No sec. 10(23C) relief to school collecting fees in name of development fund to be created for benefit of trustee

Facts:

a)  The assessee-trust established a higher secondary school. There was a search in the premises of husband of managing trustee of trust. The seized material found during the course of search operation showed excess collection over and above the fees in the name of development fund.

b)  Before the Assessing officer, the assessee claimed exemption under section 10(23C). The Assessing Officer held that since it was a family trust which was established for the benefit of children of managing trustee, thus, claim of the assessee for exemption under section 10(23C) was to be rejected;

c)  The CIT(A), however, allowed the claim of the assessee on the ground that it was a capital receipt. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)  Section 10(23C) provides that the educational institution existing solely for educational purposes and not for purposes of profit is eligible for exemption. In the instant case, the trust was established for the benefit of the children of managing trustee;

2)   It was a private family trust. Now, the question for consideration was as to when the trust itself was established for the benefit of the two children of managing trustee, whether the trust had any profit motive or not?;

3)  A bare reading of the trust deed clearly showed that the trust was established for the benefit of two children of managing trustee;

4)  There was a clause in the trust deed which enabled the children of managing trustee to appropriate the profit. The assessee had no obligation to reinvest the profit in the educational activities. Therefore, it could be concluded that the assessee was not in existence solely for educational purposes. It existed only for profit motive and, hence, it was not eligible for exemption under 10(23C). – ACIT v. Sabarigiri Trust [2014] 43 taxmann.com 19 (Cochin - Trib.)

‘Satisfaction’ of AO for assessment of other person may come after concluding assessment of searched person: SC

The Assessing Officer could record his satisfaction for issuing notice under section 158BD in the case of person other than searched person even after the completion of assessment of searched person.

The issue that falls for consideration of Supreme Court is:

At what stage of proceedings under Chapter XIV-B the assessing authority is required to record his satisfaction for issuing a notice under section 158BD?

The Supreme Court held in favour of revenue as under:

1)  The section 158BD is a machinery provision and it is inserted in the statute book for the purpose of carrying out assessment of a person other than the searched person. Under Section 158BD, if an officer is satisfied that there exists any undisclosed income which may belong to a person other than the searched person, after recording such satisfaction, he may transmit the records/documents to the Assessing Officer having jurisdiction over such other person;

2)  After receipt of the aforesaid satisfaction and upon examination of the said other documents relating to such other person, the jurisdictional Assessing Officer may proceed to issue a notice for the purpose of completion of the assessments under Section 158BD;

3)  Section 158BD provides that the satisfaction note could be prepared by the Assessing Officer either at the time of initiating proceedings for completion of assessment of a searched person under Section 158BC or during the stage of the assessment proceedings.

4)  It didn't mean that after completion of the assessment, the Assessing Officer couldn't prepare the satisfaction note to the effect that there exists undisclosed income belonging to person other than the searched person;

5)  Thus, for the purpose of Section 158BD, a satisfaction note is sine qua non and must be prepared by the Assessing Officer before he transmits the records to the other Assessing Officer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages:

a)  At the time of or along with the initiation of proceedings against the searched person under Section 158BC;

b)  Along with the assessment proceedings under Section 158BC ; and

c)  Immediately after the assessment proceedings are completed under Section 158BC of the searched person.- CIT v. Calcutta Knitwears [2014] 43 taxmann.com 446 (SC)

Scope of retro-amendments couldn’t be curtailed by treaty - HC’s passing remarks; denies stay on recovery of demand

The scope and effect of the legislation cannot be curtailed by the DTAA, if after it comes into force an Act of Parliament is passed which contains contrary provision. This issue could have been discussed further had the petitioner questioned the legality of the Finance Act, 2012 inserting Explanations 5 and 6 in section 9(1)(vi) of the Act.

Facts:

a)  The assessee, engaged in business of providing telecom services to its subscribers in India, entered into agreements with non-resident telecom operators ('NTOs') for providing bandwidth and inter-connects capacity outside India.

b)  It also entered into a capacity transfer agreement with 'Belgacom' (a tax resident of Belgium) for acquisition of capacity over the Europe-India gateway (EIG) cable system.

c)  The assessee argued that the payments to NTOs and Belgacom couldn't be termed as 'royalty' under the provisions of Income-tax Act. Accordingly, it filed the instant writ with the High Court against the impugned order of Tribunal granting limited stay on recovery of tax.

