Subsequent reversal of a transaction among group entities isn’t colourable device, if effect carried in ledgers

The assessee-trust was managed by Ansal group. It had entered into agreement with its group concern (‘APIL’) for purchase of plots to open a school in furtherance of its objects. The assessee had paid 95 per cent of the sale consideration and obtained possession of the plots. Subsequently, the sale agreement was cancelled and entire sale consideration was returned to assessee by APIL. During assessment, AO held that the transactions were not genuine and were devised with an intention to advance surplus money to APIL. The AO withdrew the benefit of exemption under section 11 and 12 on the ground that the directors and trustees of both concerns were connected persons falling within the purview of specified persons under section 13(1)(c), and the money had been advanced without interest for the benefit of specified persons. The CIT(A) reversed the order of AO.

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

1) The assessee was a charitable institution and there was no change in its objects;

2) From assessee's books of account, it clearly emerged that more often than not APIL had credit balance; thus, it had been providing monetary support to trust now and then. Therefore, a presumption could not be drawn that APIL had diverted the funds without proper justification for its use;

3) Assessee's debiting of 95 per cent advance to asset acquisition account itself indicated that because of substantial advance and possession it treated the plots as its assets. Treatment of these amounts as advances in APIL books did not militate against assessee's method of accounting. Therefore, the alleged variation in categorization of accounting in two different sets of books would not convert valid transactions into colourable transactions;

4) It could not be found that there was any motivation on the part of APIL to clandestinely divert Trust’s Funds for its personal use;

5) Assessee contended that cancellation of plots was in the interest of trust as by that time it had moved on to better projects including a university. Since no cancellation charges were to be levied, it terminated the agreements;

6) From objective view every entity has a right to carry on its objectives in the manner it best considers. Revenue couldn’t step in the shoes of the trustee in these matters.

Therefore, the exemption under Sec. 11 was allowed to assessee - Chiranjiv Charitable Trust v. ADIT [2012] 27 taxmann.com 99 (Delhi - Trib.)

Indo-Swiss treaty relief extended to international shipping profits, ITAT explains meaning of ‘dealt with’

The assessee, a Swiss-company, was engaged in the business of operations of ships in international waters through chartered ships. During the relevant year, the assessee had declared his total income at nil on the following grounds:

1) There was no article in the India-Swiss treaty dealing specifically with taxability of shipping profit;

2) Article 7 of the treaty dealing with business profits specifically excluded profits from the operation of ships in international traffic; and

3) Article 22 of the treaty dealing with other income subjected to tax shipping profits only in the State of residence viz. Swiss confederation.

The AO rejected the assessee’s contention and held that the shipping profits were taxable in India under section 44B of the IT Act. CIT(A) however, allowed assessee’s appeal. The department then preferred an appeal to the ITAT.

The Tribunal held in favour of assessee as under:

1) Para 1 of Article 22 of indo-swiss treaty provides that the ‘items of income of a resident of a contracting State, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State’;

2) When Article 7 provides for taxability of business profits other than international shipping profits, then it can’t be said that the said article ‘dealt with’ international shipping profits;

3) The fact that the expression used in Article 22(1) of the Indo-Swiss treaty is “dealt with” clearly demonstrates that the expression “dealt with” is some thing more than a mere mention of such income in the article.

Article 22(1) of Indo-swiss treaty contemplates that items of income covered under this article will be taxable in the state of resident only i.e. Switzerland in the instant case. Therefore, the same couldn’t be taxed in India – ADIT v. Mediterranean Shipping Co. [2012] 27 taxmann.com 77 (Mumbai - Trib.)

ITAT considered ‘carbon credits’ as inventory yet held income from their sale as ‘capital receipts

The assessee-company was generating power through biomass power generation unit. For the relevant year, it sold 1,70,556 Carbon Credits (‘CERs’) to a foreign company

for Rs. 12.87 crores. During assessment, the AO opined that the sale proceeds of the CERs were revenue receipts since the CERs are a tradable commodity and are even

quoted in the Stock Exchange. Accordingly, a tax demand of Rs. 3.60 crores was raised. The CIT (A) confirmed the order of AO.

