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.)

Wednesday, October 29, 2014

Exp. on civil and electrical work for installation of windmill was eligible for depreciation at 80%


Where foundation, civil and electrical works were necessary for installation of windmill, depreciation at rate of 80 per cent was to be allowed

Facts


a)The assessee-company purchased windmill. For the operation and maintenance of the windmill, assessee made specific civil and electrical installations.

b)It claimed depreciation at the rate of 80 per cent on said installations which was disallowed by Assessing Officer.

c)On appeal, appellate authorities allowed the assessee's claim on ground that the foundation, civil and electrical works were necessary for the installation of the windmill and was clearly part and parcel of the windmill project on which depreciation at the rate of 80 per cent was allowable.

d)Aggrieved by the order of appellate authorities, Revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under:

1)The Legislature has provided for higher rate of depreciation at 80 per cent on renewable energy devices, including windmill and any specially designed devise, which runs on windmill.

2)Windmill is scientifically designed machinery and it has to be fitted and mounted on a civil construction, equipped with electric fittings in order to harness the wind energy to the maximum potential.

3)Thus, it can be easily imagined that windmill cannot function without appropriate installation and electrification.

4)Therefore, the approach of appellate authorities to allow depreciation at the rate of 80 per cent on such installation was perfectly justified, as civil structure and the electric fitting were part and parcel of the windmill and could not be separated from the same - CIT V. PARRY ENGINEERING & ELECTRONICS (P.) LTD.[2014] 49 taxmann.com 252 (Gujarat)

Tuesday, October 28, 2014

No denial of reassessment due to time constraint if it was made in consequence of finding/direction of ITAT


Where ITAT by its order excluded some income from the total taxable income of assessee for a particular assessment year, an assessment of such income in another assessment year could be made without any time-limit.

Facts:


a)The Tribunal had deleted addition made under section 68 of the Income-tax Act, 1961 (herein after referred to as ‘Act’) by the Assessing Officer (AO) on the grounds that relevant credit entries were relating to the earlier year.

b)AO initiated re-assessment proceedings for the said earlier year after a lapse of 7 years by issue of notice under section 148 and passed an order making addition.

c)The CIT(A) held that the notice under section 148 for the relevant assessment year was belatedly issued after a lapse of 7 years and, therefore, was beyond the time-limit prescribed under section 149.

d)On appeal, the Tribunal held that AO lacked jurisdiction to re-open assessment.

e)Aggrieved by the order of Tribunal, Revenue filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

1)Section 150 of the Act which reads as under, clearly states that:

“Notwithstanding anything contained in section 149, the notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law”.

2)Similarly, as per section 153(3)(ii) of the Act, there is no time-limit for completion of assessments, reassessments and re-computations if such assessment, reassessment or re-computation is made in consequence of or to give effect to any finding or direction contained in an order under sections 250, 254, 260, 262, 263, or 264 or in an order of any Court in a proceeding otherwise than by way of appeal or reference under this Act.

3)Further, Explanation 2 to Section 153 of the Act makes it clear that even where any income is excluded from the total income of the assessee from a particular assessment year, then an assessment of such income for another assessment year shall, for the purpose of Section 150 as also of Section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order.

4)From combined reading of the above provisions, it is abundantly clear that where ITAT by its order excluded any income from the total income of the assessee from a particular assessment year, then an assessment of such income for another assessment year could be made without any time-limit.

5)Hence, it was noticeable that the appellate authorities did not refer to section 150 and Explanation 2 to section 153 and therefore, they erred in setting aside the order passed by AO- CIT V. PP ENGINEERING WORK[2014] 49 taxmann.com 321 (Delhi)

Monday, October 27, 2014

ITAT allows benefit of second proviso to Sec. 40(a)(ia) in case of payment to NR; Non-discrimination clause invoked


Rigour of disallowance of payment under Section 40(a)(ia) is relaxed in case of payment to resident if recipient pays taxes on such sum and files return of income. It would be contrary to scheme of DTAA and discriminatory if similar relaxation is not allowed under Section 40(a)(i) in case of payment to non-resident without withholding of taxes if such non-resident pays taxes on such sum and files return of income. Relaxation under second proviso to Section 40(a)(ia) is to be read into Section 40(a)(i) as well and it was required to be treated as retrospective in effect in the same manner as second proviso to Section 40(a)(i).

