Wednesday, December 31, 2014

Defect of framing assessment on non-existent entity couldn't be cured by resorting to sec. 292B


Facts:

a) The assessee-company had been amalgamated with another company under Sections 391(2) and 394 of the Companies Act. Consequently, the assessment order was made on the assessee.

b) Aggrieved by the assessment order, the assessee appealed to the CIT(A). It argued that the assessment order was invalid, because on the date on which order was passed, it had already ceased to exist (having been amalgamated). The CIT(A) held in favour of assessee. 

c) The revenue, being aggrieved by the order of CIT(A) appealed to the ITAT, which upheld the order of CIT(A). Finally the aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) In case of Spice Entertainment Ltd. v. CIT [IT Appeal No. 475 of 2011] the Delhi High court held that:

“it [becomes] incumbent upon the Income Tax Authorities to substitute the successor in place of the said 'dead person'. Such a defect cannot be treated as procedural defect... once it is found that assessment is framed in the name of non-existing entity it does not remain a procedural irregularity of the nature which could be cured by invoking the provisions of Section 292B of the Act."

2) In Spice Entertainment Ltd. (supra), this Court expressly classified "the framing of assessment against a non-existing entity/person" as a jurisdictional defect. This had been a consistent position. In case of CIT v. Express Newspapers Ltd. [1960] 40 ITR 38 (Mad), the Madras High Court held that:

“there cannot be an assessment of non-existent person. The assessment in the instant case was made long after the Free Press Company was stuck off from the register of the companies, and it could not be valid."

3) It was clear that all contentions sought to be urged by the revenue were in respect of familiar grounds, which had been ruled upon, against it. Thus, assessment could not be made on amalgamating company even by resorting to Section 292B. – CIT v. Dimension Apparels (P.) Ltd [2014] 52 taxmann.com 356 (Delhi).

Every suit for recovery of money from Sick Co. doesn't require prior permission of BIFR, rules HC


Facts:

a) The petitioner-company filed an application under section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) but same was dismissed by impugned order holding that a simple suit for recovery of moneys was not barred by section 22 of SICA.

b) The Trial court in the impugned order also recorded that in spite of repeated directions to the petitioner/defendant, no document was filed to show that the debt of the respondent/plaintiff was included in the scheme of rehabilitation of the petitioner-company

On writ, the High Court of Delhi held as under:

Since every suit for recovery of money does not require permission under section 22 of SICA and despite repeated directions of Court petitioner-company failed to show that debt of the respondent was included in scheme of rehabilitation, application filed by petitioner under section 22 of SICA was to be dismissed. - Kusum Products Ltd. v. Hitkari Industries Ltd. [2014] 52 taxmann.com 230 (Delhi)

Requirement of amending articles pursuant to Section 43A in case of hybrid Companies is only optional on part of shareholders


Requirement of amending Articles of Association pursuant to Companies (Amendment) Act, 2000 insofar as hybrid companies, i.e., deemed public companies are concerned, is only optional on part of shareholders

Issue:


Whether requirement of amending Articles of Association pursuant to Amendment Act 53 of 2000, in case of hybrid companies are optional on part of shareholders?

The Supreme Court held as under:

1) A private company which becomes a public company by virtue of operation of any one of four sub-sections of section 43A of Companies Act, 1956 has choice either to retain or delete those stipulations as specified in its Articles of Association relating to matters specified under section 3(1)(iii)

2) After amendment to Companies Act by Act No. 53 of 2000 concept of hybrid (section 43A) companies is not altogether abolished, at least insofar as companies falling under section 43A(1C) are concerned which were in existence on 13-12-2000 would continue to be hybrid companies 

3) Effect of amendment to section 3(1)(iii) on private companies in existence on 13-12-2000 is that if they choose to make provisions in their Articles of Association to give effect to mandate of section 3(1)(iii)(d), they become private companies with effect from such date when they make such provision by virtue of section 43(2A) and if they do not make such an amendment, they would still continue to be public companies governed by section 43A(1C) (hybrid companies) and can continue to have provisions in their Articles of Association referable to section 3(1)(iii)(a), (b) & (c) 

4) Thus, requirement of amending Articles of Association pursuant to Amendment Act 53 of 2000, insofar as hybrid companies are concerned, is only optional on part of shareholders---Darius Rutton Kavasmaneck v. Gharda Chemicals Ltd. [2014] 52 taxmann.com 349 (SC)

Wednesday, December 24, 2014

SC: Mobile charger is an accessory of mobile phone and not its integral part; leviable to VAT at 12.5%


Where assessee was selling mobile phone with battery charger in same packing, it did not charge any separate amount for battery charger from customers and was charging only for handset; battery charger was an accessory to cell phone and was not a part of it, thus, liable to VAT at general rate of 12.5 %.

Facts:


a) The assessee ('Nokia India (P.) Ltd.'), was a registered dealer under the Punjab VAT Act. It had sold mobile phones alongwith battery chargers. It had paid tax at 4% (i.e., the rate at which tax on sale of mobile phone was paid) on the sale of value of charger.

b) It stated that the product was being sold as mobile phone under a solo pack and was covered under Entry No. 60 of Schedule 'B' of the Punjab VAT Act. No separate amount for battery charger was being claimed from the customers and only amount charged was for handsets. Whenever it sold chargers separately then VAT at 12.5% was charged, which was applicable to goods in residuary Schedule 'F' of the VAT Act.

c) The assessing authority held that the battery charger was an accessory to the mobile phone and was not a part of it. It was liable to be taxed at general rate, i.e., at 12.5% and not at concessional rate applicable to the mobile phones (i.e., at 4%).

The Supreme Court held in favour of revenue as under:

1) The authorities had rightly held that the battery charger was not a part of the mobile phone. If the charger was a part of mobile phone, then it could not have been operated without using the battery charger. But in reality, it was not required at the time of operation.

2) The battery in the mobile phone could be charged directly from the other means also like laptop without employing the battery charger, implying thereby, that it was nothing but an accessory to the mobile phone.

3) The Tribunal noticed that as per the information available on the website of the assessee, it had invariably put the mobile battery charger in the category of an accessory, which meant that in the common parlance also the mobile battery charger would have to be understood as an accessory.

4) Thus, the authorities had rightly held that the mobile phone charger was an accessory to mobile phone and was not a part of mobile phone. The battery charger could not be held to be a composite part of the cell phone but was an independent product which could be sold separately without selling the cell phone. The High Court failed to appreciate the aforesaid fact and wrongly held that the battery charger was a part of the cell phone.

5) Thus, battery charger was liable to be taxed at general rate, i.e., at 12.5% and not at concessional rate applicable to the mobile phones (i.e., at 4%). - State of Punjab v. Nokia India (P.) Ltd. (2014) 52 taxmann.com 410 (SC)

Tuesday, December 23, 2014

Perpetual transfer of satellite rights of a film for 99 years is a sale; excluded from definition of ‘royalty’


Transfer of satellite right to assessee under an agreement for a period of 99 years is a sale and, therefore, excluded from definition of 'royalty' under clause (5) of Explanation 2 to section 9(1)(vi).

Facts:


a) The assessee was dealings in film satellite rights by taking them on assignment basis and reassigning to channels.

b) He did not deduct tax at source on purchase of copyright of film as he was of the view that such purchase was neither covered under section 194J nor under section 194C. However, the Assessing Officer held that the payments debited as purchase warranted TDS under section 194J and worked out disallowance under section 40(a)(ia).

c) The CIT(A) allowed the appeal of assessee by holding that the consideration paid did not attract section 194J.

d) On appeal, the Tribunal held that the payments made would fall within the definition of 'royalty' and as the assessee had failed to deduct tax under Section 194J rigour of section 40(a)(i) stood attracted. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) Perusal of the facts and circumstances of the instant case and case of Mrs. K. Bhagyalakshmi v Dy.CIT [2013] 40 taxmann.com 350 (Madras) would show that the substantial question of law raised were the one and same in both the cases.

2) The earlier division bench of this court in case of Mrs. K. Bhagyalakshmi (supra) after considering the perpetual transfer of rights for a period of 99 years [in terms of Section 26 of Copy Right Act and also the definition under clause (5) to Explanation 2 to section 9(1)] held that it was a sale and, therefore, excludible from definition of royalty.

3) Following the decision rendered in the case of Mrs. K. Bagyalakshmi (supra) it was to be held that transfer of satellite right to assessee under an agreement for a period of 99 years would be a sale and excludible from definition of 'royalty'. Therefore, the Tribunal had erred in concluding that the payment made by the assessee was royalty and not sale. - S.P.Alaguvel v. DY. CIT [2014] 52 taxmann.com 231 (Madras)

HC nods to capital reduction scheme approved by majority of shareholders as it wasn't prejudicial to creditor’s rights


Where reduction of share capital was approved by majority of shareholders and did not involve any cash outflow to prejudice rights of creditors, same was to be confirmed

Facts:


a) The petitioner filed petition under section 101(1) of the Companies Act, 1956 for confirming the reduction of share capital account.

b) It was submitted that after the proposed reduction of the equity share capital by adjusting with debit balance and profit and loss account, financial statements of the company would exhibit realistic picture of the company's financial position.

c) The company also had no secured or unsecured creditors and, hence, there was no question of interest of the company's creditors to be adversely affected.

d) Further, the shareholders had unanimously passed the special resolution approving of the reduction of capital in extraordinary general body meeting. The petitioner also sought liberty of the Court for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956.

