ITAT allows benefit of second proviso to Sec. 40(a)(ia) in case of payment to NR; Non-discrimination clause invoked

Rigour of disallowance of payment under Section 40(a)(ia) is relaxed in case of payment to resident if recipient pays taxes on such sum and files return of income. It would be contrary to scheme of DTAA and discriminatory if similar relaxation is not allowed under Section 40(a)(i) in case of payment to non-resident without withholding of taxes if such non-resident pays taxes on such sum and files return of income. Relaxation under second proviso to Section 40(a)(ia) is to be read into Section 40(a)(i) as well and it was required to be treated as retrospective in effect in the same manner as second proviso to Section 40(a)(i).

Facts:

a)The AO noted that certain non-resident entities were taxable in India under the provisions of the Income Tax Act (‘IT Act’) as also under the provisions of relevant DTAA as these entities had a PE in India.

b)Thus, in the opinion of the AO, the assessee was required to deduct tax at source from these payments to non-residents, in terms of section 195.

c)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by the recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them under section 139(1).

d)Accordingly, the assessee contended that non-discrimination clause of treaty was applicable on impugned payment made to non-residents.

Held:

1)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them undersection 139(1).

2)However, section 40(a)(i) does not have an exclusion clausesimilar to second proviso to Section 40(a)(ia), so far as payments made to non-residents,without deduction of tax are concerned. Thus, such payments would be disallowable even when the non-resident recipient hastaken into account such payments in computation of his income, has paid taxeson the same and duly filed income-tax return under section 139(1).

3)So far as discrimination to the non-resident taxpayers was concerned, the right comparator would be a resident Indian taxpayer. As we were examining the issue of deduction parity, we had to examine the position of deductibility in respect of a similar payment, i.e., without deduction of tax at source, made to a resident Indian taxpayer.

4)A different treatment to the foreign enterprise per sewas enough to invoke the non-discrimination clause.

5)Therefore, it would be contrary to the scheme of the tax treaties if rigour of disallowance of a payment, on account non-deduction of tax from the related payment, was to be relaxed in the situations in which the resident recipient had taken the said amount into account in computation of income, paid taxes on the income so computed and filed return of income under section 139(1), and yet the rigour of disallowance in respect of payments made, without deduction of tax at source, to the non-residents wasnot relaxed when such non-resident recipient had taken such receipts into account in computation of income, paid taxes on the income so computed and filed return under section 139(1).

No sec. 32A relief to hotel as preparation of food items therein couldn’t be deemed as manufacture

Preparation of food articles in hotel is not manufacturing activity, thus, hotel building is not a plant entitled to investment allowance.

Facts:

a)The assessee was running a hotel. It claimed investment allowance under Section 32A on preparation of food articles in hotels on the ground that it was definitely a manufacturing activity.

b)However, the Assessing Officer was of the view that preparation of food articles did not justify that it was a manufacturing activity so as to provide relief under section 32A. On appeal, the CIT(A) also rejected the contention of the assessee. However, the Tribunal allowed the claim of the assessee. The aggrieved revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)The Apex Court in the case of CIT v. Anand Theatres [2000] 110 Taxman 338 has held that the function of building is to shelter the business of assessee. Building is more durable and the Legislature has made distinction between the 'building' and 'machinery' or 'plant'.

2)The Tribunal had committed an error in treating the hotel building as a plant and, accordingly, it was not justified in allowing the claim for investment allowance under section 32A on the ground that the preparation of food articles in a hotel be treated as manufacturing of goods. – CIT V. SB PROPERTIES & ENTERPRISES LTD. [2014] 49 taxmann.com 298 (Rajasthan)

Vibratory compactor was earth moving machinery; entitled to concessional tax rate under Karnataka Sales Tax Act

Vibratory compactor manufactured by assessee was earth moving machinery entitled to concessional tax rate under Karnataka VAT.

