Wednesday, August 28, 2013

Gift received by assessee on the occasion of his daughter’s marriage isn’t exempt from tax

Gift received by assessee on occasion of his daughter's marriage won't be exempt as the word individual appearing in proviso to sub-clause (vi) of sec. 56(2) relates to marriage of assessee and not of his daughter

The High Court held as under:

1) Proviso to sec. 56(2)(vi) provides that gift received on the occasion of the marriage of an individual would be exempt from tax. There is no ambiguity in such proviso;

2) The expression "individual" appearing in proviso (b) to section 56(2)(vi) of the Act, is preceded by the word "marriage" and, therefore, relates to the marriage of the individual concerned, i.e., the assessee and not to the marriage of any other person related to him in whatsoever degree, whether as his daughter or son;

3) The expression "marriage of the individual" is unambiguous in its intent and does not admit of an interpretation, that it would include an amount received on the marriage of a daughter;

4) If the Legislature had intended that gifts received on the occasion of marriage of the assessee's children would be exempted, nothing would prevent the Legislature from adding the words "or his children", after the words "marriage of the individual";

5) Thus, in view of unambiguous legislative intent appearing in the proviso, the addition made to the appellant's income on account of gifts received on the occasion of his daughter's marriage was to be affirmed - Rajinder Mohan Lal v. Dy.CIT [2013] 36 250 (Punjab & Haryana)

‘Tax avoidance’ arrangement is legitimate if it’s within four corners of law, says HC

Where arrangement of assessee to avoid payment of tax did not contravene any statutory provision and was achieved within four corners of law, it couldn’t be found fault with

In the instant case the assessee was holding shares in BFSL, which had purchased 15 acres of land from assessee. The assessee sold its shareholding in BFSL for a certain consideration to DLF through Stock Exchange after paying STT and claimed exemption from gain on sale of shares under section 10(38). The AO held that sale of shares by assessee was a colourable device and that virtually the immovable property had been transferred to DLF and assessee was liable to tax on short-term capital gain on sale of immovable property. Further, the CIT (A) and the Tribunal upheld the order of the AO.

The High Court held in favour of assessee as under:

1) Every taxpayer is entitled to arrange his affairs so that his taxes would be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. If the taxpayer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other will not, he would at liberty to choose the latter one and would do so effectively in the absence of any specific tax avoidance provision;

2) If BFSL had sold the property by executing a registered sale deed and received the sale consideration, then it ought to have paid capital gains on the said consideration. All the authorities were carried away by this aspect of the matter and because the Department was deprived of the tax, they had come to the conclusion that it was a colourable device and tax planning to avoid payment of taxes;

3) The assessee by resorting to such tax planning had taken advantage of the benefit of the loopholes in the law, which had endured to his benefit. After seeing how this loophole had been exploited within four corners of the law, it was open to the Parliament to amend the law plugging the loopholes;

4) However, by any judicial interpretation one couldn’t read into the section, which was not intended to by the Parliament at the time of enacting this provision. If the shareholder chose to transfer the land to the purchaser of the shares, it would be a legal transaction, in law, and merely because it was able to avoid payment of tax, it couldn’t be said to be a colourable device or a share transaction;

5) The finding of the assessing authority that it was a transfer of immovable property was contrary to law and material on record.

Unfortunately, three authorities committed the very same mistake which was illegal, contrary to settled legal position and, therefore, required to be set aside - Bhoruka Engineering Inds. Ltd. v. Dy.CIT [2013] 36 82 (Karnataka)

No deduction of tax from medical allowances paid to employees along with salary before incurring of such exp

Employer was not at fault for not deducting tax at source from medical allowances paid to its employees before incurring of actual medical expenditure. It couldn’t be deemed to be in default for non-deduction of tax on medical reimbursements if it has made bona fide estimate of taxable salary of its employees

