Thursday, July 31, 2014

‘Javed Akhtar’ got 50% deduction for getting his Society’s lift replaced benefitting his professional work


Where assessee had incurred expenditure on replacement of new lift to remove hardship and inconvenience in his professional work as well as family life, 50 per cent of total expenditure which was considered to be for professional purpose was allowed as revenue expenditure.

Facts:


a)The assessee, a lyricist, did his professional work from two premises occupied by him in a building for professional and residential purposes. Assessee offered replacement of old lift with new one on the condition that lift would belong to society and would be used by all members. Assessee claimed expenditure on installation of lift as an allowable expenditure under section 37(1).

b)The Assessing Officer did not accept the claim of the assessee. On appeal, the CIT(A) was of the view that the installation of lift was a capital expenditure. Since the lift was installed both for personal and professional purposes, the CIT(A) held that 50% of expenditure was of capital nature and depreciable.

On appeal, the Tribunal held as under:

1)It was apparent from the facts that the assessee had incurred expenses for replacement of the lift due to compelling circumstances as he was facing inconvenience and hardship on his professional front as well as in his private life due to frequent break down of the old lift in the building.

2)Thus, it was clear that the advantage of the new lift was not restricted exclusively to the professional activity of the assessee but assessee as well as his family members also enjoyed such facility.

3)Though other residents of the buildings were also using the lift, yet, for considering the allowability of expenditure the use of lift by other residents in the building was not relevant. The assessee had incurred the expenditure keeping in view his professional and family requirements.

4)For allowing the expenditure under section 37, the mandatory condition is that the expenditure has to be laid out wholly and exclusively for the purpose of business or profession, however, it should not be on the capital field.

5)Since the assessee did not acquire any advantage on the capital account or any new asset for its professional purpose and the lift was not an apparatus for generating the professional income, it could not be considered as an expenditure of capital nature.

6)The assessee had incurred expenditure in the compelling circumstances for removing the inconvenience and hardship faced by him in his professional work as well as non-professional life. The said expenditure had been incurred so that professional activity of assessee would be carried out more efficiently and profitably.

7)Thus, 50% of the total expenditure was to be considered to be for the professional purposes and was to be allowed as revenue expenditure. – JAVED AKHTAR V. ACIT [2014] 46 taxmann.com 395 (Mumbai - Trib.)

Tuesday, July 29, 2014

Beneficiaries of discretionary trust won’t be liable to tax if income of trust is taxed at maximum marginal rate


Where income from trust had already been assessed in hands of trustees at maximum marginal rate, beneficial share could not be assessed in hands of beneficiaries again.

Facts:

a)Assessee was one of beneficiaries of a private discretionary trust. Trust's income was from dividend, which was exempt under section 10(34). The assessee received her beneficial share out of said dividend income and claimed it as exempt as income of trust had already been taxed in hands of trustees under section 164.

b)The Assessing Officer, however, was of the view that section 164 provided that it was only when no income was distributed amongst the beneficiaries by a private discretionary trust then the trust’s income was taxable in the hands of the trust.

c)Thus, he made additions on the ground that when the surplus was distributed by such trust, the receipt in the hands of beneficiary would be taxable as it becomes "income from other sources" in his hands. On appeal, the CIT(A) confirmed the addition. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The revenue had not denied the fact that the department had already assessed discretionary-trust at the maximum marginal rate.

2)Thus, it clearly emerged that the department had already exercised the option to tax the trust’s income directly in the hands of trustees in terms of sections 161 to 166. The assessee's stand was correct that as per the scheme of assessment of private discretionary trust department had to opt whether to assess the income in the hands of trust or beneficiaries. The option was clearly exercised first in the hands of trust as demonstrated by its assessment order.

3)In any case it had not been disputed that entire trust income from dividends was exempt under section 10(34) and what came in the hands as beneficial share retained the same colour and was also exempt under section 10(34). Therefore, alternatively also, the beneficial share being part of exempt dividend income, was exempt from tax and was to be excluded while computing the income of assessee.