The High Court held in favour of revenue as under:

1)  Section 9(1)(vi) makes it clear that payments for rendering any services in connection with activities referred to in clauses (iv) and (v) of the Explanation 2 to section 9(1)(vi) would attract the definition of 'Royalty;

2)  Explanations 5 and 6 to section 9(1)(vi) inserted by the Finance Act, 2012 provide that royalty includes consideration in respect of any right, property or information. As these Explanations are in the book of statute, unless they are declared ultra vires or their legality is tested, it is indispensable for the Assessing Officer to apply these Explanations while determining tax liability under the Act;

3)  The petitioner had not questioned the validity of the said amendments in this writ. Thus, the Assessing Officer was bound to apply such provisions in determining the taxability of the payments made by the petitioner to the NTOs;

4)  The scope and effect of the legislation can't be curtailed by the DTAA if after its entry into force an Act of Parliament is passed which contains contrary provision. The DTAA is entered into pursuant to the power conferred upon the Government under section 90;

5)  Thus, a detailed discussion was required as to whether section 90(2) was of such nature so as to nullify all Acts of the Parliament which create tax liability under the Act? This issue could be debated further had the petitioner questioned the legality of the Finance Act, 2012, inserting Explanations 5 and 6in section 9(1)(vi) of the Act;

6)  Any observation made on the above issues would not be construed as an expression of opinion on merit in view of the fact that all these issues are sub judice in the two appeals filed before the Tribunal. Thus, it needed to be examined whether the petitioner had made out a case for grant of stay in its entirety;

7)  There was no material placed before the Court to show that the petitioner would suffer irreparable hardship and injuries to his favour due to order of Tribunal granting limited stay on recovery of tax. The Tribunal had answered the grounds urged by the petitioner seeking grant of interim stay and had reached the logical conclusion by directing the petitioner to deposit 50% of the tax liability. The order of the Tribunal could not be interfered with.- Vodafone South Ltd. v. Dy. DIT (International Taxation) [2014] 43 taxmann.com 444 (Karnataka)

MCA notifies Rules under Companies Act, 2013

The Ministry of Corporate Affairs has notified 11 Rules under Companies Act, 2013. They will be effective from April 1, 2014. The major sections of Companies Act, 2013 have already been notified on March, 26, 2014. The salient features of these Rules are as under:

1)  New Definitions: It incorporates definitions of ‘Certifying Authority’, ‘digital signature’, ‘Digital Signature Certificate’,  ‘electronic Mail’, ‘electronic mode’ , electronic record’, ‘electronic Registry’.

2)  One person company (‘OPC’): Only a natural person who is an Indian citizen and resident shall be eligible to incorporate a OPC.

3)  Cessation of OPC status: OPC’s status shall be ceased if-

a)  Its paid up capital exceeds fifty lakh rupees or

b)  Its average annual turnover exceeds two crore rupees.

4) Penalty: The OPC or any of its officer will be liable for penalty of upto Rs 10,000 and further a fine of Rs 1,000 per day if they contravenes any of the provisions of these rules.

5) Prospectus:  Following reports shall be required to be filed along with the Prospectus:

a) Auditor’s report on profits and losses and assets and liabilities.

b) The reports of preceding five financial years relating to profits and losses of the enterprise. Reports can be filed for less than five financial years if the enterprise was in existence for lesser period.

c) Auditor’s report in respect of business of the enterprise.

6) Annual Return: Every company is required to prepare its annual return in Form No. MGT.7. Companies satisfying the following criteria are required to certify its Annual Return from a Company Secretary in practice:

(i)    listed companies or

(ii)   Companies having paid-up share capital of Rs 10 crore or more or

(iii)  Companies with turnover of Rs 50 crore or more.

Agricultural land won't lose its privileges even if sold in violation of State laws; not taxable as capital asset

Merely because agricultural land was sold in favour of non-agriculturist in breach of law prevailing in State, said land would not lose its character as agricultural land and, hence, could not be treated as capital asset.