The High Court of Madras held as under:

1) Since reduction of share capital was purely a commercial decision which was approved by majority of shareholders and reduction did not involve any cash out flow to prejudice rights of creditors with procedure laid down under section 100 of the Companies Act, 1956 having been fully complied with, reduction of share capital as resolved by company in its special resolution was to be confirmed and also the prayer for dispensing with the words 'and reduced' as contemplated in section 102(3) of the Companies Act, 1956 was to be allowed..-----Comtec Components Ltd., In re [2014] 52 taxmann.com 173 (Madras)

Friday, December 19, 2014

Bombay High Court: Service tax on services of advocate/arbitral tribunal is constitutional


Levy of service tax on services provided by advocates and arbitral tribunal is constitutionally valid and not violative of Article 19(1)(g); further, exemption to services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs is based on intelligible differentia and not violative of Article 14.

Facts:


The petitioner, a practicing advocate, filed writ petition for declaration that section 65(105) (zzzzm) of the Finance Act, 1994 as inserted by the Finance Act, 2011 providing for service tax on services by advocates is null and void and ultra vires the Constitution of India.

The High Court held in favour of revenue as under:

1) There is no basis or foundation in the complaint by petitioner inasmuch as imposition of such levy does not burden the litigant or the consumer of justice. There is no substance in the complaint that the profession of advocates and legal profession itself has been treated on par with commercial or trading activities or dealings in goods and other services. Merely because of the role of the advocate, it does not mean that his position as an officer of the Court and part and parcel of administration of justice is in any way undermined, leave alone interfered with.

2) The Advocates and legal practitioners are known to pay professional taxes and taxes on their income. They are also brought within the purview of service tax because their activities in legal field are expanding in the age of globalization, liberalization and privatization. They are not only catering to individuals but business entities too. If it is found that the advocates are catering to affluent and rich class of litigants and recipients of legal services, then, the tax on the services rendered to them is definitely within the permissive sphere of legislation. That cannot be faulted.

3) Hence, activities carried out by advocates for consideration by way of fees, etc., amounts to 'service' and can be charged to service tax. Similarly, arbitration is also carried out for hefty fees and levy of service tax on services by arbitral tribunal is not invalid.

4) Levy of service tax is not violative of Article 19(1)(g) of Constitution, as it is a reasonable restriction and similar to income-tax and professional tax being paid by advocates. Since services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs stands exempted, it does not deny justice to poor and needy. Further, such exemption to individuals and small businessmen does not transgress doctrine of equality under Article 14 of Constitution of India, as such exemption is based on intelligible differentia/classification.

5) Moreover, since service tax on non-exempt services provided by advocates/arbitral tribunal is payable by service recipients under reverse charge on and from 1-7-2012, such advocates/arbitral tribunal can no longer complain of levy of service tax. Even for period prior thereto when there was no reverse charge, levy of service tax could not be regarded as invalid and arguments that 'reverse charge be treated as retrospective' was to be set aside. - P.C. Joshi v. Union of India [2014] 52 taxmann.com 311 (Bombay)

Wednesday, December 17, 2014

“Stake money” or “prize money” paid by race clubs to horse owners won’t attract TDS under Sec. 194B


The issue that arose before the High Court was:

Whether the assessee was liable to deduct tax at source under Section 194B on making payment of ‘stake money’ to the owners of the horses?

The High Court held as under:

1) A cursory look of the Finance Act, 2001 introduced with effect from 01.04.2002 and particularly section 194B would indicate that it was introduced to tax deduction at source on winning from ‘card games and other games of any sort’. Explanation to Section 224)(ix) was simultaneously introduced along with the words inserted in section 194B where under the card games and other games of any sort was introduced with the ambit of tax deduction along with lotteries and cross-word puzzles.

2) Game show involving prize money being telecast through electronic media and said prize money had not found its place in the definition of clause “income” under the income-tax Act (I-T Act’). The Legislature had introduced Explanation (i) and (ii) to Section 2(24)(ix) so as include such prize money also under definition of “income”, since in those events people would compete with each other to win prizes. This position would become clear from budget speech of the Finance Minister herein below: “Winnings from lotteries, crossword puzzles etc., are currently taxed at 40%. As the marginal personal income-tax rates have now stabilized at 30%. Television game shows are very popular these days. I wish the winners well. At the same time, I propose that income-tax at the rate of 30% will be deducted at source from the winnings of these and all similar game shows”

3) Thus, amendment brought by the Finance Act, 2001 to Section 2(24) and section 194B would have no bearing on the income earned from ‘owning and maintaining horses’. The term ‘any other similar game’ found in Explanation (ii) to Section 2(24)(ix) is inclusive definition and has to be read ejusdem generis and as such, activity of owning and maintaining horses cannot by any stretch of imagination fall in the definition of ‘card game or other game of any sort’ found in section 194B.

4) Therefore, the “stake money” or “prize money” paid by race clubs to horse owners would not attract the provisions of Section 194B of the IT Act. - Bangalore Turf Club Ltd. v. Union of India [2014] 52 taxmann.com 290 (Karnataka)

Tuesday, December 16, 2014

Sec. 80-IB relief available even if buyer can convert flats into duplexes in excess of built-up limit after acquisition


Where supplying design to merge flats into a duplex in excess of limit of built-up area constituted only a marketing strategy to boost sale of flats and assessee constructed flats in accordance with plan approved by authorities it was entitled to deduction under section 80-IB.

Facts:


a) The assessee had formed an AOP for developing a property with two wings and each wing was to have 96 flats. All the flats were approved to be with the built up area of less than 1000 sq. ft. as prescribed in clause (c) of Explanation to section 80-IB(10).

b) There was a survey action under section 133A and the officers noted that flats were constructed in such a way that the said flats could be conveniently combined with the lower 1-BHK flats vertically in order to generate spacious duplex flats.

c) The built up area of each of the said duplex flat exceeded the stipulated area. Accordingly, the revenue officers opined that the assessee intended to sell 1 BHK flats as duplex flats. Thus, the AO held that the assessee was not eligible for Section 80-IB relief as it had violated the condition relating to the maximum stipulated area of the flat. Further, the CIT(A) upheld the opinion of AO.

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

1) Impounding of the brochure with details of method of merger of 1-BHK flats into a duplex, could not be used against the assessee as it only provided the design of merger. The fact was that the assessee got the approval for constructing impugned flats from the authorities and completed the construction as per the approved plans. In the instant case, from the approval stage till the stage of issuance of the completion certificate, there was no violation by the developer.

2) There was no evidence to suggest that it was the developer who had planned and generated duplex flats out of the 1-BHK flats and, then sold as such to the buyers.

3) The AO undertook the exercise of verification under section 133(6) and all the flat buyers responded to the said queries. Not even a single flat owner stated that the developer (‘assessee’) constructed those duplex flats.

4) The discrepancy of mere providing a hole for intended staircase for flat buyers and supplying of the design to merge flats into a duplex flat constituted a marketing strategy to boost the sale of the 1-BHK.

5) Thus, such a marketing strategy would not come in the way of granting deduction under Section 80-IB. Therefore, the assessee was entitled to deduction in respect of the profits attributable to all the 1-BHK flats of the projects. – Poddar & Ashish Developers v. ITO [2014] 51 taxmann.com 505 (Mumbai - Trib.)

Monday, December 15, 2014

No clubbing of interest-free loan given by 'Shahrukh Khan' to his wife from whom she had purchased assets


'Shahrukh Khan' gave interest-free loan to his wife, Gauri Khan, who in turn, purchased a residential house and jewellery from said loan amount. The department clubbed the value of loan amount in the net wealth of 'Shahrukh Khan'. Extending cash loan, to wife does not come within the definition of asset as provided under Section 2(ea) of the wealth tax Act, thus, it could not be said that there was a transfer of asset; the impugned loan amount was not includible in net wealth of assessee.

Facts:

a)Shahrukh Khan (assessee) gave interest free loan to his wife, Gauri Khan, who, in turn, purchased residential house and jewellery in her name from such loan amount.

b)The Assessing Officer ('AO') opined that the loan given by the assessee to his wife would be treated as indirect "transfer of asset" within the meaning of section 4(1)(a)(i) of the Wealth Tax Act. Accordingly, he clubbed the value of loan amount in the net wealth of the assessee.

c)On appeal, the CIT(A) affirmed the view of the AO against which the assessee had filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)Section 4(1)(a)(i) of the Wealth-tax Act, 1957 provides as under: In computing the net wealth of an individual, there shall be included, the value of any asset which are held by spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart.

2)Extending cash loan, to wife does not come within the definition of asset as provided under Section 2(ea) of the wealth tax Act, thus, it could not be said that there was a transfer of asset as alleged by the department.

3)The instant case was not of tax avoidance as in the instant case assessee gave the loan to his wife and the same was duly declared. There is distinction between the term "transfer" and "loan". In act of transfer, some legal interest is created in the transferee over the subject matter of transfer, whereas in case of lending, except a possessory interest, which may be momentary also, no other interest is created.

4)In the instant case, the wife of assessee was having independent source of income, filing her return and even subsequently repaid part of the loan. Therefore, there was no "transfer of asset" or "colourable device", as assessee was not the owner of "any asset" which was transferred to the wife, rather a new property was purchased from a third party out of the interest free cash loan taken by the wife from her husband.