4)Therefore, the department had already exercised the option to tax the income directly in the hands of the trust, there was no provision to review the option taken in the case of trust and again to change the option from one beneficiary to another, the impugned income was therefore held to be exempt in the hands of the assessee. – SMT. ALPANA KIRLOSKAR V. ACIT [2014] 46 taxmann.com 336 (Delhi - Trib.)

Monday, July 28, 2014

CIT couldn’t revise order of AO because AO lost his jurisdiction due to a circular issued by CBDT subsequently


Income tax Officer had valid jurisdiction at time of issuance of notice under section 143(2), subsequent disqualification would not deprive him of jurisdiction of making assessment.

Facts:


a)The Assessing Officer (‘AO’) issued notice under section 143(2) after analyzing various claims made by the assessee. The ITO passed assessment order, which was partly allowed by the CIT(A).

b)However, later on the Commissioner initiated proceeding under section 263. But on basis of detailed submission of assessee, said revisional proceeding was dropped by him

c)Thereafter, the subsequent CIT initiated revisional proceeding on ground that there was an internal circular according to which with effect from 1-4-2001 for any return of income of any assessment year, being over Rs. 5 lakh, ITO would have no jurisdiction, as jurisdiction in such case would lie with Dy. CIT /ACIT.

d)On appeal, the Tribunal quashed the order of CIT. The aggrieved-revenue filed the instant appeal. The High Court held in favour of assessee as under:

1)The AO had the jurisdiction when the notice under section 143(2) was issued. Once the ITO had valid jurisdiction at the time of issuance of notice, the Assessing Officer ought to have informed the assessee if there was some internal circular.

2)The opinion of CIT that the ITO had no jurisdiction could not be said to be proper, as the assessee appeared on valid notice and after considering all the submissions or representation, the ITO passed the order.

3)It was not the case where the ITO had passed order in a cryptic or summary manner accepting the returned income. The order could not be termed to be erroneous only because the CIT was not satisfied with the conclusion.

4)If the CIT was of the view that the AO had passed the order without jurisdiction then he ought to have initiated departmental enquiry against such officer. No such information had been brought forward from the appellant-revenue or perused from the order of Commissioner under section 263.

5)Thus, the order of CIT under section 263 would be deemed as a change of opinion and would tantamount to abuse of powers granted to him. The practice adopted by the CIT amounted to unnecessary harassment to the assessee for no fault of his. Thus, there was no infirmity or perversity in the order of the Tribunal so as to call for any interference.- CIT V. KAILASH CHAND METHI [2014] 47 taxmann.com 59 (Rajasthan)

Thursday, July 24, 2014

Sum received on transfer of carbon credits isn’t taxable, as no profit element is involved on their transfer


Where assessee, engaged in business of power generation, received carbon credits, such carbon credits not being linked with power generation, amount received on their transfer did not have element of profit or gain, and it could not be charged to tax.

Facts:


a)The assessee-company was engaged in business of power generation through biomass power generation unit. It received carbon credits, namely, carbon Emission Reduction Certificates for its project activity of conversion of fossil fuel from naptha and diesel to biomass;

b)It transferred said carbon credits and offered receipt from said transfer as capital receipt. However, the revenue treated said receipt as business income and brought it to tax. c)Further, the Tribunal held in favour of assessee and it opined that carbon credit had no element of profit or gain.

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

1)The Tribunal had factually found that "Carbon Credit was not an offshoot of business but an offshoot of environmental concerns. No asset was generated in the course of business but it was generated due to environmental concerns."

2)We agree with this factual analysis as the assessee was carrying on the business of power generation. The Carbon Credit was not even directly linked with power generation.

