AO had discretionary powers to determine value of property under Rule 3 or Rule 8 for wealth tax purposes

AO had discretionary power to apply Rule 8 of schedule III of the Wealth-Tax Act, 1957 to determine value of immovable property as per Rule 20 if he found Rules 3 to 7 impracticable in the given case.

Facts

a)Assessee, who owned a residential flat at Mumbai which was being used as a guest house, filed its wealth tax return declaring net taxable wealth at Rs.1.32 crores (including value of residential flat at Rs.1.55 Lakh, which was self-assessed by assessee as per Rules 3 to 7 of Schedule III of the Wealth-Tax Act, 1957 )

b)During assessment proceedings, Assessing Officer (AO) was of opinion that value of said flat as disclosed in return (at Rs.1.55 lakhs) did not appear to be in consonance with market value for a similar sized flat in Mumbai and referred matter to Departmental Valuation Officer (DVO) under Rule 20 of Schedule III who valued flat at Rs.2.61 crores.

c)AO was of opinion that due to wide variation between alleged market value as determined by DVO and value as disclosed by assessee, it was not practicable to value property as per Rules 3 to 7, hence, Rule 8(a) was attracted and, accordingly, made addition to the assessee’s wealth by accepting the valuation made by DVO.

d)AO’s order was affirmed by the High Court and the appellate authorities.

e)Aggrieved assessee filed the instant appeal before the Supreme Court.

The Supreme Court held in favour of revenue as under-

1)A conjoint reading of the various provisions, i.e., Rules 3, 8 and 20 of Schedule III of the Wealth-Tax Act, 1957 makes it clear that the Legislature has not laid down a rigid directive for the AO that the valuation of an asset is mandatorily required to be made by applying Rule 3. The AO has the discretionary power to determine whether Rule 3 or Rule 8 would be applicable in a particular case. If the AO is of the opinion that it is not practicable to apply Rule 3, he can apply Rule 8 and value of the asset can be determined in the manner laid down in Rule 20.

2)However, the discretion to discard the value determined as per Rule 3 had to be judicially exercised by AO. It must be reasonable, based on subjective satisfaction and open to judicial scrutiny.

3)By examining the facts and circumstances of this case, the Supreme Court affirmed the order of AO as he had the following reasons to reject the self-assessment made by assessee:-

i.There was a wide variation between the market value and the valuation done by the assessee as per municipal taxes.

ii.The property was used as a guest house.

iii.The value for levy of municipal tax was very low, as the total ratable value of the asset was done by the municipal authorities at the rate of Rs.6,573 per annum.

iv.The assessee was a tenant of the property at the rental of Rs.500 per month. After purchase of the property a lot of expenditure was incurred from time-to-time on improvement of the property which was very difficult to ascertain.

Sums paid by TPA to hospitals for settlement of mediclaim won’t attract rigours of sec. 194J TDS

Where assessee-third party administrator, settled mediclaim of insured and arranged said amount from insurance company, it was not liable to deduct tax against said payment and, therefore, no disallowance under section 40(a)(ia) could be made.

Facts:

a)The assessee was carrying on business of Third Party Administrator (TPA). During the assessment proceedings, the Assessing Officer (‘AO) noted that the assessee had paid certain amounts to hospitals for settlement of claim of insurance for rendering medical services.

b)The AO was of the view that the assessee was bound to deduct tax at source under Section 194J on such payments. Accordingly, the AO disallowed impugned payments under section 40(a)(ia) for non-deduction of tax.

c)On appeal, the CIT(A) granted part relief to the assessee by holding that section 40(a)(ia) is applicable to the amount payable by the assessee to the hospital and not to the amount already paid by the assessee to the hospital.

The Tribunal held in favour of assessee as under:

1)Though the assessee was under the obligation to deduct tax under section 194J, yet the disallowance under section 40(a)(ia) could not be triggered when the assessee had not claimed the impugned payment as deductible expenditure.

2)The assessee had shown the income relating to only the service charges receivable from insurance companies for rendering services as TPA. The assessee was not getting any margin or profit element in the payment received from the insurers for the purpose of remitting it to the hospitals to settle medical claim.

3)Therefore, when the said payment had not been claimed as expenditure then the provisions of section 40(a)(ia) were not attracted for non-deduction of tax at source.- PARAMOUNT HEALTH SERVICES (TPA) (P.) LTD. V. ITO [2014] 49 taxmann.com 97 (Mumbai - Trib.)

Fee to allow use of technology for 3 yrs without supply of know-how during that period was taxable in year of receipt

Facts:

Whether the entire licence fee received by the assessee for granting the right to use technical know-how could be taxed in the year of receipt or it could be spread over period of contract?