5)The CIT(A) had opined that it amounts to indirect transfer of asset within meaning of Section 4(1)(a)(i) of the Wealth Tax Act. This angle of CIT(A) was on weak footing as in the instant case there was no transfer of asset rather interest-free loan was given by the assessee to his wife.

6)Thus, the impugned loan amount was not includible in wealth of assessee. Accordingly the order of CIT(A) was to be reversed- Shah Rukh Khan v. Assistant Commissioner of Wealth Tax (2014) 52 taxmann.com 252 (Mumbai - Trib.)

Saturday, December 13, 2014

Call centre services to recipients located abroad were export of services even when Indian TelCos were involved


When call centre services were provided electronically to recipient located outside India, data had to be delivered to telecom authorities for transmission abroad and merely because of involvement of telecom authorities in India, it could not be said services were not exported.

The issues that arose for the consideration of the CESTAT was:

a) Whether call centre services provided by assessee to recipients located outside India would be deemed as 'exports' if they were not directly exported from premises of assessee but were routed through telecom service provider?

b) Whether the use of leased telecom lines for exporting call centre services electronically was 'input service' and, thus, was eligible for credit?

The CESTAT held in favour of assessee as under:

1) When data was transmitted through electronic medium, it had to be first transmitted to a server of telecom authorities in India and, thereafter, up-linked/transmitted to foreign service recipient. In the instant case, foreign service recipient had received output service and had made payment in convertible foreign exchange to assessee. Hence, said activity was export of service.

2) Exports were undertaken electronically and to undertake export, assessee needed dedicated lines from their office premises to telecom authorities. Without these dedicated lines, assessee could not deliver output service and therefore, leasing of telecom lines by telecom authorities was an eligible input service. - WNS GLOBAL SERVICES (P.) LTD. V. COMMISSIONER OF CENTRAL EXCISE (2014) 52 taxmann.com 131 (Mumbai - CESTAT)

Friday, December 12, 2014

Entity set-up for providing housing and other infra facilities is charitable in nature; entitled to registration


Facts:

a) The assessee ('Jaipur Development Authority') was wholly owned and controlled by Government of Rajasthan.

b) It was formed for planning, coordinating and supervising proper, orderly and rapid development of the areas in Jaipur region and of executing plans, projects and schemes for such development, so that housing, community facilities, civil amenities and other infrastructural facilities were created in such region.

c) The registration was granted to the assessee under section 12AA. During the relevant year, the CIT withdrew the registration by observing that the objects of the assessee were not charitable but came under the purview of last limb of section 2(15) of the Act, i.e., 'Advancement of any other object of general public utility'.

The Tribunal held in favour of assessee as under:

1) The Jaipur Development Authority was a tool of State Government for coordinated and planned development in Jaipur region. In practical, the main work of Jaipur Development Authority was construction of roads, sewerage, parks, play grounds, provide plots for educational, health and cultural institution for over all development of the community.

2) By making planned development it provides smooth transportation so that air pollution can be minimized and save time of the public. If it would be left in the hands of private operator, these facilities would not be provided on similar price as provided by the Jaipur Development Authority. The intention of the institution was not to earn profit but recover the cost of the establishment as well as other expenditure to implement its objects.

3) The CIT can cancel the registration in two situations, viz, if the activities of the institution are not genuine and if the activities assessee not carried out in accordance with the objects of the institution.

4) In the instant case, as the assessee was a government authority, its object was to prove civil amenities and infrastructure and no trade or business, therefore, withdrawal of registration by the CIT was not justified. - Jaipur Development Authority v. CIT (2014) 52 taxmann.com 25 (Jaipur - Trib.)

Thursday, December 11, 2014

"Umbrella" of combined entity level TNMM can't be used to benchmark separate transactions on combined basis


The Tribunal held as under:

1) Transfer pricing legislation contemplates determination of arm's length price ('ALP') of an international transaction, which means for each transaction separately. The term 'transaction' has been defined in Rule 10A(d) to mean 'a number of closely linked transactions.'

2) ALP is required to be determined in respect of each international transaction separately. If, however, there are a number of closely linked transactions, then such closely linked transactions can be considered as a single transaction for the purposes of benchmarking. To put it conversely, the transactions which are not closely linked, should be processed under the transfer pricing regime independently and not on a consolidated basis.

3) In the instant case, the clubbing of royalty payment with other international transactions for processing them in a combined TNMM approach, would defeat the mandate of the transfer pricing legislation.

4) When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That was why the legislature provided for determining the ALP of each international transaction separately.

5) As the international transaction of royalty payment was separate transaction and not closely linked with the other transactions (i.e., import of raw materials, service spares and export of finished goods, etc.) with which the assessee had merged it, such merger could not be allowed for the purposes of the determination of its ALP on entity level under TNMM. - LG ELECTRONICS INDIA (P.) LTD. V. ACIT (2014) 52 taxmann.com 240 (Delhi - Trib.)

Wednesday, December 10, 2014

ITAT invokes MFN clause to import make available clause from India-Portugese DTAA into the India-Sweden DTAA


Swedish-company could claim Fee for Technical Services ('FTS') received from its Indian subsidiaries as tax-exempt if 'make available' condition was not satisfied, as India-Sweden DTAA contained Most Favoured Nation clause ('MFN' clause) as per which make available clause in India-Portugese could be imported into the India-Sweden DTAA.

The issue that arose for consideration of the ITAT was:

Whether the assessee, a Swedish-company could be given benefit of India-Portuguese DTAA on principle of MFN clause?

The ITAT held in favour of assessee as under:

1) An MFN clause can direct more favourable treatment available in other treaties only in regard to the same subject matter, same category of matter or same clause of the matter.

2) The MFN clause in the protocol attached to the treaty takes care of a situation wherein either of the contracting states enter into a DTAA with another sovereign state and where the same subject matter has been given more favourable treatment by way of a definition or mode of tax.

3) The parties can claim the benefit on the recognized principle of MFN clause. On the basis of protocol to India-Sweden DTAA, a Swedish-company could claim the benefit of 'make available' condition in India-Portugal treaty to claim tax-free status for FTS received from its Indian Subsidiaries.- Sandvik AB v. Dy. DIT (International Taxation) (2014) 52 taxmann.com 211 (Pune - Trib.)

Tuesday, December 9, 2014

Commission paid to affiliate on import of furnace oil was illegal as it was purchased in breach of law


Where purchases of furnace oil from sister concern, its storage and consequent sale were in complete breach of Solvent, Raffinate & Slop [Acquisition, Safe, Storage & Prevention of Use in Automobiles] Order, 2000, payment made by assessee to sister concern could not be allowed under section 37(1).

Facts:

1) The assessee entered into a contract with a foreign company for purchase of furnace oil. It failed to get licence for storage and sale of solvents, as required by the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000 (‘SRS order’).

2) After realizing that any import in absence of valid license would attract criminal/penal proceedings, it approached its sister concern who had said licence. It transferred the contract of import in the name of its sister concern and made payment for said purpose by claiming it as commission.

3) The AO disallowed the commission.

4) On appeal CIT(A) allowed said payment which was subsequently reversed by the Tribunal. Further the High Court upheld the order of Tribunal. The assessee filed the Special leave petition before Supreme court against impugned order of High Court.

The Supreme Court dismissed the Special Leave Petition against the order of High Court, wherein the High Court held as under:

1) When the SRS order prohibits importation of goods, its acquisition, storage and sale, without a valid licence, assessee could not import such furnace oil without issuance of requisite licence.

2) Even assuming that the sister concern had a licence for importing the furnace oil, the assessee diverted its contractual obligation for averting the payment of damages, yet nothing was brought on the record to explain as to how the sum termed as 'commission' for performing the contractual obligation was needed to be paid to the sister concern.

3) It also emerged from record that not only the assessee got contract executed through its sister concern even by a valid licence held by the sister concern, the subsequent purchases from the sister concern of the very furnace oil, its storage and consequent sale appeared to be in complete breach of the SRS Order.

4) Even the nomenclature used as 'Commission' was not taken into consideration and if the character of payment in substance was to be looked at, nowhere it emerged that there was any valid claim for allowing the impugned sum (paid as commission) which was a consideration for transfer of contractual obligation.

5) Even if there was no loss to the revenue because the revenue had recovered tax on the said amount from the sister concern, then also, when from the record itself, it showed that the transaction was in contravention of SRS order and entire modus was also apparent from the paper book produced by the assessee, disallowance by the Tribunal invoking its statutory power required to be sustained. - Overseas Trading & Shipping Co. (P.) Ltd. v. ACIT [2014] 51 taxmann.com 374 (SC)

Monday, December 8, 2014

No penalty for inadvertently filling 'no' response in column seeking info about tax audit


Where assessee-company at time of filing its e-return had inadvertently filled column regarding details of audit under section 44AB wrongly as 'No', penalty could not be levied under section 271B.

Facts:

a) The assessee-company e-filed its return of income. In the said return of income, the assessee was required to answer whether it was liable for audit under section 44AB and if yes, it was required to furnish certain information regarding same.

b) The Assessing Officer noticed that the assessee had answered the said question as 'No' and, consequently, it did not furnish the details relating to auditor. Hence, he took the view that the assessee did not get its accounts audited under section 44AB and, accordingly, he initiated penalty proceedings under section 271B.
c) On appeal, the CIT(A) also confirmed said penalty. The aggrieved assessee filed the instant appeal.

