Monday, March 31, 2014

Scope of retro-amendments couldn’t be curtailed by treaty - HC’s passing remarks; denies stay on recovery of demand

The scope and effect of the legislation cannot be curtailed by the DTAA, if after it comes into force an Act of Parliament is passed which contains contrary provision. This issue could have been discussed further had the petitioner questioned the legality of the Finance Act, 2012 inserting Explanations 5 and 6 in section 9(1)(vi) of the Act.
a)  The assessee, engaged in business of providing telecom services to its subscribers in India, entered into agreements with non-resident telecom operators ('NTOs') for providing bandwidth and inter-connects capacity outside India.
b)  It also entered into a capacity transfer agreement with 'Belgacom' (a tax resident of Belgium) for acquisition of capacity over the Europe-India gateway (EIG) cable system.
c)  The assessee argued that the payments to NTOs and Belgacom couldn't be termed as 'royalty' under the provisions of Income-tax Act. Accordingly, it filed the instant writ with the High Court against the impugned order of Tribunal granting limited stay on recovery of tax.
The High Court held in favour of revenue as under:
1)  Section 9(1)(vi) makes it clear that payments for rendering any services in connection with activities referred to in clauses (iv) and (v) of the Explanation 2 to section 9(1)(vi) would attract the definition of 'Royalty;
2)  Explanations 5 and 6 to section 9(1)(vi) inserted by the Finance Act, 2012 provide that royalty includes consideration in respect of any right, property or information. As these Explanations are in the book of statute, unless they are declared ultra vires or their legality is tested, it is indispensable for the Assessing Officer to apply these Explanations while determining tax liability under the Act;
3)  The petitioner had not questioned the validity of the said amendments in this writ. Thus, the Assessing Officer was bound to apply such provisions in determining the taxability of the payments made by the petitioner to the NTOs;
4)  The scope and effect of the legislation can't be curtailed by the DTAA if after its entry into force an Act of Parliament is passed which contains contrary provision. The DTAA is entered into pursuant to the power conferred upon the Government under section 90;
5)  Thus, a detailed discussion was required as to whether section 90(2) was of such nature so as to nullify all Acts of the Parliament which create tax liability under the Act? This issue could be debated further had the petitioner questioned the legality of the Finance Act, 2012, inserting Explanations 5 and 6in section 9(1)(vi) of the Act;
6)  Any observation made on the above issues would not be construed as an expression of opinion on merit in view of the fact that all these issues are sub judice in the two appeals filed before the Tribunal. Thus, it needed to be examined whether the petitioner had made out a case for grant of stay in its entirety;

7)  There was no material placed before the Court to show that the petitioner would suffer irreparable hardship and injuries to his favour due to order of Tribunal granting limited stay on recovery of tax. The Tribunal had answered the grounds urged by the petitioner seeking grant of interim stay and had reached the logical conclusion by directing the petitioner to deposit 50% of the tax liability. The order of the Tribunal could not be interfered with.- Vodafone South Ltd. v. Dy. DIT (International Taxation) [2014] 43 444 (Karnataka)

Saturday, March 29, 2014

MCA notifies Rules under Companies Act, 2013

The Ministry of Corporate Affairs has notified 11 Rules under Companies Act, 2013. They will be effective from April 1, 2014. The major sections of Companies Act, 2013 have already been notified on March, 26, 2014. The salient features of these Rules are as under:
1)  New Definitions: It incorporates definitions of ‘Certifying Authority’, ‘digital signature’, ‘Digital Signature Certificate’,  ‘electronic Mail’, ‘electronic mode’ , electronic record’, ‘electronic Registry’.
2)  One person company (‘OPC’): Only a natural person who is an Indian citizen and resident shall be eligible to incorporate a OPC.
3)  Cessation of OPC status: OPC’s status shall be ceased if-
a)  Its paid up capital exceeds fifty lakh rupees or
b)  Its average annual turnover exceeds two crore rupees.
4) Penalty: The OPC or any of its officer will be liable for penalty of upto Rs 10,000 and further a fine of Rs 1,000 per day if they contravenes any of the provisions of these rules.
5) Prospectus:  Following reports shall be required to be filed along with the Prospectus:
a) Auditor’s report on profits and losses and assets and liabilities.
b) The reports of preceding five financial years relating to profits and losses of the enterprise. Reports can be filed for less than five financial years if the enterprise was in existence for lesser period.
c) Auditor’s report in respect of business of the enterprise.
6) Annual Return: Every company is required to prepare its annual return in Form No. MGT.7. Companies satisfying the following criteria are required to certify its Annual Return from a Company Secretary in practice:
(i)    listed companies or
(ii)   Companies having paid-up share capital of Rs 10 crore or more or