3)On the sale of excess Carbon Credits the income was received and, hence, as correctly held by the Tribunal it was capital receipt and it could not be deemed as business receipts or income. Thus, the appeal was to be dismissed.- CIT V. MY HOME POWER LTD [2014] 46 taxmann.com 314 (Andhra Pradesh)

Wednesday, July 23, 2014

ITAT lays down litmus test to determine ‘closely linked’ transactions for TP purposes and for their clubbing


When the transactions are influenced by each other, particularly in determining the price/profit involved in the transactions then those transactions would be regarded as ‘closely linked’ transactions. Transactions of hiring of equipment to be used for execution of a project to be clubbed only to the extent of number of transactions with each AE.

Facts:

a)The assessee, a Dutch based firm, entered into dredging contract with Indian Oil Corporation. It had international transactions with its AEs (in respect of hiring of vessels/equipments on leasing basis) for purposes of execution of contract.

b)The assessee had clubbed various leasing transactions with AEs for purpose of determining the ALP. The TPO rejected the claim of assessee on the ground that all transactions were not closely linked or continuous, therefore, ALP needed to be determined on transaction-by-transaction basis.

c)Thus, the issue arose for consideration of Tribunal was: “Whether the CIT(A) had erred in adopting a vessel-by-vessel approach in determining the lease rentals of vessels paid to Associated Enterprises (‘AEs’) without following ‘class of transactions’ approach (i.e., clubbing) in respect of closely linked transactions?”

The Tribunal held as under:

1)If a number of transactions are closely linked and are arising from continuous transactions of supply of amenity or services,they can be deemed as closely linked transactions for the purpose of Transfer Pricing in terms of Rule 10A(d);

2)Aggregation/clubbing of the closely linked transaction are permitted under the Income-tax Rules and Transfer Pricing guidelines of OECD also support this approach;

3)In order to examine whether the number of transactions are closely linked or continuous so as to aggregate then for the purpose of evaluation it is to be considered that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and is dependent wholly or substantially on the earlier transaction;

4)Therefore, when the transactions are influenced by each other, particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions;

5)In the instant case, the assessee had taken a number of dredging equipments from more than one AE. In the business decisions when number of transactions were entered into between two parties then it was very important to consider a portfolio approach rather than the individual transaction approach for determination of price of the transactions between the parties.

6)Therefore, the hiring of various equipments to be used for execution of a project could be aggregated for the purpose of determination of ALP only to the extent of number of transactions with each AE;

7)The transactions carried out with different AEs could not be clubbed or aggregated, because they could not be termed as closely linked so as to influence the price in aggregate or the profit of the parties arising from transactions;

8)Thus, the AO/TPO was to be directed to determine the ALP by aggregating the various transactions between the assessee and each AE separately and not by clubbing the transactions with all AEs - BOSKALIS INTERNATIONAL DREDGING INTERNATIONAL CV V. DY. DIT, INTERNATIONAL TAXATION [2014] 47 taxmann.com 150 (Mumbai - Trib.)

Monday, July 21, 2014

Transfer of division in exchange of shares only couldn’t be held as slump sale; rules HC


Facts

a)The assessee had transferred its lift division to T Ltd and the said transfer took place under the Scheme of Arrangement under section 391, read with section 394 of the Companies Act, 1956.

b)The disbursement on transfer of division was made by way of allotment or issue of bonds/preference shares. The Assessing Officer (‘AO’) opined that the transfer of division was a slump sale under section 2(24C) and was taxable in terms of section 50B. c)The order of AO was affirmed by CIT(A). However, it was rejected by the Tribunal. The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Section 2(42C) of the Income-tax Act defines slump sale as under: ‘Slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

2)Thus, from the bare reading of the definition of slump sale, it is clear that sale must be affected for a lump sum consideration to hold it as slump sale.

3)The Tribunal had rightly held that it was not a case where the consideration was determined and decided by parties in terms of money, rather its disbursement was made by way of allotment of bonds/preference shares. Thus, it was a case of exchange and not a sale. Accordingly, the impugned transaction was not a slump sale and the additions made by the Assessing Officer was not sustainable -CIT VS. BHARAT BIJLEE LTD. [2014] 46 taxmann.com 257 (Bombay)

Saturday, July 19, 2014

NBFC couldn't take shelter of prudential norms to treat overdue interest as NPA if it didn't try to recover it


Overdue interest could not be treated as NPA by taking shelter of prudential norms of RBI prohibiting recognition of interest on loans, which remained overdue for more than six months if assessee had not taken any steps to recover it.

