occupation of Ruler under sec. 10(19A)

As long as the Ruler continues to occupy the palace, whether by actually utilizing it or by keeping it vacant, it shall be for the purpose of section 10(19A) deemed to be in his occupation. He, however, would disentitle himself to the exemption from tax on the annual value of that part of the palace which is let out to a tenant

Facts:
The issue before the High Court was:

Whether the rental income received by a Ruler from part of the palace, which was declared as his official residence, would be exempt from tax under section 10(19A) of income-tax Act (the Act')?

The High Court held in favour of revenue as under:

1)Section 10(19A) of the Act clearly provides that the annual value of any one palace which is in the occupation of a ruler would be exempt from tax.

2)The Apex Court in case of Mohammad Ali Khan v. Commissioner of Wealth-tax [1997] 92 Taxmann 52 (SC) had ruled (in the context of wealth tax Act) that if any portion of a building was let out to a tenant, it couldn't be said to be in the occupation of the Ruler. Hence, to claim exemption under Wealth Tax Act, the Ruler should have occupation over the building.

3)There is substantial similarity in the language of section 5(1)(iii) of the Wealth Tax Act and section 10(19A) of the Act on all relevant aspects, except that the word "building" has been substituted by "Palace" in the latter Act;

4)Therefore, the ratio of Mohammad Ali Khan (supra) would squarely apply to the present case. As herein also Section 10(19A) of the Act postulates exemption from income-tax on "the annual value of any one palace in the occupation of the Ruler"

5)Thus, so long as Ruler continues to occupy the palace, whether by actually utilizing it or by keeping it vacant, it shall be, for the purpose of section 10(19A) of the Act, deemed to be in his occupation. He, however, would disentitle himself to the exemption from income-tax on the annual value of such part of the palace, possession and/or control of which he has parted with in favour of the tenant.- CIT V. MAHARAO BHIM SINGH OF KOTA [2014] 45 taxmann.com 350 (Rajasthan)

Composite contract of manufacture, supply and installation of lifts in buildings amounts to works contract

Composite contract of manufacture, supply and installation of lifts in buildings (involving civil construction) amounts to works contract; however, if there are two contracts - purchase of components of lifts from a dealer and separate contract for installation, same would be 'sale' and 'labour and service' respectively. Facts:

The issue before the Supreme Court was:

Whether a contract for manufacture, supply and installation of lifts in buildings is a "contract for sale of goods" or a "works contract"?

The Supreme Court held as under:

1)Lift is not a plant which is erected at site. It is basically comprised of components like lift car, motors, ropes, rails, etc., which have their own identity even prior to installation of lift. The Lifts cannot be functional without its installation because it is a permanent fixture in a building;

2)Therefore, installation of a lift in a building could not be regarded as a transfer of a chattel or goods and it was to be deemed as composite contract;

3)Thus, composite contract which required installation of lift in a building would be deemed as 'works contract' and liable to tax accordingly.

4)However, if there was two contracts, namely, purchase of components of lift from a dealers, and separate contract for installation, they would be deemed as 'sale' and 'labour and service' respectively. - KONE ELEVATOR INDIA (P.) LTD. V. STATE OF TAMIL NADU [2014] 45 taxmann.com (SC)

Sec. 54F doesn’t stipulate approval from Municipal Corporation for construction of residential house; says ITAT

Provisions of section 54F mandate construction of a residential house within period specified, however, there is no condition that building plan of residential house should be approved by Municipal Corporation.
Facts:

a)During relevant year, the assessee earned long-term capital gain on sale of shares. He claimed deduction under section 54F in respect of construction of a new residential property.

b)The Assessing officer denied benefit under section 54F to assessee and made additions. On appeal, the CIT(A) upheld the order of AO on the ground that since there was no approval plan for new construction the assessee was not entitled to section 54F benefit.

c)The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The provisions of section 54F mandate construction of a residential house within the period specified, however, there is no condition that the building plan of the residential house should be approved by the Municipal Corporation.

2)If any person constructs a house without approval of building plan, he will be raising construction at his own risk and cost. As far as for availing of exemption under section 54F was concerned, approval of building plan was not necessary. The approved building plan, certificate of occupation, etc., are sought to substantiate the claim of new construction.