(iii)  Companies with turnover of Rs 50 crore or more.

Friday, March 28, 2014

Agricultural land won't lose its privileges even if sold in violation of State laws; not taxable as capital asset

Merely because agricultural land was sold in favour of non-agriculturist in breach of law prevailing in State, said land would not lose its character as agricultural land and, hence, could not be treated as capital asset.
a)  The assessee had filed return of income and disclosed income from sale of agricultural land in response to notice issued under section 153C.
b)  The Assessing Officer made addition on account of capital gain by holding that the land, which was sold by assessee, was a capital asset as it was sold in violation of laws prevailing in the State.
c)  On appeal, the CIT(A) deleted the addition. Further, the Tribunal confirmed order of the CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:
1)  It was not in dispute that what was sold by the assessee was an agricultural land which was situated beyond 8 Kms. of local limits of the Municipality and at the relevant time, the land was held by the assessee as agricultural land;
2)  The character of land would not change merely because it was sold to a non-agriculturist in breach of law prevailing in the State and the land still would continue as an agricultural land;
3)  Even though the sale in favour of non-agriculturist could be declared as illegal, yet the land would not lose its character as agricultural land;
4)  When the land was an agricultural land, which was situated beyond 8 Kms. from the municipal limits, no error had been committed by the Tribunal in not considering the land as 'capital asset';

5)  Thus, the land was to be treated as agricultural land and it was outside the purview of capital asset. – CIT v. Rajshibhai Meramanbhai Odedra [2014] 42 497 (Gujarat)

Thursday, March 27, 2014

ITAT explains interplay between Article 7 and Article 13 of India-UK DTAA

The Tribunal held as under:
1)  The Para 1 of Article 7 of the India-UK treaty ('DTAA') provides that if an enterprise carries on business in the other Contracting State through a permanent establishment (‘PE’) situated therein, then the profits of the enterprise may be taxed in the other State but only so much of them as are directly or indirectly attributable to that PE;
2)  The effect of Para 9 of Article 7 is that if 'Business profits' include an item of income which falls under any of the specific Articles of the DTAA, such as Royalties and fees for technical services (‘FTS’) under Article 13, then such income shall be excluded from the 'Business Profits' and falls under specific Articles such as Article 13;
3)  Para 6 of Article 13 of DTAA provides that the provisions of paragraphs 1 and 2 of Article 13 shall not apply if the beneficial owner of the royalties or FTS, carries on business in the other Contracting State (in which the royalties or FTS arise) through a PE situated therein and the right, property or contract in respect of which the royalties or FTS are paid is effectively connected with such PE. In such case, the provisions of Article 7 (Business profits) of this Convention, as the case may be, shall apply;

4)  Thus when Article 7 had excluded royalty or FTS to be considered under Article 13 but Para 6 of Article 13 has sent the matter back to Article 7, it was the mandate of Article 7 which would apply on the amount excluded by Para 6 of Article 13. – Dy. DIT v. JC Bamford Excavators Ltd. [2014] 43 343 (Delhi - Trib.)

