Reserve and surplus acquired on amalgamation is not revenue receipt; held not taxable under sec. 28(iv)

Enhancement of capital reserve due to amalgamation (in nature of merger) of assessee-co. with other companies, was not in revenue field and, thus, was not in nature of income so as to be considered for taxation under section 28(iv).

The Tribunal held as under:

1)    Provisions of section 28(iv) provide that besides the profits and gains from business or profession (‘PGBP’) carried on by the assessee, any other benefit or perquisite arising therefrom is also chargeable to tax under the head 'PGBP’;

2)    The conditions precedents for such taxability are:

(i)   There should be benefit or perquisite, and

(ii)  Such benefit or perquisite should arise from the business or the exercise of a profession;

3)    The expression 'arising from business' essentially implied that the benefit or perquisite would be in the nature of a business receipt or revenue receipt. No matter how wide could be the scope of section28(iv), the difference between a capital receipt and revenue receipt could not be overlooked;

4)    Thus, unless a receipt was revenue receipt, it could not be in the nature of income and unless it was in nature of income, it could not be considered for taxation under section 28(iv);

5)    The instant case was of amalgamation in the nature of merger which was proposed for the purpose of better, efficient and economical management to withstand the recessionary trend in the economy and to obtain advantage of economies of large scale;

6)    Even if there was a benefit in the process, such a benefit could only be in the capital field, because it was related to the non-trading assets and capital. What it affected was the capital structure of the assessee-company and the manner in which business was consolidated;

7)   Therefore, the enhancement of its capital reserve as a result of amalgamation could only be construed as a benefit accrued to the assessee. But such benefit was not in revenue field and was, thus, not in nature income. Accordingly, there was no occasion to invoke section 28(iv) – ITO v. Kyal Developers (P.) Ltd [2014] 42 taxmann.com 70 (Kolkata - Trib.)

Order passed by CIT under sec. 119 is an administrative order which isn't appealable before ITAT

Order passed by Commissioner under section 119(2)(b) was an administrative order against which appeal before Tribunal under section 253 was not maintainable.

Facts:

a)  The assessees approached the Commissioner for regularization of their returns in terms of section 119(2)(b);

b)  The CIT rejected said applications. However, the Tribunal directed the Commissioner to consider the case of the assessees afresh, after giving proper opportunity of being heard to them.

c)  Aggrieved-CIT filed the instant appeal.

The High Court held as under:

1)  In view of section 253, appeal against the order passed by the Commissioner under section 119(2)(b) was not maintainable;

2)  Such order passed by the Commissioner under section 119(2)(b) was an administrative order against which appeal before Tribunal under section 253 would not be maintainable;

3)  Thus, the Tribunal had materially erred in entertaining the appeals against the order passed by the Commissioner under section 119(2)(b) and had materially erred in passing the impugned order directing the Commissioner to consider the case of the respondent-assessees afresh. – CIT v. Rasida Ibrahimbhai Vohra [2014] 42 taxmann.com 85 (Gujarat)

Extended period of 6 years not available for reassessment unless AO gets info to show escaped income above 1 lakh

Extended time-limit of 6 yrs under section 149(1)(b) requires data for prima facie computation of income escaping assessment. 

The High Court held as under:

1)  Extended time-limit of 6 years under section 149(1)(b)to initiate proceedings to bring to tax income escaping assessment cannot be availed by AO without getting hold of data which prima facie supports computation of  quantum of income escaping assessment above one lakh rupee;

2)  The Assessing Officers may be handicapped in such cases but there are sufficient provisions in the Act to get hold of the said data before proceedings are initiated or reasons are recorded;

3)  The AO must obtain such data for relevant assessment year and cannot even use data of subsequent or other assessment years as figures for every year will alter or change.

