Thursday, October 29, 2015

Set-off of losses allowed despite change in shareholding if control over Co. remains unchanged

a)  Assessee-company (‘APSL’) was wholly owned subsidiary of AMCO Batteries Limited (‘ABL’).
b)  ABL transferred 45% and 49% of its shareholding to its subsidiary company (‘APIL’) and Tractors and Farm Equipments Limited (‘TAFE’), respectively.
c)  Consequently, ABL retained only 6% shares and 45% of shares held by its subsidiary, APIL. The remaining 49% shares were with TAFE.
d)  As shareholding of the ABL in APSL reduced to 6% in the relevant assessment year, meaning thereby, it was left with less than 51% shares. Thus, AO did not allow APSL to carry forward and set-off the business losses of that year as per section 79 of the Income-tax Act (‘Act’).
e)  On appeal, CIT(A) confirmed the order of AO. However, on further appeal, the Tribunal sets aside the order of AO.
f)  Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.
The High Court held in favour of assessee as under-
1)  Section 79 provides that where there is a change in shareholding of a Company, no losses (incurred in any year prior to the previous year) shall be carried forward and set-off against the income of the previous year, unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.
2)  The expression ''not less than 51% of voting power..."used in Section 79 indicates that only voting power is relevant and not the shareholding pattern.
3)  In the instant case, despite the transfer of shares, the holding-company (ABL) still holds effective control over the assessee-company (ABSL) as it holds 51% of shareholding along with its subsidiary (APIL).

4)  Section 79 was introduced to prevent misuse of carry forward of losses by the new owner. But, in the instant case, effective control over the assessee-company (APSL) remained unchanged even after the change in shareholding. Therefore, losses could be carry forward and set-off- CIT v. AMCO Power Systems Ltd. [2015] 62 350 (Karnataka)

Wednesday, October 28, 2015

Excess money refunded on cancellation of booking of flats couldn't be held as interest for purpose of sec. 194A TDS

Builder could not be held liable to deduct tax on excess amount refunded to purchasers on cancellation of booking of apartments as such excess payment could not be qualify as interest as defined under section 2(28A)
a)  Assessee-Builder entered into construction agreements with various customers.
b)  After entering into the agreements and making certain payments, some purchasers opted out of the agreement and, accordingly, assessee entered into fresh agreements with new buyers at prices that were higher than what was agreed with the old purchasers.
c)  Out of the receipts from the new buyers, the assessee refunded to the old purchasers the amount paid by them and a portion of the excess amount received from the new buyers.
d)  The Assessing Officer (AO) held that the excess amount so paid by the assessee to old purchasers had to be treated as interest paid on deposit and, hence, liable for TDS under section 194A and that having failed to do so, assessee was an assessee-in-default and, accordingly, assessment was completed under section201.
e)  The order of AO was set aside by the first appellate authority. However, the said order was reversed by the Tribunal.
f)  Aggrieved by the order of the tribunal, assessee filed the instant appeal before the High Court.
The High Court held in favour of assessee as under-
1)  Section 2(28A) which defines ‘interest’ can be attracted only in cases where there is debtor-creditor relationship and payments are made in discharge of a pre-existing obligation.
2)  The amount refunded to the purchasers represented the consideration the purchasers paid towards the undivided shares in the property agreed to be purchased and also the cost of construction of the apartment, which work was entrusted to the assessee-builder.
3)  Such a relationship between assessee and purchasers could not spell out a debtor-creditor relationship nor was the payment made by the assessee to the purchaser in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A).
4)  Further, there was no finding in the assessment order or in the order of the Tribunal that the amount paid by the purchasers, which was refunded, was accounted for as deposit or advance received from them or that there was any debtor-creditor relationship between the parties, obliging the assessee to pay the amount to the purchasers.
5)  There was also no case for the revenue that the excess amount paid by the assessee was based on any agreement between them or that it was quantified at rates that were already agreed between the parties.