In the instant case the payments made by assessee to its employees every month included a component towards medical expenditure. The AO treated assessee as an ‘assessee-in-default’ for not deducting tax at source from medical reimbursements upto Rs. 15,000 paid to the employees. In this regard, AO held that the payment of medical expenditure had not to precede the actual incurring of the expenses and it should be only by way of reimbursement. On assessee’s appeal, the CIT(A) quashed the order of the AO Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The exemption in respect of medical expenditure was to be restricted to expenditure actually incurred by the employees, or Rs. 15,000 whichever was lower. The exemption was to be granted even if the payment preceded the incurrence of expenditure;

2) Though the allowance paid by the assessee to the employees would not form part of taxable salary of an employee, yet if the employer was required to deduct tax at source treating it as part of salary, then that would be contrary to the provisions of Sec.192(3) of the Act;

3) The liability of the person deducting tax at source couldn’t be greater than the liability of the person on whose behalf tax at source was deducted. No tax could be recovered from the employer on account of short deduction of tax at source under section 192 if a bona fide estimate of salary taxable in the hands of the employee was made by the employer. Thus, the order passed by the AO was rightly quashed by the CIT(A) – ACIT v. SAP Labs India (P.) Ltd. [2013] 36 200 (Bangalore - Trib.)

Friday, August 23, 2013

AO is supposed to be mentor of assessee; should provide correct advice to assessee if wrong claim is made in return

Where due to ignorance wrong section had been mentioned by assessee in return, AO was required to advise assessee about correct claim and assess tax legitimately
In the instant case the assessee had invested sale consideration from sale of shop in construction of residential house and claimed exemption of capital gains. The AO didn’t consider the claim of the assessee on ground that the assessee had mentioned the wrong sections while claiming the exemption. On appeal, the CIT (A) upheld the order of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) Claim of the assessee was fortified by the assessment order itself, wherein it had been mentioned that exemption was claimed by assessee by mentioning a wrong section. Further, the CIT (A) had acknowledged this fact;

2) Even if a wrong section was mentioned by the assessee in the return, it was the duty of the AO to assist the taxpayer in a reasonable way and provide the relief if due to the assessee. This attitude rather would help the revenue in assessing the income correctly;

3) A correct advice by the department would inspire the confidence of public at large. Even identical guidelines or instructions have been issued from time-to-time by the CBDT to its Officers;

4) If due to ignorance a wrong section had been mentioned by the assessee, AO ought to have advised the assessee about the correct claim and assessed the tax legitimately. This was the clear intention of the Legislature;

5) Thus, matter was remanded to the AO to examine the claim of the assessee afresh under provisions of section 54F after providing due opportunity of being heard to the assessee - Paramjeet Singh Chhabra v. ITO [2013] 35 612 (Indore - Trib.)

No penalty on payer for non-quoting of PAN in TDS certificates as it was payee’s duty to intimate his PAN

No penalty on deductor of TDS for non-mention of payee’s PAN in Form 16A if payee didn’t intimate his PAN to deductor

The High Court held as under:

Deductor couldn’t be penalized for non-mentioning of PAN in TDS certificates issued to payee in Form 16A if payee hadn’t furnished his PAN to deductor as required by section 139A(5A). Penalty couldn’t be imposed on assessee under sec. 272B(1) for non-mentioning of PANs of payees in Form 16A issued to them as there was nothing on record to show that contractors (payees) to whom certain sums were paid by assessee after deducting TDS had intimated their PANs to assessee. Default by payees in furnishing their PANs to assessee would be a "sufficient cause" for non-imposition of penalty under section 272B(1) – CIT v. Gail (India) Ltd. [2013] 36 336 (Allahabad)

Thursday, August 22, 2013

Service tax on restaurants and hotel accommodations is unconstitutional; HC sets aside levy of ST

Levy of service tax on service forming part of supply of goods in a restaurant, as well as short-term accommodation services in hotels, inns, etc. is unconstitutional

In the instant case the assessee challenged the levy of service tax on AC restaurants licensed to serve alcoholic beverages and short-term accommodation provided by hotel, inn,  guest house, club or camp-site under sections 65(105)(zzzzv) and 65(105)(zzzzw)] as unconstitutional.