Trust can work for charity with life-long members; registration can't be revoked on ground of perpetual members

The High Court held as under:

1)  The object of Section 12AA is to examine the genuineness of the objects of the Trust and though while examining genuineness, the income as well as resources of the Trust may be taken into consideration but any suspicion as to these facts cannot be the sole criteria for rejecting an application under Section 12A;

2)  Merely because a trustee was a life-long member of a trust, same could not itself raise an inference that trust was not charitable. Therefore, Tribunal was justified in directing registration of assessee as charitable trust. – CIT v. Baba Kartar Singh Dukki Educational Trust [2014] 42 taxmann.com 17 (Punjab & Haryana)

Capacity underutilization lowers profits; ITAT affirms its adjustment to fix ALP of Panasonic’s product

Capacity underutilization is certainly an important factor affecting net profit margin of enterprise as it results in higher costs per unit, which, in turn, result in lower profits. Thus, adjustment of capacity utilization is to be made to determine ALP of international transaction.

The Tribunal held as under:

1)  Rule 10 B (1)(e)(ii) does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market;

2) Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Thus, the adjustment for capacity utilization was rightly approved by the CIT(A). - Panasonic AVC Networks India Co. Ltd. v. Dy. CIT [2014] 42 taxmann.com 420 (Delhi - Trib.)http://www.taxmann.com/income-tax-rules.aspx

Normal dress worn by employees isn’t ‘uniform’, no exemption on uniform allowance; employer to withhold tax

The Tribunal held as under:

1)    As per dictionary meaning or even as otherwise understood in common parlance, "uniform" is an identifying outfit or style of dress which is identical or consistent without variations in details. Examples are uniform of police personnel, armed forces, canteen staff, etc;

2)    Uniform may change as per rank and designation of group of employees concerned. If appellant's interpretation of 'uniform'(that it's a standard style of dress and not uniformity of dressing style) were to be accepted, in every office, any dress worn by the employees' would qualify as 'uniform';

3)    The prescribed uniform was done away by appellant way back in 1995. No 'uniform' was prescribed by appellant during the period under consideration;

4)   Therefore, it could not be said that the allowance was towards purchase or maintenance of uniform and it could not be exempted from tax in the hands of employees under Rule 2BB(l)(f) read with section10(14)(i). Thus, the appellant was liable for TDS from uniform allowances. - ONGC, Basin Baroda v. ACIT(TDS) [2014] 42 taxmann.com 350 (Ahmedabad - Trib.)

Amount credited to PPF account immune from attachment for recovery of income-tax dues

The High Court held as under:

1)  Rule 10 of the Second Schedule to the Income-Tax Act provides that all such property as is by the Code of Civil Procedure, 1908, exempt from attachment and sale in execution of a decree of a civil court shall be exempt from attachment and sale under this Schedule.

2)  Proviso to section60(1) of Code of Civil Procedure contains list of properties which shall not be liable to attachment or sale which, inter alia, covers all deposits and other sums derived from any fund to which the Public Provident Fund Act, 1968, applies,  in so far as they are declared by the said Act as not to be liable to attachment;

3)  Therefore, any amount lying in the PPF account of a subscriber is immune from attachment and sale for recovery of the income tax dues. As long as an amount remains invested in a PPF account of an individual, the same would be immune from attachment from recovery of the tax dues. - Dineshchandra Bhailalbhai Gandhi v. Tax Recovery Officer [2014] 42 taxmann.com 300 (Gujarat)

Scope of sec. 50 limited to compute capital gain; tax rate to be fixed as per holding period of depreciable assets

The Tribunal held as under:

1)  It had been argued by the learned AR that the provisions of section 50, deeming the capital gain as short-term capital gain was only for the purposes of sections 48 and 49 which relates to computation of capital gain;

2)  The view canvassed by the learned AR was supported by the judgment of the Mumbai bench of Tribunal in case of  Manali Investments v.Asstt. CIT [2011] 45 SOT 128/10 taxmann.com 293 in which it had been held that the provisions of section 50 were to be extended only to the stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was held for more than three years would retain the character of long-term capital gain for the purpose of all other provisions of the Act;