3)In the instant case, the fact that the assessee had raised new construction was evident from the interim order issued by the Municipal Corporation. It was evident that the assessee had put up a new construction in place of old residential building; thus, he was entitled to claim exemption under section 54F. – B. SIVASUBRAMANIAN V. ITO [2014] 45 taxmann.com 74 (Chennai - Trib.)

NR’s capital gains are taxable at concessional rate under Proviso to sec. 112(1); Cairn’s judgment followed

The first and second proviso to section 48 can't be said to be granting the same relief or benefit. Both provisos are neither identical nor they serve the same purpose. Hence, benefit of Proviso to section 112(1) is allowable to non-resident availing of benefit of first proviso to section 48.
Facts

a)'P', a Mauritian Company ('applicant'), purchased listed shares of an Indian company from 'I' (a US based Company).

b)The applicant sought advance ruling on the issue whether tax had to be deducted at 10% under section 195 on long-term capital gain arising to such non-resident as per proviso to section 112(1)?

The Authority held as under:

1)The observations of the High Court in case of Cairn UK Holdings Ltd. v. DIT [2013] 38 taxmann.com 179 (Delhi provided as under:

a)Proviso to section 112(1) gives an option to assessee to tax long-term capital gain at lower rate of 10% (without giving benefit of indexation as per second proviso to section 48) in case of transfer of listed securities, units or zero coupon bonds.

b)The first proviso to section 48 ensues that non-resident would be given benefit to adjust fluctuation in foreign exchange while computing capital gain.

c)The second proviso to section 48, which provides for cost inflation index, is applicable to all assessees including non-residents, if such non-residents are not covered by the first proviso.

d)The two provisos to Section 48 cannot be equated as granting same relief or benefit. They operate independently and have different purposes and objectives.

e)It is difficult to state that benefits under the first proviso and second proviso to section 48 are identical or serve the same purpose.

f)Thus, the legislative intent was to allow benefit of Proviso to section 112(1) to non-residents as well who are claiming benefit of first proviso to section 48.

2)Following the order of High Court (supra), the Mauritian Company was directed to deduct tax at source at the rate of 10% under proviso to section 112(1). - PAN-ASIA IGATE SOLUTIONS, IN RE [2014] 45 taxmann.com 322 (AAR - New Delhi)

‘Most Favoured Nation’ clause can be referred to interpret treaties and not to import ‘make available’ clause

Facts:

a)The applicant entered into a Management Service Agreement with 'S' France for various management services.

b)It was submitted that the 'make available' clause was not satisfied in the case and, hence, the services would not fall under the technical services as per the India-France Treaty.

c)Applicant stated that, although there was no 'make available' clause in the India-France Treaty, yet, pursuant to protocol signed between India and France, the restricted scope of FTS in the India-UK DTAA would be applicable.

d)Therefore, in absence of such 'make available' of the technical knowledge, experience, skill, know-how or processes, the services rendered by S would not fall under the definition of technical services.

The Authority held in favour of Revenue as under:

1)A Protocol cannot be treated as the same with the provisions contained in the treaty itself, though it may be an integral part of the Treaty.

2)Protocol to the said DTAA puts restrictions on the rates and 'make available' clause cannot be read in the items.

3)The Notification ratifying the protocol did not include anything about the 'make available' provision. Had the intention of the Protocol or the Government been to include 'make available' clause in the Tax Treaty between India and France, it would have been done so in the said Notification.

4)Protocol or Memorandum of Association can be used for interpreting provision of the Treaty. It will not be correct/proper to import words, phrases or clause, that are not available into the Treaties between two Sovereign nations, on the basis of Treaties with another countries.

5)Therefore, the payments made by the applicant for the services rendered would come under the definition of fees for technical services both under the Act and the Treaty and would be liable to tax in India.- STERIA (INDIA) LTD., IN RE [2014] 45 taxmann.com 281 (AAR - New Delhi)

Rules uploaded on MCA portal under Companies Act, 2013 won't be effective until their publication in gazette; HC

Bombay High Court questions application of Rules framed under Companies Act, 2013 from 1-4-2014, without they being notified in Gazette

The Bombay High Court held as under:
1)The website of the Ministry of Corporate Affairs3 has, on its front page, a link to a single scanned PDF file entitled "COMPANIES ACT 2013 - STATEMENT OF NOTIFICATION OF RULES".4 Some 21 rules are listed. They are all said to be effective 1st April 2014. Several of these are not yet gazette.