6)  In such circumstances, the payments made would not qualify to be interest as defined in section 2(28A) of the Act and the assessee did not have the obligation to deduct tax at source as provided under section 194A nor could they be proceeded against under section 201A, treating them as assessee-in-default- Beacon Projects (P.) Ltd. v. CIT [2015] 62 177 (Kerala)

Tuesday, October 27, 2015

ICAI withdraws 5 Guidance Notes on various Accounting Aspects

The Institute of Chartered Accountants of India has decided to withdraw 5 Guidance Notes on different accounting aspects. The list of the Guidance notes which have been withdraws are as follows:-

1.  Guidance Note on Accounting for Depreciation in Companies.

2.  Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets.

3.  Guidance Note on Some Important Issues Arising from the Amendments to Schedule XIV to the Companies Act, 1956.

4.  Guidance Note on Remuneration Paid to Key Managerial Personnel - Whether a Related Party Transaction.

5.  Guidance Note on Applicability of Accounting Standard (AS) 20, Earning Per Share.

These Guidance notes have been withdrawn because the guidance provides in these guidance notes have been addressed by changes made in the Companies Act, 2013.

CBDT extends due date for filing of return and tax audit report up to 31-10-2015 in all States

Pursuant to the order of High Courts of Gujarat and Punjab & Haryana, the CBDT vide order No. 225/207/2015/ITA.II dated September 30, 2015, extended the due date for filing of return only for the taxpayers in the State of Gujarat, Punjab, Haryana and Chandigarh.

Thereafter, Bombay and Orissa High Courts also directed the CBDT to extend the due date up to October 31, 2015. Thus, to avoid discrimination with taxpayers residing in other states, CBDT decides to extend the due date up to 31-10-2015 for all tax payers across the Country for filing of return and tax audit report.

Activity of distribution of lottery isn't liable to service-tax, rules Sikkim High Court

Service Tax: Activity of buying and selling of lottery is not service. Department cannot demand service tax on said activity on basis of Rule 6(7C) of Service Tax Rules since it is an optional scheme of payment of tax and does not create a charge of service tax.


1)  Assessee was engaged in business of sale of paper and online lottery tickets organized by Government of Sikkim.

2)  Section 65B(44) defines service. It excludes transaction in money or actionable claim. An Explanation was inserted vide Finance Act, 2015 to restrict the meaning of transaction in money or actionable claim. Explanation excluded, from purview of transaction in money or actionable claim, activity carried out by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind.

3)  Section 66D provides negative list of services. Any service listed under Section 66D is outside the ambit of service tax net. An Explanation was inserted in Section 66D to exclude aforesaid activity from purview of negative list of services.

4)   The effect of aforesaid amendments was: said activities in relation to lottery became subjected to service tax. Department demanded service tax from assessee on the basis of aforesaid amendments.

5)  The assessee challenged said levy of service tax.

The High Court held in favour of assessee as under:

a)  Section 65B(44) defines service. Principal requirements of said provision is that the activity should be carried out by a person for another and that such activity should be for a consideration. Activity of assessee did not establish the relationship of principal and agent but rather that of a buyer and a seller on principal to principal basis. Nature of transaction being bulk purchase of the lottery tickets by the assessee from the State Government on full payment of price as a natural business transaction. There is no privity of contract between State and assessee. It was held in an earlier case of assessee and this position is not changed even after Finance Act, 2015.

b)   Department demanded service tax on the strength of Rule 6(7C) the Service Tax Rules, 1994. In earlier case of assessee it was held that Rule 6(7C) only provides an optional composition scheme for payment of service tax which by itself does not create a charge of service tax. This Rule is only a piece of subordinate legislation framed under the rule making power provided in the Finance Act, 1994 and, therefore, in view of the position of law that Subordinate Legislation cannot be override the statutory provisions, Rule 6(7C) cannot go beyond the provision of the Finance Act, 1994. This provision has not changed even now.

c)  Assessee in buying and selling the lottery tickets was not rendering service to the State and, therefore, their activity does not fall within the meaning of 'service' as provided under Section 65B(44) and, therefore, outside the purview of impugned Explanation as well.