The ITAT held in favour of assessee as under :

1) The assessee had filed the return of income under e-filing procedure. 'Part A-01' of the return of income requires the assessees who would be liable for audit under section 44AB to furnish certain information. The same is optional for the assessees who are not liable for audit under section 44AB.

2) The information to be given in 'Part A-01' contains the details to be furnished in Form No. 3CD. It was seen from the copy of e-return filed by the assessee that the assessee had duly furnished all the details under 'Part A-01' of the return of income, meaning thereby, there appeared to be some truth in the submission of the assessee that it had obtained the tax audit report before the due date for filing return of income.

3) Hence, it was viewed that the assessee could have obtained the audit report under section 44AB before filing the return of income and it had inadvertently filled the relevant column wrongly as 'No'. Since the assessee could have obtained the tax audit report before the due date for filing return of income, there was no justification for levying penalty under section 271B. Accordingly, the order of CIT(A) was to be set aside and he was to be directed to delete the penalty levied in the hands of the assessee under section 271B. - Sujata Trading (P.) Ltd. v. Income-tax Officer, [2014] 50 taxmann.com 397 (Mumbai - Trib.)

Friday, December 5, 2014

Sale on principal-to-principal basis to be included in 'turnover' for purpose of tax audit under sec. 44AB


Sale of gas cylinders to consumers was to be included in turnover for purpose of Section 44AB when assessee was appointed as a distributor on principal-to-principal basis for sale of such cylinders.

Facts:

a) The assessee was a distributor of Indian Oil Cooking Gas and was also engaged in sale of gas stoves and spare parts.

b) The assessee did not include the turnover from sale of cylinders for computing the threshold limit prescribed under section 44AB. By including such sales, the turnover of assessee would exceed the threshold limit prescribed under section 44AB.

c) Thus, the Assessing Officer (AO) issued a show-cause notice to assessee on the ground that it did not get its accounts audited under section 44AB.

d) The assessee contended that it had sold gas cylinders on commission basis as the ownership of same remained with the Indian Oil Corporation. Therefore, sale of gas cylinders could not be included in its turnover to compute the threshold limit prescribed under section 44AB. The Assessing Officer did not agree with assessee's reply and imposed a penalty on it under section 271B.
e) The appellate authorities affirmed the order of AO. Aggrieved assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

1) The agreement clearly indicated that the assessee was appointed as a distributor on principal-to-principal basis for sale of gas cylinders to consumers and it was not selling gas cylinders on commission basis.

2) Consequently, the sale of gas cylinders was liable to be included in the turnover of the assessee. Since the turnover exceeded the threshold limit prescribed under Section 44AB, the books of account were liable to be audited.
3) Since the books of account were not audited, penalty proceedings were rightly initiated. The explanation given by the assessee for non-compliance with the provision of section 44AB was neither sound nor justifiable. - Attara Gas Service v. CIT (2014) 50 taxmann.com 445 (Allahabad)

Thursday, December 4, 2014

Though income of Chamber of Commerce held as business receipt, yet Sec. 11 relief available as profit motive absent


The Tribunal held in favour of assessee as under:

1) The concept behind Section 28(iii) is to overcome the mutuality principle being relied upon in support of a claim for exemption, when the assessee was actually deriving income or making profits as a result of rendering specific services to its members in a commercial way.

2) The reason for the introduction of Section 28(iii) of Act was to ignore the principle of mutuality and reach the surplus arising to the mutual association. It was clear from the fact that these provisions were confirmed to services performed by the association "for its members". Such income would either be charged as business income or under the residual head, depending upon whether the activities of the association with the non-members amounted to a business or otherwise.

3) Section 28(iii) constitutes certain income of the association to be business income without affecting the scope of the exemption under Section 11.

4) Section 2(15) incorporates the definition of "charitable purposes" and shows that several mutual associations may also fall within the definition.

5) The receipts derived by a chamber of commerce and industry for performing specific services to its members, though treated as business income under Section 28(iii), would still be entitled to the exemption under Section 11 read with Section 2(15) of the Act, provided there is no profit motive.

6) Thus, assessee being a charitable Institution carrying on the object of promotion and development of trade and commerce and not involved in the carrying on of any activity in the nature of "business", the said section 28(iii) of the Act would not apply.

7) Hon'ble Apex Court in the earliest case of Andhra Chamber of Commerce had clearly laid out the principle that if the primary purpose of an Institution was advancement of objects of general public utility, it would remain charitable in nature even if an incidental or ancillary activity or purpose, for achieving the main purpose, was profitable in nature. The basic principle underlying the definition of "charitable purpose" remained unaltered even on amendment in the section 2(15) of the Act w.e.f. 01/04/2009, though the restrictive first proviso was inserted therein- Indian Chamber of Commerce v. ITO (Exemption) (2014) 52 taxmann.com 52 (Kolkata - Trib.)

Monday, December 1, 2014

I-T returns and info provided to tax authorities are exempt from disclosure under RTI Act


Issue

Whether the Income-tax returns and other information provided to Income Tax Authorities by a taxpayer are personal and confidential in nature and, therefore, cannot be placed in public domain through RTI Act?

The High Court held as under-

1) Income-tax returns and other information provided to Income Tax Authorities by individuals and unincorporated assessees are confidential in nature and cannot be placed in public domain, as it would be exempt under section 8(1)(j) of Right to Information Act, 2005 (RTI Act).

2) In cases of widely held companies, most information relating to their income and expenditure would be in public domain and, therefore, it is only confidential information that would be exempt from disclosure under section 8(1)(d) of RTI Act.

3) Information furnished by an assessee in income-tax return can be disclosed only where it is necessary thing to do so in public interest and where such interest outweighs in importance any possible harm or injury to assessee or any other third party. However, information furnished by corporate assessees that neither relates to another party nor is exempt under section 8(1)(d) RTI Act can be disclosed- Naresh Trehan v. Rakesh Kumar Gupta [2014] 51 taxmann.com 548 (Delhi)

Lumpsum amount paid for transfer of know-how wasn’t royalty if payment wasn’t made for any particular period


Assessee had entered into an agreement with UK based company for supply and installation of machinery, which involved transfer of technical know-how. It had paid lumpsum amount in connection with transfer of technical know-how. Such payment could not be treated as royalty as it was not made for any particular period.

Facts:


a) Assessee entered into an agreement with UK based Co. to supply and install certain machinery, which involved transfer of technical know-how.

b) The AO treated the payment inconnection with transfer of technical know-how as royalty. The assessee pleaded that the such payment couldn’t be treated as royalty on following grounds:

i) It was paid in lumpsum and not year after year for the use of patent or any facility;

ii) The transfer of technical know-how or patent was for the limited purpose of installation and fixing the machinery.

c) On appeal, the CIT(A) dismissed the appeal of assessee. Further, the Tribunal set aside the order of AO by holding that amount paid to UK Co. couldn’t be treated as royalty.Aggrieved by the order of tribunal, the revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) Though the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lumpsum amount. However, a lumpsum payment would be deemed as royalty, only when it is for a fixed period for which the facility can be utilised.

2) A lumpsum payment without mentioning the period is prone to take away such amount from the definition of royalty.

3) Royalty, by its very nature, is a sum payable to the owner of a design, invention or trademark by another for using it. It is clearly opposed to an outright transfer.

4) In the instant case, the amount paid in lumpsum was not for any particular period. It was paid for transfer of technical know-how for limited purpose of installation and fixing of machinery. Thus, such lumpsum payment could not be treated as royalty- CIT v. The Andhra Petrochemicals Ltd. [2014] 51 taxmann.com 451(AP)

Tuesday, November 25, 2014

Sum received by international news agency on distribution of news and related photos in India is royalty


Facts:

a)The assessee, an International News Agency, was having its headquarter in France. It had been distributing its news and photos connected with news in India through various Indian News agencies.

b)There were two categories of payments received by assessee from India - one for transmission of news and the other for transmission of related photos.

c)The Assessing Officer (‘AO’) as well as the CIT(A) held that copyright subsisted in news-reports and photographs circulated by the assessee in terms of Copyright Act, 1957. Hence, the payments received by the assessee would qualify as 'royalties' under section 9(1)(vi) and Article 13(3) of the India-France Treaty (‘DTAA’).

d)The assessee submitted that no copyright subsisted in the work of the assessee as news reports as well as photographs provided by the assessee lacked originality and were devoid of any creativity.

The Tribunal held in favour of revenue as under:

1)On a perusal of Article 13 of DTAA, it was evident that 'royalty' cover within its fold payments pertaining to copyright of literary, artistic work, etc. Since these terms had neither been defined nor illustrated under Income-tax Act nor under DTAA, reliance was to be placed on relevant provisions of the Indian Copyright Act, 1957 to understand their true meaning and context.

2)To appreciate the distinction between mere reporting of facts from news stories, it would be worthwhile to analyse the recent reporting about Malaysia Airlines Flight 370 flight that disappeared on 8 March, 2014. In one of the newspapers i.e. 'Strait Times', the catchline read as Malaysia's MH 370 report shows delayed response, offers no new clues' while, another newspaper 'The New York Times' reported this incident with the catchline Questions Over Absence of Cellphone Calls From Missing Flight's Passengers'. It was to be pointed out that, the piece reported by the first newspaper consisted of news inputs as well as photographs from AFP while as the latter one consisted of news inputs from 'New York Times News Service'.