2)A question was raised that how any such rules can be made effective on this basis where a ministry simply puts up some scanned document under the signature of one of its officers but sans any publication in the official gazette. That publication is not an idle formality. It has a well-established legal purpose. That purpose is not and cannot be achieved in this ad-hoc manner.

3)Therefore, till such time as these rules are gazetted, or there is some provision made for the dispensation of official gazette notification, none of the rules in the Ministry of Corporate Affairs PDF document that are not yet gazetted can be said to be in force. - WADALA COMMODITIES LTD., IN RE [2014] 45 taxmann.com 245 (Bombay)

Postal ballot voting can't completely serves as substitute for actual meeting; doesn't apply to court-convened meetings

Provisions for compulsory voting by postal ballot and by electronic voting to the exclusion of an actual meeting cannot and do not apply to court-convened meetings.
Facts:

The issue before the High Court was:

Whether in view of the provisions of Section 110 of the Companies Act, 2013, a resolution for approval of amalgamation Scheme can be passed by a majority of the shareholders casting their votes by postal ballot, which includes voting by electronic means, which would eliminate need for an actual meeting?


The High Court held as under:
1)Provisions for compulsory voting by postal ballot and by electronic voting to the exclusion of an actual meeting could not and do not apply to court-convened meetings; 2)At such meetings, provision ought to be made for postal ballots and electronic voting, in addition to an actual meeting. Electronic-voting would also be made available at the venue of the meeting;

3)Any shareholder who has cast his vote by postal ballot or by electronic voting from a remote location (other than the venue of the meeting) would not be entitled to vote at the meeting. He or she might attend the meeting and participate in those proceedings. - WADALA COMMODITIES LTD., IN RE [2014] 45 taxmann.com 245 (Bombay)

Notice is required while contemplating attachment of bank a/c and not for initiating action for such attachment

No notice is required for initiating action for attaching account of tax defaulter; notice required when such act is contemplated.
Facts:
a)The assessee filed an application for stay before the assessing authority when the matter was pending before the CIT (A). The Assessing Officer did not dispose of the stay application without any explanation for nearly two years.

b)During the pendency of that application, the authorities passed an order for attachment of bank account of assessee under section 226(3) in haste without giving any prior notice.

c)The aggrieved-assessee filed the instant writ petition. One of the issues for consideration of High Court was:

Whether before taking recourse to section 226(3), the authorities should have issued a prior notice to the assessee?

The High Court held as under:

1)In Golam Momen v. Asstt. CIT [2003] 132 Taxman 826 (Cal.), it was held that mere filing of an appeal does not tantamount to stay of the recovery proceedings. Section 226(3) contemplates the notice to be issued to the assessee but it does not prescribe issuing of prior notice to assessee before taking course to the aforesaid provision.

2)The section does not postulate that before an action is set into motion, a notice is required to be served on the assessee but what is held is that if such an action is contemplated, the notice should also be served to the assessee. Therefore, the judgment rendered in the case of Golam Momen (supra) depicted the correct proposition of law. - ANIL KUMAR BANERJEE V. UNION OF INDIA [2014] 44 taxmann.com 465 (Calcutta)

No sec. 80G approval to trust created for benefit of Hindu community even if religious exp. was less than 5%

Where assessee-trust was established with objects of religious nature for benefit of a particular community, it could not be granted approval under section 80G(5) merely because expenditure incurred by trust on religious activities was less than 5 per cent of its total income.
Facts:
a)The assessee-trust moved an application before the Commissioner for approval under section 80G(5).

b)The Commissioner noticed that the dominant objects of the assessee-trust were for the benefit of Hindu Community only and were purely religious in nature. It was, therefore, opined that these objects contravened the provisions of section 80G(5). c)Accordingly, the Commissioner rejected the application of assessee-trust on the ground that assessee-trust was not established for charitable purpose. The Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue:
1)The provisions for grant of approval under section 80G(5) apply to donations to any institution or fund only if it fulfills certain conditions mentioned therein. One of the conditions prescribed by section 80G is that the assessee-trust should be established for charitable purpose only and the institution or fund is not for the benefit of any particular religious community or caste;