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

1) Carbon credit is in the nature of "an entitlement" received to improve world’s atmosphere and environment reducing carbon, heat and gas emissions;

2) Carbon credits are made available on account of saving of energy consumption and not because of assessee’s business. Transferable Carbon Credit is not a result or

incidence of one's business and it is a credit for reducing Carbon emissions;

3) The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying the business;

4) In the case of CIT vs. Maheshwari Devi Jute Mills Ltd. 57 ITR 36 the SC held that transfer of surplus loom hours to other mill was capital receipt and not income.

Being so, the consideration received by the assessee in respect of Carbon Credit was similar to consideration received by transferring of loom hours.

5) Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to

environmental concerns.

Thus, the entitlement earned for Carbon Credits can, at best, be regarded as a capital receipt and can’t be taxed as a revenue receipt.

Apart, from above observation, the Tribunal at the end of judgment took a view in accordance with Guidance Note issued by ICAI which states that CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets, those should be accounted for as per AS-2 (Valuation of inventories). Thus, the assessee generating these should apply AS-9 to recognise revenue in respect of sale of CERs - MY HOME POWER LTD.V. DCIT [2012] 27 taxmann.com 27 (Hyderabad - Trib.)

‘Son of Sardar’ losses against ‘Jab tak hai Jaan’; recital between single screen theatre owners and YRF held valid

The Ajay Devgn Films (“ADF”) alleged that Yash Raj Films (“YRF”) while distributing the rights to exhibit ‘Ek Tha Tiger’ put a condition on single screen theater owners that they would have to simultaneously exhibit the other film ‘Jab Tak Hai Jaan’ to be released on the eve of Diwali. The ADF further alleged that, since there was a threat that the YRF would not allow to exhibit the movie ‘Ek Tha Tiger’ if the contract to exhibit ‘Jab Tak Hai Jaan’ was not entered simultaneously, it amounted to abuse of dominance and violation of section 3 and 4 of Competition Act. ADF argued that the agreement between theater owners and YRF was a tie-in arrangement.
The grievance of the ADF arose because of its fear that it would not get enough theaters for the movie ‘Son of Sardar’ releasing on the same date as of ‘Jab Tak Hai Jaan’

The Commission held in favour of YRF as under:

a) The impugned agreement would not be affecting the competition in the Indian market as such or would not create any barriers for new entrants or drive existing competitors out of the market;

b) The single screen theater owners took competitive business decision in their interest to screen two films of YRF. Such agreement was purely commercial in nature between parties promoting their economic interests;

c) Since single screen theater owners had liberty either to agree or not to agree, the agreement could not be said to be a restraint on the freedom of business of theater owners;

d) The release of any other film including ‘Son of Sardar’ could be postponed or preponed as per availability of the screens;

e) The market could not be restricted to any particular festival period like Eid or Diwali and the market had to be considered a market available throughout the year;

f) Further, the ADF didn’t present any evidence to prove the dominant position of the YRF in the film industry. In the absence of evidence of its market share, economic strength, etc. it could not be construed that YRF had dominance in the market just because it had produced various blockbuster movies in past and it had big name in the industry.

In view of above, the Commission was prima facie of the opinion that there was no contravention of the provision of the Act – AJAY DEVGN FILMS V. YASH RAJ FILMS PRIVATE LIMITED [2012] 26 taxmann.com 350

No exemption to a trust if its main objects are abandoned and it is just perusing other incidental objects

The main objects of the assessee, a Section 25 company, were to organize and undertake scientific research. The assessee was recognised as a scientific research institution by the CBDT from its inception, which was, however, withdrawn wef 31st March, 1981 as it was found that assessee carried out no scientific research as stated in its main objects. In 1984, assessee applied for and was granted registration under Section 12A of the Act. During the relevant year, the assessee handed over the possession of commerce centre constructed by it to the various lessees and claimed exemption under section 11(1)(a) of the Act in respect of such lease income. The AO denied the exemption. The CIT(A) and ITAT also upheld the order of AO.