d)  Hence levy of service tax on activities carried out by assessee is invalid. - Future Gaming & Hotel Services (P.) Ltd. v. Union of India [2015] 62 238 (SIKKIM)

ITAT refused to invoke LOB clause of India-UAE treaty as shipping Co. wasn’t a conduit Co. in UAE

Shipping company in UAE could not be said to have been created for the purpose of availing India-UAE tax treaty benefits on the ground that such company was owned by shareholders in Switzerland when treaty protection in respect of income of such a nature was anyway available under India-Swiss tax treaty
a)  The Assessing officer denied benefit of India-UAE DTAA to shipping company by invoking Limitation of Benefit ('LOB') clause of DTAA.
b)  The AO had given two reasons for invoking LOB clause – First, that vessel is owned by an entity based in Marshall Island which has no tax treaty with India; and – Second, that the assessee company is owned by shareholders in Switzerland and if the assessee company were to carry on business directly, the treaty protection would not have been available.
A.  On first ground
1)    Though the merchant vessel was owned by a Marshall Island based entity and it was given to the assessee under long-term time charter arrangement but ownership of vessel is not a sine qua non for availing treaty protection of shipping income under Article 8.
2)    Article 29 of DTAA can be pressed into the service only when main purpose, or one of the main purposes of the creation of an entity was to obtain benefits of DTAA which would otherwise not be available but then since nothing really turns on the situs of ownership of the ships so far as treaty benefits, are concerned, the fact of the ships being owned by an entity in Marshall Island is wholly irrelevant for invoking Article 29.
B.  On second ground
1)    Coming to the second ground on which the AO had invoked Article 29, it has been stated that the income from operations of ships of the Switzerland based entities in international traffic is not covered by Article 8 of India-Swiss DTAA and therefore, if the shareholders, which wholly own capital of the assessee-company, were to carry on business directly, the treaty protection would not have been available.
2)    Whether a Swiss tax resident earns Indian sourced income from operations of ships in international traffic or whether a UAE tax resident earns Indian sourced income from operations of ships in international traffic, the income is not taxable in India – in the former case because of provisions of Article 22(1) of India-Swiss tax treaty, and in the later case of because of provisions of Article 8 of India-UAE tax treaty.

3)    When treaty protection in respect of income of such a nature was anyway available, though under a different kind of provision of the India-Swiss tax treaty, the assessee entity could not be said to have been created for the purpose of availing India-UAE tax treaty benefits. The action of the AO in invoking the provisions of Article 29 was vitiated in law on this count- ITO v. MUR Shipping DMC Co., UAE [2015] 62 319 (Rajkot - Trib.)

Friday, October 23, 2015

Sec. 54F: Mother can’t be deemed as owner of house purchased by minor-daughter out of her own income


a)   Assessee had sold a capital asset and invested a part of sales consideration in a new residential house so as to claim exemption under section 54F.

b)  She owned more than one residential house on date of transfer of original asset. However, one residential house was owned by her minor daughter.

c)   Commissioner denied Section 54F exemption on the ground that assessee would be deemed as owner of house owned by her minor daughters. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  By virtue of fiction created by Section 64(1A), the incomes of properties owned by the two minor daughters were clubbed in the hands of the assessee since the date of purchase of the said properties.

2)  The investment for purchase of said properties has come from the independent sources of these daughters, which has been accepted by the department.

3)  Simply by virtue of inclusion of rental income of minor daughters under Section 64(1A) in the income of assessee, it could not be presumed that the assessee was owner of property purchased by minor daughters. Thus, the findings of the learned CIT were factually incorrect and legally unsustainable. Hence, assessee would be eligible for exemption under Section 54F. - SMT. S. UMA DEVI v. COMMISSIONER OF INCOME-TAX [2015] 62 64(Hyderabad - Trib.)