Facts


a)The assessee, a company registered as NBFC, advanced term loans to two companies. In return of income, the assessee didn’t show interest income on the ground that prudential norms of RBI prohibited recognition of interest on loans which remained overdue for more than six months.

b)The Assessing Officer (‘AO’) opined that assessee was bound to show the interest accrued on the loans as its income as it was following mercantile system of accounting. Further, he held that interest accrued on loans was chargeable to tax and consequently, made additions.

c)On appeal, the CIT(A) deleted the additions made by AO. The aggrieved revenue filed the instant appeal. The Tribunal held in favour of revenue as under:

1)Rule 3 of prudential norms states that income including interest/discount shall be recognized only when it is actually realised if a loan is considered as NPA. It further prescribes that a loan can be treated as NPA when it remained overdue for a period of six months or more. However, in the instant case, the assessee had been unable to produce any document to show that it had made any demand for return of the loan.

2)As per section 5 of the income-tax Act, total income shall include all income from whatsoever source derived by such person, which accrues or arise to him in a given in previous year.

3)In case of Southern Technologies Ltd. v. Jt. CIT [2010] 187 Taxman 346 (SC) it was held by the Supreme Court that prudential norms issued by the Reserve Bank of India could not override the provisions of the Act. Thus, by virtue of the application of the accrual principle, interest income had definitely accrued to the assessee.

4)The concerned companies (i.e. borrowers) were charging interest in their respective accounts, deducting tax at source and also remitting such tax to the Government account. Hence, there was nothing on record to show that there was no possibility of realising the interest.

5)Hence, one could not presume that interest income was illusory. Therefore, the CIT (A) had erred in deleting the addition made by the AO – ITO V. TRADELINK SECURITIES LTD [2014] 46 taxmann.com 190 (Kolkata - Trib.)

Friday, July 18, 2014

‘Ready to print books’ exported in form of CD or email deemed as customized electronic data; eligible for sec. 10B relief


'Ready to print books' exported by assessee in form of a CD or e-mail were customized electronic data eligible for claiming benefit of deduction under section 10B.

Facts:


a)The assessee was engaged in business of export of software of 'ready to print books'. It had claimed exemption under section 10B on account of export of ready to print books in form of a CD or e-mail.

b)The AO disallowed the said claim and made addition to the income of the assessee. The CIT(A) confirmed the disallowance made by AO.

c)Aggrieved by the CIT(A)’ s order, assessee filed the instant appeal before Tribunal.

The Tribunal held in favour of assessee as under:

1)Section 10B applies to an undertaking which manufactures or produces any articles or things or computer software. Clause (i) of Explanation 2 to section 10B defines ‘computer software as under- "computer software" means—

(a)any computer programme recorded on any disc, tape, perforated media or other information storage device; or

(b)any customized electronic data or any product or service of similar nature as may be notified by the Board,

which is transmitted or exported from India to any place outside India by any means.

2)Thus, the intention of the Legislature is very clear that it provides deduction under section 10B not only to enterprises engaged in manufacture or production of any article or thing but even to those assessees whose end product is any customized electronic data.

3)In the instant case, the assessee after collecting raw data and pictures had utilized its expert designing skills in producing 'a ready to print e-book'. The final product was intended for use of a particular customer and, therefore, the case under consideration would fit in the category of production of 'any customized electronic data' as per the definition of 'computer software' defined in the Explanation 2 to section 10B.

4)Thus, the AO was to be directed to allow deduction under section 10B in accordance with law.- KIRAN KAPOOR V. ITO [2014] 46 taxmann.com 147 (Delhi - Trib.)

