Sec. 54F relief couldn't be withdrawn if residential property was subsequently put to use for commercial purpose

Subsequent change in usage of property does not disentitle assessee to relief under section 54F, if what was acquired was originally a residential property.

Facts:

a)  The assessee had purchased a piece of land. He gave property to a developer to construct a residential property. The municipal permission had also been obtained for such purposes.

b)  The assessee had received possession of such residential property but said property was subsequently used for commercial purposes. He claimed exemption under section 54F.

c)  The Assessing Officer (‘AO’) noticed that the income chargeable to tax had escaped assessment and completed assessment by working out-long term capital gains.

d)  The CIT (A) denied exemption under section 54F to assessee. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The intention of the parties was to construct a residential property when the development agreement was entered. The municipal permission had also been obtained only for construction of a residential complex;

2)  The assessee had received possession of such residential property but the said property was subsequently used for commercial purposes;

3)  Merely because of change in the use of such property for non-residential purposes, it could not be held that what was acquired was not a residential property, but a commercial one;

4)  The assessee was entitled to relief under section 54F, if what was originally acquired was a residential property. Thus, the impugned order of the CIT (A) was set aside, and the matter was restored to the AO, with a direction to consider the assessee's claim for exemption under section 54F. -  Shyamlal Tandon v. ITO [2014] 43 taxmann.com 155 (Hyderabad - Trib.)

Sums received in excess of capital account by retiring partner were capital receipts

Additional amounts paid to retiring partners in excess of the capital account are not in nature of any profit or income; hence not taxable

Facts:

a)  The assessees (i.e. partners) retired from the firm and at the time of retirement, they were paid amounts in addition to the amounts lying in their capital accounts.

b)  The Assessing Officer invoked section 28(va) and held that the amount received by partners in excess of the capital account was to be treated as business income on ground that while retiring from the firm, partners had agreed not to carry on any activity in relation to any business.

c)   The additional amount was, thus, brought to tax in the respective hands of the assessees. On appeal, the CIT (A) allowed the appeal of assessees.

The Tribunal held in favour of assessees as under:

1)  The retirement deeds executed by the parties were not in the nature of any agreement restraining the parties from carrying on business activities. Therefore, section 28(va) was not applicable if partners were retiring from the business. That clause was more applicable to situations like non-competition agreement, etc;

2)  The character of additional amounts paid to the retiring partners represented the share of the retiring partners in the worth and value of the business in which they were partners. The worth and value included the standing of the business, the goodwill and many other intangible virtues;

3)  So, what was paid to the retiring partners was their rightful share in that worth and value of the firm. The only thing was that their shares in worth and value of business had been separately computed;

4)  Therefore, the additional payments made to the retiring partners were not in the nature of any profit or income within the meaning of section 28(va); They were non-taxable capital receipts. Thus, the CIT(A) was right in holding that the amounts were not taxable. – ACIT v. P. Sivakumar (HUF) [2014] 43 taxmann.com 211 (Chennai - Trib.)

No sec. 10(23C) relief to Govt. approved educational unit if it was not funded by Govt.

Where assessee-institute was approved as Government autonomous body for educational purpose but was not wholly or substantially financed by Government, exemption under section 10(23C) (iiiab) could not be allowed.

Facts:

a)  The assessee, an educational institution, claimed its income as exempt under section 10(23C)(iiiab) by contending that institute was approved by the Punjab Government and it was 100% funded Govt. Autonomous Body.

b)  The Assessing Officer disallowed exemption claimed by assessee on ground that assessee-society had been granted exemption under section 10(23C)(vi).

The Tribunal held in favour of revenue as under:

1)  The assessee-institute was an educational institute but his main motto was profit. It was also approved as the 100 per cent Govt. autonomous body;

2)  The Government had not financed any paisa to the institute in the last 5 years because the institute was already having a good amount lying in Fixed Deposits with Banks;

3)  The assessee was not fulfilling the conditions regarding the institutions ought to have been wholly or substantially financed by the Government. The assessee had not produced any documentary evidence to prove that the assessee had got approval from the prescribed authority for the exemption under section 10(23C)(iiiab);

4)  Therefore, the assessee was not entitled to exemption under section 10(23C)(vi).- Dy. CIT v. Malout Institute of Management & Information Technology [2014] 43 taxmann.com 228 (Amritsar - Trib.)

Exp. on installation of traffic signals to ensure timely presence of employees in office was allowable u/s 37(1)

Where assessee incurred expenditure on installation of traffic signals at various parts of city in order to secure free movement of its employees so that they reached office in time, amount so spent being a part of its corporate responsibility, was to be allowed as business expenditure under section 37(1)

Facts

·         The assessee paid certain amount for installation of traffic signals in a particular part of the city.

·         The assessee claimed that the traffic signals had been installed to ensure that employees would reach office in time without facing any traffic problems and, hence, it should be allowed as revenue expenditure.

·         The Assessing Officer held that benefit from installation of traffic signals derived by assessee being very remote, the expenditure could not be allowed under section 37(1).

·         The Tribunal, however, allowed the assessee's claim.

·         On revenue's appeal:

Held

Expenditure incurred by the assessee was allowed by the High Court in the light of the following grounds:-

1)    Payment made by aseessee couldn’t be considered as illegal as it wasn’t paid to the police or rowdies to keep them away from the business premises.

