Converting a leasehold property into a freehold property improves title of asset; holding period reckoned from date of lease

Conversion of rights of lessee in property from leasehold right into freehold right only results in improvement of his or her rights over property and it would not have any effect on taxability of gain from such property, which is related to period over which property is held

Facts:

1) The assessee purchased a property on leasehold basis in year 1984. She got said property converted into freehold property in year 2004 and thereupon sold it. . The capital gain arising therefrom was declared by assessee as long-term capital gain (‘LTCG’);

2) The Assessing Officer held that since the property was acquired by converting the leasehold right into freehold right and was sold within three years, gain arising thereform was taxable as short-term capital gain.

3) On appeal, the CIT(A) held that capital gain arising from sale of such property was to be taxed as LTCG. 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 as under:

1) The difference between the 'short-term capital asset' and 'long-term capital asset' was the period over which the property had been held by the assessee and not the nature of title over the property;

2) The conversion of the rights of the lessee in the property from having leasehold right into freehold right was only by way of improvement of her rights over the property and it would not have any effect on the taxability of gain arising from such property, which was related to the period over which the property was held by assessee;

3) In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on 31.3.2004, (i.e. after holding it for more than three years) after the leasehold rights were converted into freehold rights on the same property which was in her possession. Thus, gain arising from such property would be taxable as LTCG  -  CIT v. Smt. Rama Rani Kalia [2013] 38 taxmann.com 176 (Allahabad)

Assessee needn’t be unemployed while going abroad for a job; only stay in India would determine his residential status

Where status of assessee was a non-resident, fact that assessee was already employed before leaving India should not affect his residential status

Facts:

a) The assessee working in Whirlpool China filed his return of income and declared taxable income under the head 'salary'. During scrutiny assessment, he pleaded that he was out of India for 236 days and he was not liable to be taxed in India as he was non-resident during the relevant financial year;

b) The Assessing Officer did not accept the assessee's contention and made the assessment on ground that assessee was already employed in Whirlpool India prior to leaving India;

c) On appeal, the CIT (A) held that the assessee’s salary was not taxable in India. The aggrieved revenue filed the instant appeal.
The Tribunal held as in favour of assessee as under:

1) Section 6(1) read with the Explanation  provides that for an individual, who has left India for employment outside India, should be treated as resident of India only if he was in India during the relevant year for 182 days or more [Anurag Chaudhary, In re [2010] 190 Taxman 296 (AAR-New Delhi)];

2) A careful reading of such Explanation would show that the requirement of the Explanation is not leaving India for employment but it is leaving India for the purposes of employment outside India. For the purpose of the Explanation, an individual need not be an unemployed person who leaves India for employment outside India [British Gas India (P) Ltd. In re [2006] 155 Taxman 326 (AAR-New Delhi)]

3) During the relevant financial year, the assessee's stay in India was of less than 182 days and, thus,  his residential status was non-resident;

4) The assessee’s contention, that he was already employed in the Whirlpool India prior to the leaving India for working with Whirlpool China, would not affect his residential status. Therefore, the order of the CIT(A) stating that salary income of the assessee accrued and arose during his employment in China and was not taxable in India was to be upheld - ACIT v. Raj Jain [2013] 38 taxmann.com 133 (Delhi- Trib.) 

Buyer should withhold tax from sum paid to a non-resident co-owner to acquire a house property

Where assessee purchased a property jointly owned by co-owners, in view of fact that one of co-owners of property was a non-resident, assessee was required to deduct tax at source under section 195 to extent sale-consideration paid to said co-owner.

Facts:

a) The assessee purchased a property owned by two co-owners for a total consideration of 1.20 crores. One of the co-owner was a non-resident who had executed a General Power of Attorney in favour of other resident co-owner to execute sale agreement;

b) The AO opined that since one of co-owner was a non-resident, assessee was required to deduct tax at source under section 195 on entire sale consideration of Rs 1.20 crores. On assessee's failure to deduct tax at source, the AO treated the assessee as 'assessee-in-default';

c) On appeal, the CIT (A) held that assessee ought to have deducted tax at source on the share of the non-resident in the sales consideration. Aggrieved assessee filed the instant appeal.

