Even joint ownership in second house at the time of sale of capital assets would lead to denial of sec. 54F benefits

Where assessee owns a residential house even jointly with another person, on date of sale of long-term capital asset, his claim for deduction under Section 54F would be rejected.

Facts:

a)During relevant assessment year, assessee had sold his undivided interest in land. He claimed deduction under 54F in respect of long-term capital gain arising from sale of land.

b)The revenue authorities rejected assessee's claim for deduction under sections 54F on the ground that assessee was having two residential houses having one half share each therein on date of sale of land.

c)The Tribunal, however, allowed assessee's claim under Section 54F on the ground that 'a residential house' means complete residential house and would not include shared interest in a residential house. The aggrieved revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)Section 54F provides that if the assessee has a residential house he cannot seek the benefit of long-term capital gains. Under this provision, merely because the words residential house were preceded by word 'a' would not exclude a house shared with any other person.

2)Even if assessee shared the residential house, his right and ownership in the house, to whatever extent, was exclusive and nobody could take away his right in the house without due process of law.

3)Even if right of assessee, was one half in the residential house, it could not be taken away without due process of law or it would continue till there was a partition of such residential house. 4)Thus, the view expressed by the Tribunal on this issue could not be accepted. Hence, the assessee was not eligible to claim Section 54F benefit.- CIT V. M.J. SIWANI [2014] 46 taxmann.com 170 (Karnataka)

No sec. 40A(2) disallowance if payment to director was authorized by CLB and taxed at maximum rate in his hands

Where payment made to director was authorised by CLB and said payment was taxed at maximum rate, no addition could be made under section 40A(2).

Facts:

a)The assessee had made payment to its director which was disallowed by AO by invoking section 40A(2). b)However, addition made by AO was deleted by CIT(A) and Tribunal. Thus, the aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Section 40A(2) permits the Assessing Officer to disallow certain expenses or payments, where he is of the opinion that such expenditure or payment is excessive or unreasonable; having regard to the fair market value of the goods, services or facilities for which the payment is made.

2)In the instant case, the members of the Company approved of the payment made to director in the annual general meeting and such payment was also approved by the Company Law Board. The salary was also taxed in the hands of director at maximum rate.

3)Nothing had been brought on record by the Revenue to controvert the findings of CIT(A) and, therefore, the impugned payment to director was to be allowed-[2014] 45 taxmann.com 478 (Gujarat)

Sums incurred on transfer of human skill and HR database from predecessor to successor co. are allowable expenses

Where in pursuance of an agreement, a part of business being handled by erstwhile TATA IBM was handed over to assessee-company, expenditure incurred by assessee for use of domestic customer database and transfer of human skills in terms of said agreement, was to be allowed as business expenditure.

Facts

a)A part of the business being handled by the erstwhile TATA IBM was handed over to the assessee-company in view of bifurcation of the software and hardware business.

b)For the transfer of domestic customer database and the man power, the assessee paid certain amount to TATA IBM which was claimed as business expenditure.

c)The AO taking a view that expenditure in question resulted in enduring benefit to assessee, disallowed assessee's claim. Further, the CIT(A) upheld the order of AO. The Tribunal, however, allowed assessee's claim. The aggrieved-revenue filed the instant appeal.

High Court held in favour of assessee as under:-

1)In the instant case, insofar as payment for getting domestic customer database was concerned it was clear that assessee had only got the right to use that database. The company which had provided such database was not precluded from using such database. Hence, the expenditure was incurred for the use of database and not for acquisitions of such database.

2)In respect of payment made towards transfer of human skill, it had been made towards the expenses incurred for training and on recruitment. Such expenses were under revenue field, and ,therefore, the payments had been made to save such revenue expenses as per the agreement.

3)TATA IBM had spent lot of money to impart training to those employees who were transferred to the assessee-company. They were trained in the field of software.

4)They had opted for employment with assessee-company and for their past services in TATA IBM, expenditure had been incurred. Hence, the expenditure incurred on transfer of human skill was also in nature of revenue expenditure. – CIT V. IBM GLOBAL SERVICES INDIA (P.) LTD [2014] 46 taxmann.com 55 (Karnataka)

SAT affirmed penalty as appellant failed to make public announcement of acquisition of equity in excess of 5%

Where appellants-promoters acquired shareholding of target company beyond 5 per cent limit prescribed under regulation 11 of Takeover Regulations but failed to make public announcement, appellants were liable to pay interest.