The High Court held the impugned levy as unconstitutional with the following observations:

1) Article 366(29A)(f) empowers State Governments to impose tax on supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink, intoxicating or not. Incidence of sales-tax is on supply of any goods by way of or as part of any service;

2) When food is supplied or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale and there cannot be a different component of service which could be charged to service tax by Central Government;

3) In view of judgment in K. Damodarasamy Naidu & Bros. v. State of Tamil Nadu [2000] 1 SCC 521, it held that service formed part of sale of goods and State Government alone had legislative competence to enact law imposing a tax on service element forming part of sale of goods as well;

4) In view of judgment in Godfrey Philips India Ltd. v. State of U.P [2005] 2 SCC 215, it held that luxuries were activities of enjoyment or indulgences which were costly or generally recognised as being beyond necessary requirements of an average member of society;

5) Service tax imposed on services provided in a hotel and other similar establishments, which fall within extended meaning of word "luxuries", trenches upon legislative function of State under Entry 62 of List II;

6) Hence , sub-clauses (zzzzv) and (zzzzw) to clause 105 of section 65 of the Finance Act, 1994 as amended by the Finance Act, 2011 were beyond the legislative competence of the Parliament as the sub-clauses were covered by Entry 54 and Entry 62 of List II of the Seventh Schedule - Kerala Classified Hotels & Resorts Association v. Union of India [2013] 35 568 (Kerala)

Friday, August 16, 2013

Work carried out on lump sum basis as a contractor doesn't mean rendition of 'Manpower Supply Services'

Work carried out on lump sum basis as a contractor, does not, prima facie, amount to Manpower Supply Services and is not chargeable to service tax under that service

In the instant case the assessee, a sugar co-operative society of farmers, was buying sugarcane grown by farmers. It had appointed labour for cutting of sugarcane crops, then loading of same into the trailer, unloading and for putting them into its sugar factory. The assessee was paying price for purchase of sugarcane after deducting Rs. 300 per MT for work done by it .Department viewed  that Rs. 300 per MT was sum towards manpower supply services provided by the assessee to farmers and demanded service tax thereon.

The Tribunal held as under:

1) Invoices raised by assessee showed that assessee was charging lump sum amount of Rs. 300/- per metric tonne for help provided by it for cutting, loading and unloading of sugarcane from fields of farmers;

2) In view of decision in K. Damodarareddy v. CCE [2010] 25 STT 69 (Bang.-Cestat) and in Ritesh Enterprises v. CCE [2010] 24 STT 283 (Bang-Cestat), prima facie, such work carried out on lump sum basis could not be categorized as 'manpower supply services' - Shri Bileshwar Khand Udyog Sahakari Mandali Ltd. v. Commissioner of Central Excise [2013] 36 8 (Ahmedabad - CESTAT)

Monday, August 12, 2013

Transaction at uniform global price can’t be assumed to be at ALP unless comparability analysis is done

Purchase transactions could not be held to be at arm’s length where no comparability analysis was done, simply because AE supplied products globally at listed price.

The assessee, a wholly owned subsidiary of 'K', Netherlands, had international transactions with its Associated Enterprises (‘AEs’). In its TP report, assessee applied RPM. However, it did not provide the working or basis of its benchmarking of arm’s length price and claimed the transactions to be at ALP. TPO rejected assessee’s claim and made upward adjustment. The CIT(A) confirmed the order of TPO.

ITAT remanded the matter with following observations:

1) The fact that the AE supplied the products at listed price worldwide could not justify the assessee’s stand because no analysis had been done on the supplies made by the AE to the other countries;

2) If any comparability analysis would have been carried out in case of other parties to whom the AE had supplied the same material, then such a plea of the assessee could have been accepted;

3) The foundation of the TP mechanism is to determine the most appropriate ALP by following any of the prescribed method. The initial burden is on the assessee to demonstrate as to which appropriate method should be followed for carrying out comparability analysis of controlled transactions with the uncontrolled transactions for benchmarking its transaction and justifying that it is at ALP;

4) Therefore, the entire issue needed to be restored back to the file of the TPO for de novo adjudication after taking into consideration what should be the most appropriate method (that is, whether RPM or CUP method), and the onus would be on the assessee to demonstrate as to why CUP method had to be followed and what would be the comparables based on which comparability analysis could be done - Kodak Polychrome Graphics (I) (P.) Ltd. v. ACIT [2013] 36 42 (Mumbai - Trib.)