Thursday, July 17, 2014

Verdict in Satyam's case: SEBI bars 'Ramalinga Raju' from accessing securities market for 14 long years


Facts:

a)Mr. B Ramalinga Raju, ex-Chairman, Satyam Computer Services Limited, individually as well as acting in concert with others falsified books of account and misstated financials of Satyam Computers and, thus, portrayed a false picture of its published quarterly/annual results;

b)False CEO/CFO certifications were provided, and various announcements were made and advertisements/press releases were issued on basis of falsified and misstated financial position of company and indulged in insider trading on basis of unpublished price sensitive information (UPSI).

The SEBI held as under:

1)Given the vital function of protecting investors and safeguarding the integrity of the securities market vested in SEBI and the commensurate powers given to it under the securities laws, it was necessary for SEBI to exercise these powers firmly and effectively to insulate the market and its investors against the fraudulent actions of the participants in the securities market.

2)One of the basic premises that underlines the integrity of securities market is that the participants conform to standards of transparency, good governance and ethical behaviour prescribed in securities laws and do not resort to manipulative, deceptive and fraudulent activities.

3)In this case, the acts, omissions and conduct of the noticees, as brought out in the SCNs had been in violation of this basic premise. The financial frauds as found in this case were inimical to the interests of the investors in securities and endangered the market integrity. This was a case where befitting enforcement action was necessary to send a stern message to the market to create an effective deterrence.

4)The Acts and omissions of ex-Chairman/Managing Director/CFO, etc., were, clearly a device employed by noticees to defraud in connection with dealing in securities of Satyam Computers and would fall within ambit of prohibited activities under section 12A(a)(b)(c) of The SEBI Act and regulations 3 and 4 of PFUTP Regulations;

5)In order to protect interest of investors and integrity of securities market, Ramalinga Raju alongwith others were restrained from accessing securities market and prohibited from dealing in securities, directly or indirectly, or being associated with securities market in any manner, whatsoever, for a period of 14 years – Satyam Computer Services Ltd. In re (2014) 47 taxmann.com 47 (SEBI)

Wednesday, July 16, 2014

Even joint ownership in second house at the time of sale of capital assets would lead to denial of sec. 54F benefits


Where assessee owns a residential house even jointly with another person, on date of sale of long-term capital asset, his claim for deduction under Section 54F would be rejected.

Facts:

a)During relevant assessment year, assessee had sold his undivided interest in land. He claimed deduction under 54F in respect of long-term capital gain arising from sale of land.

b)The revenue authorities rejected assessee's claim for deduction under sections 54F on the ground that assessee was having two residential houses having one half share each therein on date of sale of land.

c)The Tribunal, however, allowed assessee's claim under Section 54F on the ground that 'a residential house' means complete residential house and would not include shared interest in a residential house. The aggrieved revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)Section 54F provides that if the assessee has a residential house he cannot seek the benefit of long-term capital gains. Under this provision, merely because the words residential house were preceded by word 'a' would not exclude a house shared with any other person.

2)Even if assessee shared the residential house, his right and ownership in the house, to whatever extent, was exclusive and nobody could take away his right in the house without due process of law.

3)Even if right of assessee, was one half in the residential house, it could not be taken away without due process of law or it would continue till there was a partition of such residential house. 4)Thus, the view expressed by the Tribunal on this issue could not be accepted. Hence, the assessee was not eligible to claim Section 54F benefit.- CIT V. M.J. SIWANI [2014] 46 taxmann.com 170 (Karnataka)

Tuesday, July 15, 2014

No sec. 40A(2) disallowance if payment to director was authorized by CLB and taxed at maximum rate in his hands


Where payment made to director was authorised by CLB and said payment was taxed at maximum rate, no addition could be made under section 40A(2).

Facts:

a)The assessee had made payment to its director which was disallowed by AO by invoking section 40A(2). b)However, addition made by AO was deleted by CIT(A) and Tribunal. Thus, the aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Section 40A(2) permits the Assessing Officer to disallow certain expenses or payments, where he is of the opinion that such expenditure or payment is excessive or unreasonable; having regard to the fair market value of the goods, services or facilities for which the payment is made.

