No capital gains when revaluation reserve is credited to partner’s capital account; not taxable under sec. 45(4)

Where revaluation of assets of partnership firm and credit of revalued amount to capital account of partners in their respective profit sharing ratio did not entail any transfer as defined under section 2(47), gains on revaluation could not be brought under tax net.

Facts:

a)The assessee was a partner in Cable TV advertising business. The partnership firm had revalued network rights and corresponding credit in respect thereof was given to the partners including the assessee.

b)After revaluation of network rights, revaluation reserve was credited to partners' capital account and the assets account was debited in the books of the partnership firm. The Assessing Officer (‘AO’) held that the revalued sum was to be charged to tax as the assessee had earned short-term capital gain.

c)On appeal, the CIT(A) confirmed the order of AO. The aggrieved-assessee filed the instant appeal

. The Tribunal held as under:

1)Crediting the amount of revaluation reserve to partner's capital account does not amount to transfer of partnership firm's assets to the individual partner. As per settled principle of law of partnership, during continuation of partnership, partners do not have separate rights over the assets of firm in addition to interest in the share of profits;

2)After revaluation also, there would neither be division of assets nor any realization of assets. Networking rights were property of partnership firm until date of its conversion into a company as per Part IX of Companies Act. Provisions of Section 45(4) would not be applicable to firm or to partners as there was no official dissolution of firm and distribution of assets of firm among partners.

3)Revaluation of assets of partnership firm and credit of revalued amount to capital account of partners in their respective profit sharing ratio would not entail any transfer as defined under section 2(47), hence, gains on revaluation could not be brought under tax net

4)Thus, there was no merit in the action of the lower authorities in bringing gains on revaluation under the tax net. – RAVINSHANKAR R. SINGH V. ITO [2014] 45 taxmann.com 359 (Mumbai- Trib.)

Sum paid to unrelated party via banking route after deduction of tax at source couldn’t be treated as bogus

The sums paid to unrelated parties could not be treated as bogus if they were paid through banking channel after deduction of tax thereon.

Facts:

a)The Assessing Officer disallowed consultancy charges paid by assessee by treating them as bogus expenditure.

b)He made the disallowance on ground that consultancy was not provided by parties, as no reply was received from them in respect of letters issued to them.

c)On Appeal, the CIT (A) deleted such additions. Further, 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 Tribunal, after taking into account substantiating material produced before it, rightly concluded that it was difficult to believe that any assessee would claim such bogus expenditure, when it was eligible for 100% deduction under section 80IA;

2)In addition, even otherwise, the services rendered by Consultants were not found to be doubtful. The doubt was only with regard to the quantum of services rendered by them;

3)However, when payment was made to unrelated parties through the baking channel after deduction of tax, the appellate authorities had rightly addressed the instant issue;

4)Thus, the sums paid to unrelated parties could not be treated as bogus if it they were paid through banking channel after deducted of tax thereon. – CIT V. MUNDRA PORT AND SEZ LTD [2014] 45 taxmann.com 361 (Gujarat)

Sums collected by society for area development was for specific social purposes which couldn’t be held taxable

Where, assessee, a co-operative sugar factory, deducted certain Sum from bills payable to members and non-members towards supply of sugarcane on account of 'Area Development Fund', in view of fact that said sum was impressed with an obligation to spend it for specified social purposes approved in AGM, it could not be brought to tax in assessee's hands as income.

Facts:

a)The assessee, a co-operative sugar factory, was engaged in the business of manufacturing and sale of sugar.

b)It deducted certain sum from the bills payable to the members and non-members towards the supply of sugarcane and the said deduction was shown under the head 'Area Development Fund' (ADF).

c)The Assessing Officer (‘AO’) held that the sum collected by the assessee towards the ADF was to be assessed as income in the hands of the assessee. On appeal, the CIF (A) confirmed the order of AO. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The ADF was used for giving incentive to primary schools, wrestlers, road developments, medical assistance and assistance for group marriages, etc. Initially the assessee was collecting funds on his own discretion and spending it on the different projects undertaken in the area of operation but, subsequently, the collection and use of fund were regulated by the Govt.

2)The assessee had maintained separate accounts in respect of ADF and it was seen that the assessee had been utilizing it on different projects as per the approval given in the annual general meeting (AGM).

3)It was not the case of the revenue that any money was diverted by assessee towards any other purpose other than approved in the AGM of the members. Merely because the sum collected was not kept separately in the bank account, the character of the amount would not change.

4)The assessee was required to submit the auditor's report to the Director of sugar, Govt. of Maharashtra, each year showing the opening balance of the ADF, amount collected and utilized during the year.