2)    Payment made by assessee couldn’t be disallowed on the ground that expenditure was incurred voluntary and without any necessity and pubic was also benefited from such expense.

3)    To allow an expense the term ‘for the purpose of business’ shouldn’t be limited to meaning of earning the profits only.

4)    Expense incurred by assessee had to be allowed because late coming of employee due to severe traffic congestion was seriously affecting the business of the assessee.

5)    Expense couldn’t be disallowed on the ground that it was the responsibility of the State and in particular, the police department either to install the traffic signal or control the traffic because it was also the corporate Social responsibility of the assessee.

Payment for transponder service is ‘royalty’; ITAT refers Explanation 6 to Sec. 9(1)(vi) to interpret ‘process’

Payment for use of transponder service for broadcasting of programme held as ‘royalty’ as it involves transmission by satellite which falls in the expression ‘process’ as per Explanation 6 of Section 9(1)(vi) of the I-T Act

Facts:

1)    The assessee, engaged in broadcasting television channels from India, received transponder service from Intelsat, a tax resident of USA, in lieu of a fee.

2)    The assessee approached to the AO under 195(2) of I-T Act for Nil withholding tax certificates, for such payment of fees to Intelsat, which was denied by the AO.

3)    On the question of whether fee payable to Intelsat is in the nature of ‘Royalty’ in the light of amended provisions of section 9(1)(vi) as well as under Article 12 of Indo-US DTAA, the Tribunal held in favour of revenue as under.

Held:

a)    The Explanation 6 introduced by Finance Act, 2012 was only clarificatory in nature and, therefore, it did not amend the definition of royalty per se.

b)    There was no quarrel on the point that any payment for use or right to use of process is in the nature of royalty as per the provisions of Article 12(3) of DTAA between India and USA as well as per the Explanation 2 of section 9(1)(vi) of the Act.

c)    Since the term ‘process’ is not defined under the DTAA, therefore, by virtue of Article 3(2) of the India-US DTAA,the meaning of term ‘process’ as defined in the Act would apply for this purpose.

d)    The use of transponder by the assessee for telecasting/broadcasting the programme involves the transmission by the satellite including up-linking, amplification, conversion for downlinking of signals which falls in the expression ‘process’ as per Explanation 6 of Section 9(1)(vi).

e)    Hence the payments made for use/ right to use of process falls in the ambit of expression ‘royalty’ as per DTAA as well as per provisions of Income Tax Act.

f)    The decision of Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 197 Taxman 263 (Delhi)was not applicable in present case as it was pronounced prior to the insertion of Explanation 6 and Explanation below section 9(2).

Income from hoardings earned by Municipal Corporation is taxable under sec. 56

Where assessee, a Municipal Corporation, granted licences for putting up hoardings in its property, income from hoardings was in nature of 'income from other sources' and, therefore, it was exempt under section 10(20).

Facts:

a)  The assessee, a Municipal Corporation, granted licences for putting up hoardings in its properties. It had received income from hoardings and claimed that the same was exempted under section 10(20) as it was in the nature of 'income from other sources'.

b)  The Assessing Officer treated the income from hoardings as 'income from business' and accordingly disallowed the assessee's claim for exemption under section 10(20).

c)  On appeal, the CIT (A) held in favour of assessee. Further, the Tribunal upheld the order of the CIT (A).

The High Court held in favour of assessee as under:

1)  The Corporation was granting licenses for putting up hoardings in its properties and it was merely charging license fees to regulate such activities;

2)  In terms of its function, it would also be necessary for the Corporation to regulate such activities. It is the duty of the Corporation to regulate the offensive trades or practices and to construct, maintain, alter and improve public streets, bridges, sub-ways, etc;

3)  Further, it is the duty of the Corporate to remove obstructions and projections in or upon the streets, bridges and other public places. It may undertake any measure not specifically hereinbefore named, likely to promote public safety, health, convenience or instruction;

4)  Thus, if the Corporation permits hoardings to be put up in its property by issuing licenses, for which it was charging license fees, the same could not be deemed as its business activity;

5)  The collection from such licence fees is less than 1 per cent of the total revenue of the Corporation. Therefore, such income was not 'business income' and to be held as 'income from other sources'.-  CIT v. Rajkot Municipal Corporation [2014] 43 taxmann.com 99 (Gujarat)

Mandatory e-filing for firms, political parties and trusts giving notice of accumulation of income

The CBDT amended Rule 12 with Income-tax (Fourth Amendment) Rules, 2014, which brings following assessee within the net of mandatory e-filing of return or notice, as the case may be:

1)   Partnership firms: Earlier e-filing of return was mandatory only for those firms who were liable to get their accounts audited. In view of this amendment, every firm is now required to e-file the return even when they are not liable for tax audit for Assessment Year 2014-15.

2)   Political parties: Earlier political parties were given an option to file e-returns. Now every political party (it its income exceeds the maximum amount not chargeable to tax) is under an obligation to file e-return.

3)   Specified Trust: As per section 11(2) every trust can accumulate its income for application in subsequent years if its total income wasn’t applied or was not deemed to have been applied for charitable purposes in India during the previous year. Such trusts are required to give notice to the Assessing officer in prescribed format regarding accumulation of income. These trusts are now are required to file such notice in electronic mode.

NOTIFICATION NO.24/2014 [F.NO.142/2/2014-TPL]/SO 997(E), DATED 1-4-2014

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)