Trust activities couldn't be tainted as commercial even if it had earned profits from its charitable activities

Assessee-trust was not hit by proviso to section 2(15) if its aims and objects were charitable and profit earned from said activities was incidental in nature.

Facts:

a)  The assessee-trust was created with object to breed the cattle and to improve the quality of the cows and oxen.

b)  During the course of assessment, the Assessing Officer (‘AO’) denied benefit of section 11 to assessee-trust on ground that considerable income was generated from the activity of milk production and sale and therefore, trust was directly hit by the proviso to section 2(15).

c)  On appeal, the CIT (A) had confirmed the order of the AO. On further appeal, the Tribunal held in favour of assessee. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  The proviso to section 2(15) applies only to cases of advancement of any other object of general public utility, if the conditions provided under the proviso are satisfied. However, for the application of the proviso, what is necessary is that the entity should be involved in carrying on activities in the nature of trade, commerce or business.

2)  Many activities of genuine charitable purposes, which are not in the nature of trade, commerce or business, may still generate marketable products. The law does not expect the trust to dispose of its produce at any consideration less than the market value;

3)  If there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating 'surplus' is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature.

4)  The objects of the trust clearly established that the same was for general public utility and were for charitable purposes. Profit making was neither the aim nor object of the Trust. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, it would not render the activity as in the nature of trade, commerce or business;

5)  The proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of 'public utility'. Thus, the Tribunal had not committed any error in directing the Assessing Officer to provide exemption under section 11 and holding that the proviso to section 2(15) was not applicable to this case. – DIT (Exemption) v. Sabarmati Ashram Gaushala Trust [2014] 44 taxmann.com 141 (Gujarat)

TDS refund couldn't denied if delay in issue of TDS certificates caused delay in filing of refund claim

Facts:

a)  The Land Acquisition Officer (‘LAO’) acquired assessee’s lands and paid compensation to assessee in installments from financial year 2000-01 to 2005-06. He had deducted tax at source on the entire compensation and remitted the same to the department. 

b)  However, TDS certificate was issued in favour of petitioner only in financial year 2005-06. The petitioner filed application for refund of the tax so deducted.

c)  The Commissioner rejected the said application on ground that the petitioner had not prayed for refund within a period of six years i.e. 2000-01 to 2005-06. The aggrieved-assessee filed the instant petition.

The High Court held in favour of assessee as under:

1)  The TDS certificate was issued in favour of the petitioner only on 10-2-2005. Only thereafter, petitioner came to know that certain sum was deducted at source from the compensation;

2)  The petitioner filed the returns in the year 2005 itself. Thus, there was no delay on the part of the petitioner. No tax deduction was required be made under section 194-L(2) from any payment made on or after June 1, 2000;

3)  Thus, deduction made by the LAO towards tax, out of the compensation awarded was illegal. Therefore, the amount so deducted was to be refunded to the petitioner. - Ashok B. Jadhav v. CIT [2014] 44 taxmann.com 102 (Karnataka)

ITAT rejects working of PLI when TPO took FOB value of goods as 'total cost' instead of cost incurred by assessee

While working out PLI 'total cost' has to be taken as costs incurred by assessee and not the FOB value of goods.

Facts:

a) The assessee had provided 'Sourcing Support services' to its associated enterprises and it was compensated at cost plus markup of 5 per cent.

b) It adopted Transactional Net Margin Method (TNMM) as the most appropriate method with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC).

c) The assessee declared its OP/TC and claimed that its margin was within tolerable range of 5 per cent range and, hence, the transactions to be considered at ALP.

d) T.P.O. applied markup on the FOB value of goods between third party enterprises instead of assessee's cost. The DRP did not change the cost base but reduced the percentage of markup applied by the TPO.

The Tribunal held as under:

1) In the preceding year, the Transfer Pricing officer (‘TPO’) had applied the same base of 'total cost' as in the year under consideration, which got the approval from the Tribunal;

2) The assessee had assailed the Tribunal's order before the High Court and, the High Court had reversed the Tribunal's order by holding the FOB value of goods between the third party enterprises, sourced through the assessee, could not be accepted.

