Bar Council of India can’t remand disciplinary proceedings transferred to it from State Bar Council: SC

The Disciplinary Committee of Gujarat Bar Council of India (BCI) could not complete its proceedings within a year as mandated under the provision of the Advocacy Act, 1961, as a consequence of which disciplinary proceeding had been transferred to the Bar Council of India. However, the BCI’s Disciplinary Committee got back the case to the State Bar Council with a direction to dispose of the matter within a stipulated period of time.

Being aggrieved by the action of Bar Council of India, Appellant filed a case before the Apex Court. It was held that when a disciplinary proceeding before a State Bar Council gets transferred to Bar Council of India (BCI) under the provision of the Advocates Act, 1961, the BCI cannot send it back to the State Bar Council with a direction to decide it within a stipulated time. - [2017] 80 taxmann.com 54 (SC)

‘Quasi-capital’ loan not to be compared with ‘loan’ for ALP computation

Facts:

a) Assessee had advanced an optionally convertible loan to its associated enterprise (AE). The tenure of loan was five years and the lender had the option for repayment or for conversion of loan into equity at par with the company at any time during the tenure of the loan.

b) Assessee did not provide for any interest on said loan. TPO was of the view that merely because loan was convertible into equity, it did not alter its character as loan at the relevant point of time, and once that was so, the benchmarking of loan was to be done as per the prevailing market rate.

c) TPO made addition to assessee's ALP in respect of interest on loan to AE. 

d) The DRP confirmed said addition. Aggrieved-assessee filed the instant appeal before the Tribunal.

Tribunal held in favour of assessee as under:-

1) The transaction in question was not of the transaction of lending money to AE. Amount advanced to the AE was attached with the obligation of the AE to issue share capital, in case the assessee exercised option for the same, on certain conditions, which were admittedly more favourable, and at an agreed price, which was admittedly much lower, vis-à-vis the conditions and price which independent enterprise would normally agree to accept.

2) The lending was thus in the nature of quasi-capital in the sense that substantive reward, or true consideration, for such a loan transaction was not interest simplictor on amount advanced but opportunity to own capital on certain favourable terms. 

3) Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor. For example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi-capital, are treated differently than the normal loan transactions.

4) However, what the authorities had held that a quasi-capital transaction can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loan.

5) Keeping in mind these factors, as also entirety of the case, it was fit and proper to delete the arm's length price adjustment in respect of interest which, according to the revenue authorities, assessee should have charged on the optionally convertible loan granted to the AEs. - [2017] 80 taxmann.com 24 (Ahmedabad - Trib.)

Unutilized Foreign Tax Credit isn’t a tax deductible expenditure: Ahmedabad ITAT

Facts:

a) Assessee pointed out that in terms of the Explanation 1 to Section 40(a)(ii), bar on deduction under section 40(a)(ii) is confined to only such income tax paid abroad in respect of which tax credit is granted under section 90 or 91. There is no bar on deduction under section 40(a)(ii) in respect of foreign tax for which no tax credit is available.

b) The issue before the Tribunal was as under:

‘Whether deduction under section 37(1) could be allowed in respect of foreign tax credit for which only partial credit was allowed in the current year?’ 

Tribunal held in favour of revenue as under:-

1) As per Explanation 1 to section 40(a)(ii), any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91 and as per Explanation 1 to section 40(a)(ii) any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;

2) The scope of Explanations to Section 40(a)(ii), on which assessee had relied upon so much, it may be noticed that if the main provision does not cover the taxes paid abroad, there cannot be any occasion to include under Explanations to Section 40(a)(ii), taxes in respect of which relief under section 90 and 91 is not admissible. 