2)In the instant case, the members of the Company approved of the payment made to director in the annual general meeting and such payment was also approved by the Company Law Board. The salary was also taxed in the hands of director at maximum rate.

3)Nothing had been brought on record by the Revenue to controvert the findings of CIT(A) and, therefore, the impugned payment to director was to be allowed-[2014] 45 taxmann.com 478 (Gujarat)

Tuesday, July 8, 2014

Sums incurred on transfer of human skill and HR database from predecessor to successor co. are allowable expenses


Where in pursuance of an agreement, a part of business being handled by erstwhile TATA IBM was handed over to assessee-company, expenditure incurred by assessee for use of domestic customer database and transfer of human skills in terms of said agreement, was to be allowed as business expenditure.

Facts


a)A part of the business being handled by the erstwhile TATA IBM was handed over to the assessee-company in view of bifurcation of the software and hardware business.

b)For the transfer of domestic customer database and the man power, the assessee paid certain amount to TATA IBM which was claimed as business expenditure.

c)The AO taking a view that expenditure in question resulted in enduring benefit to assessee, disallowed assessee's claim. Further, the CIT(A) upheld the order of AO. The Tribunal, however, allowed assessee's claim. The aggrieved-revenue filed the instant appeal.

High Court held in favour of assessee as under:-

1)In the instant case, insofar as payment for getting domestic customer database was concerned it was clear that assessee had only got the right to use that database. The company which had provided such database was not precluded from using such database. Hence, the expenditure was incurred for the use of database and not for acquisitions of such database.

2)In respect of payment made towards transfer of human skill, it had been made towards the expenses incurred for training and on recruitment. Such expenses were under revenue field, and ,therefore, the payments had been made to save such revenue expenses as per the agreement.

3)TATA IBM had spent lot of money to impart training to those employees who were transferred to the assessee-company. They were trained in the field of software.

4)They had opted for employment with assessee-company and for their past services in TATA IBM, expenditure had been incurred. Hence, the expenditure incurred on transfer of human skill was also in nature of revenue expenditure. – CIT V. IBM GLOBAL SERVICES INDIA (P.) LTD [2014] 46 taxmann.com 55 (Karnataka)

Monday, July 7, 2014

SAT affirmed penalty as appellant failed to make public announcement of acquisition of equity in excess of 5%


Where appellants-promoters acquired shareholding of target company beyond 5 per cent limit prescribed under regulation 11 of Takeover Regulations but failed to make public announcement, appellants were liable to pay interest.

Facts:


a)Appellant-promoters had acquired shareholding of target company which exceeded shareholding limit of 5 per cent prescribed under regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

b)After conducting enquiry, SEBI found the appellants guilty of having violated regulation 11(1) as appellants failed to make public announcement to shareholders of company.

c)SEBI directed appellants to make public announcement and to pay interest on offer price from date when appellants had acquired shares of target company. The aggrieved-appellant filed the instant appeal.

The Securities Appellate Tribunal held as under:

1)The acquisition of shares of the target company by each appellant was effected at the instance of appellant who was admittedly, the promoter and Managing Director of the target company. The appellants failed to make public announcement on acquiring shareholding beyond 5 per cent, and, thus, appellants were liable to pay interest.

2)In view of clear violation of the mandate of Takeover Regulations, there was no substance in the present case to take a lenient view in relation to making public announcement by altering the impugned order.