No registration for a trust seeking employment for students in lieu of subscription fees

Activities of assessee-trust, of charging fees for providing employment opportunities to students of a college, were not charitable in nature
In the instant case the assessee-trust filed the application seeking registration under section 12A. The CIT rejected its application for grant of registration under section 12A on ground that trust was created to provide opportunities for students of a college (Delhi School of Economics) to seek employment; it was charging fees for the same and it was also charging subscription fees from companies who were providing employment to the enrolled students. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) The activities of trust were focused on education of the college students. After completion of their courses, the trust provides opportunity to these students to interact with corporate and non-corporate houses approaching the college;

2) The public at large was neither eligible to become a member of the trust nor was provided any benefit by the trust, as all its activities were for the enrolled members;

Moreover, its activities couldn’t be in any manner be classified as being charitable in nature. Apart from administrative heads of expenditure, no other expenses were shown to have been incurred on any charitable activity;

4) As per the documents submitted by the assessee it couldn’t be held that the assessee's activities were charitable in nature. Therefore, the order of CIT was to be upheld - DSE-Economics Placement Cell v. DIT (Exemptions) [2013] 35 459 (Delhi - Trib.)

Thursday, August 8, 2013

Sum incurred to defend directors arrested for narcotics offence was not an allowable business exp.

Expenditure incurred on professional fees to defend directors of assessee-company who were arrested for narcotics offence couldn’t be allowed being squarely covered within the meaning of Explanation to section 37(1)

In the instant case the assessee was engaged in the business of import of timber and heavy metal scrap. On a specific information, a container destined to be delivered to the assessee was intercepted in mid sea by the officers of Norcotics Control Bureau (NCB). Thereafter, the directors of the assessee-company were arrested by NCB. The assessee claimed the deduction of legal expenses incurred to defend the directors of the company in that case. During assessment, the AO disallowed the deduction towards such expenditure on the ground that it was incurred for the purpose of an offence prohibited by law. The CIT (A) upheld the order of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1) A bare perusal of the Explanation to section 37(1) (‘the Explanation’) indicates that incurring of any expenditure for a purpose which is an offence or prohibited by law cannot be allowed as deduction. As no final order on conviction or acquittal of directors was passed till relevant time, it showed that the charge was still continuing, which was otherwise an offence under the Narcotics Drugs and Psychotropic Substances Act, 1985;

2) There could be no reason to allow deduction towards such an expenditure which had been incurred for the purpose of an offence prohibited by law and which was squarely covered within the meaning of the Explanation;

3) The next ground of the assessee, about there being no nexus between the legal fees paid and breach of law, was not sustainable. Mandate of the Explanation is crystal clear that any expenditure incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction;

4) It does not make any difference whether expenditure was direct or indirect. So long as nexus of the expenditure with the offence was established, it would continue to be hit by the Explanation to section 37(1). Thus, there was no infirmity in the impugned order passed by CIT(A) - OPM International (P.) Ltd. v. Dy.CIT [2013] 35 480 (Mumbai - Trib.)

A registered society is a ‘person’ defined under section 2(31); capable to exercise all rights of a natural person

Primary co-operative credit society which is registered under Co-operative Societies Act, must be treated as juristic person capable of exercising all rights of a natural person

In the instant case the appellants were Primary Co-operative Credit Societies registered under the Kerala Co-operative Societies Act. Notices were issued to the appellants under section 142 for submitting returns. The appellants challenged said notices contending that they were not persons as contemplated under section 142(1). The Single Judge took the view that a combined reading of section 142(1) and section 2(31) would show that co-operative societies like the appellants were also 'persons' as defined in the Act and it could not be held that the notices issued were without jurisdiction.