2)The assessee pleaded that since the expenditure incurred by it on religious activities was less than 5 per cent of the total income, it would be given benefit of section 80G(5B). However, the benefit of section 80G(5B) is provided to that trust which is established for charitable purpose only and it incurs expenditure on religious activities not exceeding 5 per cent of its total income;

3)In the instant case, the Commissioner on going through the dominant objects of the assessee-trust had specifically held that they were religious in nature and for the benefit of Hindu Community;

4)Thus, as the assessee had failed to satisfy the conditions of section 80G(5), it was not entitled to approval under the section 80G. – YUG CHETNA PARMARTH TRUST V. CIT [2014] 44 taxmann.com 446 (Agra - Trib.)

Sec. 194-I applicable if vehicle hired for employee is at his disposal; Chauffeur cost covered under sec. 194C

Hiring of vehicle and at disposal of employee shall be subject to Section 194-I. A reasonable sum towards chauffeur and fuel charges are to be deducted from composite sum and the balance amount would fall under Section 194-I.

Facts:

The issue before the Tribunal was:
Whether payment for hiring of vehicle (including chauffeur and fuel cost) for a designated person or class of persons, for a particular time, would fall under section 194C or under section 194J for the purpose of deduction of tax at source?

The Tribunal held as under:
1)Where payment was made for solitary transaction of hiring of vehicle or where a pick and drop facility was provided, it would clearly fall under Section 194C as payment was made for a specified work.

2)In this case, the arrangement was for making available cars for a designated person or class of person for a particular time, which was at the disposal of the employee.

3)As the arrangement also included services of a chauffeur and the fuel cost of transportation. The same could not by any means be considered as towards car rental.

4)Therefore, after deduction of a reasonable amount towards chauffeur and fuel charges, the balance amount would fall under section 194-I.

5)As it was a finding of fact, AO was directed to decide the case after due verification and after giving reasonable opportunity to assessee. – ITO v. Bharat Sanchar Nigam Ltd. [2014] 45 taxmann.com 124 (Mumbai - Trib.)

Subsidy provided by Govt. to theater owners in form of entertainment tax was capital receipt

Facts: a)The assessee was running a cinema hall. It had shown certain receipts, which included entertainment tax.

b)In the profit and loss account, the assessee had transferred a part of receipts to entertainment subsidy account and claimed it as exempt from tax being in the nature of capital receipts. The Assessing Officer treated said receipt as income of assessee.

c)The CIT (A), however, deleted the entire addition by treating the entertainment subsidy as a capital receipt. 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)In the instant case, it was apparent that the State Government proceeded to exempt entertainment tax for a period of 5 years payable by a "new" cinema hall; subject to the condition that commercial exhibition of films in such cinema hall was required to be started by 31-3-2000.

2)Merely because the amount was not directly meant for repaying the amount taken for construction of the cinema hall, its purpose could not be considered to be other than that of promoting construction of new cinema hall.

3)The submission that once the assessee had collected the entertainment tax and had not deposited the same with the Government, it was to be treated as revenue receipt remained devoid of substance.

4)The remission by the Government had been to the proprietor of the entertainment and not to the person admitted to the entertainment. The remission had been the methodology adopted by the State Government to provide assistance to the new cinema hall; and had been essentially in the nature of a subsidy, i.e., the assistance from the Government to the new cinema hall. Thus, the entertainment subsidy was to be treated as capital receipts. – CIT V. SAMTA CHAVIGARH [2014] 44 taxmann.com 337 (Rajasthan)

Sum paid to acquire rights of telecasting from outside India, in absence of its link with PE in India, wasn’t royalty