Facts:

a)Appellant-promoters had acquired shareholding of target company which exceeded shareholding limit of 5 per cent prescribed under regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

b)After conducting enquiry, SEBI found the appellants guilty of having violated regulation 11(1) as appellants failed to make public announcement to shareholders of company.

c)SEBI directed appellants to make public announcement and to pay interest on offer price from date when appellants had acquired shares of target company. The aggrieved-appellant filed the instant appeal.

The Securities Appellate Tribunal held as under:

1)The acquisition of shares of the target company by each appellant was effected at the instance of appellant who was admittedly, the promoter and Managing Director of the target company. The appellants failed to make public announcement on acquiring shareholding beyond 5 per cent, and, thus, appellants were liable to pay interest.

2)In view of clear violation of the mandate of Takeover Regulations, there was no substance in the present case to take a lenient view in relation to making public announcement by altering the impugned order.

3)Thus, it was not found appropriate to interfere with the impugned order in exercise of powers conferred under section 15T(4) of the SEBI Act, 1992. - MS. SANGEETA SETHIA V. SEBI (2014) 46 taxmann.com 164 (SAT - Mumbai)

No concealment penalty if assessee opts to take route of presumptive taxation to escape sec. 40A(3) disallowance

Where at time of initiating penalty proceedings AO did not have any material on record showing that payments made by assessee were bogus, he could not have concluded that assessee had provided inaccurate particulars and levy penalty merely on basis of assessee's offer to be taxed on presumptive basis,

Facts

a)The assessee, a construction company, had issued large number of bearer cheques to small suppliers for delivering building material at construction site.

b)The AO disallowed said payments by invoking Section 40A(3). In response, assessee had shown its income on presumptive basis under Section 44AD to stay away from unnecessary litigation. The AO accepted the contention of assessee and completed the assessment by applying presumptive taxation.

c)After completing the assessment, the AO passed a penalty order under section 271(1)(C) and it was affirmed by the CIT (A). The Tribunal, however, set aside penalty order passed by CIT (A).The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Since at time of initiating penalty proceedings the AO did not have any material on record to show that payments made to suppliers were bogus, he could not have concluded that assessee had provided inaccurate particulars in its return merely on basis of assessee's offer to be taxed on estimate basis,

2)Moreover, the course of action suggested by the Assessing Officer was, in fact, accepted by the assessee as reasonable. Thus, the imposition of penalty was not justified. Therefore, there was no infirmity in the impugned order of the Tribunal. - Vatika Construction (P.) Ltd v. [2014] 45 taxmann.com 471 (Delhi)

Institute of Cost Accountants asks for expansion of ambit of cost audit; expresses concern over new cost audit rules

Institute of Cost Accountant of India (‘The Institute’) has expressed its concerns over the Companies (Cost Records and Audit) Rules, 2014 which were notified on June 30, 2014. The Institute stated that provisions for maintaining Cost Accounting Records and Cost Audit to fulfil the objectives of improving Public Distribution System, Health Care System and transforming Indian industry into a globally competitive manufacturing hub and to encourage Small Scale Industries have not been addressed. The Institute urged for necessary intervention by the Ministry of Finance in this matter and issue directive to modify the Rules in line with the suggestions given by the Institute.The key suggestions given by the Institutehave been listed as under:

1)The new Rules and the product definitions will lead to major increase in the cost to the Government as the entire “Product Group”, “Costing Taxonomy” and “XBRL” filing process (herein after referred to as ‘Taxonomies’) have to be revisited for this purpose;

2)The existing Taxonomies have stood the test of filing for two years and they have become robust after many course corrections over a period of four years;

3)The coverage of industries does not have a clear logic and it will lead to confusion as to what products are covered and what are not covered. The Product Group as per Excise Classification (Based on international HSN Code) was a clear definition of the products covered. New classification will again have to be developed involving another year of work with additional cost;

4)The Cost Audit Report filing (CRA-4) does not have any provision for Cost Auditor’s signature, which is a very important part of audit standards;

5)The maintenance of cost records should comply with the requirement of Cost Accounting standards and Generally Accepted Cost Accounting Principles as defined in the Companies (Cost Accounting Records) Rules, 2011 and which are omitted in the new Companies (Cost Records and Audit) Rules, 2014.