3) Thus, the markup (on FOB value of goods) applied by TPO and approved by the DRP could not be accepted. Therefore, the 'total cost' being the denominator in the PLI of OP/TC, was to be taken as the cost incurred by the assessee and not the FOB value of goods between third party enterprises. - Li & Fung (India) (P.) Ltd. v. DY. CIT [2014] 44 taxmann.com 125 (Delhi - Trib.)

Methodologies in Return Form don’t prevail over I-T Act; MAT credit to be given after computing surcharge and SHEC

Tax has to be computed on the total income as assessed under normal provisions of the Income-tax Act as increased by applicable surcharge and education cess, MAT credit to be granted thereafter.

Facts:

a)  The Assessing officer made certain additions during assessment of the assessee. 

b)  The assessee contended that the MAT credit should be allowed before calculation of surcharge and education-cess, as per the methodology provided in the form for filing of return of income.

c)  The CIT(A) rejected such contention and held against the assessee. The aggrieved-assessee filed the instant appeal.

The Tribunal held as under:

1)  In an issue before the Madras High Court in Chemplast Sanmar Ltd. [2009] 180 Taxman 335 as to whether the form for filing return of income, which lays down the manner of computing the total tax, prevails over the provisions of the Act, the Court held that rule 12(1)(a) of Income-tax Rules and Form for filing of return couldn’t go beyond the provisions of the Act;

2)  The Supreme Court in the case of CIT v. K Srinivasan, [1972] 83 ITR 346 held as under:

a)  The meaning of ‘surcharge’ is to charge in addition or to subject to an additional or extra charge. The additional charges form a part of the income-tax and Super-tax. The word ‘surcharge’ has been used in article 271 for the purposes of distributing the proceeds between the Union and the States.

b)  The proceeds of the surcharge are exclusively assigned to the Union. Even in the Finance Act it is expressly stated that the surcharge is meant for the purpose of Union;

3)  The income-tax includes surcharge which is a receipt in the nature of additional income-tax. The assessee’s argument that the term ‘tax’ has been defined under section 2(43) and it includes only income-tax and not surcharge, goes against the proposition laid down by the Supreme Court. The only requirement is that the levy should have been under the Income-tax Act itself as there is no reference to any Central Act in the proviso or in section 158 BA(2). [Merit Enterprises v. DCIT (Hyd.)(SB).

4)  Thus, the impugned tax is to be computed on the total income as assessed under normal provisions of the Income-tax Act as increased by applicable surcharge and education cess, thereafter credit of MAT is to be granted.- 3F Industries Ltd. v. JCIT [2014] 44 taxmann.com 200 (Visakhapatnam - Trib.) 

ITAT highlights lacuna in Rule 10B; it doesn't mandate and merely provide an option to apply Comparable PSM

Rule 10B(1)(d) of Income-tax Rules provides an option but not a compulsory mandate to apply a comparable Profit Split Method.

The Tribunal held as under:

1)  Comparable Profit Split Method (‘PSM’) is rarely used internationally, in view of lack of reliable external data with respect to third party behavior to split profits;

2)  OECD and UN clearly gives taxpayers an option to adopt any one of the three sub-methods under the overall PSM, namely, contribution PSM, residual P'SM and comparable PSM, without requiring the contribution and residual PSMs to mandatorily pass through the sanity of comparable PSM, being a mandate given under the Indian transfer pricing regulations, in the form of rule 10B(I)(d) of the Income-tax Rules (I-T Rules);

3)  The requirement contained in IT Rules of mandatory adoption of comparable PSM in all cases of PSM is a lacuna, which renders the entire scheme or mechanism of PSM virtually redundant, otiose and impossible to comply with even in the most deserving cases.

4)  Such lacuna is curable through interpreting rule 10B(1)(d) in a manner that the same provides an option and not compulsorily mandate to apply a comparable PSM in a case where reliable external data to gauge third party behavior is impossible to be obtained.- Global One India Ltd. V. ACIT [2014] 44 taxmann.com 100 (Delhi - Trib.)