3)From a reading of the above news-item, it is evident that, even though the factum or news remains to be imbedded in a fact its reporting or form of an expression makes it unique. Thus, such news-reports as well as archived data being in the nature of 'original literary works' meet the statutory requirements for copyright outlined under section 13(1)(a) of the Indian Copyright Act, 1957. Hence, copyright subsisted in such news item/news story.

4)Section 2(c)(i) of the Indian Copyright Act, 1957 categorically includes photographs as artistic work. As per terms of usage of assessee's photos for news items or non-news items, it could not be denied that it had an intrinsic value of its own and when used for 'news items'; it helped to assist in conveying the message in the news story. Hence, copyright subsisted in such photographs/ image under consideration. Therefore, sum received by international news agency on distribution of its news and related photos in India was taxable as royalty. – Agence France Presse v. ADIT, International Taxation, New Delhi [2014] 51 taxmann.com 186 (Delhi - Trib.)

HC can’t review orders of SetCom; powers are confined to reviewing its decision making process rather decision itself


IT: High Court cannot assume the role of an appellate authority to review orders passed by the SetCom. Its role is confined to judicial review of the decision making process adopted by the SetCom and not the decision itself.

The High Court held as under:

1)The High Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, cannot assume the role of an appellate authority to conduct a review of orders passed by the Settlement Commission (‘SetCom’).

2)Its role is confined to reviewing decision making process adopted by the SetCom and not the decision itself.

3)The scope of enquiry of the Court, in matters involving a challenge to orders passed by the SetCom, is only to see whether its order complied with the statutory provisions of Chapter XIX-A of the I-T Act.

4)The Karnataka High Court in N.Krishnan v. Settlement Commission [1989] 47 TAXMANN 294 (KAR.) observed that a decision of the SetCom could be interfered with only:

i)If grave procedural defects, such as violation of the mandatory procedural requirements of the provisions in Chapter XIXA of the Income-tax Act, 1961, and/or violation of the rules of natural justice were made out; or

ii)If it was found that there was no nexus between the reasons given and the decision taken by the SetCom..

5)The Supreme Court in Union of India v.Ind-Swift Laboratories Limited [2011] 4 SCC 635 held that an order passed by the SetCom could be interfered with only if the said order was found to be contrary to any provisions of the Act. So far as the findings of fact recorded by the SetCom or question of facts were concerned, the same were not open for examination either by the High Court or by the Supreme Court.

6)Hence, it was well-settled that the power of judicial review was not to be exercised to decide the issue on facts or on an interpretation of the documents available before the Court. Thus, in the instant case, the enquiry by Court could only be whether or not the SetCom had exercised a jurisdiction that it did not have or, alternatively, if it did have the jurisdiction, whether it had erred in the exercise of that jurisdiction. In the latter event, the Court would also have to bear in mind the nature of the jurisdiction exercised by the SetCom, which was akin to a statutory arbitration. – CIT v. Settlement Commission (IT & WT) [2014] 51 taxmann.com 351 (Kerala)

SEBI plans to widen definition of insider in insider norms and to reduce timeline to complete delisting process


The SEBI board met in Mumbai on November 19, 2014 and approved of new regulation in place of existing insider trading regulations and amendment to delisting regulations. It has widened the definition of insider under amended insider trading norms and has reduced the time-line for completing delisting process.

Some of the changes approved by SEBI are outlined hereunder:

1)Amendment to Insider trading norms: In order to strengthen the regulatory framework dealing with insider trading in India, SEBI has approved of new regulation in place of the existing Insider Trading regulations. The salient features of the proposed regulations are as under:

a)Definition of ‘insider’ broadened: The definition of insider has been widened. Following persons have been included in the definition of ‘insider’:

Persons connected in any contractual, fiduciary or employment relationship that allows such persons access to unpublished price sensitive information (UPSI).

Immediate relatives would be presumed to be connected persons, with a right to rebut the presumption.

b)Insider trading norms aligned with international practices: The requirement of communication of UPSI in the case of legitimate business transaction has been recognized, in law, and a safeguard has been provided.

c)Disclosure of UPSI in public domain: Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market, as prevalent in other jurisdictions.

2)Insertion of uniform regulation in place of listing agreement: SEBI has approved of conversion of Listing Agreement to Listing Regulations. Listing Regulations, interalia, would be comprehensive Regulations in respect of various types of listed securities. These Regulations would consolidate and streamline the provisions of existing listing agreements, thereby ensure better enforceability.

3)Amendment to delisting regulations: SEBI has approved certain changes to SEBI (Delisting of Equity Shares) Regulations, 2009:

a)Conditions for delisting:

It has been proposed that delisting would be considered successful only when the shareholding of the acquirer together with the shares tendered by public shareholders reach 90% of the total share capital of the company, and Atleast 25% of the number of public shareholders, (holding shares in dematerialised mode as on the date of the Board meeting approve of the delisting proposal) tender in the reverse book building process.

b)Exemption from reverse book building process: Further, companies whose paid-up capital and net worth does not exceed Rs.10 crores and Rs.25 crores, respectively, as on the last day of the previous financial year are exempted from following the Reverse Book Building process.

c)Reduction in time-line to complete delisting: Timelines for completing the delisting process has been reduced from 137 calendar days (approx 117 working days) to 76 working days.

4)Risk based supervision of market intermediaries: SEBI is in the process of formalizing its risk based approach towards supervision of market intermediaries which will be in alignment with the global best practices. The system will be implemented in a phased manner.

5) Granting Single Registration to Depository Participants: With a view to further simplify the registration requirements for Depository Participants (DPs), the Board has approved of the policy of granting single registration for the application of initial registration as well as the permanent registration for operating with both the Depositories.

6) Use of Secondary Market infrastructure for public issuance (“e-IPO”): The Board has approved the proposal to frame suitable regulations for using Secondary Market infrastructure for public issuance (“e-IPO”) after going through the public consultation process

7) Imposing restrictions on wilful defaulters - Amendments to Regulations framed under SEBI Act, 1992: The Board has approved of the proposal to review the policy in respect of restricting an issuer company / its promoter / directors, categorized as wilful defaulter, from raising capital after going through the public consultation process.

Wednesday, November 19, 2014

Sales incentives to employees establish LO promotional activities in India; treated as PE of foreign Co.


Facts:

a)The assessee, a company incorporated in US, established a Liaison Office (‘LO’) in India. During assessment the Assessing Officer (‘AO’) contended that the activities of the LO extended to searching for the prospective buyers and for promoting sales of the assessee in India.

b)The AO posed a few queries before the Chief Representative Officer (‘CRO’) of the assessee which were explained by him.

c)In one of the queries pertaining to the remuneration schemes for the employees, the CRO explained that the employees were entitled to sales incentives to the extent of 25% of their annual remunerations. Further, the performance of the employees was judged by the number of direct orders received by them.

d)The CRO further explained that the incentive plan was a standard term which was inadvertently included in the offer letters given to the employees. In fact, no such incentive was given to any employees during the year.

e)On basis of such an enquiry, the Assessing Officer held that the activities of LO were not limited to preparatory or auxiliary activities in India and they had extended to marketing and promotional activities as well. Accordingly, the income attributable to the LO in India would be taxable in India. The Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer.

The High Court upheld order of the Tribunal:

The High Court upheld the order of the Tribunal which provided that:

1)Whether or not any incentive was paid to an employee during the year was not material. What was relevant was the nature of the incentive plan.

2)Nature of incentives to employees indicated that purpose of LO was not just to advertise products of assessee but extended to activities which traversed the actual marketing of the products of assessee in India.

3)The explanation that the incentive plan, being a standard language, was inadvertently included in the offer letter was far-fetched, because the assessee carrying over a transnational business with a range of advisors could not be assumed to have committed an inadvertent mistake on this significant issue.

4)Therefore, LO would be treated as PE of foreign company.

5)However, on the issue of determination of the income attributable to the LO which had to be taxed in India, the High Court restored the matter before the AO. - BROWN AND SHARPE INC. V. CIT [2014] 51 taxmann.com 327 (Allahabad)

Tuesday, November 18, 2014

Time gap of 30 days isn't intended between book closure date and record date for declaration of dividend, says SAT


As per clause 16 of 'Listing agreement' time gap of 30 days is intended to be between two book closures and two record dates and not between a book closure and a record date

Facts:


a)The appellant-company, listed on BSE and NSE (‘respondents’), had declared book closure date for the purpose of its AGM. The AGM was held and on the same day interim dividend was declared and the record date was fixed.

b)Thereafter, both the respondent's alleged that time gap between book closure date and record date was less than 30 days which was violative of clause 16 of the 'Listing Agreement'.

c)The SEBI held that appellant-company had violated clause 16 and, accordingly, called upon appellant to comply with it.

On appeal the Securities Appellate Tribunal held as under:

1)On perusal of clause 16 of ‘Listing Agreement’ it was seen that in a year there could be more than one book closure for the purpose of declaration of dividend or the rights issue or bonus shares, etc.

2)If more than one book closure was postulated under clause 16 of the listing agreement, then the time gap of 30 days under clause 16 would be referred to as the time gap between two book closure dates and it could not be inferred that time gap should be between book closure date and record date.