The High Court held as under:

1)The income had duly accrued or arisen in the year of receipt of license fee. The assessee did not have any obligation or responsibility to carry out further activity or to perform any new task, after the agreement dated 14th July, 1995 was executed, towards know-how or technology.

2)What was permitted and allowed to ETL (‘ to whom technology was made available) was the right to continue use of such design engineering component for a period of three years, in spite of disengagement and termination of the joint venture agreement;

3)The amount paid under the agreement was not an advance relating to unperformed obligation, which had to be performed or undertaken. A payment would be an advance or deposit if the said amount was repayable or the person receiving the deposit as advance had to perform and render services post deposit in future.

4)However, in the instant case the assessee did not have any obligation or responsibility to carry out further activity or to perform any new task, after execution of agreement. Therefore, the entire licence fee was taxable in the year of receipt. - NEW HOLLAND TRACTORS (INDIA) (P.) LTD. V.CIT [2014] 49 taxmann.com 573 (Delhi)

A policy can’t be taken as ‘Keyman Insurance Policy’ unless it is a pure life insurance policy on life of an employee

Where assessee purchased Insurance Policies, in view of fact that only a fraction of total premium was meant for risk premium and balance was meant for deployment of purchase of units, i.e., investment in units, such policies could not be regarded as 'Keyman Insurance Policies'.

Facts:

a)The assessee took three insurance policies, namely, ICICI Prudential (Life time), ICICI Prudential (Premium life) and Jeevan Shree (LIC) on the life of its employees.

b)The policies taken by the assessee were investment Plan & Guaranteed Return/Addition Plan. The assessee claimed that it was eligible for deduction of premium paid on Keyman Insurance Policies.

c)The Assessing Officer (‘AO’) opined that the assessee had invested in Unit Linked Insurance Plan and it was not Keyman Insurance Policy. Accordingly, the assessee's claim for deduction was rejected. The CIT(A) confirmed the order of the AO. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)The meaning of Keyman Insurance Policy was to be taken from the Explanation to the clause (c) of section 10(10D). As per definition of 'Keyman Insurance Policy', a person purchasing life insurance can only do so to the extent of his insurable interest in the assured.

2)In the instant case the policies had been taken from Unit Linked Investment Plan premium of which had been put into growth fund and it was not a Pure Life Insurance Policy on the life of another person.

3)The CIT(A) had rightly confirmed the action of the AO that the assessee had taken policy, which was, in fact, Unit Linked Insurance Plan, an Investment Plan, the purpose of which was to guarantee returns on the premium amount, which was not allowable as an expenditure.

4)Only a fraction of the total premium was meant for risk premium and balance was meant for the deployment of purchase of units, i.e., Investment in Units which, in fact, could not be claimed as business expenditure. Accordingly, premium paid on such policies was not eligible for deduction as business expenditure. - F.C. SONDHI & COMPANY (INDIA) (P.) LTD. V. DY. CIT [2014] 49 taxmann.com 180 (Amritsar - Trib.)

CBDT directs AO to enquiry into only AIR data or 26AS mismatch issues if scrutiny is made on this basis

It has been brought to the notice of CBDT that during assessment proceedings, the Assessing Officers were routinely calling for information, which was not relevant for inquiry into the issues. This practice of AOs is causing undue harassment to taxpayers. Many times the core issues, which formed the basis of selection of the case for scrutiny, were not examined properly.

Therefore, the CBDT directs that the scope of enquiry of AO should be restricted to verification of either AIR data or Credit Information Bureau (CIB) information or 26AS mismatch issues if:

a)Cases has been selected for scrutiny during the Financial Year 2014-15 under Computer Aided Scrutiny Selection (‘CASS’);and

b)Selection has been made on the basis of either AIR data or CIB information or for non-reconciliation with 26AS data.

However, the cases may be taken up for comprehensive scrutiny with the approval of concerned Principal CIT or Principal DIT if following conditions are satisfied:

a)If it is found that there is potential escapement of income exceeding Rs 10 lakhs (for non-metro cities (sic), the monetary limit shall be Rs 5 lakhs); and

b)Escapement of income is found on any other issue(s) apart from the AIR/CIB/26AS information based on which the cases were selected under CASS requiring substantial verification.

HC follows SC’s ruling in Sandvik’s case; directs revenue to pay compensation if payment of interest was delayed

If tax, interest, penalty, etc., had been collected in excess and these were withheld beyond permissible period, Revenue had to compensate for same.