Facts:

a)  The assessee had filed return of income and disclosed income from sale of agricultural land in response to notice issued under section 153C.

b)  The Assessing Officer made addition on account of capital gain by holding that the land, which was sold by assessee, was a capital asset as it was sold in violation of laws prevailing in the State.

c)  On appeal, the CIT(A) deleted the addition. Further, the Tribunal confirmed order of the CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  It was not in dispute that what was sold by the assessee was an agricultural land which was situated beyond 8 Kms. of local limits of the Municipality and at the relevant time, the land was held by the assessee as agricultural land;

2)  The character of land would not change merely because it was sold to a non-agriculturist in breach of law prevailing in the State and the land still would continue as an agricultural land;

3)  Even though the sale in favour of non-agriculturist could be declared as illegal, yet the land would not lose its character as agricultural land;

4)  When the land was an agricultural land, which was situated beyond 8 Kms. from the municipal limits, no error had been committed by the Tribunal in not considering the land as 'capital asset';

5)  Thus, the land was to be treated as agricultural land and it was outside the purview of capital asset. – CIT v. Rajshibhai Meramanbhai Odedra [2014] 42 taxmann.com 497 (Gujarat)

ITAT explains interplay between Article 7 and Article 13 of India-UK DTAA

The Tribunal held as under:

1)  The Para 1 of Article 7 of the India-UK treaty ('DTAA') provides that if an enterprise carries on business in the other Contracting State through a permanent establishment (‘PE’) situated therein, then the profits of the enterprise may be taxed in the other State but only so much of them as are directly or indirectly attributable to that PE;

2)  The effect of Para 9 of Article 7 is that if 'Business profits' include an item of income which falls under any of the specific Articles of the DTAA, such as Royalties and fees for technical services (‘FTS’) under Article 13, then such income shall be excluded from the 'Business Profits' and falls under specific Articles such as Article 13;

3)  Para 6 of Article 13 of DTAA provides that the provisions of paragraphs 1 and 2 of Article 13 shall not apply if the beneficial owner of the royalties or FTS, carries on business in the other Contracting State (in which the royalties or FTS arise) through a PE situated therein and the right, property or contract in respect of which the royalties or FTS are paid is effectively connected with such PE. In such case, the provisions of Article 7 (Business profits) of this Convention, as the case may be, shall apply;

4)  Thus when Article 7 had excluded royalty or FTS to be considered under Article 13 but Para 6 of Article 13 has sent the matter back to Article 7, it was the mandate of Article 7 which would apply on the amount excluded by Para 6 of Article 13. – Dy. DIT v. JC Bamford Excavators Ltd. [2014] 43 taxmann.com 343 (Delhi - Trib.)

Rental income of godown constructed on an agricultural land couldn't be termed as agriculture income

Facts:

a)  The assessee, a partnership firm, was carrying on business of constructing godowns and renting them to parties for earning rental income.

b)  It had constructed a godown on agricultural land belonging to its partners. The godown was given on rent and rental income so derived was declared by assessee as agricultural income.

c)  The Assessing Officer had accepted assessee's claim of agricultural income. The CIT passed a revisional order to hold that the rental income from godown could not be treated as agricultural income within meaning of section 2(1A)(c). The agrrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)  The income in the instant case needed to be considered under section 2(1A)(c). The requirement of section 2(1A)(c) is that the income should be derived from any building owned and occupied by the receiver of the rent or revenue of the land;

2)  In the instant case, neither the assessee was receiver of the rent or revenue of the land, nor was the building occupied by it;

3)  Further, the requirement of this section is that the building must be occupied by the cultivator or the receiver of rent-in-kind of any land with respect to which or with respect to the produce of which, any process which is ordinarily employed by a cultivator or receiver of rent in kind, (so as to render the produce raised or received by him fit to be taken to the market)  is performed;

4)  The assessee also failed to fulfill this requirement, as the godown building was occupied by 'K' and 'I', who were the assessee's tenants during the year under consideration and were not either cultivators, or receivers of rent in kind of any land.;

5)  Further, it had also not been shown by the assessee that either the land beneath the godown building, or the produce thereof was subjected to any process ordinarily employed by a cultivator or receiver of rent in kind to render the produce raised or received by him fit to be taken to the market. Thus, the rental income from godown could not be treated as agricultural income. - New Jain Godowns v. ITO [2014] 42 taxmann.com 434 (Delhi - Trib.)