Facts:

a)The assessee was engaged in the business of manufacturing vibratory compactor. It claimed that the said equipment was earth mover entitled to concessional tax rate under Notification Nos. FD 117 CSL 2001(I) and FD 117 CSL 2001 (II), dated 26-7-2001

b)The Assessing Officer held that the vibratory compactor would not come within the purview of earth mover and further said that it was general category machinery falling under SL. No. 1(iii)(a) of Part M of the Second Schedule to the Act.

c)Both, the First Appellate Authority and the Tribunal confirmed the order of the Assessing Officer.

d)Aggrieved by the order of appellate authorities, assessee filed the instant appeal before the High Court:

The High Court held in favour of assessee as under:

1)The assessee had produced copy of the notification dated 31-3-1993 issued under the Karnataka Sales Tax Act. In the said notification the vibratory compactor had been classified as earth moving equipment.

2)However, it was the contention of the revenue that the said notification had been withdrawn. Withdrawing of the notification would be of no consequence, when it was the stand of the Government that vibratory compactor had been classified as earth moving machine.

3)In that view of the matter, the vibratory compactor was earth moving machinery entitled to concessional tax rate under Notification Nos. FD 117 CSL 2001 (I) and FD 117 CSL 2001 (II), dated 26-7-2001 – L & T CASE EQUIPMENTS (P.) LTD. V. COMMISSIONER OF COMMERCIAL TAXES [2014] 49 taxmann.com 563 (Karnataka)

Conduct of respondent was oppressive as it used petitioner's funds in its own Cos without informing petitioner

Where money invested by petitioner in R-1 company was utilized in other companies managed by person managing R-1 company but no information about investment was provided to petitioners, such conduct would be held to be oppressive

Facts:

a)The petitioner-foreign company made FDI investment in Respondent-1-company five years ago on assurance of growth. However, nothing happened in Respondent-1-company. It virtually remained a shell company, whereas funds invested by the petitioner were invested into Respondent-7-company, which was nothing but alter ego of RC, who was managing Respondent-1-company.

b)When petitioner asked for inspection and audit of accounts and financials of the respondent-7-company, the respondents refused to provide any clue as to what had happened to investment made by the petitioner.

c)There were many companies which were alter egos of Respondent-5, who was managing Respondent-1-company.Respondent-5 and Respondent-6 who were in control of company were also not inclined to disclose any information relating to money invested by petitioner.

d)The petitioner filed instant petition.

The Company Law Board held as under:

1)The conduct of respondent-5 and respondent-6, who were running all those companies, was oppressive and prejudicial to interest of petitioner–CPI INDIA REAL ESTATE VENTURE LTD. V. PERPETUAL INFRACON (P.) LTD. (2014) 49 TAXMANN.COM 25 (CLB - NEW DELHI)

No tax on advance received by NHPC against depreciation as it was part of tariff and would reduce future tariff

Where assessee, engaged in selling electricity, received advance against depreciation (AAD) by way of tariff charges which was to be adjusted against future depreciation, so as to reduce tariff in future years, amount so received was not includible in computation of taxable income.

Facts:

a)Assessee, a public sector enterprise, was required to sell electricity to State Electricity Board at tariff rates notified by CERC. The Government has introduced a mechanism to generate additional cash flow by allowing power generating companies to collect AAD by way of tariff charge.

b)It was decided that the year in which normal depreciation would fall short of original scheduled loan repayment such shortfall would be collected as advance against future depreciation. Thus, the issue that arose for consideration of the Tribunal was as under: Whether the CIT(A) was right in deleting the addition made by the Assessing Officer on account of 'AAD', in spite of the Hon'ble Supreme Court's ruling ( in case of National Hydroelectric Power Corpn. Ltd v. CIT [2010] 187 TAXMAN 193) wherein, it was held that the advance against depreciation was “income received in advance”?

The Tribunal held in favour of assessee as under:

1)The Supreme Court in case of National Hydroelectric Power Corpn. Ltd ( Supra) held as under: AAD was not meant for an uncertain purpose. It was an amount that was under obligation, right from the inception, to get adjusted in the future, hence, it could not be designated as a reserve.

AAD was nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant the same would be reduced to nil.

Therefore, the assessee could not use the AAD for any other purpose except to adjust the same against future depreciation so as to reduce the tariff in the future years.