3)Where a company kept its transfer books closed during AGM as per clause 16 and also sought to declare dividend, then stipulating record date for such dividend after 30 days of book closure date as well as payment of dividend would be violative of section 205A of the Companies Act, 1956 – ORACLE FINANCIAL SERVICES SOFTWARE LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 24 (SAT - MUMBAI)

Forex losses arising from services provided to foreign AEs are operative in nature; to be part of PLI for TP study


Foreign exchange loss in case of providing services to AEs is to be considered as operative in nature and, hence, is to be included in PLI calculation of an assessee.

Facts:

One of the grounds raised for appeal was as under:


The DRP/AO had erred in confirming the action of the TPO in considering the foreign exchange loss as operating, though the loss was mainly due to the re-instatement of balances at the year end and did not pertain to the operations of the Appellant.

The Tribunal held as under:

1)The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd v. ACIT [2011] 44 SOT 156 (Bang.), observed as follows:

a)The foreign exchange fluctuation gain was nothing but an integral part of the sales proceeds of an assessee carrying on export business.

b)The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of an exporter-assessee. The foreign exchange fluctuation income could not be excluded from the computation of the operating margin of the assessee-company.

2)Thus, following the aforesaid decision of the Tribunal, it was to be held that while computing the margin for determining the ALP, the foreign exchange gain/loss has to be taken as part of the operating margin. Therefore, foreign exchange loss in case of providing services to AEs was to be considered as operative in nature and, hence, was to be included in the PLI calculation of the assessee. - KENEXA TECHNOLOGIES (P.) LTD. V. DY.CIT [2014] 51 taxmann.com 282 (Hyderabad - Trib.)

Saturday, November 15, 2014

Provision of suspension of legal proceedings under SICA prevails over provisions of debt recovery under RDDB Act


Section 22 of SICA covers and interdicts instances of application for recovery made under the provisions of the RDDB Act. Provisions of SICA, in particular section 22, shall prevail over provisions for recovery of debts in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’).

Issues:

a)Whether as per bar contained in section 22 of Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’), no recovery proceeding could be effected against defaulting-Company?

b)Since Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’) was a subsequent enactment, whether provisions under sub-section (2) of section 34 of RDDB Act would have an overriding effect over other laws mentioned therein, including SICA?

The Supreme Court held as under:

1)Proceedings by way of an application for recovery according to a summary procedure as provided for under the RDDB Act are not referred to in Section 22 of SICA simply because the RDDB Act had not then been enacted.

2)Though the RDDB Act is the later enactment, sub-section (2) of Section 34 specifically provides that the provisions of the Act or the rules thereunder, shall be in addition to, and not in derogation of the other laws mentioned therein including SICA.

3)Section 22 of SICA clearly covers and interdicts such an application for recovery made under the provisions of the RDB Act. Therefore, the provisions of SICA, in particular Section 22, shall prevail over the provision for the recovery of debts in the RDDB Act. – KSL & INDUSTRIES LTD. V. ARIHANT THREADS LTD. [2014] 51 TAXMANN.COM 252 (SC)

Thursday, November 13, 2014

Consent fee paid to SEBI without admitting alleged violation by broker couldn’t be held as penalty; deduction allowed


IT: When SEBI accepted consent application (settlement application) without admitting or denying guilt by assessee-stock-broker, resultant consent fee paid to SEBI could not be equated with a “penalty” - The fee was paid for purpose of business, to settle a dispute with SEBI and to be able to conduct business without interruption - Thus, consent fee was allowable as business expenditure under Section 37.

Facts:


a)The assessee-company was engaged in share broking business. It filed its return of income. on examination of the said return, the Assessing Officer (‘AO’) noticed that assessee had paid a sum of Rs. 50 lakhs to SEBI as consent fee.

b)On further examination, he noticed that the SEBI had recommended suspension of Certificate of Registration of assessee as stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, period of suspension was reduced to four months.

c)The assessee challenged said order by filing an appeal before the Securities Appellate Tribunal. While the said appeal was pending, the SEBI issued a circular whereby it agreed to settle the disputes in consideration of ‘Consent Application’ furnished by the assessee on payment of consent fee.

d)Thus, the AO took the view that the said amount of Rs.50 lakhs was a compounding fee paid for offences committed under SEBI (Stock Brokers and sub-brokers)Regulations, 1992. Accordingly, he held that it was a penalty paid for infraction of law and, hence, disallowed the said claim by invoking the Explanation to Sec. 37(1) of the Income-tax Act (‘I-T Act’). On appeal, the CIT(A) deleted the disallowance made by AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

The Tribunal upheld the order of the CIT(A) which provided as under:

a)It was apparent from the Circular issued by the SEBI that instances of administrative/civil actions which included, inter-alia, orders of suspension from trading, etc., were different from criminal actions.

b)Further, it was apparent from the order of SEBI that the appellant had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines. It had been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI had also accepted the application on this basis.

c)Thus, SEBI had accepted that guilt might or might not be established at the end of the appellate proceedings. Therefore, the fee paid could not be equated with a “penalty” which had necessarily to be a punishment for infraction of a law or a regulation having statutory force.

d)The fee was claimed to have been paid for the purposes of business to settle a dispute with SEBI and to be able to conduct its business without interruption. Thus, if the concerned impost was purely compensatory in nature, the same was an allowable expense under section 37 of the I-T Act. – ITO V. RELIANCE SHARE & STOCK BROKERS (P.) LTD. [2014] 51 taxmann.com 215 (Mumbai - Trib.)

Wednesday, November 12, 2014

RBI prescribes stringent norms for NBFCs on lines of banking norms


In order to bring Non Banking Finacial Company (NBFC) regulations in alignment with the banking norms, RBI has issued revised regulatory framework for NBFCs. The key changes introduced to regulatory framework are delineated below:

1)Limit of minimum ‘Net Owned Fund’ raised to Rs. 2 Crores: As per new regulations, it shall be mandatory for all NBFCs to attain a limit of minimum Net Owned Fund (‘NOF’) of Rs. 200 lakhs by the end of March 2017, as per the milestone given below:

a)Rs. 100 lakh by the end of March 2016,

b)Rs. 200 lakh by the end of March 2017.

NBFCs failing to achieve the aforesaid ceiling within the stipulated time shall not be eligible to hold the Certificate of Registration (‘CoR’) as NBFCs. It will be incumbent upon such NBFCs, the NOF of which falls below Rs. 200 lakh, to submit a certificate of statutory auditor certifying compliance to the revised levels at the end of each of the two financial years, i.e. (March 2016 and March 2017).

2)Existing unrated asset finance companies to get themselves rated: In order to move over to a regimen of only credit rated NBFCs accepting public deposits, the existing unrated asset finance companies are required to get themselves rated by March 31, 2016.

3)Revised Systemic Significance: The threshold limit for defining systemic significance for non-deposit accepting NBFCs (‘NBFCs-ND’) has been revised in the light of the overall increase in the growth of the NBFC sector. Now systemically important non-Deposit taking NBFCs (‘NBFCs-ND-SI’) should have asset size of Rs. 500 crore and above as per the last audited balance sheet.

4)Assets size of NBFCs in case of multiple NBFCs: NBFCs that are part of a corporate group or floated by a common set of promoters will not be viewed on a standalone basis. The total assets of NBFCs in a group (including deposit taking NBFCs, if any) will be aggregated to determine if such consolidation falls within the asset sizes two categories, i.e., NBFCs-ND or NBFCs-ND-SI.

5)Compliance with prudential norms and conduct of business regulations: All NBFCs-ND with assets of Rs. 500 crore and above, irrespective of whether they have accessed public funds or not, shall comply with prudential regulations as applicable to NBFCs-ND-SI. They shall also comply with conduct of business regulations if customer interface exists.

6)Prudential regulations applicable to NBFCs-ND with assets of less than Rs. 500 crores: The NBFCs-ND with asset size of less than Rs. 500 crores, are exempted from the requirement of maintaining Capital To Risk Asset Ratio (CRAR) and complying with credit concentration norms.

7)Revised criteria for NPA classification: The revised norms would reduce the period in a phased manner so that the norms would become at par with banks by March 31, 2018.

8)Revised provisioning norms for Standard Assets: The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, had been increased to 0.40%. The compliance to the revised norm will be phased in as given below:

a)0.30% by the end of March 2016.

b)0.35% by the end of March 2017.

c)0.40% by the end of March 2018

9)Revised corporate governance and disclosure norms for NBFCs: NBFCs-D with minimum deposits of Rs. 20 crores, and NBFCs-ND with minimum asset size of Rs. 50 crores are required to constitute an Audit Committee. NBFCs-D with minimum deposits of Rs. 20 crores and NBFCs-ND with minimum assets of Rs. 100 crores are advised to constituting Nomination Committee to ensure ‘fit and proper’ status of proposed/existing directors and Risk Management Committee.

10)Minimum Tier-I capital: Non-deposit taking NBFCs with minimum asset size of Rs. 500 crores and all deposit taking NBFCs are required to maintain minimum Tier-I capital of 10% by the end of March 2014 and 8.5% by the end of March 2016.