5)Therefore, the collection made by assessee towards the ADF was impressed with an obligation to spend it for the specified purposes approved in AGM and the members paying contribution to ADF were aware for what purposes the assessee was collecting the said fund and where the fund would be utilized. The assessee's role was like a trustee of the 'ADF'. The AO was, thus, directed to exclude the amount of 'ADF' from the income of assessee. - LOKNETE BALASAHEB DESAI SAHAKARI SAKHAR KARKHANA LTD. V. DY. CIT [2014] 45 taxmann.com 366 (Pune - Trib.)

Family pension received from UK based bank would fall under residuary Article 23 of India-UK DTAA - taxable in UK only

Where the assessee received family pension from the employer of the deceased wife, i.e., from RBS, UK on which tax was deducted in the source country (i.e., UK), said income could not be taxed for a second time in India.

Facts:

The issue before the Tribunal was:

Whether family pension received by assessee from the employer of his deceased wife (i.e., RBS, UK) on which tax was deducted in source country (i.e., UK) could be taxed again in India?

The Tribunal held as under:

1)Article 20 of India-UK DTAA (‘treaty’) was related to pensions, which means that the payment received by the employee in consideration of past employment. It had no relevance to the family pension, which is generally received by the spouse or family members or legal dependent of the deceased employee from the employer of deceased family member.

2)The Article 23(3) of treaty is related to the items of income which are not included in the foregoing articles of the treaty. Such income arising in the other contracting State may be taxed in that other State. Thus, 'family pension' which was not within the ambit of foregoing articles of India-UK Treaty and arose in the other contracting State, could be taxed in other state.

3)The expression ‘may be taxed’ mentioned in Article 23(3) of treaty authorizes only the State of source to tax such income. Accordingly, the family pension received by the assessee from the employer of his deceased wife was rightly taxed at source in UK and no amount of family pension was, thus, taxable in India.

4)In the instant case, the source country had deducted tax on family pension and, consequently, assessee had received amount after deduction of tax. Thus, the same income could not be taxed second time in the other contracting State, i.e., in India. – ACIT V. KARAN THAPAR [2014] 46 taxmann.com 46 (Delhi - Trib.)

Conveyance allowance received by LIC employee to develop insurance business is exempt from tax

Conveyance allowed paid by LIC to its Development Officer for performance of his duties and development of insurance business is exempt under section 10(14).

Facts:

a)The assessee, a Development Officer of LIC, had received certain amount towards conveyance allowance from the LIC.

b)Though the same was part of the salary certificate but the contention of the assessee was that the said amount had been incurred in development of LIC’s business to receive the premium on account of various policies and the said amount was entirely exempt under section 10(14).

c)The AO rejected assessee's contention and made addition of impugned sum as income of the assessee. On appeal, the CIT(A) held in favour of assessee. Further, the Tribunal upheld the order of CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)The conveyance allowance was paid to the Development Officers for meeting actual expenditure incurred by them in discharge of their field duties and, thus, necessarily and exclusively for meeting of such expenditure, the allowance was being exempt.

2)The LIC was sanctioning conveyance allowance to the Development Officers considering the expenditure incurred by them for procuring the business and it was fixed by a general formula having reference to the parameters of the business. Thus, the impugned allowances were reimbursement of the actual expenditure incurred by the Development Officers on account of conveyance in relation to the performance of their duties.

3)The said expenditure had a close nexus to the performance of the duties and development of the insurance business, inter alia, by way of meeting several persons, to enroll new life insurance agents, to meet the customers for encouraging them to take insurance policies etc. Thus, in such circumstances, expenditures had to be incurred towards conveyance. Therefore, the Tribunal was justified in upholding the exemption granted by the CIT(A). – CIT V. MADAN GOPAL BANSAL [2014] 45 taxmann.com 301 (Rajasthan)

Holy Cow! No revocation of registration of trust working for welfare of cows if it made profit from sale of milk

Where assessee-trust was established for purpose of cow breeding and protection of cows and oxen, incidental income earned by it from sale of milk could not be regarded as carrying on activity of trade or commerce within meaning of proviso to section 2(15).

Facts:

a)The assessee-trust was established for cow breeding, protection of cows and oxen. It got registration under section 12AA.

b)The DIT(E) found that income of assessee from sale of milk was far in excess of prescribed limit under proviso to section 2(15).

c)He, thus, opined that assessee was doing regular activities which were in the nature of business by way of sale of milk and was directly hit by the proviso to section 2(15). He, accordingly, cancelled the registration of trust. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The dominant purpose of the trust was to provide asylum for old, sick, weak, disabled and stray animals and birds, more particularly cows and other cattle and to bring about improvement in breeding of cattle for the beneficial promotion, upkeep, maintenance and propagation of cows.

