Tuesday, January 29, 2013

Commission as envisaged under Section 194H doesn’t require principal-agent relationship, ITAT rules

TDS under section 194H attracted so long as payment is in the nature of brokerage or commission; Section 194H does not require that relationship between the payer and the payee be necessarily of a principal and agent

Depreciation is not an outgoing expenditure but a statutory deduction.  Therefore, the provisions of section 40(a)(i) are not attracted on such deduction

In the instant case, the moot questions raised before the Tribunal were as follows:
1) Whether Sec. 194H can be invoked in a situation where principal-agent relationship amongst parties is missing?

2) If payment to NR is capitalized in books of accounts and depreciation thereon is being claimed by assessee, whether the depreciation can be disallowed by invoking Sec. 40(a)(ia)?

On first Issue, the Tribunal held in favour of revenue as under:

1) Section 194H talks about the payment to a recipient which is the income by way of commission or brokerage.

2) It does not require that the relationship between the payer and the payee should be of a principal and agent.

3) The Explanation to section 194 elaborates on the terms ‘commission or brokerage’ by including any payment received or receivable directly or indirectly by a person acting on behalf of another person.

4) Thus, it is clear that the provisions of section 194H do not require any formal contract of agency.

On Second issue, the Tribunal held in favour of assessee as under:

1) The deduction under section 32 is not in respect of the amount paid or payable which is subjected to TDS;

2) Depreciation is a statutory deduction on an asset which is not an outgoing expenditure.  Therefore, the provisions of section 40(a)(i) are not attracted on such deduction;

3) Therefore, where payment, which has been made without deduction of TDS, has been capitalized as part of cost of asset, depreciation in respect of such payment can’t be disallowed by invoking section 40(a)(i) - SKOL Breweries Ltd. v. ACIT [2013] 29 taxmann.com 111

Wednesday, January 16, 2013

Mere payment of advance tax isn’t sufficient to avoid additions for ‘undisclosed income’ if ROI isn’t filed by due date

On assessee's failure to file IT return by the due date under section 139, payment of advance tax per se cannot indicate his intention to disclose income so as to exclude the applicability of Chapter XIV-B provisions i.e. "Special Provisions for assessment of search cases"

In the instant case, the issue that came for consideration before the Supreme Court was as under:

“Whether payment of advance tax by an assessee would by itself tantamount to disclosure of income for the relevant assessment year and it couldn’t be treated as undisclosed income for the purpose of application of Chapter XIV-B of the Act”?

The Supreme Court held in favour of revenue as under:

1) Chapter XIV-B, find application only in the event of discovery of "undisclosed income" of an assessee. The legislature has defined "undisclosed income" without providing any definition of "disclosure" of income. The only way of disclosing income, on the part of an assessee, is through the filing of a return, as stipulated in the Act;

2) The legislature has clearly carved out two scenarios for income to be deemed as undisclosed: (i) where the income has clearly not been disclosed and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and hence, subject to the machinery provisions of Chapter XIVB;

3) If the search is conducted after the expiry of the due date for filing return (as in the instant case), payment of advance tax is irrelevant in construing the intention of the assessee to disclose income. Such a situation would find place within the first category carved out by section 158B of the Act i.e. where income has not been disclosed;

4) Payment of advance tax may be a relevant factor in construing intention to disclose income or filing return as long as the assessee continues to have the opportunity to file return of Income;

5) The disclosure of total income by the filing of a return under section 139 of the Act is mandatory even after the payment of advance tax by an assessee, since the "current income" which forms the basis of the advance tax is a mere estimation and not the final total income for the relevant assessment year liable to be assessed; and

6) On failure to file return of income by the due date under section 139 of the Act, payment of advance tax per se cannot indicate the intention of an assessee to disclose his income. As the assessee had not filed its return of income by the due date, the AO was correct in assuming that the assessee had not disclosed its total income and applied provisions of chapter XIV-B – ACIT v. A.R. Enterprises [2013] 29 taxmann.com 50 (SC)

Monday, January 7, 2013

Presumption as to validity of document wouldn’t discharge assessee’s onus to prove ‘source’ and ‘nature’ of receipt evidenced by document

In view of Sec. 292C, if any document is found during the search, such document shall be presumed to be depicting the true position. Even in that case, assessee would be under obligation to prove the ‘source’ and ‘nature’ of receipts to avoid the additions envisaged under provisions of Sec. 68, 69, etc.