3) These Explanations do not extend the scope of the Section 40(a)(ii) but rather explain the scope of the said section. If something is covered by the Explanation, it cannot be said that it is not covered by the main provision. If taxes in respect of which tax credit under section 90 or 91 are covered by the proviso, these are covered by the scope of Section 40(a)(ii) as well. And if these taxes are covered by Section 40(a)(ii), the theory that meaning of 'tax' under section 40(a)(ii) must remain confined to the taxes levied under Income Tax Act, 1961 comes to a naught since the taxes in respect of which credits are available under section 90 or 91 cannot be, under any circumstances, imposed under the Indian Income Tax Act.

4) Therefore, in the event of assessee being allowed only partial tax credit in respect of taxes withheld abroad, he could not be allowed any deduction in respect of the balance of the taxes so withheld abroad under section 37(1). - [2017] 80 taxmann.com 6 (Ahmedabad - Trib.)

CA could demand higher remuneration if he produced good quality audit report

Facts:-

a) Petitioner-Chartered Accountant (CA) was engaged by the revenue authorities to conduct a special audit of a company. Audit Report was submitted and a huge addition of Rs. 720 crore was made.

b) CA submitted bill to the revenue for his professional services detailing 1315 man hours spent by his team. A total bill of more than Rs. 1 crore was raised taking average rate of manhour at Rs. 7500 per hour.

c) AO was of the view that time spent on lunch, refreshments, etc. should have been proportionately discounted from the bill. 85 per cent of the billed hours were considered by him as reasonable and accordingly reduced the average rate from Rs. 7500/hour to Rs. 4000/hour.

d) CIT(A) upheld the order of the AO. CA filed writ before the High Court: 

High Court held as under:-

1) Unlike employees, professionals do spend 9 to 10 hours a day on their work, even at odd hours, and attend to their basic necessities in the remaining hours of the day. Exclusion of such necessary recess for consumption of food and refreshment, etc. for a person to render quality work was illogical.

2) It was noteworthy that the quality of the report had been assessed as 'very good' by the AO.

3) Audit work was rendered by the CA’s four partners, Chartered Accountants and other personnel i.e. by qualified assistants and semi-qualified assistants. 

4) Notably, the work experience of the partners ranged from 3 to 27 years while the range permissible billing rate was between Rs. 3,500/- to Rs. 7,500/- and the rate of sitting could be correspondingly adjusted as per their regular sitting hours; instead it had arbitrarily been reduced to an average rate of Rs. 4,000/- per hour.

5) What the revenue was to assess was whether the special audit report was (i) within time, (ii) of the desired quality (iii) the billing was commensurate with the nature of inquiry and the quantum of the records to be looked into; etc.

6) If the audit report was of good quality and, inter alia, authored by a qualified professional having a fair number of years of experience then he/she might well be entitled to ask for the highest prescribed billing rate. [2017] 79 taxmann.com 415 (Delhi) 

No Sec. 195 TDS on crediting income to payee when it is taxable on receipt basis under treaty: ITAT

Facts:-

a) The assessee was liable to make royalty payment, to Saira Europe SPA, Italy. Liability was duly accounted for in the books of account, though payment was made a bit later.

b) Assessing Officer (AO) raised demand on the assessee by treating the due date for depositing tax deductible at source as being 7 days from the end of the month in which amount was credited in the books of account.

c) Assessee contended before AO that as per article 12(3) of India Italy DTAA, royalty payment was taxable only at the point of time when it was actually paid and not at the point of time of credit. AO, on the contrary rejected the contention of assessee.

d) On appeal, CIT(A) upheld order of AO. Aggrieved-assessee filed instant appeal before tribunal:-

Tribunal held in favour of assessee as under:-

1) It is only elementary that the TDS liability under Section 195 is a vicarious liability in the sense that it's survival in the hands of tax-deductor is wholly dependent on existence of tax liability in the hands of recipient of income.

2) When a credit or a payment made by an Indian resident to a non-resident does not trigger the taxability of that income in the hands of recipient, the tax deduction liability does not come into play at all.

3) The provisions of Section 195 are to be read in conjunction with the charging provisions under the statue, as also in conjunction with the relevant double taxation avoidance agreements which override these charging provisions.