TRO couldn't declare sale of property void under sec. 281 and attach property even if tax was overdue from seller

TRO had no power to declare sale transaction as void and attach property even when several demand notices were issued against the seller of such property

Facts

a)    The assessee purchased a property from one 'M' who had defaulted in making payment of income tax dues even after issuing with several demand notices by AO.

b)    Consequently, TRO attached the said property and passed the order without giving any notice to the assesse about recovery of the tax dues of ‘M’.

c)    Consequently, assessee preferred a writ with Gujarat High Court.

Held

1)   Section 281 provides that if during pendency of any proceedings under the Act or after completion thereof, an assessee creates a charge on or parts with the possession of any of his assets in favour of any other person, such charge or transfer shall be held void if any tax was payable by the assesse as a result of completion of the said proceedings unless such charge or transfer was made-

a)   For adequate consideration and without any notice of pendency of such proceedings or tax payable by assesse; or

b)   With prior permission of AO.

2)    The above two exceptions are equally applicable to the transferor as well as to the transferee. Therefore, even if the transferor had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice of such proceeding against the transferor.

3)    The Bombay High Court in the case of GangadharVishwanathRanade v. T.R.O. [1989] 177 ITR 176 held that under section 281, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO v. GangadharVishwanathRanade [1998] 100 Taxman 236 confirmed the view of the Bombay High Court.

4)    Since the issue involved in the instant case is squarely covered by the decision of the Supreme Court in the case of GangadharVishwanathRanade (supra), the order passed by the Tax Recovery Officer under section 281 was liable to be set aside- KarsanbhaiGandabhai Patel v.Tax Recovery Officer [2014] 43 taxmann.com 415 (Gujarat)

ITAT exempts capital gain on sale of self-generated trademark as its cost of improvement isn't ascertainable

The self-generated trademark is not capable of improvement at an ascertainable cost in terms of money, therefore, it is outside the scope and ambit of the charge envisaged under section 45(1).

Facts:

a)  The assessee-firm had sold some 'trademarks'. The Assessing Officer denied claim of deduction of 'cost of improvement' on the ground that 'cost of improvement' was liable to be taken as 'Nil' in view of section 55(1)(b).

b)  The assessee contended that it was not liable to pay any capital gains tax in respect of sale of trademarks because such asset did not have any cost of improvement as same could not be ascertained.

c)  On appeal, the CIT(A) disallowed the claim of assessee. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The term 'cost of any improvement' for the purposes of section 48 has been explained in section 55(1)(b) and the same does not include a capital asset in the shape of trademark. A conjoint reading of section 55(2)(a) and section 55(1)(b), ascribes the meaning of 'cost of acquisition' and 'cost of any improvement' respectively for the purposes of section 48;

2)  Section 55(2)(a) prescribes cost of acquisition of a trademark for the purposes of section 48 at Nil, whereas no such prescription is contained in section 55(1)(b) defining the 'cost of any improvement' of a trademark for the purposes of section 48;

3)  Therefore, the plea of the assessee that a self-generated trademark was not capable of improvement at an ascertainable cost in terms of money and 'cost of any improvement' thereto has not been defined for purposes of section 48 in section 55(1)(b), was well founded;

4)  The self-generated trademarks are not capable of improvement at an ascertainable cost in terms of money and therefore, the computation of capital gains fails and, accordingly, it is outside the scope and ambit of the charge envisaged under section 45(1);

5)  Therefore, there was no capital gain exigible to tax under section 45(1) on transfer of the impugned trademark by the assessee and the lower authorities had erred in taxing the same while computing the total income of the assessee. - Institute For Micronutrient Technology v. DY. CIT [2014] 43 taxmann.com 426 (Pune - Trib.)

Sec. 80G approval denied to a society working for upliftment of Sikh community explicitly

Approval under section 80G could not be given to a society working only for upliftment of Sikh community and barring an outsider from becoming its member.