Tuesday, October 20, 2015

LOB clause of Indo-Singapore DTAA won't apply if income of Singaporean Shipping Co. is remitted in UK

a)  Assessee (a Singaporean Shipping Company) claimed benefit of India-Singapore DTAA in respect of freight charges remitted to it by its Indian agent.
b)  AO denied to grant benefit of DTAA by invoking Limitation of benefit (LOB) clause of India-Singapore DTAA (Article 24) on ground that remittance was made by the Indian agent in UK and not in Singapore.
c)  Aggrieved by the order of AO, assessee filed an unsuccessful appeal before CIT(A). The contention of the assessee was that benefit of DTAA should be granted as it was a tax resident of Singapore and income from shipping activities is also taxable in Singapore as per Article 8 of India-Singapore DTAA.
d)  Aggrieved by the order of CIT(A) the assessee filed the instant appeal before the Tribunal
The Tribunal held in favour of assessee as under-
1)  Article 24 of India-Singapore DTAA lays down twin conditions - Firstly income should be exempt from tax in source state or is subject to low tax and, secondly said income is taxable in Singapore on receipt basis though remitted outside Singapore. But in the instant case, income of assessee was taxable on accrual basis and not on receipt basis in Singapore and his global income (including freight remitted by Indian Agent) was taxable only in Singapore as it was a tax resident of that country.
2)  Hence, benefit of India- Singapore DTAA can’t be denied and income from shipping activities shall be taxable only in Singapore even if such income is remitted outside Singapore. - Alabra Shipping Pte Ltd. v.  ITO [2015] 62 185 (Rajkot - Trib.)

Monday, October 19, 2015

Foreign tax credit would be allowed even if income is exempt in India; Credit of states taxes is also allowed

The Karnataka High Court allowed credit of taxes paid outside India (which includes states taxes) in respect of an income which is exempt in India by virtue of Section 10A
a)  The assessee (‘Wipro Limited’) paid tax in foreign countries in respect of profit attributable to its permanent establishment (PE) situated outside India.
b)  Being an Indian company, assessee was liable to pay tax in India on its worldwide income including the profits attributable to its Permanent Establishments and, accordingly, it claimed relief under Section 90 in respect of taxes paid outside India.
c)  The assessee also made a claim for tax relief against the State Taxes paid in USA and Canada.
d)  AO disallowed assessee’s claim of foreign tax credit on the ground that the income in respect of which claim was made do not form part of total income as per Section 10A.
e)  AO also rejected assessee’s claim for tax relief against the State Taxes paid in USA and Canada. The contention of the AO was that DTAA with USA and Canada allows credit of the taxes paid under the Income Tax Act in India and Federal tax in USA and Canada. Therefore, the claim for relief for the State Taxes paid was not admissible under respective DTAA.
f)  On appeal, CIT(A) set aside the order of AO. However, on further appeal by revenue before the tribunal, the tribunal confirmed the order of AO.
g)  Aggrieved by the order of tribunal, assessee filed the instant appeal before the High Court.
The High Court held in favour of assessee as under-
1)  Section 90(1)(a)(ii) provides relief from double taxation where the income of the assessee is chargeable under the income-tax Act as well as in the corresponding law in force in the foreign country. Hence, as per section 90(1)(a)(ii), what is important is that income should be chargeable to tax in either country and not subjected to tax.
2)  Income under Section 10A is chargeable to tax under Section 4 and is includible in the total income under Section 5, but no tax is charged on such income because of the exemption given under Section 10A. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax.
3)  Therefore, assessee would be entitled to take credit of income tax paid in a country outside India in relation to income eligible for deduction under section 10A.
4)  As far as issue related to credit of states taxes is concerned, section 91 provides relief from double taxation where no agreement relating to avoidance of double taxation exist with a foreign country.
5)  Explanation (iv) to Section 91 defines the expression income tax in relation to any country to include any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.
6)  The intention of the Parliament is very clear. The Income tax in relation to any country includes income tax paid not only to the Federal Government of that Country, but also any income tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter payment also.
7)  Therefore, even though, India has not entered into any agreement with the State of a Country, the income tax paid in relation to that State is also eligible for tax credit.

8)  Hence, the argument that in the absence of an agreement between India and the State, the benefit of Section 90 is not available to the assessee is ex-facie illegal and requires to be set aside- Wipro Ltd. v. DCIT [2015] 62 26 (Karnataka)