Wednesday, March 26, 2014

Rental income of godown constructed on an agricultural land couldn't be termed as agriculture income

a)  The assessee, a partnership firm, was carrying on business of constructing godowns and renting them to parties for earning rental income.
b)  It had constructed a godown on agricultural land belonging to its partners. The godown was given on rent and rental income so derived was declared by assessee as agricultural income.
c)  The Assessing Officer had accepted assessee's claim of agricultural income. The CIT passed a revisional order to hold that the rental income from godown could not be treated as agricultural income within meaning of section 2(1A)(c). The agrrieved-assessee filed the instant appeal.
The Tribunal held in favour of revenue as under:
1)  The income in the instant case needed to be considered under section 2(1A)(c). The requirement of section 2(1A)(c) is that the income should be derived from any building owned and occupied by the receiver of the rent or revenue of the land;
2)  In the instant case, neither the assessee was receiver of the rent or revenue of the land, nor was the building occupied by it;
3)  Further, the requirement of this section is that the building must be occupied by the cultivator or the receiver of rent-in-kind of any land with respect to which or with respect to the produce of which, any process which is ordinarily employed by a cultivator or receiver of rent in kind, (so as to render the produce raised or received by him fit to be taken to the market)  is performed;
4)  The assessee also failed to fulfill this requirement, as the godown building was occupied by 'K' and 'I', who were the assessee's tenants during the year under consideration and were not either cultivators, or receivers of rent in kind of any land.;

5)  Further, it had also not been shown by the assessee that either the land beneath the godown building, or the produce thereof was subjected to any process ordinarily employed by a cultivator or receiver of rent in kind to render the produce raised or received by him fit to be taken to the market. Thus, the rental income from godown could not be treated as agricultural income. - New Jain Godowns v. ITO [2014] 42 434 (Delhi - Trib.)

Tuesday, March 25, 2014

Income arising from sale of trees that were cut legally to get hindrance free cultivation was capital receipt

Where trees were not of spontaneous growth and same could not be regenerated and gave benefit to assessee in near future, income earned out of sale of such trees could not be chargeable to tax in hands of assessee and was to be treated as capital receipts
a)  The assessee had purchased a agricultural land on which teak trees were creating hindrance in undertaking cultivation on such land. He took permission of collector to cut those trees;
b)  The Assessing Officer treated income earned out of sale of those trees as of revenue receipt, considering that it was sale of forest produce of wild spontaneous grown trees;
c)  The CIT (A) held the income earned by assessee was capital receipt. The Tribunal upheld the view of the CIT (A). The aggrieved-revenue filed the instant appeal.
The High Court held in favour of assessee as under:
1)  The assessee was an agriculturist and not found to be engaged in any business activity. The cutting and selling of the trees were made after obtaining prior permission from the competent authority;
2)  The sale of the trees was made to the State and both cutting and selling were governed by the provisions of the Code and Rules framed thereunder which inter alia provided that no one could either cut or/ and sell any tree without obtaining prior permission of the competent authority;
3)  Further, the price of the trees was determined by the State authorities in which the assessee had no role to play. Hence, there was no scope for any price negotiations;
4)  The Rules provided that the trees had to be cut in a particular manner and the same was also done by the assesee. The certificate given by the Tahsildar stipulated that so far as the trees were concerned, they would not regenerate in near future because they do not belong to the categories of a species which have a spontaneous growth;
5)  The land was put to use for cultivation by the assessee after cutting the trees. After looking to the nature of trees which were cut above the root, it did not result in its spontaneous growth and lastly, there was no evidence to show that any profit element in the transaction was noticed or that assessee earned any profit;

6)  Thus, it was proved that the assessee did not intend to earn any profit out of the sale of such trees and nor his intention was to indulge in any profit making activity by sale of such trees. Therefore, impugned receipts were essentially in the nature of capital receipt.- CIT v. Mahendra Karma Pooranchand Soni [2014] 42 380 (Chhattisgarh)

Monday, March 24, 2014

Cost of improvement is allowable even if it’s sourced through general loan and through housing loan

Merely because loan used by assessee in improvement of house was a general loan and not a housing loan, cost of improvement could not be disallowed.
a)  The assessee had borrowed loan from a bank for improving the house property. He had sold said property and while computing capital gains, he had claimed cost of improvement.
b)  The Assessing Officer had disallowed the claim of assessee merely because the loan was classified as a general loan and not as a housing loan. 
The Tribunal held as under:
1)  The assessee had claimed deduction of cost of improvement of property while computing capital gains during the assessment year 2006-07;
2)  The original construction of property was made in the year 1991-92, thus, there would have been some kind of improvement or maintenance after lapse of so many years. Therefore, the assessee’s claim could not be rejected in toto;
3)  The assessee would have spent considerable amount during the assessment year 2006-07 at least for maintenance of the building, if not on improvement of the original construction.