The High Court held as under:

A perusal of the definition of the word 'person' showed that it included within its sweep all juridical persons. Appellants were cooperative societies. Indisputably they were registered under the Co-operative Societies Act. On a reading of section 9 of the Kerala Co-operative Societies Act it showed that the appellants were co-operative societies which had been registered and which were to be treated as body Corporates vide section 9 of the Kerala Co-operative Societies Act. Under section 2(31) a person comprehends juristic entity. Having regard to the fact that appellants were registered under the Co-operative Societies Act, the appellants had to be treated as body corporate and, therefore, juristic persons capable of exercising all the rights of natural persons as provided in the Act - Mangalam Service Co-operative Bank Ltd. V. ITO [2013] 35 381 (Kerala)

Assessee can’t claim status of a ‘trust’ if its parental body doesn’t surrender its status of mutual club

Where assessee-trust was an extension of mutual club, status of mutuality having transgressed to assessee, it could not be held to be a Charitable Institution and, accordingly, it could not be granted approval under sub-section (5) of section 80G

In the instant case the assessee was registered under section 12AA as a charitable trust. It was also granted recognition under section 80G for a period. The Director of Income-tax (Exemption) refused to give it approval under section 80G for further period on the ground that the assessee had not carried out any charitable activities for previous three financial years.

The Tribunal held as under:

1) The trust was an extension of the Mutual Club of Masons. The status of mutuality reflected on the assessee trust also. Therefore, it couldn’t claim the status of a charitable institution;

2) As the mother body (i.e., Club of Masons) was not surrendering its status of mutuality, it was not possible to treat the assessee-trust as an independent charitable institution. If it was so treated, one would be encouraging violation of law by permitting the mother body to go beyond the perimeter of mutuality through the medium of a trust;

3) Therefore, even though the assessee was registered under the law relating to trust, yet it couldn’t be construed as a charitable institution for the purpose of the Income-tax Act. Consequently, the application put up by the assessee under section 80G couldn’t be entertained - Lodge of Universal Charity 273 EC Charitable Trust v. DIT (Exemptions) [2013] 35 429 (Chennai - Trib.)

Section 54F exemption to be allowed on investment even if transaction hasn’t been completed within stipulated time

Assessee would be entitled to benefit under section 54F if he had invested amount of capital gain in purchasing or constructing a residential house, even though transaction was not completed within stipulated period

In the instant case the assessee had sold certain property and claimed exemption from capital gains under section 54F by stating that he had invested the amount in purchase of land and construction of house property. During the assessment, the AO noted that the period of 3 years from the date of sale of that property had expired and that the assessee had neither purchased any residential house nor had completed construction of any residential house as stipulated in section 54F, therefore, assessee was not eligible for deduction under section 54F. The CIT (A) confirmed the action of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1) Provisions contained in section 54F being a beneficial provisions, have to be construed liberally. In various judicial precedents it has been held that the condition precedent for claiming benefit under section 54F is only that the capital gain realized from the sale of capital asset should be invested by assessee either in purchasing or constructing a residential house within the stipulated period;

2) If the assessee had invested the money in construction of residential house, merely because the construction was not complete in all respects and the house was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit under section 54F;

3) Once the assessee demonstrated that the consideration received on transfer had been invested, even though the transaction was not complete in all respects, he would be entitled to avail of benefit under section 54F;

4) Even though investment made in purchasing a plot of land for the purpose of construction of a residential house had been held to be an investment satisfying the conditions of section 54F, yet the assessee was required to prove the actual date of investment and the amount invested towards purchase or construction of the residential house with supporting evidence;

5) The order of CIT (A) was to be set aside and matter was to be restored to the file of the AO. Thus, ground raised by the assessee was to be allowed - NARASIMHA RAJU RUDRA RAJU V. ACIT 35 90 (Hyderabad - Trib.)