Facts:

a)The AO noted that certain non-resident entities were taxable in India under the provisions of the Income Tax Act (‘IT Act’) as also under the provisions of relevant DTAA as these entities had a PE in India.

b)Thus, in the opinion of the AO, the assessee was required to deduct tax at source from these payments to non-residents, in terms of section 195.

c)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by the recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them under section 139(1).

d)Accordingly, the assessee contended that non-discrimination clause of treaty was applicable on impugned payment made to non-residents.

Held:

1)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them undersection 139(1).

2)However, section 40(a)(i) does not have an exclusion clausesimilar to second proviso to Section 40(a)(ia), so far as payments made to non-residents,without deduction of tax are concerned. Thus, such payments would be disallowable even when the non-resident recipient hastaken into account such payments in computation of his income, has paid taxeson the same and duly filed income-tax return under section 139(1).

3)So far as discrimination to the non-resident taxpayers was concerned, the right comparator would be a resident Indian taxpayer. As we were examining the issue of deduction parity, we had to examine the position of deductibility in respect of a similar payment, i.e., without deduction of tax at source, made to a resident Indian taxpayer.

4)A different treatment to the foreign enterprise per sewas enough to invoke the non-discrimination clause.

5)Therefore, it would be contrary to the scheme of the tax treaties if rigour of disallowance of a payment, on account non-deduction of tax from the related payment, was to be relaxed in the situations in which the resident recipient had taken the said amount into account in computation of income, paid taxes on the income so computed and filed return of income under section 139(1), and yet the rigour of disallowance in respect of payments made, without deduction of tax at source, to the non-residents wasnot relaxed when such non-resident recipient had taken such receipts into account in computation of income, paid taxes on the income so computed and filed return under section 139(1).

Tuesday, October 21, 2014

No sec. 32A relief to hotel as preparation of food items therein couldn’t be deemed as manufacture


Preparation of food articles in hotel is not manufacturing activity, thus, hotel building is not a plant entitled to investment allowance.

Facts:


a)The assessee was running a hotel. It claimed investment allowance under Section 32A on preparation of food articles in hotels on the ground that it was definitely a manufacturing activity.

b)However, the Assessing Officer was of the view that preparation of food articles did not justify that it was a manufacturing activity so as to provide relief under section 32A. On appeal, the CIT(A) also rejected the contention of the assessee. However, the Tribunal allowed the claim of the assessee. The aggrieved revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)The Apex Court in the case of CIT v. Anand Theatres [2000] 110 Taxman 338 has held that the function of building is to shelter the business of assessee. Building is more durable and the Legislature has made distinction between the 'building' and 'machinery' or 'plant'.

2)The Tribunal had committed an error in treating the hotel building as a plant and, accordingly, it was not justified in allowing the claim for investment allowance under section 32A on the ground that the preparation of food articles in a hotel be treated as manufacturing of goods. – CIT V. SB PROPERTIES & ENTERPRISES LTD. [2014] 49 taxmann.com 298 (Rajasthan)

Saturday, October 18, 2014

Vibratory compactor was earth moving machinery; entitled to concessional tax rate under Karnataka Sales Tax Act


Vibratory compactor manufactured by assessee was earth moving machinery entitled to concessional tax rate under Karnataka VAT.

Facts:

a)The assessee was engaged in the business of manufacturing vibratory compactor. It claimed that the said equipment was earth mover entitled to concessional tax rate under Notification Nos. FD 117 CSL 2001(I) and FD 117 CSL 2001 (II), dated 26-7-2001

b)The Assessing Officer held that the vibratory compactor would not come within the purview of earth mover and further said that it was general category machinery falling under SL. No. 1(iii)(a) of Part M of the Second Schedule to the Act.

c)Both, the First Appellate Authority and the Tribunal confirmed the order of the Assessing Officer.

d)Aggrieved by the order of appellate authorities, assessee filed the instant appeal before the High Court:

The High Court held in favour of assessee as under:

1)The assessee had produced copy of the notification dated 31-3-1993 issued under the Karnataka Sales Tax Act. In the said notification the vibratory compactor had been classified as earth moving equipment.

2)However, it was the contention of the revenue that the said notification had been withdrawn. Withdrawing of the notification would be of no consequence, when it was the stand of the Government that vibratory compactor had been classified as earth moving machine.