4)  Thus, cost of improvement could not be disallowed merely because it was sourced through general loan and not through housing loan. Therefore, rejecting the claim of the assessee in toto was not justified. - K.K. Venugopalv. Dy. CIT [2014] 42 389 (Cochin - Trib.)

Saturday, March 22, 2014

Sec. 54F relief can’t be denied if assessee merely pays booking amount one year prior to date of transfer

Mere booking of flat one year prior to date of transfer of asset did not vest assessee with ownership of new asset and it was only by virtue of registered sale deed executed within prescribed time period under section 54F assessee became owner of flat. Thus, assessee's claim for deduction under section 54F was to be allowed
a)  The assessee received compensation on acquisition of his land by State Industrial Area Development Board (SIADB). The assessee had declared long term capital gains after claiming deduction under section 54F in respect of investment made in purchase of a flat.
b)  The Assessing Officer found that assessee had availed housing loan and booked said flat one year prior to date of receipt of compensation, and accordingly, he rejected assessee's claim for deduction. 
c) On appeal, the CIT (A) held against the assessee. The aggrieved-assessee filed the instant appeal.
The Tribunal held in favour of assessee as under:
1)  The authorities were not justified in holding that the investments were made one year prior to the date of receipt of compensation for the asset as the amounts paid by the assessee on booking of the asset had not vested the assessee with ownership of the new asset;
2)  The assessee had been vested with the ownership of the new flat only by virtue of the registered sale deed executed within prescribed time period under section 54F;

3)  Thus, the assessee's claim for deduction was to be allowed. The Assessing Officer was to be directed to allow the assessee’s claim of exemption under section 54F accordingly. - Gopilal Laddha v. ACIT [2014] 42 390 (Bangalore - Trib.)

Friday, March 21, 2014

Sum paid in cash of smaller denomination in lieu of currency of higher denomination is out of ambit of sec. 40A(3)

No element of expenditure was involved when sums were paid by assessee-company to its managing director for conversion of currency in small denomination into currency of higher denomination, and, thus, provisions of section 40A(3) were not applicable.
a)  The assessee-company paid sums to its Managing Director (‘MD’) for conversion of currency in smaller denomination to currency of higher denomination and certain sum was advanced to him for incurring of expenditure on behalf of assessee-company.
b)  The Assessing Officer was of the view that the provisions of section 40A(3) were attracted as the sums paid were in cash, and, accordingly, disallowed the same. On appeal, the CIT (A) deleted the disallowance.
c)  The aggrieved-revenue filed the instant appeal.
The Tribunal held in favour of assessee as under:
On sums paid for conversion of money:
1)    It could not be disputed that there was no element of expenditure involved and there was no outgo of funds of the assessee-company, inasmuch as whatever amount was paid to the MD, was returned by him; only difference being in the size of denomination of the currency given and returned.
2)    Thus, the provisions of section 40A(3) were not attracted to this amount.
On sums paid as advances:
3)    At the point of time, when advance was given for incurring the expenditure, there was no outgo of funds of the assessee-company, and the actual outgo took place only when expenditure was actually incurred by MD or such other person to whom he passed on such sums for incurring expenditure on behalf of the assessee-company;
4)    In the instant case, the process prior to actual incurring of expenditure was also recorded in the form of advances given, etc. The money did not go out of the coffers of the assessee-company unless and until the amount of such advance was spent towards any expenditure on behalf of the assessee-company;

5)    It was only the outgo of funds in the form of expenditure exceeding Rs. 20,000 in cash at a time, out of the coffers of the company, that would attracted the provisions of section 40A(3). Thus, the CIT (A) was justified in deleting the disallowance under section 40A(3).- ACIT v. Dodla Dairy Ltd [2014] 42 407 (Hyderabad - Trib.)