Friday, August 2, 2013

Service tax refund can't be denied without specifying documents required from assessee

Department cannot deny refund of service tax alleging non-supply of 'requisite documents'; it must specify, in writing, list of documents required, in addition to documents already submitted by assessee

In the instant case the assessee was a service provider to its associates which were located outside India. The assessee wrongly raised invoices on its associates for commission which had to be received from the associates and paid service tax thereon. Later on, on finding that invoice was not to be issued, it issued credit note and filed a claim for refund along with copy of service tax returns, invoices, credit notes, correspondence and challan and a certificate from chartered accountant. Despite all that the refund claim was rejected on the premise that the assessee had not provided the required documents in support of claim of its refund.

The Tribunal remanded the matter with the following observation:

The adjudicating authority must have specified, in writing, list of documents required, apart from documents already submitted by the assessee. Matter was to be remanded back for supply and verification of additional documents required by the adjudicating authority - CMA CGM Global (India) (P.) Ltd. v. Commissioner of Service Tax [2013] 35 318 (Mumbai - CESTAT)

Failed candidates could endanger lives of PSC interviewer; their personal details out of ambit of RTI Act

Disclosure of names and addresses of members of Interview Board of PSC would ex facie endanger their lives; such disclosure would serve no fruitful public purpose

In the instant case the Bihar Public Service Commission (‘the Commission’) published advertisement to fill up post of 'State Examiner of Questioned Documents in police Laboratory’. The advertisement stated that written examination would be conducted if adequate number of applications were received. Since limited applications were received, selection was done on basis of viva voce test. The respondent filed an application before the Commission seeking information regarding interview conducted for aforesaid post. The Commission furnished all information. However, particulars of members of interview Board were not furnished.  Aggrieved assessee filed the writ in HC which was also dismissed. Assessee challenged the judgment of the learned Single Judge before the Division Bench of that Court which held in favour of assessee.

On appeal, the Supreme Court held as under:

1) The disclosure of names and addresses of the members of the Interview Board would ex facie endanger their lives or physical safety. The possibility of a failed candidate attempting to take revenge from such persons couldn’t be ruled out. Disclosure was likely to expose the members of the interview Board to harm and it would serve no public purpose;

2) Furthermore, the view of the High Court in the judgment under appeal that element of bias could be traced and would be crystallized only if the names and addresses of the interviewers were furnished, was without any substance;

3) The element of bias could hardly be correlated with the disclosure of the names and addresses of the interviewers. The transparency that was expected to be maintained in such process would not take within its ambit the disclosure of the information called for regarding the names and particulars of examiners;

4) Transparency in such cases was relatable to the process where selection was based on collective wisdom and collective marking. Marks were required to be disclosed but disclosure of individual names would hardly be relevant either to the concept of transparency or for proper exercise of the right to information. The judgment of HC was to be set aside and the Commission was not bound to disclose the information asked for by the applicant - Bihar Public Service Commission v. Saiyed Hussain Abbas Rizwi [2013] 35 333 (SC)

ESOPs from foreign employer are taxable in India if these relate to services rendered by employee in India

In case of an assessee, being an employee of a foreign company, only such proportion of ESOP is taxable which relates to service rendered by such assessee in India

In the instant case the assessee, an employee of foreign company, had exercised ESOPs while on his assignment in India. He, therefore, offered to tax the amount of proportionate ESOP earned in India, i.e., proportionate to the number of days of his assignment in India. However, the AO while framing the assessment brought to tax the entire amount of perquisite on account of stock options. On appeal, the CIT (A) allowed assessee's appeal. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The principle laid down by the Delhi 'I' Bench in the case of Asstt. CIT v. Ellin 'D' Rozario [IT Appeal No. 2918 (Delhi) of 2005, dated 5-12-2008] was that only proportionate salary would be taxable in India, if a part of activity done by the assessee had no relation to any India-specific job or activity;

2) In the instant case, it was not in dispute that the assessee was in India only for a short period and prior to it, he had not done any service connected with any activity in India;

3) As the assessee had not rendered service in India for the whole grant period, applying the proposition laid down (supra), only such proportion of the ESOP would be taxable in India as related to the service rendered by the assessee in India. - ACIT v. Robert Arthur Keltz [2013] 35 424 (Delhi - Trib.)