2)It could not be denied that milk needs to be procured from cows, otherwise it will be detrimental if the milk is not procured from time-to-time. The milk so procured was distributed free of charge to children, hospitals, schools, etc., and, thereafter, the remaining milk was distributed to public at large at a very nominal rate. This activity could not be deemed as business, trade or commerce.

3)The assessee-trust was engaged in multifarious activities of diverse nature but the primary and the dominant activity was “panjrapole”. This predominant object had been held as charitable purpose by the Gujarat High Court in case of CIT v. Swastik Textile Trading Co. (P.) Ltd. [1978] 113 ITR 852 (Guj.)

4)The assessee-trust would not loose its character of charitable purpose merely because some profits arose from the activity of the sale of milk. Such activity could not be carried on in such a manner that it would not result in any profit.

5)There was no material available on record, which could suggest that the assessee-trust was conducting its affairs solely on commercial lines with a motive to earn profit only. The proviso to section 2(15) was not applicable to the instant case and the assessee deserved continuance of registration under section 12AA. Accordingly, the order of the DIT(E) was to be set aside.- SHREE NASHIK PANCHVATI PANJARPOLE V. DIT (E) [2014] 45 taxmann.com 220 (Mumbai - Trib.)

Temporary transfer of copyright in films doesn’t amount to sales; levy of ST on it is constitutionally valid: HC

Variant modes of business transactions between producer and distributor, distributor and sub-distributor or area distributor or exhibitor (theatre owner) are not "sale or deemed sale of goods" and, therefore, levy of service tax on Temporary transfer of copyright in film under section 65(105)(zzzzt) is constitutionally valid.

Facts:

a)The assessee challenged the vires of Section 65(105)(zzzzt) of the Finance Act, 1994 on ground that ‘temporary transfer of copyright’ amounted to 'sale' or 'deemed sale' of goods.

b)The assessee argued that temporary transfer of copyright was a "transfer of right to use goods" which was to be deemed as sale in terms of Article 366(29A), read with Entry 54 of List II of the Constitution and, therefore, it was not a service.

c)The revenue argued that clause (29A) of Article 366 of the Constitution was inserted to give extended meaning to the definition of sale and that Parliament had not divested its power to levy service tax.

d)The issue before the High Court was: Whether section 65(105)(zzzzt) levying service tax on the temporary transfer or permitting the use or enjoyment of copyright was ultra vires the Constitution?

The High Court held in favour of revenue as under:

1)Variant modes of business transactions between producer and distributor, distributor and sub-distributor or area distributor or exhibitor (theatre owner) were not "sale of goods" to fall under Entry 54 List II or Entry 92A List I;

2)By resorting to Entry 97 of List I Residuary Entry to levy service tax, Parliament was within its legislative competence to levy service-tax on residual items and Section 65(105)(zzzzt) was not ultra vires the Constitution;

3)Temporary transactions of copyrights or permission to use or enjoyment of copyright could not be brought either under Entry 54 of List II or Entry 92A of List I;

4)In case producer of films grants a few prints of film to distributor for exhibition purposes and distributor is not free to use prints for other purposes, viz., satellite, TV, etc., then, there is temporary transfer of copyright in films, which is a service; it does not amount to sale or deemed sale under 'transfer of right to use goods';

5)Temporary transfer of copyright in film amounted to rendering of service, thus, levy of service tax on it under section 65(105)(zzzzt) was constitutionally valid – AGS ENTERTAINMENT (P.) LTD. V. UNION OF INDIA [2014] 46 taxmann.com 92 (Madras)

50% of additional depreciation allowable in 1st year and balance in next year on usage of asset for less than 180 days

In terms of section 32(1)(iia), there is no restriction on assessee to carry forward additional depreciation. Thus, where only 50 per cent of additional depreciation was allowable in year of purchase of machinery, as it was put to use for less than 180 days during said year, balance additional depreciation could be claimed in subsequent assessment year.

Facts:

a)The assessee claimed additional depreciation in respect of new machinery and plant acquired after 30-9-2005. The Assessing Officer (‘AO’) allowed 10 per cent of the additional depreciation for the assessment year 2006-07. The assessee claimed the remaining 10 per cent of the depreciation during the year under consideration.

b)The Assessing Officer rejected the claim of the assessee on the ground that there was no provision for carry forward of any additional depreciation. The DRP confirmed order of Assessing Officer.

c)The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)Section 32(1)(iia) provides that in case a new machinery or plant is acquired and installed by an assessee, who is engaged in the business of manufacture or production of an article or thing, then a sum equal to 20 per cent of the actual cost of the machinery and plant shall be allowed as a deduction.