3)In that view of the matter, the vibratory compactor was earth moving machinery entitled to concessional tax rate under Notification Nos. FD 117 CSL 2001 (I) and FD 117 CSL 2001 (II), dated 26-7-2001 – L & T CASE EQUIPMENTS (P.) LTD. V. COMMISSIONER OF COMMERCIAL TAXES [2014] 49 taxmann.com 563 (Karnataka)

Friday, October 17, 2014

Conduct of respondent was oppressive as it used petitioner's funds in its own Cos without informing petitioner


Where money invested by petitioner in R-1 company was utilized in other companies managed by person managing R-1 company but no information about investment was provided to petitioners, such conduct would be held to be oppressive

Facts:

a)The petitioner-foreign company made FDI investment in Respondent-1-company five years ago on assurance of growth. However, nothing happened in Respondent-1-company. It virtually remained a shell company, whereas funds invested by the petitioner were invested into Respondent-7-company, which was nothing but alter ego of RC, who was managing Respondent-1-company.

b)When petitioner asked for inspection and audit of accounts and financials of the respondent-7-company, the respondents refused to provide any clue as to what had happened to investment made by the petitioner.

c)There were many companies which were alter egos of Respondent-5, who was managing Respondent-1-company.Respondent-5 and Respondent-6 who were in control of company were also not inclined to disclose any information relating to money invested by petitioner.

d)The petitioner filed instant petition.

The Company Law Board held as under:

1)The conduct of respondent-5 and respondent-6, who were running all those companies, was oppressive and prejudicial to interest of petitioner–CPI INDIA REAL ESTATE VENTURE LTD. V. PERPETUAL INFRACON (P.) LTD. (2014) 49 TAXMANN.COM 25 (CLB - NEW DELHI)

Thursday, October 16, 2014

No tax on advance received by NHPC against depreciation as it was part of tariff and would reduce future tariff


Where assessee, engaged in selling electricity, received advance against depreciation (AAD) by way of tariff charges which was to be adjusted against future depreciation, so as to reduce tariff in future years, amount so received was not includible in computation of taxable income.

Facts:


a)Assessee, a public sector enterprise, was required to sell electricity to State Electricity Board at tariff rates notified by CERC. The Government has introduced a mechanism to generate additional cash flow by allowing power generating companies to collect AAD by way of tariff charge.

b)It was decided that the year in which normal depreciation would fall short of original scheduled loan repayment such shortfall would be collected as advance against future depreciation. Thus, the issue that arose for consideration of the Tribunal was as under: Whether the CIT(A) was right in deleting the addition made by the Assessing Officer on account of 'AAD', in spite of the Hon'ble Supreme Court's ruling ( in case of National Hydroelectric Power Corpn. Ltd v. CIT [2010] 187 TAXMAN 193) wherein, it was held that the advance against depreciation was “income received in advance”?

The Tribunal held in favour of assessee as under:

1)The Supreme Court in case of National Hydroelectric Power Corpn. Ltd ( Supra) held as under: AAD was not meant for an uncertain purpose. It was an amount that was under obligation, right from the inception, to get adjusted in the future, hence, it could not be designated as a reserve.

AAD was nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant the same would be reduced to nil.

Therefore, the assessee could not use the AAD for any other purpose except to adjust the same against future depreciation so as to reduce the tariff in the future years.

2)Thus, after considering the categorical finding of the Supreme Court it was to be held that the CIT(A) was correct in holding that AAD could not be added in the computation of the normal income. - UNION OF INDIA V. INTERCONTINENTAL CONSULTANTS & TECHNOCRATS (P.) LTD [2014] 49 taxmann.com 520 (SC)

ITAT interprets Formula under Rule 8D for allocating common interest exp.


Facts:

In the instant case the dispute arose between assessee and revenue in respect of computation mechanism provided under Rule 8D(2)(ii).

The Tribunal held as under:

1)Rule 8D(2)(ii) seeks to allocate 'common interest expenses' to taxable income and tax exempt income. However, the definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous as it specifically excludes interest expenditure directly related to tax exempt income, yet it does not exclude interest expenditure directly related to taxable income.

2)Resultantly, while rule 8D(2)(ii) ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income.

3)The incongruity arose due to the wordings of rule 8D(2)(ii), as it provided that out of total interest expenses, only interest expenses directly relatable to tax exempt income were excludible, and interest expenses directly relatable to taxable income were not excludible.