Income of Indian branch computed on basis of commercial activities rendered by it to its foreign HO

For determining the total income of an Indian branch receipt arising on account of commercial services rendered by it to American head office to be considered

The Tribunal held as under:

1) Article 7(3) of the India-US DTAA is in two parts. The first part of the Article relates to the activity carried on by the branch office which is commercial in nature whereas the second part relates to the activities which are not commercial in nature and relates to specific services performed by the branch office;

2) The assessee contented that it was rendering services covered by second part and, hence, the income arising on account of such specific services couldn’t be considered for determining its total income;

3) The services performed by the branch office was on account of outsourcing of commercial activities by its head office and, therefore, income arising out of such services rendered would be taxable under article 7(3) of India-USA DTAA, whereas if some non-commercial activities were specifically assigned by the head office to its branch office, then income arising out of such activity would not be taxable;

4) The branch office was involved in the customer care and medical transcription services. Thus, it was very clear that the branch office was also rendering services of commercial nature which had been outsourced by the head office;

5) After going through the order of the CIT (A), it was quite obvious that the assessee was only carrying out the normal commercial activities of the head office, in USA, i.e., a part of medical transcription work and software development. The assessee hadn’t established the fact that the activities carried on by it were non-commercial and in the nature of specific services as per the instruction of the head office. There was no infirmity in the order of the CIT (A) in holding that the income earned by the assessee from the activities carried on by it was taxable in India - Wellinx Inc. v. ADIT (International taxation) [2013] 35 420 (Hyderabad - Trib.)

Pre-payment charges for closure of housing loan are eligible for section 24 deduction

Prepayment charges for closure of loan account which was taken for acquisition of property are allowable under section 24(b)

In the instant case during the assessment, the AO disallowed the assessee's claim for deduction of prepayment charges on closure of housing loan. Further, the CIT (A) upheld the disallowance. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The definition of interest under section 2(28A) makes it clear that it has basically two components, firstly, the amount of interest for moneys borrowed and secondly, the amount paid by whatever name called in respect of the money borrowed or debt incurred;

2) The second category might also encompass any charges paid for not utilizing the credit facility. By incorporating the definition of 'interest' in section 24(b), the position that emerges is that not only the amount paid as interest but also any other amount paid, by whatever name, called, in relation to such debt incurred also qualifies for deduction;

3) By early repayment, the assessee managed to wipe out its interest liability in respect of the loan, which would have otherwise qualified for deduction under section 24(b) during the continuation of loan;

4) It was obvious that these prepayments had live and direct link with the obtaining of loan which was availed for acquisition of property. It was beyond comprehension as to how the amount paid as interest on the loan taken was allowable as deduction but the amount paid as prepayment charges of the very same loan was not deductible;

5) The payment of such 'prepayment charges' couldn’t be considered as de hors the loan obtained for acquisition or construction or repair, etc., of the property on which interest was deductible under section 24(b). Both, the direct interest and prepayment charges, were species of the term 'interest'. Therefore, the impugned order of CIT(A) was to be set aside and deduction claimed by the assessee was to be granted - Windermere Properties (P.) Ltd. v. Dy. CIT [2013] 34 109 (Mumbai - Trib.)

Special audit can be directed without providing an opportunity of personal hearing to assessee

Proviso to section 142(2A) does not envisage any personal hearing to assessee before an order under sub-section (2A) can be passed

In the instant case the assessee-company was opposed to the proposal of special audit on the ground that there were no complexities in the accounts and contented that proviso to section 142 (2A) provides an opportunity of personal hearing to assessee.