2)Thus, after considering the categorical finding of the Supreme Court it was to be held that the CIT(A) was correct in holding that AAD could not be added in the computation of the normal income. - UNION OF INDIA V. INTERCONTINENTAL CONSULTANTS & TECHNOCRATS (P.) LTD [2014] 49 taxmann.com 520 (SC)

ITAT interprets Formula under Rule 8D for allocating common interest exp.

Facts:

In the instant case the dispute arose between assessee and revenue in respect of computation mechanism provided under Rule 8D(2)(ii).

The Tribunal held as under:

1)Rule 8D(2)(ii) seeks to allocate 'common interest expenses' to taxable income and tax exempt income. However, the definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous as it specifically excludes interest expenditure directly related to tax exempt income, yet it does not exclude interest expenditure directly related to taxable income.

2)Resultantly, while rule 8D(2)(ii) ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income.

3)The incongruity arose due to the wordings of rule 8D(2)(ii), as it provided that out of total interest expenses, only interest expenses directly relatable to tax exempt income were excludible, and interest expenses directly relatable to taxable income were not excludible.

4)Therefore, common interest expenditure could be computed only when interest directly attributable to tax exempt income, i.e., under rule 8D(2)(i), and interest directly relatable to taxable income, were excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii). - GEOJIT INVESTMENT SERVICES LTD. V. ACIT [2014] 50 taxmann.com 150 (Cochin - Trib.)

Whole premium paid on Keyman Insurance policy was deductible even if policy cover extended to next year

Where assessee purchased Keyman Insurance Policy on last day of relevant financial year, it was entitled to claim full deduction of premium paid during relevant year itself, even though insurance policy cover extended to next financial year.

Facts:

a)The assessee paid premium in respect of keyman insurance policy.

b)The Assessing Officer (‘AO’) allowed proportionate amount of premium on finding that the assessee had paid a premium only on the last date of the year, and, therefore, the expenditure pertained to the next financial year.

c)The Tribunal, however, allowed assessee's claim in full. The aggrieved revenue filed instant appeal. The High Court held in favour of assessee as under:

1)There was no dispute regarding the allowability of premium on Keyman Insurance Policy. The disallowance was made by the AO only because the assessee took the insurance policy on the last date of the financial year. Therefore, the AO had held that proportionate amount of the premium pertained to the next financial year.

2)This bifurcation was not permissible. The expenditure was made during the financial year relevant to the assessment year under consideration. Therefore, it was allowable.

3)Extension of insurance policy cover to the next financial year would not mean that the premium paid during the year under consideration was not an allowable expenditure. Thus, premium paid on Keyman Insurance Policy was fully deductible. – CIT V. HARIT EXPORTS LTD [2014] 49 taxmann.com 200 (Bombay)

CLB ordered transfer of shares to petitioner-insurer as it had obtained rights for lost shares after paying for those shares

Where petitioner-insurer had obtained right in respect of lost shares of respondent-company after paying insurance claim to insured and company had no objection to transfer of shares, shares were to be transferred in name of petitioner.

Facts:

a)A broker had taken insurance policy from petitioner to indemnify him for losses including loss of shares. Petitioner executed the transaction for purchase of shares of respondent-company however certificates of said shares were lost.

b)Accordingly, the petitioner-insurer paid a sum as compensation to insured broker who, in turn, transferred all its rights in respect of shares of respondent-company in favour of petitioner.

c)The petitioner filed petition before CLB for transfer of shares contending that he had acquired all rights, title and interest in respect of shares of respondent-Co.

The Company Law Board held in favour of petitioner as under:

1)The Practicing Company Secretary of respondent-company didn’t object to the prayers made in the petition and stated that company would transfer the shares as requested for subject to furnishing of an indemnity bond and meeting compliances as required in terms of Articles of Association of the company for transfer of shares.

2)Since neither transferors and lodgers nor the respondent-company had raised any objection to transfer of shares in favour of petitioner, shares were to be transferred in name of petitioner – ORIENTAL INSURANCE CO. LTD. V. LUPIN LTD. [2014] 49 TAXMANN.COM 92 (CLB - MUMBAI)

Place of issuance of notice on cheque dishonouring won’t confer jurisdiction upon Court to take cognizance of offence

Place of issuance of a statutory notice could not by itself confer territorial jurisdiction upon Court to take cognizance of an offence under section 138 of the Negotiable Instrument Act (‘the NI Act’).

