No disallowance u/s 40(a)(ia) when taxpayer is claiming exemption under sec. 11

The issue before the ITAT was

Whether the provisions of section 40(a)(ia) are applicable when income is computed under sections 11, 12 and 13?

The ITAT held as under:

1) Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax if such conditions are fulfilled. Section 40(a)(ia) falls under chapter IV-D which deals with computation of profits and gains from business or profession.

2) Therefore, the provisions of section 40(a)(ia) are relevant if income is computed under the head 'profits and gains of business or profession". The concept of computation of income under section 11 is real income concept which is computed on the principles of real income generated from property held under trust and not notional income under other provisions of the Act.

No disallowance under sections 40(a)(ia) and 43B if assessee-trust was enjoying exemption under section 11

Issue

Whether disallowance under sections 40(a)(ia) and 43B could be made in a case of trust enjoying exemption under section 11 of the Income-tax Act (‘Act’)?

The tribunal held as under-

1)    Sections 11, 12 and13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled.

2)    Sections 40(a)(ia) and 43B fall under Chapter IV-D of the Act. The said Chapter deals with computation of profits and gains from business or profession. The profits and gains from business or profession are computed under section 28. Section 29 provides the manner of computation of income under the head "profits and gains of business or profession", which states that the income referred to in section 28 shall be computed in accordance with the provisions of sections28 to 43D.

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

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

Facts:

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

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

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

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

The High Court held in favour of assessee as under:

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

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

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

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.)

Payments of commission for services rendered in relation to securities are out of ambit of sec. 194H; no TDS

Services rendered in relation to securities are excluded from express definition of 'brokerage or commission' and, thus, excluded from purview of section 194H.

Facts

a)The assessee received certain amount from Mutual fund houses and paid commission to TPL on account of brokerage for motivating potential investors to invest through the assessee in Mutual funds. According to agreement entered into by the assessee, TPL canvassed and marketed various Mutual fund schemes to potential investors after collecting details from the assessee.

b)The Joint Commissioner passed an order under section 144A directing disallowance of the commission paid to TPL.

c)The Assessing Officer disallowed the commission paid by the assessee to TPL under section 40(a)(ia) on the ground that tax was liable to be deducted at source under section 194H, but had not been deducted.

d)On appeal, the CIT(A) set aside the disallowance holding that services rendered in relation to securities are excluded from the express definition of 'brokerage or commission' and, thus, excluded from the purview of section 194H. Further, the Tribunal upheld the order of the CIT(A). The aggrieved- revenue filed the instant appeal.

The High Court held in favour of assessee:

1)The Joint Commissioner was in error in holding that while TPL had motivated investors to subscribe to Mutual Funds, it had no connection whatsoever with 'securities' as defined in Explanation to section 194-H. Explanation (iii) to section 194-H specifically states that the expression 'securities' will have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulations) Act, 1956.

2)Once it was an admitted position that TPL had motivated potential investors to invest through the assessee in Mutual Funds, it had to be held that these services were rendered in relation to a transaction in 'securities' and would be excluded from the definition of 'brokerage or commission' under section 194-H.

3)The CIT(A) was justified in coming to the conclusion that the services were rendered by TPL were in relation to 'securities'. Consequently, the disallowance under section 40(a)(ia) was not warranted.

4) Thus, there was no reason to hold that the Tribunal was in error. The appeal by the revenue had not given rise to a substantial question of law - CIT V. TANDON & MAHENDRA [2014] 45 taxmann.com 183 (Allahabad)

Sec. 40(a)(ia) contemplates actual tax deduction and not mere debit entry in account of payee

The Tribunal held in favour of revenue as under:

1)  Deduction of tax at source as contemplated by section 40(a)(ia) needs to be real and not illusory;

2)  Deduction of tax at source implies subtraction of the amount of tax from the amount payable by the assessee to the payee out of which tax is deductible at source before it is paid to the payee or is credited to the account of the payee;

3)  It is after deduction of such tax from the amount payable to the payee that the assessee can pay/credit the remaining amount;

4)  The law contemplates real deduction of tax at source out of amount payable by the assessee and not mere book entries by which such tax is debited to the running account of the payee in the books of the assessee, unless such entries are supported by actual deduction;

5)  There was no evidence before the revenue that tax was actually deducted by the assessee at source out of the amounts paid or credited by it to the payees, although such tax was deductible at source;

6)  Unless the assessee proves that it has actually deducted the tax at source out of amounts paid/credited in favour of the payees, it was not possible to delete the impugned disallowance. Therefore, the appeal of the assessee was liable to dismissed. - Atul Auto Ltd. v. JCIT [2013] 40 taxmann.com 394 (Rajkot - Trib.)