Thursday, March 20, 2014

Explicit religious trust won't get registration; Madarsa with dual purpose of charity and religious gets registration

The Supreme Court held as under:
1)  The objects of trust providing for activities of religious nature and were restricted to the specific communities were objects with religious purpose only. However, other objects would not be purely religious in nature if such objects trace their source to the Holy Quran and resolve to abide by the path of godliness shown by Allah;
2)  The establishment of Madarsas or institutions to impart religious education to the masses would qualify as a charitable purpose under the head of education under the provisions of section 2(15). The Madarsas do not confine themselves to only dissipation of religious teachings but also contribute to the holistic education of an individual;
3)  Therefore, the objects of the trust exhibited the dual tenor of religious and charitable purposes and activities;
4)  From the phraseology in section 13(1)(b), it could be inferred that the Legislature intended to include only the trusts established for charitable purposes in such provision. That, however, would not mean that if a trust was a composite one, i.e., one for both religious and charitable purposes, it would not be covered by clause (b);
5)  What was intended to be excluded from being eligible for exemption under section 11 was a trust for charitable purpose which was established for the benefit of any particular religious community or caste;
6)  In the instant case, the objects of the trust were based on religious tenets under Quran according to religious faith of Islam. The perusal of the objects and purposes of the trust would clearly demonstrate that the activities of the trust, though, were both charitable and religious, yet were not exclusively meant for a particular religious community;

7)  The objects of trust did not channel the benefits to any community and, thus, would not fall under the provisions of section 13(1)(b).Thus, assessee was a charitable and religious trust which did not benefit any specific religious community and, therefore, it would be eligible to claim exemption under section 11.- CIT v. Dawoodi Bohara Jamat [2014] 43 243 (SC)

Wednesday, March 19, 2014

SC upholds right of deductor to claim interest on excess TDS deposited to and refunded by revenue subsequently

The Supreme Court held as under:
1)  In the instant case, the deductor had paid taxes pursuant to a special order passed by the assessing officer. In the appeal filed against the said order, the assessee has succeeded and a direction was issued by the appellate authority to refund the taxes paid;
2)  When the said amount was to be refunded it would carry interest in the matter of course. Awarding interest was a kind of compensation for use and retention of the money collected unauthorizedly by the Department.
3)  When the collection was illegal, there was corresponding obligation on the revenue to refund such amount with interest as they have retained and enjoyed the money deposited;
4)  The object behind insertion of section 244A was that an assessee was entitled to payment of interest for money remaining with the Government which would be refunded.
5)  There was no reason to restrict the payment of interest to an assessee only without extending the similar benefit to deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/ foreign company;
Thus, the deductor was entitled to interest under section 244A(b) from the date of payment of TDS, i.e., date of deposit of TDS with Government

Tuesday, March 18, 2014

Holding period of booking rights of flats to be counted from date of agreement and not from date of allotment letter

The issue for consideration of the High Court was:
Whether booking rights of apartment accrued to the assessee on the date of application for allotment/confirmation of allotment (‘confirmation letter’) or on the date of execution of the agreement to sell, i.e., the buyer's agreement? 

The High Court held as under:
1)  Booking rights in apartment could be held as long-term capital asset only after the period of 36 months from the date of buyer's agreement with builders;
2)  The 36 months period under section 2(42A) was to be counted from date of buyer's agreement and not from the date of confirmation letter if it was mentioned in the letter that no right to provisional or final allotment would be accrued until buyer's agreement was signed and returned to the builder.
3)  Thus, the builders do not intend to convey any right of provisional/final allotment or any right to claim title under the confirmation letter.

4)  It would be impermissible to conclude that right to obtain booking rights emanated from confirmation letter. These rights might only be prescribed in the buyer's agreement, and, thus, the date of signing of said agreement was to be considered as the date of acquisition of the capital asset.- Gulshan Malik v. CIT [2014] 43 200 (Delhi)