Circular No. DNBR (PD) CC.No.002/03.10.001/2014-15 Dated, 10-11-2014

Tuesday, November 11, 2014

Short deduction of tax due to application of wrong provision won't lead to sec. 40(a)(ia) disallowance


Facts:

a)The Tribunal held that the assessee had to deduct tax under section 194-I and that the provisions of section 194C were not applicable in respect of transactions entered between the assessee and the contractee.

b)On appeal, the High Court confirmed the order of the Tribunal. However, the High Court restored the matter back to the file of the Tribunal for the limited purposes of applicability of section 40(a)(ia) in respect of short deduction of tax at 2.06% instead of at 10%.

c)On remand, the revenue contended that for the short deduction of TDS there would be disallowance under section 40(a)(ia).

The Tribunal held in favour of assessee as under:

1)In case of Apollo Tyres Ltd. v. Dy. CIT [2013] 35 taxmann.com 593 (Coch.) it was held that section 40(a)(ia) did not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act.

2)There was an obvious omission to include short deduction/lesser deduction in section 40(a)(ia) of the Act. Therefore, in case of short/lesser deduction of tax the entire expenditure could not be disallowed whose genuineness was not doubted by the Assessing Officer.

3)Thus, in view of the decision of this Tribunal in Apollo Tyres (Supra) short deduction of tax could not be a reason or basis for disallowance under section 40(a)(ia). Accordingly, the orders of the lower authorities were to be set aside and the disallowance made under section 40(a)(ia) was to be deleted. - THREE STAR GRANITES (P.) LTD. V. ACIT [2014] 49 taxmann.com 578 (Cochin - Trib.)

Monday, November 10, 2014

Sum paid to NR without deduction of tax would not invite sec. 40(a)(i) disallowance if such sum was capitalized


Where assessee had not claimed payment made to non-resident for providing engineering site services as expenditure but capitalised it and claimed only depreciation thereon, no disallowance could be made under section 40(a)(i).

Facts:


a)The assessee, a non-banking financial company, made payment to non-resident for providing engineering site services but did not deduct tax at the time of payment. The Assessing Officer disallowed the entire payment made by the assessee.

b)The assessee submitted that no disallowance could be made as it had not claimed said payment as expenditure but capitalized it and only depreciation was claimed thereon.

c)On appeal, the CIT(A) upheld order of the Assessing Officer. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The payment made to non-resident for technical services was admittedly taxable in India, therefore, the assessee was bound to deduct tax at source. The assessee could claim the same as expenditure. However, such claim of expenditure could be allowed only in case the assessee deducted the tax at the time of payment.

2)In the instant case, the deduction was not claimed as expenditure while computing the income chargeable to tax. The CIT(A) observed that irrespective of the fact whether the assessee had claimed deduction or not disallowance had to be made since tax was not deducted.

3)Both the authorities had not examined whether the amount paid to the non- resident was deducted while computing the income chargeable to tax or not. The language of section 40 clearly provides that the amount paid to non-resident (on which tax is not deducted) shall not be deducted while computing the income chargeable to tax.

4)Therefore, if the assessee had not deducted the amount (i.e., claimed it as expenditure) while computing the chargeable income, there was no necessity for further disallowance. - Muthoot Finance Ltd. v. ACIT [2014] 49 taxmann.com 580 (Cochin - Trib.)

Saturday, November 8, 2014

SEBI norms and clause 35 of listing agreement don't require promoters to make disclosure of encumbered shares


Neither any regulation of SEBI nor clause 35 of the Listing Agreement casts an obligation on promoter to make disclosures of shares encumbered to listed company. SEBI was not justified in directing listed company to disclose details of shares which were 'otherwise encumbered' by promoter to Stock Exchanges.

Facts:


a)SEBI imposed penalty upon appellants under Section 23E of the Securities Contract Regulation Act and Section 15HA of the SEBI Act for allegedly violating clause 35 of the Listing Agreement and Regulations 3(d) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

b)Issue raised in appeal was:

Whether a listed Company was required to disclose details of ‘otherwise encumbered’ shares held by the promoter under clause 35 of the Listing Agreement even though there was no obligation cast upon the promoter to make such disclosures to the listed Company?

The Securities Appellate Tribunal held as under:

1)Since neither any regulation of SEBI nor clause 35 of the Listing Agreement would casts an obligation on the promoter to make disclosure of encumbered shares to the listed Company, and

2)In the absence of such disclosure made by promoter, SEBI was not justified in directing the listed Company to disclose details of shares which were ‘otherwise encumbered’ by the promoter. Accordingly, penalty imposed by SEBI was to be set aside. – GOLDEN TOBACCO LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 51 (SAT - MUMBAI)

Friday, November 7, 2014

Failure to issue notice in time couldn't be cured by sec. 292BB


Failure to issue a notice under section 143(2) within prescribed period cannot be cured by taking recourse to section 292BB.

Facts:


a)The Assessing Officer issued a notice under section 143(2) to assessee. Thereafter assessment proceedings were completed and an order of assessment was passed under section 143(3).

b)On appeal, the CIT(A), held that the notice under section 143(2) was not issued within the period stipulated in that provision. Hence, section 292BB would not save a situation where the notice itself had not been issued before the expiry of the period of limitation since it could only cure a defect of service within the stipulated period.

c)Further, the Tribunal held that since no notice under Section 143(2) was issued within the prescribed period, the assessment was not valid. The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)In the present case, the notice under Section 143(2) was issued much beyond the period of six months. Section 292BB provides a deeming fiction that once the assessee has appeared in any proceedings or cooperated in any enquiry relating to an assessment or reassessment, it shall be deemed that notice has been duly served upon assessee in time in accordance with the provisions of the Act.

2)Once the deeming fiction came into operation, the assessee was precluded from raising a challenge about the service of a notice, service within time or service in an improper manner. However, Section 292BB could not obviate the requirement of complying with a jurisdictional condition. Where the Assessing Officer failed to issue a notice under Section 143(2) within the period of six months as spelt out in the proviso to clause (ii) of section 143(2), the assumption of jurisdiction under section 143(3) would be invalid.

3)The deeming fiction in section 292BB overcomes a procedural defect in regard to the non-service of a notice on the assessee, and obviates a challenge that the notice was either not served or that it was not served in time or that it was served in an improper manner.

4)Section 292BB could not come to the aid of the revenue in a situation where the issuance of a notice itself was not within the prescribed period, in which event the question of whether it was served correctly or otherwise, would be of no relevance whatsoever. Thus, failure to issue a notice under section 143(2) within prescribed period could not be cured by taking recourse to section 292BB. – CIT V. SALARPUR COLD STORAGE (P.) LTD [2014] 50 taxmann.com 105 (Allahabad)

Thursday, November 6, 2014

AO can’t disregard ITAT’s stay order to collect pending tax dues on basis of consent letter from assessee


If Tribunal grants stay of recovery of demand, the Assessing Officer cannot collect the pending amount from assessee even after obtaining a consent letter from him.

Facts:


a)The AO made a reference to Transfer Pricing Officer for determining the arm's length price of the international transactions. Thereafter an order was passed by the AO raising additional demand.

b)The assessee made an application before the ITAT, Mumbai for stay of demand. The Tribunal granted stay. Despite a specific direction by the Tribunal, the AO collected the demand by obtaining a consent letter from the assessee during the subsistence of the said order.

c)Though the case was posted from time to time, the same was adjourned at the request of the learned D.R. or for want of time, and, hence, the assessee had filed a fresh stay application for extension of the stay.

The Tribunal held as under:

1)Neither the assessee nor the Revenue had the right to flout the decision of the Tribunal and the AO, being an officer functioning under the Government of India, it was his obligation to follow the directions of the superior authority and even if there was consent he should not have collected the amount.

2)We have recently come across other cases where similar consent letters were obtained or the Department had collected tax despite the stay order passed by the ITAT. We deplore this practice and direct the Chief CIT to issue a letter to all the concerned AOs not to adopt this kind of approach of obtaining consent letters and to respect the orders passed by the Tribunal.

3)Thus, stay was granted on collection of outstanding demand for a further period of six months and AO was directed to refund the amount collected contrary to the order passed by the ITAT alongwith interest. – JOHNSON & JOHNSON LTD. V. ACIT [2014] 51 taxmann.com 1 (Mumbai - Trib.)

Wednesday, November 5, 2014

Sec. 115A doesn't debar assessee from entering into a new agreement to have lower tax rate on royalty


Provisions of section 115A(1)(b)(AA) do not debar assessee to enter into a new agreement after change of situation resulting in reduced rate of royalty.

Facts:


a)The assessee-company was incorporated in the United Kingdom. It had two associate companies in India, namely, ‘GKN S’ and ‘GKN D’.

b)The assessee had entered into agreements with GKN S and GKN D allowing them to use trademarks in respect of various products and services, in accordance with the terms and conditions mentioned in such agreements. Sum received by assessee from GKN D and GKN S was offered to tax as royalty at the rate of 10.56 per cent as per section 115A.

c)The revenue authorities opined that the subsequent agreements entered into in the year 2007 were nothing but extension of existing agreement between the contracting parties. Since it was extension of earlier agreement, the assessee would not get advantage of provisions of section 115A, wherein there was a provision for lower rate of taxability, i.e., 10 per cent. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)As per provisions of section 115A(1)(b)(AA), the rate of tax on license fee has to be taxed at the rate of 10 % on the strength of the agreement. It was undisputed that the assessee was having earlier agreement dated 12-7-2004 with GKN S and the same had been renewed from 1-1-2007.