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

1) Compliance with section 12A does not entitle an assessee to the benefit of section 11, ipso facto;

2) The assessee’s contention to have been engaged in “scientific research’ was unfounded in view of the withdrawal of its recognition under section 35(1)(ii);

3) During the assessment years 1978-79 to 1992-93, its expenditure on scientific research  never exceeded 3.32% of income in any year;

4) There was only a facade of being a scientific research institution by making claims in the annual report of scientific research activity;

5) The assessee never engaged itself in any activity connected to its main object, viz., to organize, sponsor, promote, establish, conduct or undertake the scientific research in any way;

6) Under the Companies Act,1956 an entity is entitled to carry on business in respect of the incidental and ancillary activities that didn’t by itself entitle it to claim an exemption under section11;

7) If, however, the main objects are abandoned, it can hardly be said that the expenditure towards the incidental objects was towards a charitable purpose;

8) In the assessee's case, its incidental or ancillary objects on their own, did not constitute charitable purposes. Indeed, it was rightly not even suggested by the assessee that its ancillary objects by themselves constituted charitable purposes.

Therefore, assessee’s claim for exemption under section 11 failed - M. VISVESVARAYA INDUSTRIAL RESEARCH & DEVELOPMENT CENTRE V. CIT [2012] 26 taxmann.com 200 (Bombay)

TP provisions are self-governing; TPO finding can be used against a transaction not referred to him

The assessee-company was a manufacturer of chemicals and dyes having six manufacturing divisions. To arrive at the ALP in respect of its international transactions the TPO disallowed certain adjustments as desired by assessee. The assessee filed this present appeal. The grounds of appeal, inter alia, were as follows:

i) TPO had made an upward adjustment on account of commission. In this respect, the assessee contended that since there was no reference in respect of commission because AO had made reference only in respect of goods sold to AEs, the upward adjustment in commission receipt as suggested by the TPO was without jurisdiction;

ii) The assessee raised the issue that the provisions of Chapter X could not be invoked without prima facie demonstrating that there was some tax avoidance.

On issue of adjustment on account of commission transaction, the Tribunal held in favour of assessee as under:

i) As per Section 92CA, the role of the TPO is restricted to determining the ALP in relation to the international transaction which has been referred to him, thus, it could be said that it was not within the domain of TPO to determine the ALP of a transaction not referred to him;

ii) This ground of assessee was, therefore, allowed. However, it was also held  that as per section 92C(3), the AO could consider it as a material fact and proceed to determine an international transaction which had come to his knowledge on the basis of any material or document available with him.

On issue of invoking TP Provisions without establishing tax avoidance the Tribunal held in favour of revenue as under:

1) There is nothing in the statutory language to suggest that the AO must demonstrate the avoidance of tax before invoking TP provisions;

2) Rather, the logic is to make certain that the transactions between the AEs should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. Thus, the stand of the assessee on this ground was dismissed by Tribunal - ATUL LTD. v. ACIT [2012] 26 taxmann.com 300 (Ahmedabad - Trib.)

Assessee escaped penalty for delay in filing e-TDS return on reasoning that he was new to this stuff

In the instant case, for the relevant assessment year, the assessee had not filed the E-TDS returns within the specified time and, thus, AO levied the penalty under Section 272A(2). Aggrieved by the order of AO, assessee preferred an appeal to the CIT(A), which  confirmed the penalty order passed by AO.