3)Thus, it was not found appropriate to interfere with the impugned order in exercise of powers conferred under section 15T(4) of the SEBI Act, 1992. - MS. SANGEETA SETHIA V. SEBI (2014) 46 taxmann.com 164 (SAT - Mumbai)

No concealment penalty if assessee opts to take route of presumptive taxation to escape sec. 40A(3) disallowance


Where at time of initiating penalty proceedings AO did not have any material on record showing that payments made by assessee were bogus, he could not have concluded that assessee had provided inaccurate particulars and levy penalty merely on basis of assessee's offer to be taxed on presumptive basis,

Facts


a)The assessee, a construction company, had issued large number of bearer cheques to small suppliers for delivering building material at construction site.

b)The AO disallowed said payments by invoking Section 40A(3). In response, assessee had shown its income on presumptive basis under Section 44AD to stay away from unnecessary litigation. The AO accepted the contention of assessee and completed the assessment by applying presumptive taxation.

c)After completing the assessment, the AO passed a penalty order under section 271(1)(C) and it was affirmed by the CIT (A). The Tribunal, however, set aside penalty order passed by CIT (A).The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Since at time of initiating penalty proceedings the AO did not have any material on record to show that payments made to suppliers were bogus, he could not have concluded that assessee had provided inaccurate particulars in its return merely on basis of assessee's offer to be taxed on estimate basis,

2)Moreover, the course of action suggested by the Assessing Officer was, in fact, accepted by the assessee as reasonable. Thus, the imposition of penalty was not justified. Therefore, there was no infirmity in the impugned order of the Tribunal. - Vatika Construction (P.) Ltd v. [2014] 45 taxmann.com 471 (Delhi)

Friday, July 4, 2014

Institute of Cost Accountants asks for expansion of ambit of cost audit; expresses concern over new cost audit rules


Institute of Cost Accountant of India (‘The Institute’) has expressed its concerns over the Companies (Cost Records and Audit) Rules, 2014 which were notified on June 30, 2014. The Institute stated that provisions for maintaining Cost Accounting Records and Cost Audit to fulfil the objectives of improving Public Distribution System, Health Care System and transforming Indian industry into a globally competitive manufacturing hub and to encourage Small Scale Industries have not been addressed. The Institute urged for necessary intervention by the Ministry of Finance in this matter and issue directive to modify the Rules in line with the suggestions given by the Institute.The key suggestions given by the Institutehave been listed as under:

1)The new Rules and the product definitions will lead to major increase in the cost to the Government as the entire “Product Group”, “Costing Taxonomy” and “XBRL” filing process (herein after referred to as ‘Taxonomies’) have to be revisited for this purpose;

2)The existing Taxonomies have stood the test of filing for two years and they have become robust after many course corrections over a period of four years;

3)The coverage of industries does not have a clear logic and it will lead to confusion as to what products are covered and what are not covered. The Product Group as per Excise Classification (Based on international HSN Code) was a clear definition of the products covered. New classification will again have to be developed involving another year of work with additional cost;

4)The Cost Audit Report filing (CRA-4) does not have any provision for Cost Auditor’s signature, which is a very important part of audit standards;

5)The maintenance of cost records should comply with the requirement of Cost Accounting standards and Generally Accepted Cost Accounting Principles as defined in the Companies (Cost Accounting Records) Rules, 2011 and which are omitted in the new Companies (Cost Records and Audit) Rules, 2014.

6)The product, production, production of goods, product group, service and providing service need to be defined in the Rules to avoid any ambiguity in future; 7)The provision for cost records certificate should be kept which may either be certified by a Practicing Cost Accountant or the management to ensure cost competitiveness of the industry using the resources of the society. This will be applicable to industries which are not covered under the provisions of Cost Audit;

8)The activities mentioned under the companies engaged in strategic sector 3A need to be correlated with the Chapter heading of the Central Excise Tariff Act, 1985 to avoid any ambiguity;

9)Machinery, mechanical appliances and parts thereof, electrical/ electronic machinery equipment and parts thereof, automobile and auto-ancillary included in Chapters 84 85 and 87 of the Central Excise Tariff Act, 1985 need to be covered under the Rules to safeguard the interest of Central exchequer, as the country has experienced several disputes in this sector.