4) Section 195(1) states that any person responsible for paying to a non-resident any sum chargeable under the provisions of this Act, shall, at the time of credit of such income to the account of the payee or at the time of payment deduct tax at source.

5) As per Article 13 of India-Italy DTAA, the term "royalties" means payments of any kind “received”. Therefore, royalty payment was not liable to be taxed at the point of time when account of the non-resident was credited, in view of the fact that under the related DTAA, tax liability can only arise at the point of a subsequent event, i.e., payment.

6) Since, income embedded in the payment was not taxable at that point of time of crediting the amount, there could not be any occasion for deduction of withholding of the tax on such income. – [2017] 79 taxmann.com 460 (Ahmedabad - Trib.)

New ITR forms for AY 2017-18: Which ITR form you should opt for?

Every year CBDT notifies new income-tax return (ITR) forms. In 2016 the CBDT hadnotified the ITR Forms at the end of March, 2016 and it deviated from its past practice ofnotifying ITR Forms in the month of May or June. This time also the CBDT has notifiedthe ITR forms in the month of March, 2017.

As per the assurance given by the Finance Minister in his Budget Speech the CBDT had finally prescribed simplified ITR 1 Form with fewer columns. However, such ITR 1 is applicable only for individuals having income up to Rs 50 lakhs. Further, Individual taxpayers either having dividend income above 10 lakhs or having unexplained credit (taxable at 60% under Section 115BBE) can't opt for ITR-1.

The CBDT has scrapped ITR- 2A. Now all assessees (other than those earning salary income and business income) would be required to file ITR-2 only. Earlier taxpayers opting for presumptive taxation were required to file ITR-4S. But now they are required to file 'ITR-4 SUGAM' for presumptive income. Taxpayer earning income from business or profession are now required to file ITR-3 instead of old ITR-4.

Click here to read complete article

Click here to download Copy of new ITR forms for A.Y 2017-18

Click here to view key changes in new ITR forms for A.Y. 2017-18

Click here to download Notification No. 21/2017 dated 30-03-2017

Utilization of refund of TDS by company in liquidation would amount to contempt of court: Apex court

Contempt of Courts Act: Company in liquidation received money from National HighwayAuthority of India (NHAI) on account of acquisition of company's land.High Court had directed NHAI to deposit said amount with Registrar of High Court andNHAI deposited said amount after deducting TDS.

Thereafter, company has filed its return and claimed refund of the entire amount coveredby the TDS. Such amount was utilized for various purpose by the company. The ApexCourt held that utilization of TDS refund would amount to Contempt of order of High Court,as refund was actually compensation in respect of land acquired from company and itwas that amount which High Court wanted to protect by its order. - [2017] 79 taxmann.com 463 (SC)

Share premium isn’t part of capital employed for computing Sec. 35D deduction of preliminary exp: SC

The issue before the Supreme Court was as under:

Whether "Premium" collected by Company on its subscribed share capital was to be treated as "capital employed in the business of the Company" within the meaning of Explanation(b) of sub-section(3) to Section 35D so as to enable the Company to claim deduction of preliminary expenses as prescribed under Section 35D?Supreme Court held in favour of revenue as under:

The "premium amount" collected by the Company on its subscribed issued share capital could not be said to be the part of "capital employed in the business of the Company" inview of the following reasons:-

1) If the intention of the Legislature was to treat the amount of "premium" collected by theCompany from its shareholders while issuing the shares to be the part of "capitalemployed in the business of the company", then it would have been specifically said so inthe Explanation(b) to sub-section(3) of Section 35D of the Act. It was, however, not said so.

2) Section 78 of the Companies Act which deals with the "issue of shares at premium anddiscount" requires a Company to transfer the amount so collected as premium from theshareholders and to keep the same in a separate account called "securities premiumaccount". It does not anywhere say that such amount should be treated as part of capitalof the company employed in the business for one or other purpose, even under the

Companies Act.