4)Therefore, common interest expenditure could be computed only when interest directly attributable to tax exempt income, i.e., under rule 8D(2)(i), and interest directly relatable to taxable income, were excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii). - GEOJIT INVESTMENT SERVICES LTD. V. ACIT [2014] 50 taxmann.com 150 (Cochin - Trib.)

Tuesday, October 14, 2014

Whole premium paid on Keyman Insurance policy was deductible even if policy cover extended to next year


Where assessee purchased Keyman Insurance Policy on last day of relevant financial year, it was entitled to claim full deduction of premium paid during relevant year itself, even though insurance policy cover extended to next financial year.

Facts:


a)The assessee paid premium in respect of keyman insurance policy.

b)The Assessing Officer (‘AO’) allowed proportionate amount of premium on finding that the assessee had paid a premium only on the last date of the year, and, therefore, the expenditure pertained to the next financial year.

c)The Tribunal, however, allowed assessee's claim in full. The aggrieved revenue filed instant appeal. The High Court held in favour of assessee as under:

1)There was no dispute regarding the allowability of premium on Keyman Insurance Policy. The disallowance was made by the AO only because the assessee took the insurance policy on the last date of the financial year. Therefore, the AO had held that proportionate amount of the premium pertained to the next financial year.

2)This bifurcation was not permissible. The expenditure was made during the financial year relevant to the assessment year under consideration. Therefore, it was allowable.

3)Extension of insurance policy cover to the next financial year would not mean that the premium paid during the year under consideration was not an allowable expenditure. Thus, premium paid on Keyman Insurance Policy was fully deductible. – CIT V. HARIT EXPORTS LTD [2014] 49 taxmann.com 200 (Bombay)

CLB ordered transfer of shares to petitioner-insurer as it had obtained rights for lost shares after paying for those shares


Where petitioner-insurer had obtained right in respect of lost shares of respondent-company after paying insurance claim to insured and company had no objection to transfer of shares, shares were to be transferred in name of petitioner.

Facts:

a)A broker had taken insurance policy from petitioner to indemnify him for losses including loss of shares. Petitioner executed the transaction for purchase of shares of respondent-company however certificates of said shares were lost.

b)Accordingly, the petitioner-insurer paid a sum as compensation to insured broker who, in turn, transferred all its rights in respect of shares of respondent-company in favour of petitioner.

c)The petitioner filed petition before CLB for transfer of shares contending that he had acquired all rights, title and interest in respect of shares of respondent-Co.

The Company Law Board held in favour of petitioner as under:

1)The Practicing Company Secretary of respondent-company didn’t object to the prayers made in the petition and stated that company would transfer the shares as requested for subject to furnishing of an indemnity bond and meeting compliances as required in terms of Articles of Association of the company for transfer of shares.

2)Since neither transferors and lodgers nor the respondent-company had raised any objection to transfer of shares in favour of petitioner, shares were to be transferred in name of petitioner – ORIENTAL INSURANCE CO. LTD. V. LUPIN LTD. [2014] 49 TAXMANN.COM 92 (CLB - MUMBAI)

Thursday, October 9, 2014

Place of issuance of notice on cheque dishonouring won’t confer jurisdiction upon Court to take cognizance of offence


Place of issuance of a statutory notice could not by itself confer territorial jurisdiction upon Court to take cognizance of an offence under section 138 of the Negotiable Instrument Act (‘the NI Act’).

Fact:


a)The petitioner had taken a loan from the respondent-company for its business purposes. It had issued a cheque (drawn on the Syndicate Bank, Bangalore) against repayment of the loan amount. However, the cheque was dishonoured when presented for encashment to ING Vysya Bank, Gurgaon.

b)The respondent-company issued a statutory notice to the petitioner and eventually filed a complaint before the Judicial Magistrate at Gurgaon under section 138 of the NI Act.

c)The Magistrate took cognizance and summoned the petitioners to face the trial. The petitioner, filed the instant petition seeking transfer of the complaint from Gurgaon to the competent Court at Bangalore.

d)The Petitioner contended that the Court located at Gurgaon had no jurisdiction to entertain the complaint, especially when the cheque was issued and dishonoured at Bangalore and the offence, if any, was committed only at Bangalore.