2)The provisions of section 115A(1)(b)(AA) do not debar the assessee to enter into new agreements after change of situation in the provisions of said section as far as the reduced rate of royalty is concerned.

3)It was undisputed that the new agreements entered into in 2007 between the assessee and GKN S and with GKN D were independent agreements. The revenue authorities could not interfere into the business decisions of the assessee.

4)By no stretch of imagination, the new agreement entered into in 2007 could be said to be the extension of old agreements entered into between the parties. Even if the assessee had managed its affaires, as far as renewal of agreement was concerned, the revenue authorities could not interfere with the same, unless it was proved beyond doubt that it was nothing but a colourable devise.

5)Even if the assessee had entered into new licence agreement with GKN S and in the same year with GKN D to take advantage of lower rate of tax of 10 per cent, the same could not be denied to the assessee on the ground that the it was nothing but extension of old agreement which was otherwise not correct.

6)The new licence fee agreement entered into by the assessee with GKN S and with GKN D was nothing but a new and separate agreement. Accordingly, licence fee had to be taxed at 10%. - GKN HOLDINGS PLC V. DEPUTY DIT [2014] 50 TAXMANN.COM 307 (PUNE - TRIB.)

Tuesday, November 4, 2014

Takeover option wasn't available to petitioner as he failed to exercise it within 15 days of order of CLB


Where pursuant to CLB's order petitioner exercised takeover option of respondent-company, as a relief to bring an end to acts of oppression and mismanagement, beyond 15 days from date of relevant orders of CLB and High Court, such option was no more available

Facts:


a)While disposing of oppression and mismanagement petition the Company Law Board directed petitioners to takeover the respondent-company and to communicate their decision to the respondents within 15 days from the date of the CLB’s order.

b)However, the petitioners did not exercise the option within 15 days, instead filed an appeal before the High Court. Consequently, the appeal was dismissed and a certified copy was delivered to the petitioner.

c)Thereafter, the petitioner within two days of the receipt of a copy of the High Court's order (but beyond 15 days of final order of High Court), sent a letter to the respondents exercising its option to take over the respondent-company.

d)The petitioner contended that there was no delay on his part in complying with the directions to exercise his option within 15 days as he had exercised the option with two days of receipt of copy from the High Court and was, therefore, entitled to enforcement of CLB’s order to takeover the respondent-company.

The Company Law Board held as under:

1)In view of the fact that Counsel of the petitioner was present before the CLB and before the High Court on the date of the order dismissing the appeal, the knowledge thereof on such dates to the petitioner could safely be inferred.

2)Since no appeal was preferred by the Petitioner against the order High Court, the date of receipt of certified copy of the said order would lose significance and, therefore, the petitioner should have exercised the option within 15 of final order of High Court.

3)Even though the petitioner was in knowledge of respective orders on same date, yet he failed to exercise option within 15 days from date of CLB order as well as final order of High Court, thus, takeover option would no more be available to petitioner. – DR. RAJ KACHROO V. D.S.M. HEALTHCARE (P.) LTD. [2014] 50 TAXMANN.COM 233 (CLB - NEW DELHI)

Monday, November 3, 2014

Expenses incurred on abandoned projects are allowable under sec. 37(1)


Where assessee had incurred a liability under a contract, which was terminated and, therefore, no amount under contract or in pursuance of a claim was receivable, assessee was entitled to claim said amount as business expenditure.

Facts:


a)The Madhya Pradesh Electricity Board ('MPEB') awarded a contract to assessee-company for revival of a Thermal Power Station and paid certain amount as an advance.

b)The assessee gave a bank guarantee for such amount. The MPEB arbitrarily terminated the contract and invoked the bank guarantee. The assessee debited the amount, being the cost of abandoned project, in the profit and loss account.

c)The assessing authority was of the view that the assessee had been following mercantile method of accounting, thus, the expenditure on a particular project could not be allowed as an expenditure, unless there was a corresponding credit in the form of contract receipt or work-in-progress.

d)The CIT (A) as well as the Tribunal confirmed said disallowance. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1)If the assessee incurred a liability when the contract was terminated and when no amounts under the contract or in pursuance of a claim were receivable, assessee was entitled to claim the said amount as expenditure for implementing the contract as a set off under section 37(1), read with section 28.

2)Though the assessee had incurred expenditure during the year in which he had not received any amount, yet when he would receive the money in pursuance of the award, the said amount would be chargeable to tax whether the business would be in existence or not in that year. Therefore, the interest of the revenue was fully protected.

3)Thus, assessee was entitled to claim the cost of abandoned project as business expenditure under Section 37(1). - ASIA POWER PROJECTS (P.) LTD. V. DY. CIT [2014] 49 taxmann.com 428 (Karnataka)

Saturday, November 1, 2014

Cenvat credit couldn’t be denied merely because original manufacturer of inputs was non-traceable


Where assessee had complied with all procedures in availing of credit and had taken all steps in accordance with law, credit could not be denied merely because original manufacturer of inputs was not traceable.

Facts:


a)The department invoked extended period of limitation to deny credit taken by assessee on ground that original manufacturer could not be traced. The Tribunal relied upon its earlier order dated 24-1-2011 and upheld denial.

b)The Assessee argued that order (dated 24-1-2011) of Tribunal was reversed in Prayagraj Dyeing & Printing Mills (P.) Ltd v. Union of India [2013] 30 TAXMANN.COM 139/38 STT 525 (GUJ.).

The High Court held in favour of assessee as under:

1)In case of Prayagraj Dyeing & Printing Mills's case (supra) it was held that if document (based on which credit was taken) was issued even by fraud, extended period of limitation could not be invoked against a holder in due course unless he was shown to be a party to a fraud.

2)Without elaborate reasons, present appeal was allowed on same lines, as was done in case of Prayagraj Dyeing (supra). Order of Tribunal was to be reversed accordingly. – KIRTIDA SILK MILLS V. C.C.E.C. [2014] 50 TAXMANN.COM 264 (GUJARAT)

Friday, October 31, 2014

Discount to foreign buyer in lieu of advance payments was in nature of interest; liable to TDS


Pre-payment discount given by assessee to foreign buyers in absence of any mention in purchase contract that obliged assessee to give said discount, was in nature of interest and tax was deductible on it at source under section 195

Facts


a)The assessee-seller gave some discount to foreign buyers on sale in consideration of receiving advance payment for the same.

b)The Assessing Officer (AO) opined that assessee was not obliged to give said discount as per the purchase contract entered into between assessee and foreign buyer and, therefore, benefit allowed by assessee to its buyers as pre-payment discount was, in fact, in nature of interest on which TDS was deductible under section 195.

c)The Commissioner (Appeals) (‘CIT(A)’) deleted the addition made by the AO.

d)Aggrieved by the order of CIT(A), revenue filed the instant appeal before the tribunal.

The tribunal held in favour of revenue as under-

1)It was mentioned in the purchase contract that the seller would cause the issuance of a banker's guarantee for an amount equal to the provisional price plus interest in the form acceptable to buyer.

2)It was also specified in the contract that within two business days from the date buyer's bank received the guarantee in the acceptable format, buyer would pay to seller the pre-payment amount. Hence, assessee was not obliged to offer discount to the buyer as per the purchase contract.

3)As per the invoice, it was seen that pre-payment discount was allowed and buyer was asked to make payment of the balance amount against the invoiced price after adjusting the advance received by the assessee and pre-payment discount.

4)So, asking the buyer to pay lesser amount after adjusting discount or making payment of discount to the buyer was same thing because in both the cases, the buyer received the benefit.

5)Thus, the benefit allowed by the assessee to its buyers as discount was, in fact, in the nature of interest because the same was in consideration of receiving advance payment, and, therefore, TDS was deductible under section 195 and disallowance made by AO was held as justified-DEPUTY CIT V. KOTHARI FOOD & FRAGRANCES [2014] 50 TAXMANN.COM 213 (LUCKNOW - TRIB.)

Thursday, October 30, 2014

Mere non-commencement of charitable activities won't lead to denial of trust's registration


Facts:

a)The assessee, a registered trust, applied for registration under section 12AA.

b)The Director of Income-tax (Exemption) (‘DIT(E)’) rejected application on the ground of non-commencement of charitable activities by assessee.

c)The reason behind non-commencement of charitable activity was shortage of funds as no admission fees was received by assessee from its life members and general members and no fund was raised from public.

d)Aggrieved by the order of DIT(E), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)There was no dispute about the charitable nature of the objectives of the trust as per the memorandum. 2)The adverse inference had been drawn by DIT(E) on the ground that assessee had no intension to commence charitable activity as no membership fees was received from members and no fund was raised from public for the same.

3)The non-contribution of membership fee by general members and life members could not be a ground for denial of registration to the trust as membership fees may be paid later on by members otherwise rights of membership could not devolve upon them.

4)As far as raising of funds from public is concerned, it is at the discretion of the trust that can be undertaken in due course, may be at the time of issue of section 80G registration which is consequent to section 12AA registration

5)Thus, mere non-carrying of the activities of trust at the time of registration per se could not be detrimental to registration of the trust under section 12AA when the objects were charitable and there was no adverse comment about them.

6)Thus, the order of the DIT(E) was reversed and it was held that the assessee was eligible for registration under section 12AA -SOHAM FOR KIDS EDUCATION SOCIETY CENTRE V. DIT(E) [2014] 49 taxmann.com 493 (Delhi - Trib.)