3) Column III of the Form of Annual Return prescribed under the Companies Act whichdeals with capital structure of the company, provides "issued shares capital break up".This column does not include in it the "premium amount collected by the company from itsshareholders on its issued share capital". This is indicative of the fact that such amount isnot considered as a part of the capital, unless it is specifically provided for in the relevantsection. - [2017] 79 taxmann.com 450 (SC)

Lessee can’t claim depreciation on reimbursement of construction cost to lessor: Apex Court

Facts:

a) Mother Hospital Private Ltd. (Assessee)entered into an agreement with a partnership firm for construction of hospital building on land belonged to the firm.

b) It wasagreed that the firm will complete the construction of the building on the condition that the entire cost of construction should be borne bythe assessee. Since the ownership of the land had to remain with the firm, it was also agreed that the land would be given on lease.

c) Assessee filed its return in which it claimed depreciation on the building portion on the ground that it was deemed owner of building as per Explanation 1 to section 32. 

d) Assessing Officer (AO) rejected claim of depreciation which was upheld by the CIT(A) and High Court on further appeals.

e) Aggrieved by the order of High Court, assessee filed the instant appeal before the Supreme Court.

Supreme Court held in favour of revenue as under:

1) As per explanation 1 to section 32:

“Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes ofthe business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of or improvement to the building, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee."

2) As is clear from the plain language of the aforesaid Explanation, it is only when the assessee holds a lease right and any capital expenditure on the construction to the building is incurred by the assessee, that assessee would be entitled to depreciation to the extent of any such expenditure incurred.

3) If construction is carried out by lessor and expenditure is reimbursed by lessee, Explanation 1 would not come to the aid of the lessee.

4) In the instant case, construction was made by the firm and not by the assessee. It was a different thing that the assessee had reimbursed the amount to the lessor.

5) Since construction was not carried out by the assessee himself, therefore Explanation 1 to section 32 could not be applied and, accordingly, assessee couldn’t claim deprecation on building. [2017] 79 taxmann.com 375 (SC) 

Mere signing of 'Sauda Chitthi' wouldn't prove that assessee had received consideration from sale of land: HC

Facts:

a) Assessee received re-assessment notice on the ground that a document was seized from the residence of Mr. RV, one of the partners of the firm in which assessee was also a partner.

b) This was a copy of 'Sauda Chitthi' entered into between the assessee and Mr. V on one hand as seller and Mr. PK and Mr. RV on other side of the deal as buyers for purchase of land.

c) According to the Assessing Officer (AO), the total sale consideration for above land, according to 'Sauda Chitthi', came to Rs. 18.80 crores and subsequently a sale deed was executed for a consideration of Rs. 56.39 lakhs and balance amount of Rs. 18.23 crores was received by assessee in cash as on-money. He held that the differential amount must be added to income of assessee.

d) Assessee filed writ petition before High Court against such re-assessment notice. High Court held in favour of assessee as under:-

1) It was an admitted position that the assessee had never executed any sale deeds. Merely on the basis of the 'Sauda Chitthi' signed by the assessee (signed and executed though, admittedly they were not owners of land for which the 'Sauda Chitthi' was executed/signed), it couldn’t be said that any amount was received by him.

2) Considering the statement of Mr. RV, he had categorically stated that the ‘Sauda Chitthi’ dated 12-03-2008 was subsequently had cancelled. It also didn’t appear that Mr. RV had stated that he had paid any amount to the assessee.

3) There was no other tangible material available with the AO other than ‘Sauda Chitthi’ to form a reasonable belief that the amount of Rs. 18.23 crores had been received by the assessee in cash.

4) Thus, formation of opinion by the AO seemed to be on surmises and conjectures, which couldn’t be the basis for reopening the assessment, in exercise of powers under section 147. [2017] 79 taxmann.com 237 (Gujarat)