2)The assessee had already claimed 10 per cent of additional depreciation in the earlier assessment year since the machinery was used for less than 180 days and the balance 10 per cent was claimed in the year under consideration.

3)Section 32(1)(iia) does not prescribe the year in which the additional depreciation has to be allowed. It simply provides that the assessee is eligible for additional depreciation at 20 % of the cost of the machinery, provided the machinery is acquired and installed after 31-3-2005.

4)As per proviso to section 32(1)(iia) if the machinery is put to use for the purpose of business for less than 180 days, the assessee is entitled to 50 per cent of the prescribed rate of additional depreciation. The Act is silent on the allowance of the balance additional depreciation in the subsequent year;

5)This issue was considered by the Delhi Bench of this Tribunal in the case of Dy. CIT v.Cosmo Films Ltd. [2012] 24 taxmann.com 189 (Trib.), wherein it was decided that when there was no restriction in the Act to deny the benefit of balance 50 per cent, the assessee was entitled to balance additional depreciation in the subsequent assessment year.

6)Thus, in view of the decision in case of Cosmo Films (supra), balance 50 per cent of the depreciation had to be allowed in the subsequent year. Therefore, the orders of the lower authorities on this issue were to be set aside. – APOLLO TYRES LTD. V. ACIT [2014] 45 taxmann.com 337 (Cochin - Trib.)

Delay in filing of appeal due to resignation of key employee dealing with case was condonable

Where assessee directed its CA to file appeal before Tribunal but its manager resigned at crucial stage and CA delayed filing of appeal, delay could not be said to be entirely on account of assessee and, hence, was to be condoned

Facts:

a)The AO made assessment on assessee under section 143(3) and made additions to its income. On appeal, the CIT(A) confirmed the additions.

b)Further, the Tribunal rejected appeal of assessee against the order of the CIT(A) on the ground that there was delay of forty five days in filing the appeal. The aggrieved-assessee filed the instant writ.

The High Court held in favour of assessee as under:

1)The assessee could not be held entirely responsible for the delay. It had engaged a firm of Chartered Accountants to represent it. It had prosecuted the appeals for the other three years duly and diligently and, in fact, successfully. 2)It instructed the CA to file the said appeal prior to the last date

for filing the same. Even if there was any delay, it was not on account and certainly not on account of the assessee. The assessee's manager had resigned at a crucial stage was another factor in its favour.

3)The assessee had been put to incur considerable expenses and effort merely to obtain a hearing on merits. The assessee could, by no stretch of imagination, be said to have waived off its rights. This was clear from the fact that the assessee had duly and diligently prosecuted the appeals in respect of the three other assessment years.

4)But for the unfortunate circumstances, this appeal would also have been heard on merits in the normal course. The assessee was not entirely at fault for the delay and negligence in prosecuting the fourth appeal. Thus, there was no justification in denying the assessee an opportunity of having its appeal considered on merits. Even assuming that there was some negligence on its part, the same had caused the revenue no prejudice whatsoever. - BAJAJ BHAVAN OWNERS PREMISES CO-OP. SOCIETY LTD. V. ITAT [2014] 45 taxmann.com 231 (Bombay)

Liability to pay interest under IT Act remained intact even if assets of assessee were attached under other Act

Even a notified person whose properties were attached under Special Court (Trial of Offences relating to Transaction in Securities) Act, 1992 would be liable to pay interest under sections 234A, 234B and 234C.

Facts

a)The assessee was notified under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992. The assets and properties of the assessee were attached by operation of the statute.

b)Interest for default in making payment of advance tax was levied on the assessee. The assessee submitted that its assets and properties were statutorily attached and permission to deal with the same, sought from the Special Court, was rejected and, thus, it was prevented from discharging the liability to pay the advance tax.

c)The Tribunal held that the provisions of sections 234A, 234B and 234C were not applicable to the notified persons and therefore, they were exempted from the liability to pay interest.

On appeal, the High Court held in favour of assessee as under:

1)The Tribunal had erred in taking a view that the assessee being a notified person under the Special Court (Trial of Offences relating to Transaction in Securities) Act, 1992 was not liable to pay interest under sections 234A, 234B and 234C.

2)Thus, merely because the assets and properties had been attached, it did not mean that the liability to pay interest would not arise. - CIT v. Cascade Holdings (P.) Ltd [2014] 45 taxmann.com 228 (Bombay)