The Supreme Court held as under:

1)The only reason the complainant claimed jurisdiction for the Court at Gurgaon was the fact that the complainant-respondent had issued the statutory notices relating to dishonour of the cheque from Gurgaon. The issue of a statutory notice could not by itself confer jurisdiction upon the Court to take cognizance of an offence under section 138.

2)Where cheque issued by petitioner was dishonoured at Bangalore, Court of Gurgaon could not have jurisdiction to entertain complaint simply because complainant-respondent had issued statutory notices relating to dishonour of cheque from Gurgaon.

3)Accordingly, the petition was to be allowed and complaint was to be transferred from the Court of Gurgaon, to the Court of competent jurisdiction of Chief Metropolitan Magistrate at Bangalore who would try the case himself or transfer the same to any other Court competent to try the same. – SREE MAHESH STATIONARIES V. INDIABULLS FINANCIAL SERVICES LTD. [2014] 49 TAXMANN.COM 67 (SC)

Tuesday, October 7, 2014

Excess premium paid by builder while refunding booking amount to be deemed as interest; attracts sec. 194A TDS


Where assessee, a builder, having collected certain booking amount from purchasers of flats, sold those flats subsequently to some other parties at a higher price, amounts refunded by assessee to original purchasers with a margin, amounted to payment of interest to attract TDS under Sec. 194A.

Facts:


a)The assessee, a builder, received certain payments from customers who initially booked flats by making advance payments and a few installments; but due to various reasons the customers could not fulfill the payment schedule and they requested for refund.

b)The assessee had sold those flats at a higher price to other parties and returned the payment received from previous customers with a margin. The Assessing Officer (‘AO’) opined that the excess amount paid to previous customers was to be deemed as payment of interest, which would attract TDS under section 194A.

c)The AO disallowed these payments as assessee had failed to deduct tax at time of making interest payments to previous customers. The CIT(A) deleted disallowance made by AO. The aggrieved revenue filed that instant appeal.

The Tribunal held in favour of revenue as under:

1)It was clear from the plain reading of section 2(28A) that money paid in respect of amount borrowed or debt incurred, was interest payable in any manner. The definition of interest in section 2(28A) proceeds to include in the terms money borrowed or debt incurred, deposits, claims and 'other similar rights or obligations'.

2)The definition of interest has been carried to the extent that even the amounts payable in transactions had not been borrowed and those that had not been incurred, were brought within the scope of its definition.

3)Undisputedly, in the instant case, the amounts were paid in respect of an obligation in respect of purchase of flats through agreement, therefore, no fault could be found on the part of the AO for treating these charges as interest and liable for TDS under section 194A.

4)The mere fact that the assessee did not choose to characterize such payment as interest, would not take such payment out of the ambit of the definition of 'interest', in so far as payments made by the assessee was in respect of an obligation incurred with earlier flat holder. Thus, impugned payments had to be treated as interest under section 2(28A) and it were liable for tax deduction under section 194A. - INCOME-TAX OFFICER (TDS), TRIVANDRUM V. BEACON PROJECTS (P.) LTD. [2014] 49 taxmann.com 173 (Cochin - Trib.)

Monday, October 6, 2014

AO had discretionary powers to determine value of property under Rule 3 or Rule 8 for wealth tax purposes


AO had discretionary power to apply Rule 8 of schedule III of the Wealth-Tax Act, 1957 to determine value of immovable property as per Rule 20 if he found Rules 3 to 7 impracticable in the given case.

Facts

a)Assessee, who owned a residential flat at Mumbai which was being used as a guest house, filed its wealth tax return declaring net taxable wealth at Rs.1.32 crores (including value of residential flat at Rs.1.55 Lakh, which was self-assessed by assessee as per Rules 3 to 7 of Schedule III of the Wealth-Tax Act, 1957 )

b)During assessment proceedings, Assessing Officer (AO) was of opinion that value of said flat as disclosed in return (at Rs.1.55 lakhs) did not appear to be in consonance with market value for a similar sized flat in Mumbai and referred matter to Departmental Valuation Officer (DVO) under Rule 20 of Schedule III who valued flat at Rs.2.61 crores.

c)AO was of opinion that due to wide variation between alleged market value as determined by DVO and value as disclosed by assessee, it was not practicable to value property as per Rules 3 to 7, hence, Rule 8(a) was attracted and, accordingly, made addition to the assessee’s wealth by accepting the valuation made by DVO.

d)AO’s order was affirmed by the High Court and the appellate authorities.

e)Aggrieved assessee filed the instant appeal before the Supreme Court.