The Tribunal held partly in favour of assessee as under:

1) To the extent the sum was paid to non-resident co-owner, the provisions of section 195 were attracted and the assessee ought to have deducted tax at source while making payments to her;

2) Thus, the assessee could be considered as an 'assessee-in-default' only to the extent of sum paid to the non-resident - R. Prakash v. ITO [2013] 38 TAXMANN.COM 123 (Bangalore –Trib.)

SC on Radia Tapes – unscrupulous elements have used corrupt means to secure favours from Govt. officers

1) The first report submitted by Supreme Court on Nira Radia Tapes has pointed out seventeen matters of criminality or irregularity. Out of these matters, following eight matters are prima facie indicative of Deep-rooted malaise in system exploited by private enterprises in connivance with Govt. officers and others:

a) Supply of low floor buses by Tata Motors to Govt. of TN;

b) Appointment of Chairman of Pipeline Advisory Committee;

c) Allotment of coal blocks to ADAG group;

d) Allotment of iron ore mines to Tata Steel, favours shown to RIL by DG Hydrocarbons;

e) Fudging in subscriber base by Reliance Communication;

f) Touts and middlemen in aviation sector;

g) Market manipulation; and

h) Hammering of stocks of Unitech.

2) The conversations between Ms. Nira Radia and her associates suggests that unscrupulous elements have used corrupt means to secure favours from Govt. officers who appear to have acted for extraneous considerations;

3) CBI directed to make an inquiry on these eight matters and to submit a report within 2 months. Report based on conversations related to corruption or malpractice in judiciary (item No. 8 of the first report) should be referred to Chief Justice of India for consideration and an appropriate action;

4) In its second report, the SC has categorized suspected calls into six categories dealing with corruption in raid/survey by IT officials, CA working as tout of ITO, etc. CBI directed to make an inquiry on these matters also and to submit a report within 2 months. Team appointed by SC to scrutinize remaining Nira Radia tapes - Ratan N. Tata v.  Union of India [2013] 38 taxmann.com 200 (SC)

Urban land held as part of Industrial undertaking ceases to have its independent character for wealth tax purposes

Scope of section 2(ea) does not include 'urban land' but once land so held is part of industrial undertaking or factory, it ceases to have independent character as an urban land; it would be part of industrial undertaking

A. The revenue required the assessee to show cause as to why value of land, shown in the balance sheet won’t be to be included in his taxable wealth. The assessee explained that impugned land was not includible in taxable wealth as the same constituted integral part of factory;

B. The AO made addition of the value of impugned land in the net wealth of assessee by observing how could an assessee sell the land over which a factory building was situated or the land which was being used for business purposes;

C. The Commissioner of Wealth Tax (A) (CWT(A)) deleted the impugned addition. Aggrieved AO filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The scope of section 2(ea) does not include 'urban land' but once the land so held is part of the industrial undertaking or factory it ceases to have the independent character as an urban land. It would be part and parcel of the industrial undertaking or factory;

2) The mere fact that a part of land, which was held as factory, was sold by the assessee as a piece of land would not change the character of asset in the hands of the assessee;

3) There could be situations in which a part of factory land might be sold as 'land' but as long as it was a part of the factory, it couldn’t have any other character in the hands of the assessee than factory as such;

4) A vacant piece of land, even if it can be sold as 'land', as such, continues to be a business asset as long as vacant land is an integral part of factory. Therefore, the land sold was a part of the factory premises and order of CWT(A) was to be upheld – Dy.CIT v. HSIL Ltd. [2013] 38 taxmann.com 45 (Kolkata - Trib.)

‘Equipment’ includes Ship and charter fees thereof is ‘royalty’; HC refers to Sec. 43(3) to define word ‘equipment’

‘Equipment' includes ship, fee paid for use of ship to be considered as royalty under sec. 9(1)(vi). Meaning of the word ‘plant’ as defined under Sec. 43(3) would be relevant to determine meaning of the word ‘equipment’.

The aggrieved assessee appealed against order of Tribunal holding that the payment made for taking ship on time charter basis would constitute ‘royalty’ as defined under Section 9(1)(vi)(b) of the Income Tax Act (‘the I-T Act’). Assessee contended that the ship was not equipment and, consequently, there was no question of use or right to use of any equipment which could be construed as ‘royalty’.