3)  For the purpose of computation of capital gain, the flat had to be treated as short-term capital assets, but for the purpose of applicability of tax rate it had to be treated as long-term capital assets if held for more than three years;

4) Thus, the AO was to be directed to compute the capital gain from the sale of flat and apply the appropriate tax rate after necessary verification in the light of observations made in this order - Smita Conductors Ltd. v. Dy. CIT [2014] 41 taxmann.com 514 (Mumbai - Trib.)

Deemed transfer of property in development agreements if right to sell a few flats was transferred to builders

Where assessee had entered into development agreement under which developer had constructed a building on property of assessee and, in turn, developer had right to sell some of the flats, grant of development right to that extent was to be treated as transfer.

Facts:

a) The assessee entered into a development agreement with the developer under which the developer agreed to construct a building on property of assessee. The major part of the building was to be transferred to the assessee. However, the developer was entitled to sell the remaining flats.

b) The Assessing Officer (‘AO’) held that capital gain arose on account of grant of development rights by the assessee. The alternate contention of assessee was that he was entitled to sec. 54 relief in respect of three floors of building.

c) The AO party allowed assessee’s claim of exemption under section 54 in respect of one residential floor. On appeal, the CIT (A) upheld the order of the AO as regards the transfer of property, however, he partly allowed the exemption claimed by the assessee under section 54.

The Tribunal held as under:

1)  The developer had the right to sell the said flats on account of the additional FSI. To that extent the rights, title and interest in the said plot of land had been transferred. Hence, it was a clear case of transfer envisaged both under the income-tax  Act and Transfer of Property Act;

2)  The High Court of Delhi in the case of CIT v. Gita Duggal [2013] 30 taxmann.com 230  held the fact that residential house consisted of several independent units couldn’t be permitted to act as an impediment to allow the deduction under section 54;

3)  In the case of CIT v. D. Anand Basappa [2009] 180 Taxman 4 (Kar.), the High Court has held that 'a residential house' as mentioned in section 54(1), had to be understood in a sense that the building had to be of a residential nature and the word 'a' had not be understood to indicate a singular number;

4) Therefore, the assessee was entitled to exemption under section 54 as regards the investments/cost of construction claimed by the assessee in respect of all the flats. – Dy. CIT v. Jai Trikanand Rao [2014] 41 taxmann.com 453 (Mumbai - Trib.)

Highlights of Interim Budget 2014-15: excise duty reduced on cars and mobiles, FM focuses on passing of GST and DTC

Key Features of Interim Budget 2014-2015

1)  GST and DTC: All political parties must resolve to pass the GST Laws and the DTC in 2014-15;

2)  Research funding organization: Proposal to set-up research Funding Orgnaisation that will fund Research. Contribution to that organisation will be eligible for tax benefits;

3) Change in rate of taxes:

a)  Excise duty on small Cars, Motorcycle, Scooters and Commercial Vehicles reduced from 12% to 8%.

b)  Excise duty on SUVs reduced from 30% to 24%.

c)  Excise duty on large and mid-segment cars reduced from 27/20% to 24/20%.

d)  Excise duty on chassis and trailors reduced.

e)  The excise duties on all mobile handsets have been restructured. The rates will be 6% with CENVAT credit or 1 percent without CENVAT credit.

f)  To encourage domestic production of specified road construction machinery, the exemption from CVD on similar imported machinery is withdrawn.

g)  A concessional custom duty of 5 percent on capital goods imported by the ‘Bank Note Paper Mill India Private Limited’ is provided for to encourage domestic production of security paper for printing of currency notes.

4) Service tax exemptions:

a)  The loading and un-loading, packing, storage and warehousing of rice have been exempted from service tax;

b)  The services provided by cord blood banks are exempted from service tax.