The Supreme Court held in favour of revenue as under-

1)A conjoint reading of the various provisions, i.e., Rules 3, 8 and 20 of Schedule III of the Wealth-Tax Act, 1957 makes it clear that the Legislature has not laid down a rigid directive for the AO that the valuation of an asset is mandatorily required to be made by applying Rule 3. The AO has the discretionary power to determine whether Rule 3 or Rule 8 would be applicable in a particular case. If the AO is of the opinion that it is not practicable to apply Rule 3, he can apply Rule 8 and value of the asset can be determined in the manner laid down in Rule 20.

2)However, the discretion to discard the value determined as per Rule 3 had to be judicially exercised by AO. It must be reasonable, based on subjective satisfaction and open to judicial scrutiny.

3)By examining the facts and circumstances of this case, the Supreme Court affirmed the order of AO as he had the following reasons to reject the self-assessment made by assessee:-

i.There was a wide variation between the market value and the valuation done by the assessee as per municipal taxes.

ii.The property was used as a guest house.

iii.The value for levy of municipal tax was very low, as the total ratable value of the asset was done by the municipal authorities at the rate of Rs.6,573 per annum.

iv.The assessee was a tenant of the property at the rental of Rs.500 per month. After purchase of the property a lot of expenditure was incurred from time-to-time on improvement of the property which was very difficult to ascertain.

Saturday, October 4, 2014

Sums paid by TPA to hospitals for settlement of mediclaim won’t attract rigours of sec. 194J TDS


Where assessee-third party administrator, settled mediclaim of insured and arranged said amount from insurance company, it was not liable to deduct tax against said payment and, therefore, no disallowance under section 40(a)(ia) could be made.

Facts:


a)The assessee was carrying on business of Third Party Administrator (TPA). During the assessment proceedings, the Assessing Officer (‘AO) noted that the assessee had paid certain amounts to hospitals for settlement of claim of insurance for rendering medical services.

b)The AO was of the view that the assessee was bound to deduct tax at source under Section 194J on such payments. Accordingly, the AO disallowed impugned payments under section 40(a)(ia) for non-deduction of tax.

c)On appeal, the CIT(A) granted part relief to the assessee by holding that section 40(a)(ia) is applicable to the amount payable by the assessee to the hospital and not to the amount already paid by the assessee to the hospital.

The Tribunal held in favour of assessee as under:

1)Though the assessee was under the obligation to deduct tax under section 194J, yet the disallowance under section 40(a)(ia) could not be triggered when the assessee had not claimed the impugned payment as deductible expenditure.

2)The assessee had shown the income relating to only the service charges receivable from insurance companies for rendering services as TPA. The assessee was not getting any margin or profit element in the payment received from the insurers for the purpose of remitting it to the hospitals to settle medical claim.

3)Therefore, when the said payment had not been claimed as expenditure then the provisions of section 40(a)(ia) were not attracted for non-deduction of tax at source.- PARAMOUNT HEALTH SERVICES (TPA) (P.) LTD. V. ITO [2014] 49 taxmann.com 97 (Mumbai - Trib.)

Wednesday, October 1, 2014

Fee to allow use of technology for 3 yrs without supply of know-how during that period was taxable in year of receipt


Facts:

Whether the entire licence fee received by the assessee for granting the right to use technical know-how could be taxed in the year of receipt or it could be spread over period of contract?

The High Court held as under:

1)The income had duly accrued or arisen in the year of receipt of license fee. The assessee did not have any obligation or responsibility to carry out further activity or to perform any new task, after the agreement dated 14th July, 1995 was executed, towards know-how or technology.

2)What was permitted and allowed to ETL (‘ to whom technology was made available) was the right to continue use of such design engineering component for a period of three years, in spite of disengagement and termination of the joint venture agreement;

3)The amount paid under the agreement was not an advance relating to unperformed obligation, which had to be performed or undertaken. A payment would be an advance or deposit if the said amount was repayable or the person receiving the deposit as advance had to perform and render services post deposit in future.

4)However, in the instant case the assessee did not have any obligation or responsibility to carry out further activity or to perform any new task, after execution of agreement. Therefore, the entire licence fee was taxable in the year of receipt. - NEW HOLLAND TRACTORS (INDIA) (P.) LTD. V.CIT [2014] 49 taxmann.com 573 (Delhi)