Sum paid to acquire rights of telecasting from outside India had no connection with the marketing activities carried out through Permanent Establishment ('PE') of assessee in India. Thus, impugned payments couldn't be deemed as royalty in view of Article 12(7) of India-Singapore DTAA.
Facts:
a)The assessee, a Singaporean company, was engaged in the business of acquiring rights in television programmes and exhibiting the same on its television channels from Singapore.
b)The issues for consideration before High Court were:
i.Whether the payment to G (a Singaporean Company)for acquisition of telecasting rights were in the nature of 'royalty' covered by Explanation 2 to section 9(1)(vi)(c)?
ii.Even if payments would be deemed as royalty, whether they would not be chargeable to tax as per Article 12(7) of India-Singapore DTAA?
The High Court held as under:
1)The appellate authorities had already held that payment was made only for broadcasting operations carried out from Singapore, which had no connection with the marketing activities carried out through alleged Permanent Establishment ('PE') of assessee in India;
2)Thus, there was no economic link between the payments. The payer was not a resident of India and the liability to pay royalty had not been incurred in connection with and was not borne out by the PE of the payer in India
3)The absence of economic link was thus the foundation on which the Tribunal's conclusions were based. Thus, the Appeal was to be dismissed as no substantial question of law was involved. – DIT (INTERNATIONAL TAXATION) V. SET SATELLITE (SINGAPORE) PTE LTD. [2014] 45 taxmann.com 100 (Bombay)

SEBI is empowered to monitor call records of any person against whom any enquiry or investigation is pending

SEBI is authorized to call for call data records from telecom service providers. However, such power can only be exercised it in respect of a person against whom an authorized officer conducts any investigation or enquiry. Facts: a)The petitioner, Indian Council of Investor, filed the instant PIL alleging violation of fundamental right of privacy by SEBI as it had intercepted and monitored calls and called for Call Data Records (CDRs) from Telecom Service providers (TSP). b)The petitioner further stated SEBI was prohibited from calling for any records such as CDRs from any TSP in view of Section 5 (2) of the Indian Telegraph Act, 1885. The SEBI denied allegation made against it on ground that it had only called for data that was already available in the records of the telecom providers. c)The respondent stated that Section 5 (2) of the Indian Telegraph Act, 1885 has no application in respect of calling for CDRs from TSP as the provision only applies to intercepting call and, or prohibiting call/messages. The High Court held as under: 1)SEBI is authorized under SEBI Act to call for CDRs from TSP. However, this power is capable of misuse and can violate a citizen's right to privacy guaranteed by Article 21 of the Constitution. 2)SEBI cannot exercise such power for conducting a fishing enquiry. It cannot be a blanket power to hunt out information without any pending inquiry or investigation. This power can only be exercised by SEBI in respect of any person against whom any investigation or enquiry is being conducted. 3)Only an officer duly authorized by SEBI can call for information about CDRs from TSP. Thus, the instant PIL was disposed of- INDIAN COUNCIL OF INVESTORS V. UNION OF INDIA [2014] 45 taxmann.com 45 (Bombay)

Assessee can’t either seek withdrawal of appeal or file revision petition when appeal is pending before CIT(A)

Where an application is filed, seeking withdrawal of appeal, but no order is passed by CIT(A), appeal will remain pending and subsequent revision petition will not be maintainable. Facts: a) Scrutiny assessment was made on assessee. Thereafter, he had filed an appeal before the CIT(A). Subsequently, the assessee sent an application by post seeking withdrawal of his appeal. The application was received by the CIT(A). Thereafter, the assessee preferred revision of assessment order stating that he had already waived of his right of appeal. b) The Commissioner allowed revision by deleting part of the addition made during assessment. When a notice was issued for hearing before the CIT(A), the assessee did not appear. He sought adjournment but the CIT (A) declined the same. The CIT(A) rejected the withdrawal application of assessee. c) Further, the CIT (A) confirmed the assessment. Subsequently, the Commissioner also passed order cancelling/revoking his earlier revisional order. The aggrieved-assessee filed the instant writ. The High Court held as under: 1) There is no provision in Income-tax Act, which permits withdrawal of an appeal, once it is filed. Once party exhausts right of appeal, and the appeal is filed before appropriate appellate authority, who after receiving the same has registered it, then there is no provision in the statute permitting withdrawal thereof; 2) Mere filing of an application seeking withdrawal of appeal would not mean a deemed withdrawn unless an order is passed by appellate authority thereon. The appeal continues to remain pending even when the assessee files the application for withdrawal of an appeal; 3) The assesseee’s appeal was pending before the CIT(A) when the revision application was filed by him or when the Commissioner passed an order on revision petition. Hence, the revisional authority was barred from revising order of assessing authority by virtue of sub-section (4) of section 264; 4) Clause (a) of section 264(4) provides for a situation where assessee has not waived of his right of appeal. When appeal was filed, the right of appeal was availed of and exhausted by assessee, hence, question of waiver of right of appeal thereafter would not arise. 5) Thus, the Commissioner had committed a manifest error in exercising revisional power when assessee's appeal was pending before the CIT (A). That being so, it had rightly been recalled. Thus, the writ petition was to be dismissed. - YOGENDRA PRASAD SANTOSH KUMAR V. CIT [2014] 44 taxmann.com 299 (Allahabad)