Facts:

a)The assessee was eligible for refund along with interest. It claimed payment of compensation as interest on the interest for the period of delay from date of assessment till date of payment.

b)Its claim for interest was rejected by Dy. CIT on the ground that there was no provision in the Income-tax Act (‘the Act’) to grant interest on interest.

The High Court held in favour of assessee as under:

1)On perusal of the judgment of the Supreme Court in Sandvik Asia Ltd. v. CIT [2006] 150 Taxman 591, the issue involved in this case was not more res integra. The Apex Court held that under the Act, the Revenue was entitled to collect only tax, interest, penalty, etc., within the four corners. For any other amount which had been collected in excess and withheld beyond the period permissible under the statute, the taxpayer was to be compensated for the deprivation of the said amount.

2)In that context, the Apex Court had considered the meaning that was required to be given to the word compensation extensively and finally the department was directed to pay interest within a period of one month from the date of receipt of copy of the order.

3)Thus, following the judgment of the Apex Court (supra), the writ petition was to be allowed and revenue was to be directed to pay the simple interest at the rate of 9 per cent p.a. to the petitioner within a period of two months from the date of receipt of copy of this order. - SIRPUR PAPER MILLS LTD. V. JOINT COMMISSIONER OF INCOME-TAX, HYDERABAD [2014] 49 taxmann.com 142 (Andhra Pradesh)

Imparting of training in seminary was 'education'; assessee was entitled to registration as a trust

Where assessee was imparting training to students in 'Seminary', training programme undertaken by assessee was also education and, therefore, it was entitled to registration under section 12A.

Facts:

a)The assessee was imparting training to students in 'Seminary'. In the return of income, it claimed exemption under section 10(23C)(iiiad). The Assessing Officer disallowed the claim of exemption.
b)On appeal, the assessee contended that it was entitled to registration under section 12A, as the training imparted in the 'Seminary' amounted to education, therefore, it had to be treated as trust running educational institution.

c)The CIT(A) opined that the training programme undertaken by the assessee could not be treated as an educational programme in order to give it status of an educational institution. On second appeal, the Tribunal held that the assessee was an educational institution.

On appeal, the High Court held as under:

It was a settled position by virtue of a judgment of the Kerala High Court rendered in the case of CIT v. St. Mary's Malankara Seminary [2012] 206 Taxman 429 that imparting training to students in 'Seminary' was also education. In the light of settled position, one needed not to ponder much over the issue or the controversy regarding the registration under section 12A to be given to the assessee. - CIT V. ST. MARY'S MALANKARA SEMINARY [2014] 48 taxmann.com 387 (Kerala)

Editor’s Comments:

In case of St. Mary’s Malankara (Supra), the question that arose for consideration of the High Court was whether assessee engaged in 'Seminary' teaching for priesthood was an educational institution entitled to exemption from tax under section 10(23C )(iiiad)?.

The High Court held that the term 'education' should enjoy a wide connotation covering all kinds of coaching and training carried on in a systematic manner leading to personality development of an individual. In the case of seminary, students on completion of their studies were made priests who headed the churches as religious leaders. The religious teaching in the seminary was also an education and, therefore, an 'educational institution' entitled to exemption under section 10(23C )(iiiad).

No denial of TDS credit on its non-appearance in ITD system of department if Form No. 16A was issued by payer

Where deductor had issued Form No. 16A after deducting tax at source, its credit could not be denied to deductee solely on ground that such credit does not appear on ITD system of department and/or same does not match with ITD system of department.

The issue that arose before the High Court was as under:

Whether deductee could claim credit of TDS on the basis of Form No. 16A issued by the deductor even if such credit did not appear or did not match with the ITD system of the department?

The High Court held in favour of assessee as under:

1)Section 204 of income tax Act (‘the Act’) imposed liability to deduct tax at source upon the employer/deductor. It is clearly stated under section 205 of the Act that the assessee (i.e., deductee) shall not be called upon to pay the tax himself to the extent to which tax has been deducted by the deductor.

2)Considering the Sections 204 and 205 of the Act, it can be said that deductee shall be entitled to claim credit of TDS when the deductor who was liable to deduct the tax at source deducted it and issued Form No.16A to the deductee.

3)Credit of TDS could not be denied to the deductee even if after deducting the tax at source, the same had not been deposited in the account of the government by the deductor. In such a case the department had to recover the said amount from the deductor instead of denying credit to the deductee.