6)The product, production, production of goods, product group, service and providing service need to be defined in the Rules to avoid any ambiguity in future; 7)The provision for cost records certificate should be kept which may either be certified by a Practicing Cost Accountant or the management to ensure cost competitiveness of the industry using the resources of the society. This will be applicable to industries which are not covered under the provisions of Cost Audit;

8)The activities mentioned under the companies engaged in strategic sector 3A need to be correlated with the Chapter heading of the Central Excise Tariff Act, 1985 to avoid any ambiguity;

9)Machinery, mechanical appliances and parts thereof, electrical/ electronic machinery equipment and parts thereof, automobile and auto-ancillary included in Chapters 84 85 and 87 of the Central Excise Tariff Act, 1985 need to be covered under the Rules to safeguard the interest of Central exchequer, as the country has experienced several disputes in this sector.

Rent receipts of property not taxable in hands of Co. if shareholders are deemed owners of property under sec. 27

Facts:

a)The assessee-company owned a land. It had constructed a commercial building on the said land and later on, it allotted specific portion of the building to the shareholders.

b)The assessee had distributed rent receipts proportionately to the shareholders after deducting maintenance cost and taxes. The shareholders had filed separate individual returns, in which they had disclosed income from the building allotted to them.

c)The assessee-company had filed a nil return of income. The AO held that the rental income was attributable to the assessee and, accordingly, levied the tax. On appeal, the CIT (A) upheld the order of the AO. Further, the Tribunal set aside the orders of the lower authorities. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Provision of section 27(iii) provides that a company or a co-operative society can allot or lease a house building to its members. It further provides that a member, to whom building was allotted, would be construed as the owner of such building;

2)In the instant case, the Memorandum of Association permitted the assessee to construct a building, sell or lease it. It also permitted it to distribute properties to its shareholders. The fact that the resolution had been made to allot a specific portion of the building to the shareholders even before its construction, was not a ground to hold that such an action was illegal;

3) The consequence of resolution under the Companies Act may be different and the said aspects need not be imported while considering purport and implication of section 27(iii). Notwithstanding, the fact that allotment of building by society or company may not make the allottee owner of the building in the context of the Transfer of Property Act, but nonetheless, the Act otherwise construes such an allottee as the owner of property;

4)The assessee-company had allotted a specific portion to the shareholders. Under the Act, shareholders are deemed to be the owners of the portion allotted to them and they would be liable for tax. However, the company, which owns the building, was an ostensible owner;

5)Therefore, it could effect the lease and it was to be construed as one executed on behalf of the shareholders. Therefore, it was to be held that the shareholders were the owners of the specific portion of the building allotted to them and the assessee-company had not retained any part of rent amount or rent deposit.

6)Thus, it could not be argued that the company would deemed to have derived the income from rental and rental deposit. Therefore, the order of the Tribunal was to be upheld. – CIT V. MONARCH CITADEL (P.) LTD [2014] 45 taxmann.com 477 (Karnataka)

Erecting road, bus shelters and so forth as part of advertisement business couldn’t be termed as infra-development

Where assessee-company had developed road medians, erected bus-shelters and light poles for its advertisement business, activities indulged by it were part of its normal activities of advertising and publicity rather than one of infrastructure development and, therefore, were not eligible for deduction under section 80-IA(4).

Facts

a)Assessee, an advertisement company, had entered into an agreement with the local authority for construction of bus shelters, putting up of footbridge, beautifying the road medians and erecting streetlights.

b)The assessee was allowed to utilize these bus-shelters, lampposts, road medians and footbridges for its advertisement business to recoup the expenditure incurred on them. The assessee claimed deduction under section 80-IA(4) after considering such activities as infrastructural activity.

c)The Assessing Officer (‘AO’) denied the benefit under section 80-IA(4). On appeal, the CIT(A) confirmed the order of AO. However, the ITAT set aside the order of CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)Assessee was not an engineering or construction company that puts up public-infrastructure. It was only an advertising company which was interested only to find out the best space at the best locations for advertisements.