Courtyard of residential unit isn’t includible in built-up area to determine sec. 80-IB(10) relief, rules HC Area of courtyard appurtenant to residential unit is not to be included to compute built-up area in terms of section 80-IB(10)

The High Court held in favour of assessee as under: 1) Section 80-IB(14)(a) prescribes that in order to avail of the deduction, the built-up area of the residential unit cannot exceed 1500 square feet. In order to be treated as a 'built -up area' some construction has to be in existence in such area. 2) Unless and until it is shown that some construction is there, the area of the courtyard which is open to the sky, cannot be included to compute the built-up area. 3) The meaning of a courtyard in the Legal dictionary, inter alia, signifies a space of land around a dwelling house which might be enclosed, appurtenant to which buildings and structures may be erected; 4) Thus, area of courtyard could not be included to calculate the built-up area in terms of section 80-IB(10). The Tribunal had misconstrued the provisions of Act and the material on record to deny the benefit of deduction to the assessee in terms of section 80-IB(10). - COMMONWEALTH DEVELOPERS V. ACIT [2014] 44 taxmann.com 303 (Bombay)

ITAT raps revenue for invoking sec. 40(b) by treating only those partners as working who were entitled to salary

Facts:

a)  The assessee firm had four partners. In terms of the partnership deed, salary was being paid only to three partners. However, bonus was paid to all the four partners.

b)  The Assessing Officer opined that when only three partners were drawing salary, only they could be treated as the working partners. Hence, the Assessing Officer disallowed the bonus paid to fourth partner.

c)  The CIT(A) confirmed said disallowance.

The Tribunal held in favour of assessee as under:

1)  It was not disputed that all the four partners were actively engaged in the conduct of the business of the firm and, thus, they were the working partners. The provisions contained under section 40(b) provide that any remuneration by whatever name called, shall not be allowable if such payment is not made to a working partner. Secondly, such payment is not found to be authorized by or is not found to be in accordance with the terms of the partnership deed;

2)  In the instant case, the partnership deed authorized payment of salary to three partners whereas payment of bonus was allowed to all the four partners. Thus, all the conditions provided under section 40(b) stand fulfilled. The interpretation by the AO and the ld. CIT(A) that only those partners who were paid the salary were working partners and not the others, was a complete misreading of the provision;

3)  It was decision taken by the partners by mutual consent that out of all the four partners, salary would be payable to only three partners whereas bonus shall payable to all the four partners, in which the law does not permit interference by the revenue.

4)  The CIT (A) had wrongly interpreted section40(b)(v) while holding that the definition of 'working partners' was meant only for section 40(b)(v). The Explanation 4 below section 40(b) clearly reads that for the purpose of this clause which meat clause (b) to section 40. Thus, the disallowance under section 40(b) was to be deleted. - Id. Mohd. Nizamuddin v. ACIT [2014] 44 taxmann.com 213 (Jaipur - Trib.)

Successor Co-op. Societies can’t claim set-off losses of amalgamating societies; Sec. 72A meant for Cos. only

IT:Section 72A provides for setting off losses on amalgamation of companies only. There is no provision in the Income-tax Act, which would permit the amalgamating co-operative society to carry forward and adjust such losses against the profits of the amalgamated co-operative society.

Facts:

The instant appeal was filed before the Supreme Court on following issue:

Whether the amalgamated society could claim the set-off of losses of amalgamating co-operative societies with its profits?

The Supreme Court held in favour of revenue as under:

1)  A non-existent person cannot file an income-tax return and, therefore, cannot carry forward its losses after its existence ends. Societies, upon their amalgamation into the appellant society, had ceased to exist. Thus, those societies had no right under the provisions of the Act to file a return to get their earlier losses adjusted against the income of a different legal personality, i.e., the appellant-society.