Facts:

a)  The assessee-society had applied for approval under section80G(5)(vi).

b)  The commissioner rejected the application of approval on ground that society was created for the benefit of a particular religious community and, thus, it did not fulfill the conditions of clause (iii) of section 80G(5).

c)  The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)  The assessee-society was working only for upliftment of Sikh community and was imparting various types of education to them;

2)  Only a Sikh could become a member of the general community of the assessee-society who was controlling the entire administration of the institutions run by the society; which was contrary to the provisions of section 80G(5)(iii);

3)  The assessee had not filed any documentary evidence to establish that it was not only working for upliftment of the Sikhs but also for general community. There was no evidence to establish that a non-Sikh could become member of General Council of the assessee-society;

4)  The objects of the assessee-society and its name (i.e. ‘Sangat Sahib Bhai Pheru Sikh Educational Society, Faridkot’), clearly established that it was not doing any charitable work for general community and it was using its funds only for Sikh community;

5)  The assessee-society did not fulfill the conditions prescribed under section 80G(5)(iii) and, therefore, it was not entitled to the approval under section 80G(5)(iv). - Sangat Sahib Bhai Pheru Sikh Educational Society v. CIT [2014] 43 taxmann.com 368 (Amritsar - Trib.)

Exp. on construction of temporary structure on leasehold land to meet business needs was revenue exp.

Expenditure on construction of temporary structure was allowable as revenue expenditure if such structure was made by assessee on leasehold land to run its business.

Facts:

a)  The assessee had entered into lease agreement with Ahmedabad Urban Development Authority [‘AUDA’] to run its AMUL milk parlour in the land of AUDA. As per the agreement,  the assessee would maintain a small garden and would permit access to the public.

b)  On such structure put up by assessee, it claimed depreciation at the rate of 100 per cent. The Assessing Officer held that the parlour was run in a pukka constructed building. He, therefore, reduced depreciation to 10 per cent;

c)  The Tribunal allowed full depreciation at the rate of 100 per cent to the assessee. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  Part A of Appendix I to the Income-tax Rules, 1962 provides for 100 per cent deduction on 'purely temporary erections such as wooden structures';

2)  The arrangement between the assessee and AUDA was purely temporary in nature. It did not derive any enduring benefit from putting up such construction;

3)  Under the agreement, the assessee was given certain rights by the AUDA to use land on the terms and conditions set out therein. Combined reading of the said conditions would establish that the assessee had the right to use the land for putting up its parlour for a period of five years;

4)  Thereafter, only upon mutual agreement between the assessee and the AUDA, the period could be extended. During the period of the agreement, the assessee had to maintain the garden and permit full access to the members of the public. The assessee did not have any right to develop any part of the land or put up construction without the permission of AUDA;

5)  Such conditions would establish that the assessee had a limited right to use the land for the limited purpose and the limited period. In the next year due to non-renewal of the agreement, the assessee's structure was demolished;

6)  Therefore, expenditure incurred on construction of structure was allowable as revenue expenditure. – CIT v. Gujarat Co-op Milk Marketing Federation Ltd [2014] 43 taxmann.com 398 (Gujarat)

Sum paid to foreign co. for transmitting bulk SMS was not a 'fee for technical service'; no withholding of taxes

No technical skill was required to render services for transmission of bulk SMS data, thus, payments for said services could not be regarded as 'fee for technical services'.

Facts:

a)  The assessee had made carrier payments to Clickatel (‘NR Company’) for transmission of bulk SMS data without withholding any taxes.

b)  The Assessing Officer disallowed such payments by invoking provisions of section 40(a)(i). On appeal, the CIT(A) deleted  such disallowance. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The nature of services rendered by NR Company was only for transmission of bulk SMS data. No technical skill was required for transmission of such data;

2)  The CIT(A) had rightly held that carrier was a medium for sending bulk SMS and, thus, it could not be considered as technical services.

3)  Since the payments made by assessee to NR Company were not 'fee for technical services,' they were not liable for taxation in India;

4)  Thus, assessee was not required to deduct tax at source while making such payments. The CIT(A) was justified in deleting impugned disallowance.- Dy. CIT v. Velti India (P.) Ltd [2014] 43 taxmann.com 425 (Chennai - Trib.)