In the instant case, the assessee-partnership firm was subject to survey action under section 133A of the Act. Incriminating documents were recovered from its premises. During assessment, the AO had made certain additions based on certain computer printouts. During appellate proceedings before ITAT, the assessee relied on Section 292C, which contains a statutory presumption as to truth of documents found during survey/search, and argued that addition made by AO under Sec. 69A was not justified as the document which was presumed to be true showed that the amount came from the partner and hence, it could not be treated as unexplained money under sections 68, 69A etc.

The Tribunal held in favour of revenue as under:

1) All that section 292C provides for a presumption as to the truth of any document found during search or the moneys recovered from assessee is belonging to the assessee;

2) The same does not contradict, rather compliments and supports the rule of evidence as enshrined in sections 68, 69, etc. The two, therefore, have to be read in conjunction and as complimentary, and not as disjunctive or de hors each other.

3) Sec. 68, 69A etc. casts an obligation on assessee to explain both the nature and source of the money, and not its source alone;

4) It was revealed during proceedings that the basic facts had been withheld by the assessee. Therefore, the deeming fiction of Section 69A validly applied by the Revenue in the facts and circumstances of the case as the assessee's explanation was silent as to the nature of receipts - Alliance Hotels v. ACIT [2012] 28 taxmann.com 277 (Mumbai - Trib.)

TP adjustments to be governed by SAAR as contained in sec. 92; Sec.40A(2) can’t be imported for such adjustments

Anti-avoidance provisions of Act, override all other provisions of Act; hence, disallowance made under section 40A(2) is not required to be made for TP adjustments

In the instant case, the Tribunal held as above on the basis of following reasonings:

1) The TP provisions in Chapter X are special provisions and section 92(1) thereof mandates that any income arising from an international transaction shall be computed having regard to the arm's length price (ALP);

2) Chapter X being brought in as an anti-avoidance measure to protect the tax base of the country, provisions thereof would override the other provisions of the Act, including section 40A(2); and

3) The Explanation to section 92(1) clarifies that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP, and, therefore, the disallowance should be made under section 92(1) and not under section 40A(2) - Toyota Kirloskar Motors (P.) Ltd. v. ACIT [2012] 28 taxmann.com 293 (Bangalore - Trib.)

HC held regulatory function of a State Agency an economic activity and denied it registration; BIS's verdict contradicted

As the activity of the State Seed Certification Agency assists the sale of certified seeds and is "in relation to any trade, commerce or business", its activity cannot be held to be a "charitable purpose" in terms of section 2(15).

The petitioner-assessee was registered under the State Society Registration Act to carry on the functions of the certification agency under the Seeds Act, 1966 in the Andhra Pradesh State. The petitioner used to certify the Seeds which met the minimum seeds certification standards as per the Indian Minimum Seed Certification Standards, 1988. The petitioner collected a fee for providing certification as the process of certification involved technical and scientific evaluation of the seeds, although the fee collected by it was enough to enable it to sustain its activities and did not result in much profit to it. However, CCIT rejected the approval in his case for exemption under section 10(23C)(iv).

On appeal, the High Court held in favour of revenue as under:

1) The term "advancement of any other object of general public utility" used in Section 2(15) of the Act includes all objects to promote the welfare of the public, particularly when the object is to promote or protect the interest of a particular trade or industry;

2) The activity of the petitioner would fall within "advancement of any other object of general public utility" but in view of the fact that certification of seeds by the petitioner facilitated trade, commerce or business in the certified seeds by the client of the petitioner, the proviso to section 2(15) would come into operation; and

3) The petitioner's activity assisted the sale of certified seeds and was "in relation to any trade, commerce or business", therefore, its activity couldn’t be regarded as "charitable purpose".

In view of the above, the rejection by CCIT of the petitioner’s application for approval under section 10(23C)(iv) was upheld - Andhra Pradesh State Seed Certification Agency v. CCIT [2012] 28 taxmann.com 288 (Andhra Pradesh)

Editor’s Note – In a recent ruling of Bureau of Indian Standards vs. DGIT(E) [2012] 27 taxmann.com 127 (DELHI), the Delhi High Court held otherwise - that performing any regulatory function can’t be enfolded within the proviso to Section 2(15) to construe it as service ‘in relation to trade, commerce or business’ so as to exclude it from the scope of "charitable purpose". The ruling in Bureau of Indian Standards (Supra) has not been considered in the instant case.