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

1) The delay in filing the returns, even if they are characterized as negligence on the part of the assessee, can only be considered as a technical or venial breach of law for which penalty should not be levied automatically;

2) The requirement of filing Form No. 24Q was new one for the assessee being the first year of filing such return and, moreover, there was no dispute about the fact that the tax had been deducted by the assessee; and

3) As held by the ITAT Mumbai Bench in the case of Royal Metal Printers (P.) Ltd.v.ACIT [2010] 37 SOT 139, for such technical or venial breach supported by reasonable cause, penalty under Section 272A(2) is not leviable.

Therefore, the impugned penalty order was cancelled - UNION BANK OF INDIA V. ACIT [2012] 26 taxmann.com 347 (Agra - Trib.)

SC reverses its earlier ruling and nods initiation of prosecution on successive dishonour of cheque

In the instant case, the respondent-company issued some cheques in favour of the appellant which were dishonored twice for insufficiency of funds. The appellant presented the issue before the Metropolitan Magistrate. During proceedings, the respondent contended that complaint had not been filed within 30 days of the expiry of the notice based on the first dishonour of the cheque. The Magistrate dismissed the application of respondent. On filing of revision petition before the High Court, it allowed the revision petition and quashed the orders passed by the Magistrate relying upon the decision of the Supreme Court in Sadanandan Bhadran v. Madhavan Sunil Kumar [1998] 6 SCC 514, according to which a complaint based on a second or successive dishonour of the cheque was not maintainable, if no complaint based on an earlier dishonour of cheque, followed by the statutory notice issued on the basis thereof, had been filed. Matter reached to the Supreme Court.

The Supreme Court held in favour of appellant as under:

1) Holder or payee of the cheque has the right to present the same any number of times for encashment during period of six months or during period of its validity, whichever is earlier: Even Sadanandan Bhadran's case (supra) upheld the same;

2) There is nothing in provisions of Act that forbids holder of a cheque to demand amount covered by cheque, by serving fresh notice under clause (b) of proviso to section 138, should there be a second or successive dishonour of cheque on its presentation;

3) So long as the cheque is valid and it is dishonored upon presentation to the bank, the holder's right to prosecute the drawer remains valid and exercisable;

4) By reason of a fresh presentation of a cheque followed by a fresh notice in terms of section 138, the drawer gets an extended period to make the payment and thereby benefits in terms of further opportunity to pay to avoid prosecution. Such fresh opportunity cannot help the defaulter on any juristic principle to get a complete relief from prosecution;

5) There is no real or qualitative difference between a case where default is committed and prosecution immediately launched and another where prosecution is deferred till cheque presented again gets dishonored.

Thus, the decision in Sadanandan Bhadran's case (supra) was overruled and it was held that prosecution based upon second or successive dishonour of the cheque was also permissible so long as the same satisfies the requirements stipulated in the proviso to section 138 - MSR Leathers v. S. Palaniappan [2012] 26 taxmann.com 332 (SC)

US Court hails Rajat Gupta’s ‘big heart and helping hand’ but jails him for insider trading

Rajat Gupta was the director of Goldman Sachs. He was privy to information which would affect company’s share prices but not known to public. Gupta was found guilty by the jury for insider trading i.e. for leaking some unpublished price sensitive information in 2008. Gupta tipped off Rajaratnam about Warren Buffett’s soon-to-be-announced infusion of $5 billion into Goldman Sachs. Rajaratnam purchased large quantities of Goldman stock just before the market closed and booked a gain of $1,231,630 by selling the stock next morning when the Buffett investment was announced and stock prices surged. The crimes merited a prison sentence of 78-97 months under the Sentencing Guidelines of the US. Given Gupta’s exemplary humanitarian record, the US District Court of New York let him off with a ‘non-Guidelines’ sentence of 2 years prison.

The Court noted Gupta’s devotion of a huge amount of time and effort to a very wide variety of socially beneficial activities, such as the Global Fund to Fight AIDS, TB and Malaria, the Public Health Foundation of India etc. Such activities were illustrations of his big heart and helping hand. The Court hailed Gupta’s “extraordinary devotion, not only to humanity writ large, but also to individual human beings in their times of need”.