Fact:

a)The petitioner had taken a loan from the respondent-company for its business purposes. It had issued a cheque (drawn on the Syndicate Bank, Bangalore) against repayment of the loan amount. However, the cheque was dishonoured when presented for encashment to ING Vysya Bank, Gurgaon.

b)The respondent-company issued a statutory notice to the petitioner and eventually filed a complaint before the Judicial Magistrate at Gurgaon under section 138 of the NI Act.

c)The Magistrate took cognizance and summoned the petitioners to face the trial. The petitioner, filed the instant petition seeking transfer of the complaint from Gurgaon to the competent Court at Bangalore.

d)The Petitioner contended that the Court located at Gurgaon had no jurisdiction to entertain the complaint, especially when the cheque was issued and dishonoured at Bangalore and the offence, if any, was committed only at Bangalore.

The Supreme Court held as under:

1)The only reason the complainant claimed jurisdiction for the Court at Gurgaon was the fact that the complainant-respondent had issued the statutory notices relating to dishonour of the cheque from Gurgaon. The issue of a statutory notice could not by itself confer jurisdiction upon the Court to take cognizance of an offence under section 138.

2)Where cheque issued by petitioner was dishonoured at Bangalore, Court of Gurgaon could not have jurisdiction to entertain complaint simply because complainant-respondent had issued statutory notices relating to dishonour of cheque from Gurgaon.

3)Accordingly, the petition was to be allowed and complaint was to be transferred from the Court of Gurgaon, to the Court of competent jurisdiction of Chief Metropolitan Magistrate at Bangalore who would try the case himself or transfer the same to any other Court competent to try the same. – SREE MAHESH STATIONARIES V. INDIABULLS FINANCIAL SERVICES LTD. [2014] 49 TAXMANN.COM 67 (SC)

Excess premium paid by builder while refunding booking amount to be deemed as interest; attracts sec. 194A TDS

Where assessee, a builder, having collected certain booking amount from purchasers of flats, sold those flats subsequently to some other parties at a higher price, amounts refunded by assessee to original purchasers with a margin, amounted to payment of interest to attract TDS under Sec. 194A.

Facts:

a)The assessee, a builder, received certain payments from customers who initially booked flats by making advance payments and a few installments; but due to various reasons the customers could not fulfill the payment schedule and they requested for refund.

b)The assessee had sold those flats at a higher price to other parties and returned the payment received from previous customers with a margin. The Assessing Officer (‘AO’) opined that the excess amount paid to previous customers was to be deemed as payment of interest, which would attract TDS under section 194A.

c)The AO disallowed these payments as assessee had failed to deduct tax at time of making interest payments to previous customers. The CIT(A) deleted disallowance made by AO. The aggrieved revenue filed that instant appeal.

The Tribunal held in favour of revenue as under:

1)It was clear from the plain reading of section 2(28A) that money paid in respect of amount borrowed or debt incurred, was interest payable in any manner. The definition of interest in section 2(28A) proceeds to include in the terms money borrowed or debt incurred, deposits, claims and 'other similar rights or obligations'.

2)The definition of interest has been carried to the extent that even the amounts payable in transactions had not been borrowed and those that had not been incurred, were brought within the scope of its definition.

3)Undisputedly, in the instant case, the amounts were paid in respect of an obligation in respect of purchase of flats through agreement, therefore, no fault could be found on the part of the AO for treating these charges as interest and liable for TDS under section 194A.

4)The mere fact that the assessee did not choose to characterize such payment as interest, would not take such payment out of the ambit of the definition of 'interest', in so far as payments made by the assessee was in respect of an obligation incurred with earlier flat holder. Thus, impugned payments had to be treated as interest under section 2(28A) and it were liable for tax deduction under section 194A. - INCOME-TAX OFFICER (TDS), TRIVANDRUM V. BEACON PROJECTS (P.) LTD. [2014] 49 taxmann.com 173 (Cochin - Trib.)