Income arising from sale of trees that were cut legally to get hindrance free cultivation was capital receipt

Where trees were not of spontaneous growth and same could not be regenerated and gave benefit to assessee in near future, income earned out of sale of such trees could not be chargeable to tax in hands of assessee and was to be treated as capital receipts

Facts:

a)  The assessee had purchased a agricultural land on which teak trees were creating hindrance in undertaking cultivation on such land. He took permission of collector to cut those trees;

b)  The Assessing Officer treated income earned out of sale of those trees as of revenue receipt, considering that it was sale of forest produce of wild spontaneous grown trees;

c)  The CIT (A) held the income earned by assessee was capital receipt. The Tribunal upheld the view of the CIT (A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  The assessee was an agriculturist and not found to be engaged in any business activity. The cutting and selling of the trees were made after obtaining prior permission from the competent authority;

2)  The sale of the trees was made to the State and both cutting and selling were governed by the provisions of the Code and Rules framed thereunder which inter alia provided that no one could either cut or/ and sell any tree without obtaining prior permission of the competent authority;

3)  Further, the price of the trees was determined by the State authorities in which the assessee had no role to play. Hence, there was no scope for any price negotiations;

4)  The Rules provided that the trees had to be cut in a particular manner and the same was also done by the assesee. The certificate given by the Tahsildar stipulated that so far as the trees were concerned, they would not regenerate in near future because they do not belong to the categories of a species which have a spontaneous growth;

5)  The land was put to use for cultivation by the assessee after cutting the trees. After looking to the nature of trees which were cut above the root, it did not result in its spontaneous growth and lastly, there was no evidence to show that any profit element in the transaction was noticed or that assessee earned any profit;

6)  Thus, it was proved that the assessee did not intend to earn any profit out of the sale of such trees and nor his intention was to indulge in any profit making activity by sale of such trees. Therefore, impugned receipts were essentially in the nature of capital receipt.- CIT v. Mahendra Karma Pooranchand Soni [2014] 42 taxmann.com 380 (Chhattisgarh)

Cost of improvement is allowable even if it’s sourced through general loan and through housing loan

Merely because loan used by assessee in improvement of house was a general loan and not a housing loan, cost of improvement could not be disallowed.

Facts:

a)  The assessee had borrowed loan from a bank for improving the house property. He had sold said property and while computing capital gains, he had claimed cost of improvement.

b)  The Assessing Officer had disallowed the claim of assessee merely because the loan was classified as a general loan and not as a housing loan. 

The Tribunal held as under:

1)  The assessee had claimed deduction of cost of improvement of property while computing capital gains during the assessment year 2006-07;

2)  The original construction of property was made in the year 1991-92, thus, there would have been some kind of improvement or maintenance after lapse of so many years. Therefore, the assessee’s claim could not be rejected in toto;

3)  The assessee would have spent considerable amount during the assessment year 2006-07 at least for maintenance of the building, if not on improvement of the original construction.

4)  Thus, cost of improvement could not be disallowed merely because it was sourced through general loan and not through housing loan. Therefore, rejecting the claim of the assessee in toto was not justified. - K.K. Venugopalv. Dy. CIT [2014] 42 taxmann.com 389 (Cochin - Trib.)

Sec. 54F relief can’t be denied if assessee merely pays booking amount one year prior to date of transfer

Mere booking of flat one year prior to date of transfer of asset did not vest assessee with ownership of new asset and it was only by virtue of registered sale deed executed within prescribed time period under section 54F assessee became owner of flat. Thus, assessee's claim for deduction under section 54F was to be allowed

Facts:

a)  The assessee received compensation on acquisition of his land by State Industrial Area Development Board (SIADB). The assessee had declared long term capital gains after claiming deduction under section 54F in respect of investment made in purchase of a flat.

b)  The Assessing Officer found that assessee had availed housing loan and booked said flat one year prior to date of receipt of compensation, and accordingly, he rejected assessee's claim for deduction. 

c) On appeal, the CIT (A) held against the assessee. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The authorities were not justified in holding that the investments were made one year prior to the date of receipt of compensation for the asset as the amounts paid by the assessee on booking of the asset had not vested the assessee with ownership of the new asset;

2)  The assessee had been vested with the ownership of the new flat only by virtue of the registered sale deed executed within prescribed time period under section 54F;

3)  Thus, the assessee's claim for deduction was to be allowed. The Assessing Officer was to be directed to allow the assessee’s claim of exemption under section 54F accordingly. - Gopilal Laddha v. ACIT [2014] 42 taxmann.com 390 (Bangalore - Trib.)