4)Hence, a deductee was not supposed to do anything in the whole transaction except that he had to accept the payment of the reduced amount after TDS. It was observed that on the amount being deducted the deductee got a certificate to that effect from the person responsible to deduct the tax and credit for the same could not be denied solely on the ground that such credit did not appear or did not match with ITD system of department.- SUMIT DEVENDRA RAJANI V. ASSISTANT CIT [2014] 49 taxmann.com 31 (Gujarat)

Charterer of ship can't be alleged as conduit if relevant docs prove its position; treaty benefits allowed

Where Cypriot shipping company was not merely a paper company and played its role, Indian agent could not be taxed for its income and treaty benefit of Article 8 of Indo-Cyprus DTAA would be available to it.

Facts:

a)A Cyprus based company, ‘G’, appointed the assessee as an agent in India and it was in the shipping business. An Arabian company required a ship to transport ore from India to Sharjah. For this purpose, an agreement was entered into with ‘G’ for making available the ship for transporting Ore.

b)The assessee, as an agent of G, filed the return under section 172 and declared nil income claiming benefit of Article 8 of India-Cyprus treaty (‘DTAA’).

c)However, the AO denied the benefit of Article 8 of DTAA on ground that G was one person company having no staff, no office, etc., thus, the effective management of G was not in Cyprus, accordingly he made assessment under section 172. The CIT(A) confirmed the order of the AO. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)It was undisputed fact that G was a one-person company registered in Cyprus and it had no staff or big office establishment. It had no branches anywhere in the world; it was a resident of Cyprus for the tax purpose and it was incorporated in Cyprus.

2)Its only office establishment was in Cyprus. Arabian-company had made a contract with G as a charterer of the ship. The bill of lading recognized G as the ship charterer in the instant case. G had played definite role in transporting the ore by ship from India to Sharjah, which was evident from the fact that all contracts and the bill of lading had been made in the name of G. Thus, all these documents and the contracts had acknowledged the role of G as a ship charterer.

3)The other reasoning given by authorities below to deny benefit of Article 8 of DTAA was that the effective management of G was not in Cyprus because it had no staff, big office establishment in Cyprus and it was a one-person company. The authorities had relied on the OECD Commentary, which explained the words 'Effective Management'.

4)The Article 8 of DTAA defined the words 'Effective Management'. It was clearly mentioned therein that if the enterprise was registered and was having the head quarters in a country, its effective management would be in that country.

5)While other treaties like the ones with Mauritius, Poland, Netherlands do not define the words 'Effective Management'. Thus, for interpreting, the word ‘Effective management’ in these treaties, reliance might be placed on the OECD Commentary but so far as the Cypriot Treaty was concerned, its Article 8 explained the word 'Effective Management', thus, there was no need to refer to OECD Commentary. The CIT(A) had erred in holding that the income of G was taxable under section 172(4) in the hands of assessee as an agent and the treaty benefits were not available to G. - SHAAN MARINE SERVICES (P.) LTD. V. DY DIT (INTL. TAXN.-I), PUNE [2014] 48 taxmann.com 388 (Pune - Trib.)

Acquirer-Co. not liable to pay non-compete fee to public shareholders if it was paid to promoters of target-Co.

Facts:

a)Appellant-Co. had entered into an agreement to acquire shares of Bangur group (target-Co.). Further, by virtue of another agreement, the appellant had agreed to pay non-compete fee to target-Co.

b)On consideration of information provided by merchant bank of Appellant, the SEBI informed the appellants through their merchant banker to revise the offer price to the public shareholders.

c)SEBI directed the appellant-Co. to include non-compete fee in the price of shares offered to public shareholders. It held that non-compete fee was, in fact, part of negotiated price payable by appellants to the target-Co.

d)On appeal, the SAT concluded that the non-compete agreement was a sham which resulted in depriving other shareholders of the target company of their rightful claim to get a just price for their shares. Consequently, the Tribunal dismissed the appeal preferred by the appellant.

The Supreme Court held as under:

1)Ordinarily when there was a gap of 25 per cent between consideration paid to outgoing promoters and non-compete fee, SEBI ought not to have conducted any inquiry.

2)However, if it appeared to SEBI that difference between offer price and the non-compete fee was less than 25 per cent but that was nevertheless a disguise or a camouflage for reducing cost of acquisition through a public offer, then SEBI could certainly delve further into the matter.

3)In absence of any disguise, the SEBI had erred in carrying out an enquiry into payment of non-compete fee by appellant-acquirer to outgoing promoters of target-company.

4)The appellant-acquirers were not liable to pay a non-compete fee to public shareholders of target-company as was being paid to outgoing promoters of target-company which was being taken over by appellants – I. P. HOLDING ASIA SINGAPORE P. LTD. V SEBI [2014] 49 TAXMANN.COM 370 (SC)