The High Court held in favour of revenue as under:

1) The consideration paid for use of the industrial, commercial and scientific equipment is ‘royalty’ in view of clause (iva) of Explanation 2 to Section 9(1)(vi) of the I-T Act. The word ‘equipment’ is not defined under Section 9, however, the word ‘plant’ has been defined under Section 43(3). In view of Section 43(3), the word ‘plant’ is widely defined to include a ship;

2) In absence of any definition of ‘equipment’ under the I-T Act and considering the business of the foreign enterprise, the definition of ‘plant’, as including ‘ship’ would be appropriate for understanding the scope of the expression ‘equipment’;

3)  ‘Plant’ includes every tool, apparatus, equipment or machinery, not limited to machinery used in tool. Thus, with the inclusive definition of plant embracing within its fold so diverse a matter from a ship to a book, or medical equipment, every tool, apparatus, ‘plant’ includes all equipments used by an assessee for carrying on his business;

4) The word ‘equipment’ construed in the light of Section 9(1)(vi) extends the normal meaning of the word to cover even those specified categories of machinery or plant that would themselves not be construed within its plain and ordinary meaning. As rightly pointed out by the Revenue, the only limitation that one may read into the word ‘equipment’ would be that which is specifically excluded;

5) In context of Section 9(1)(vi)(b), the presence of the word ‘any’ preceding the word ‘equipment’, clearly points out the need for construing ‘equipment’ widely, so as to embrace every article employed by the employer for the purposes of his business. ‘Equipment’, by whatever name called either as an apparatus or as plant or machinery, so long as they are employed for the purposes of one’s income, the same shall stand covered by clause (iva) of Explanation 2;

6) Therefore, in absence of any word of limitation other than what was explicitly provided for, we do not find any legal necessity of reading a limitation on the word equipment. Thus, ship being a plant, an equipment with which the ship owner operates the business and commercially exploits it for earning the income from chartering of ship, the payment thereof would be clearly in nature of ‘royalty’ - Poompuhar Shipping Corporation Ltd. v.  ITO, International Taxation [2013] 38 taxmann.com 150 (Madras)

ITAT devises formula for claiming lease equalization charges – gap of annual lease charges and depreciation as per Income-tax Act

While allowing deduction on account of lease equalization charges, only difference between annual lease charge of leased assets and depreciation allowed on said leased asset under the Income-tax (‘I-T’) Act should be taken into consideration

The Tribunal held as under:

1) The concept of lease equalization charge could also be followed for the purpose of computing the total income under the I-T Act. However, the same has to be done with proper care and caution, otherwise it might result in absurdity and give misleading result;

2) In the instant case the relevant transactions were treated as finance lease transaction and, the depreciation allowed as per the rates prescribed in the I-T Act could be more than the depreciation claimed by the assessee at the rate prescribed under the Companies Act;

3) For example, the assessee might be entitled to claim depreciation at 100 per cent on the leased assets in the first year itself under the I-T Act whereas in the books of account, it might have claimed depreciation on the said leased assets under the Companies Act at the rate of 10 per cent;

4) In such a case if the annual leasing charge was equivalent to 30 per cent of the value of leased assets, the assessee would debit its profit
and loss account by lease equalization charges to the extent of 20 per cent of the value of asset as per the guidance note issued by the ICAI;

5) If the lease equalization charges so debited were to be allowed as deduction while computing the total income of the assessee under the I-T Act in addition to 100 per cent depreciation already allowed, the assessee would get the deduction of 120 per cent of the value of asset in the first year itself and the very purpose of adopting the concept of lease equalization would be defeated. This would result in absurdity and give misleading results;

6) It was, therefore, necessary that while allowing deduction on account of lease equalization charges for the purpose of computing total income under the I-T Act, the difference between the annual lease charge of the leased assets and depreciation allowed on the said leased asset under the I-T Act should be taken into consideration - Infrastructure Leasing & Financial Services Ltd v. Dy.CIT [2013] 38 taxmann.com 40 (Mumbai - Trib.)