On the other hand, Gupta's criminal acts represented the very antithesis of his humanitarian record. With Goldman Sachs in turmoil but on the verge of being rescued by an infusion of $5 billion, Gupta, within minutes of hearing of the transaction, tipped Rajaratnam, so that the latter could trade on this information in the last few minutes before the market closed. This was the functional equivalent of stabbing Goldman in the back.

The Court had to balance both extremes while awarding a sentence to Mr. Gupta. Taking Court observed that “meaningful punishment is still necessary to reaffirm society's deep-seated need to see justice triumphant. No sentence of probation, or anything close to it, could serve this purpose.”

The Court took note of the provisions of the United States Code which require that the Court had to consider the need to afford specific deterrence and general deterrence. As to specific deterrence (i.e. deterring the convict repeating it in future), the Court held that loss of reputation suffered by Mr. Gupta would deter him from repeating his transgressions in future and no further punishment is needed to achieve this result. The need for general deterrence (i.e. to set an example to others), however, suggested different conclusion. Insider trading is an easy crime to commit but a difficult crime to catch. It was necessary to send out the message “when you get caught, you will go to jail”. After carefully weighing the above, the Court sentenced Rajat Gupta to 24 months' imprisonment, concurrent on all counts, to be followed by one year of supervised release and a fine of $5,000,000.

Indians need not despair that, unlike US, legal system moves slowly in India. Two recent instances offer rays of hope. One, the death sentence of Ajmal Kasab for terrorist acts on 26-11-2008 upheld by the Supreme Court in 2012. The other being two Sahara companies found guilty by the Supreme Court of public issue of securities (Optionally Fully Convertible Debentures) in the garb of private placement in 2008. Companies ordered to refund amounts collected from public. This whole case was successfully handled by SEBI, Securities Appellate Tribunal and the Supreme Court in two years flat from 2010 to 2012.

Income Tax Calculator-A Necessity

Everybody is aware of the word income tax. Each country has a rule of its own in terms of income tax calculations. In the modern times a person can easily calculate his or her income tax through the help of income tax calculator . There are several websites which has the programme of tax calculator. Speaking about India, the tax levels have increased from the year of 1950. During 1971 there were a total of 11 slabs in tax where the maximum tax rate was 93.5 % which included the surcharges. During 1974 the maximum rate was 97.5 %. The tax was then reduced due to the income tax circulars as the tax evasion was increasing. The tax rate was then decreased to 40 % during 1993.

The income of a person when does not exceed a certain level is not liable to tax is an asset. It becomes chargeable under the income tax. The rates are agreed by the income tax circulars and finance acts in a given assessment year and is determined according to a person’s residential status. Thus this tax is the tax which is payable at a rate which is enacted by Union Budget, every year on the basis of total income which is earned by each and every person in the preceding year. The charge is completely based upon the type of income of a person. Be it a capital or be it revenue. The educational cess becomes applicable at the rate of 3 & over the income tax of the person. The surcharge is not applicable.

Residential status also becomes necessary which is clearly stated clearly in the income tax circulars. There are basically 3 status of the residentially. The first one is for the ordinary residents. Under this, the person must reside in India for minimum 182 days in the previous year or must have a stay in India for 365 days in the last 4 years in the previous year. The regular residents are taxable always on their respective income which is earned in India as well as in the abroad. If the income of the non residential Indian is acquired from any kind of trade or business which is headquartered in India they are compelled to give a small amount of tax.

Basically the complete income of a resident is separated into 5 major parts. The first part is the income from the salary; the second can be attributed to the money coming from house property. The third one is the income which is generated from any profession or business of the person, the fourth one is in the form of capital gain and lastly there is the income from various other sources. The income tax circulars gives all the details regarding the rules and regulations and the tax calculator comes into handy which can be used by many to know the exact amount which must be given to the government.