The HC held as under:

1) The requirement of personal hearing is normally not seen as necessary concomitant to a reasonable opportunity of being heard. The same depends on the statutory provisions from which such right flows, the nature of the proceedings and the consequences likely to follow from such proceedings;

2) The proviso to section 142(2A) does not envisage any personal hearing before an order under sub-section (2A) can be passed. The said proviso only requires giving a reasonable opportunity of being heard to the assessee. Such reasonable opportunity ordinarily would not include right of personal hearing;

3) It was strongly argued by assessee that the very fact that the AO believed that the accounts were complex, it meant that the issues were complex and the personal hearing was required. This contention was misconceived. Complexity of accounts and complexity of the question whether accounts were complex or not were two totally different things;

4) Thus, a clear distinction had to be drawn between the two. Whether the accounts were complex so as to call for special audit was one aspect. Another aspect was whether the question to ascertain if the accounts were complex was itself a complex question. This would have a bearing on whether personal hearing was necessary. Thus, assessee’s contention of personal hearing was rejected;

5) Coming to the question of validity of the order on the premise of complexity and the requirement of interest of revenue, it was noticed that the assessee had been given previous notice under section 142(1) with respect to its accounts. For a long time the assessee did not comply with such notices;

6) The authorities had highlighted several aspects of the matter to indicate that the accounts were complex and that interest of revenue would be served if the special audit report was obtained. The various points on which the AO desired that the auditor should make a report itself would demonstrate that the accounts were complex;

7) The AO had sufficient material at his command to form an opinion that the accounts were complex and that it was in the interest of the revenue to get them audited by the special auditor. Thus, there was no merit in instant petition and the same was to be dismissed. - Neesa Leisure Ltd. v. Dy. CIT [2013] 35 216 (Gujarat)

HC presumes existence of culpable mind in not filing return within time; confirms prosecution

Where assessee had not filed return of income timely, it could be prosecuted under section 276CC on presumption that there existed a culpable mental state as onus to prove that delay was not willful was on assessee and not on department

In the instant case, the assessee had filed the return of income on 1-5-1995 for assessment year 1994-95. The revenue's case was that inspite of several notices issued to assessee, she had filed the return of income beyond the statutory period. Therefore, delay in filing return was wilful and deliberate and, thus, she was liable to be prosecuted and punished under section 276CC. However, the trial Court and the Sessions Court discharged the assessee. The revenue then filed the petition seeking reversal of orders of both the Courts.

The High Court held as under:

1) It was not in dispute that the assessee had not filed the return for the assessment year 1994-95 within prescribed period and not even within the period within which the revenue had required her to do so. The assessee had not even responded to the communications sent by the revenue requiring her to file return of income or to show the proof of filing. So, the offence under Section 276CC stood committed by that time and for that offence, the department could file a criminal complaint against her after obtaining requisite sanction from the competent authority which it did obtain and complaint was filed in Court;

2) It was for the respondent to establish during the trial that her failure to file return was not willful. The Courts went wrong in going into the question as to whether the explanation offered by the assessee before the filing of the complaint in Court was rightly rejected or not;

3) Once the complaint stood filed, the trial Court was only required to examine whether cognizance was to be taken or not and if it was decided to take cognizance, thereafter, trail Court was required to examine whether in the pre-charge evidence the complainant had been able to show that the assessee had not filed her return for the relevant assessment year within the prescribed period, which fact in the present case was not even disputed by the assessee;

4) So, after raising the presumption under section 278E, the trial Court should have framed the charge against the assessee leaving it to her to show thereafter that there was no willful default on her part. Just because the assessee had applied for the compounding of the offence before the filing of the complaint against her in Court, and the same had not been decided before the filing of the complaint, it could not be said that the complaint was not maintainable;

5) The trial Court was not required to examine at the stage of charge as to why the department was not compounding the offence in the case of the respondent herein. If she was aggrieved by any action or inaction on the part of the authority for compounding, she would have had recourse to legal remedies instead of waiting for the prosecution to be launched by the department;

6) The revisional Court also did not go into the aforesaid aspects and simply affixed its seal of approval to the order of the trail Court and, therefore, its order also couldn’t be sustained. This petition, accordingly, was allowed. The impugned orders of the trial Court and the revisional Court were set aside – ACIT v. Nilofar Currimbhoy [2013] 35 99 (Delhi)