Advance Ruling binding on both revenue and assessee; CBEC’s circular holding otherwise is invalid

Advance ruling is binding on Department as well as assessee; CBEC clarification holding contrary view and issued later in point of time, cannot annul advance ruling pronounced in favour of assessee

In the instant case the advance ruling was pronounced in assessee's favour, which was not challenged and became final. Later, on clarification being sought by some other person from CBEC, it issued a Circular holding a view contrary to order of Authority for Advance Ruling. The Department argued that view expressed in CBEC Circular was applicable to the assessee.

The High court held in favour of assessee with following observation:

1) In the instant case, the assessee himself had not sought any clarification from CBEC. A clarification sought for by some other person couldn’t bind the assessee for whom advance ruling was binding;

2) CBEC clarification, issued later in point of time, did not and could not have annulled advance ruling in view of provisions of section 96D(2) read with section 96E - Gras Impex (P.) Ltd. v. Commissioner of Commercial Taxes [2013] 38 taxmann.com 65 (Karnataka)

Worried over rising prices of CNG – Complain to Petroleum Regulatory Board rather than Competition Commission

Commission would not proceed with complaint regarding pricing of PNG when Petroleum & Natural Gas Regulatory Board was looking into grievances of consumers and pricing of CNG/PNG

Facts:

a) The complainant, a consumer of Piped Natural Gas (PNG) supplied by Indraprastha Gas Limited (‘IGL’), sent a complaint to the Chairman, MRTPC as regards price charged by IGL;

b) The complainant submitted that the respondent was exploiting its monopoly in the capital city of Delhi by not passing on the benefits of APM Gas to the domestic consumer and was charging a much higher rate than the Gujarat Gas and MG;

c) The complainant contended that the Commission should issue cease and desist order against the IGL from misusing its monopoly position and profiteering at the cost of its consumers and that the order should specify that IGL should start charging not more than Rs. 9.25 per scm for PNG.

The Competition Appellate Tribunal held as under:

1) The Commission doesn’t find it necessary to proceed with this matter particularly because the grievance of the consumers generally was being
looked into by the Petroleum & Natural Gas Regulatory Board (‘PNGRB’) who has taken up the exercise to decide and to enquire into the price structure of CNG/PNG by all the entities engaged in the business which would include the supplies made in Mumbai, Gujarat and Calcutta, etc.;

2) If the PNGRB was already doing that exercise, there would be no need for the Commission to go into the further state of affairs particularly in view of the absence of total evidence except the balance sheet of IGL suggesting that IGL had made some profits and statistics before the Commission;

3)  Thus, it was not deemed fit to proceed in the matter particularly in the absence of the evidence and also because a body like PNGRB with all the necessary statistics was enquiring into the matter – DG (I & R) v. Indraprastha Gas Service [2013] 38 taxmann.com 59 (CAT - New Delhi)

In absence of an agreement, transfer of land by assessee to his AOP won’t be deemed as transfer

Where assessee contended that he formed an AOP and transferred a land to it, but no agreement between assessee and AOP was found, transaction would not amount to transfer

In the instant case, the assessee had an agricultural land which was declared as industrial estate. He and other landowners within that industrial estate formed an AOP and transferred this land to it. The CIT (A) held that the land stood transferred in terms of section 2(47) to AOP. He, therefore, directed the AO to assess capital gain on each member of the AOP on account of transfer of capital asset. On appeal, the Tribunal refused to interfere.  Aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) For the purpose of income tax, a capital asset may be transferred to an AOP as is provided in section 2(47);

2) However, when the capital asset is an immovable property by reason of the provisions contained in the Transfer of Property Act, read with the Registration Act, transfer of an immovable property of the nature dealt with herein requires an instrument which is also required to be registered;

3) Thus, transfer will take effect in a situation as provided in section 53A of the Transfer of Property Act, namely, when there is an agreement to transfer and, in part performance thereof, the transferee is in possession of the immovable property agreed to be transferred;

4) In the instant case, there was no conveyance by the appellant in favour of AOP, nor there any agreement between them and AOP also didn’t contend that in pursuance of that agreement and in part performance thereof, it was in possession of the property in question. Therefore, the impugned transaction wouldn’t be deemed as transfer - Rajesh Kumar Agarwal v. ITO [2013] 37 taxmann.com 442 (Uttarakhand)