2)CBDT vide its Circular No. 777, dated 14/08/1995 made it clear that to avail deduction, income should arise from the use of infrastructural facility. But, in the instant case, the assessee derived income only from the advertisement hoardings erected on the bus-shelters, road medians and the street light poles. Hence, the said income could not be treated as income derived from the 'infrastructure facility'.

3)The benefit under section 80-IA could be extended only to those assessees who had developed infrastructural facility as defined under sub-section (4) of section 80-IA, i.e., road or a toll road, bridge, highway or a rail system. But, in the instant case, the assessee had developed the existing road median, erected bus shelters and light poles for its advertisement business, which, in any case could not be treated as infrastructure development.

4)Thus, the assessee was not eligible for Section 80-IA benefit and the order passed by Tribunal could not be sustained – CIT V. SKYLINE ADVERTISING (P.) LTD [2014] 45 taxmann.com 532 (Karnataka)

Room rent and food/beverage charges aren’t includible in value of convention services, if they are raised separately

Bills of room rent, food and beverages raised separately in a convention service cannot be included in value of convention service.

Facts:

a)The assessee, a provider of convention services, was paying service tax under that category. Participants of such convention normally book rooms for lodging purpose.

b)The department was of the view that room rent and charges for food provided to participants were required to be included in value of convention services.

c)Since the assessee did not pay tax on such charges, revenue initiated proceedings for recovery of tax short paid and confirmed demand.

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

1)In case of Ram Bagh Palace Hotels (P.) Ltd. v. CCE [Final Order No. ST/A/18/1012-Cus, dated 21-12-2011], it was held that renting of hotel rooms could not be held to be covered by the definition of ' Mandap Keeper' as the hotel had an identity, personality and function quite distinguishable from that of a Mandap.

2)It was also held that definition of Mandap Keeper nowhere covers the temporary occupation of hotel rooms for the purpose of boarding and temporary residence. Since bills of room rent, food and beverages were raised separately, they could not be held to be a part of value of convention service.

3)Thus, the case decided (Supra) on issue of Mandap Keeper’s Service was equally applicable to convention service. Hence, if bills were raised separately against room rent and food supply charges then they could not be included in value of convention service. - CHOKHIDHANI RESORTS (P.) LTD. V. CCE [2014] 46 taxmann.com 20 (New Delhi – CESTAT)

No disallowance of lawful exp. merely due to non-compliance with provisions of Companies Act

If the expenditure was otherwise lawful and neither amounted to offence nor any law prohibited it, but the procedural provisions attached to it were not complied with, no doubt irregularity would creep in, but such irregularity would not make the expenditure itself as unlawful under section 37(1).

Facts:

a)The Assessing Officer (‘AO’) noticed that the assessee had made payment of job work charges to a related party without obtaining prior approval of the Central Government in accordance with the provisions of section 297 of the Companies Act, 1956.

b)He, accordingly, made additions on the ground that Explanation to Section 37(1) was triggered as on the day of payment of such expenditure there was no prior approval of Central government.

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

The Tribunal held in favour of assessee as under:

1)The offence or prohibition referred to in the Explanation to section 37(1) had to be judged with reference to the 'purpose' of the expenditure on a standalone basis divorced from the fulfillment of procedural formalities attached with it and necessary for the incurring of such expenditure.

2)The Explanation to section 37(1) provided for disallowance of any expenditure incurred for 'any purpose’, which was either an offence or prohibited by law. If, however, the purpose of the expenditure was neither to commit an offence nor any law prohibited it, then there could be no question of disallowance.

3)If the expenditure was otherwise lawful and neither amounted to offence nor any law prohibited it, but the procedural provisions attached to it were not complied with, no doubt irregularity would creep in, but such irregularity would not make the expenditure itself as unlawful so as to be brought within the scope of the Explanation to sec. 37(1). – JAI SURGICALS LTD. V. ACIT [2014] 46 taxmann.com 246 (Delhi - Trib.)