2)  There is a specific provision in the Act that upon amalgamation of one company with another, losses of the amalgamating companies can be carried forward and the amalgamated company can get those losses set off against its profits. This is permissible by virtue of Section 72 A of the Act but there is no such provision in the case of co-operative societies.

3)  Such a provision has been made only with regard to amalgamation of companies and later on similar provisions were made with regard to banks, etc., but at the relevant time, there was no such provision, which would permit the amalgamating co-operative society to carryforward and adjust such losses against the profits of the amalgamated co-operative society.

4)  The societies and companies belong to different classes. Simply because both have a distinct legal personality, it could not be said that both ought to have been given the same treatment. In the taxation matters, one has to interpret taxation statute strictly.

5)  Simply because one class of legal entities is given some benefit which is specifically stated in the Act does not mean that the legal entities not referred to in the Act would also get the same benefit. Thus, amalgamating co-operative societies are not entitled to carry forward and set off losses against profits of the amalgamated co-operative societies.- Rajasthan R.S.S. & Ginning Mills FED. Ltd. v. Dy. CIT [2014] 45 taxmann.com 1 (SC)

Payment to seconded employees is FTS; Foreign co. is real employer if Indian co. can cancel secondment agreement only

Overseas entity was the real employer of seconded employees when Indian entity had only the right to terminate the secondment without conferring the right to terminate the original employment. Reimbursement of salary of seconded employees to the overseas entities was to be regarded as FTS when they rendered quality control services till the necessary skills were acquired by the resident employee group.

Facts:

a)  The CIOP ('petitioner'), incorporated in India, was wholly owned subsidiary of Centrica Plc. (a company incorporated in the UK).The BSTL and DEML were other subsidiaries of Centrica Plc.

b)  These overseas entities outsourced their back office support functions to third party vendors in India. To ensure that the Indian vendors complied with quality guidelines, the petitioner was established in India.

c)  Accordingly, the petitioner entered into a secondment agreement with these overseas entities, wherein employees continued to remain on the payrolls of the overseas entities. The petitioner was required to reimburse salary costs to the overseas employers.

d)  The issue which arose for the consideration in the instant case was:

Whether the secondment of employees by the overseas entities, would fall within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs?

The High Court held in favour of revenue as under:

1)  Sums paid to the overseas entities for the seconded employees could be covered by the India-Canada DTAA, when it was established that not only technical services were performed, but the enterprise made available the skills behind that service to the other party;

2)  The India-UK DTAA defines Fees for Technical Services ('FTS') as "payments of any kind of any person in consideration for therendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities had, through the seconded employees, provided technical services to the petitioner including the provision of services of personnel;

3)  The nature of the services rendered by the CIOP was in the nature of "business support services" and was covered within the fold of "technical or consultancy" services. The CIOP and seconded employees were to oversee the quality of service rendered by vendors to the overseas entities, which would fall within the scope of the technical or consultancy services.

4)  It was admitted by the petitioner that the reason for entering into the secondment agreement was to provide support for the initial years of operation, till the necessary skills were acquired by the resident employee group;

5)  All direct costs of such seconded employee's, social security plans, other benefits and costs were ultimately to be paid by the overseas entity. The petitioner was given the right to terminate the secondment only, excluding the right to terminate the original employment relationship (the services of the secondee vis-à-vis the overseas entities);

6)  The Division Bench in DIT v. E-Funds IT solutions [2014] 42 taxmann.com 50 (Delhi) highlighted that the nature of activity undertaken by the employees was determinative of whether it constituted a service. In the present case, the overseas entities outsourced their back office support functions to third party vendors in India. The seconded employees were to oversee quality control of the work of such vendors. This work could not be characterized as mere stewardship;

7)  What could have been left to the petitioner to do was, in fact, being done through the seconded employees, whose expertise and training lent quality and content to the Indian entity. Therefore, the real employer of these seconded employees continued to be the overseas entity concerned. And the payment made by the petitioner to the overseas entities was to be treated as FTS. - Centrica India Offshore (P.) Ltd. v. CIT [2014] 44 taxmann.com 300 (Delhi)