Wednesday, July 2, 2014

Rent receipts of property not taxable in hands of Co. if shareholders are deemed owners of property under sec. 27


Facts:

a)The assessee-company owned a land. It had constructed a commercial building on the said land and later on, it allotted specific portion of the building to the shareholders.

b)The assessee had distributed rent receipts proportionately to the shareholders after deducting maintenance cost and taxes. The shareholders had filed separate individual returns, in which they had disclosed income from the building allotted to them.

c)The assessee-company had filed a nil return of income. The AO held that the rental income was attributable to the assessee and, accordingly, levied the tax. On appeal, the CIT (A) upheld the order of the AO. Further, the Tribunal set aside the orders of the lower authorities. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Provision of section 27(iii) provides that a company or a co-operative society can allot or lease a house building to its members. It further provides that a member, to whom building was allotted, would be construed as the owner of such building;

2)In the instant case, the Memorandum of Association permitted the assessee to construct a building, sell or lease it. It also permitted it to distribute properties to its shareholders. The fact that the resolution had been made to allot a specific portion of the building to the shareholders even before its construction, was not a ground to hold that such an action was illegal;

3) The consequence of resolution under the Companies Act may be different and the said aspects need not be imported while considering purport and implication of section 27(iii). Notwithstanding, the fact that allotment of building by society or company may not make the allottee owner of the building in the context of the Transfer of Property Act, but nonetheless, the Act otherwise construes such an allottee as the owner of property;

4)The assessee-company had allotted a specific portion to the shareholders. Under the Act, shareholders are deemed to be the owners of the portion allotted to them and they would be liable for tax. However, the company, which owns the building, was an ostensible owner;

5)Therefore, it could effect the lease and it was to be construed as one executed on behalf of the shareholders. Therefore, it was to be held that the shareholders were the owners of the specific portion of the building allotted to them and the assessee-company had not retained any part of rent amount or rent deposit.

6)Thus, it could not be argued that the company would deemed to have derived the income from rental and rental deposit. Therefore, the order of the Tribunal was to be upheld. – CIT V. MONARCH CITADEL (P.) LTD [2014] 45 taxmann.com 477 (Karnataka)

Tuesday, July 1, 2014

Erecting road, bus shelters and so forth as part of advertisement business couldn’t be termed as infra-development


Where assessee-company had developed road medians, erected bus-shelters and light poles for its advertisement business, activities indulged by it were part of its normal activities of advertising and publicity rather than one of infrastructure development and, therefore, were not eligible for deduction under section 80-IA(4).

Facts


a)Assessee, an advertisement company, had entered into an agreement with the local authority for construction of bus shelters, putting up of footbridge, beautifying the road medians and erecting streetlights.

b)The assessee was allowed to utilize these bus-shelters, lampposts, road medians and footbridges for its advertisement business to recoup the expenditure incurred on them. The assessee claimed deduction under section 80-IA(4) after considering such activities as infrastructural activity.

c)The Assessing Officer (‘AO’) denied the benefit under section 80-IA(4). On appeal, the CIT(A) confirmed the order of AO. However, the ITAT set aside the order of CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)Assessee was not an engineering or construction company that puts up public-infrastructure. It was only an advertising company which was interested only to find out the best space at the best locations for advertisements.

2)CBDT vide its Circular No. 777, dated 14/08/1995 made it clear that to avail deduction, income should arise from the use of infrastructural facility. But, in the instant case, the assessee derived income only from the advertisement hoardings erected on the bus-shelters, road medians and the street light poles. Hence, the said income could not be treated as income derived from the 'infrastructure facility'.

3)The benefit under section 80-IA could be extended only to those assessees who had developed infrastructural facility as defined under sub-section (4) of section 80-IA, i.e., road or a toll road, bridge, highway or a rail system. But, in the instant case, the assessee had developed the existing road median, erected bus shelters and light poles for its advertisement business, which, in any case could not be treated as infrastructure development.

4)Thus, the assessee was not eligible for Section 80-IA benefit and the order passed by Tribunal could not be sustained – CIT V. SKYLINE ADVERTISING (P.) LTD [2014] 45 taxmann.com 532 (Karnataka)