Payment of one time lease premium to acquire a leashold land isn’t subject to tax deduction under sec. 194-I

Where payment of lease premium was not made on periodical basis but it was one-time payment to acquire land with right to construct a commercial complex thereon, section 194-I had no application on deposit of such lease premium
In the instant case the Mumbai Development Authority offered certain land on lease to assessee for a period of 80 years for certain consideration comprising of lease premium. The assessee paid said premium in two installments. The AO held that the assessee was liable to deduct tax at source on lease premium under section 194-I.The CIT (A) held in favour of assessee. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) In Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC), the Supreme Court held that the onus was on the Revenue to demonstrate that premium has been camouflaged as advance rent and the AO, in the instant case has not brought on record any material to indicate that the rent has been suppressed and the premium has been inflated.

2) Thus, undoubtedly premium in relation to leased land was on capital account not liable to be classified as revenue outgoing;

3) Since the payment of lease premium was not to be made on periodical basis but it was one- time payment to acquire land with right to construct a commercial complex thereon, section 194-I was not applicable

4) Therefore, the impugned sum does not constitute advance rent, but it was to be classified as lease premium for capital expenditure not falling within the operative realm of section 194-I -  ITO v. Indian Newspapers Society [2013] 37 taxmann.com 401 (Delhi - Trib.)

No tax on FTS if service utilized for business carried abroad; upgradation of existing website is revenue exp.

In the instant case, two moot questions were raised before the ITAT which were as under:

A. Whether website development charges were deductible as revenue expenditure?

B. Liability of tax deduction on overseas commission

On first issue, it held in favour of assessee as under:

1) Commission paid to non-residents for services rendered outside India does not accrue or arise in India;

2) Hence, no TDS was deductible from such commission and such commission couldn’t be disallowed under section 40(a)(i);

3) Even if services rendered by the non-resident did fall within the definition of "fees for technical services, the commission paid would not
be taxable in India as clause(b) of section 9(1)(vii) would save the assessee.

On second issue, it held in favour of assessee as under:

1) Expenses incurred for upgradation of an existing website ought to be distinguished from expenses for development of a new website;

2) The former was revenue expenditure and the latter was capital expenditure, resulting in creation of an intangible asset;

3) Expenditure on upgradation of existing website was equivalent to maintenance of an existing asset. Thus, it was revenue expenditure - Mahindra Holidays & Resorts India Ltd. v. JCIT (LTU) [2013] 38 taxmann.com 207 (Chennai - Trib.)

Hollow rooms with basic amenities can’t be said to be an habitable house; not eligible for sec. 54F relief

Where house constructed by assessee was not found to be habitable, deduction under section 54F could not be allowed

In the instant case the assessee claimed deduction under section 54F on ground that she had purchased a house. When the AO carried enquiry, he found that there was no construction as mentioned in the sale deed. Instead, there was a small construction consisting of two rooms made of hollow bricks. Accordingly, the claim of deduction was disallowed by AO. Further, the CIT (A) upheld the order of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) The assessee had not placed necessary evidence in support of his claim to show that the said construction was in habitable condition. A construction in inhabitable position couldn’t be equated with a residential house;

2) If a person cannot live in premises, then such premises cannot be considered as a residential house. Investment in the construction would be complete as a house only when such house becomes habitable;

3) The evidence brought on record by the AO clearly shows that the property purchased by the assessee would not fall within the description of residential house. Thus, the claim of the assessee couldn’t be allowed under section 54F - Smt. Usharani Kalidindi v. ITO [2013] 37 taxmann.com 360 (Hyderabad - Trib.)

Share issue exp. remains a capital expenditure even if SEBI disapproves of issue of shares; no sec. 37(1) allowance

Share issue expenses cannot be allowed as revenue expenditure even when shares could not be issued due to non-approval by SEBI

In the instant case the assessee incurred expenditure for issuing shares. However, on account of non-clearance from the SEBI, shares could not be issued. It claimed deduction for share issue expenses as revenue expenditure by contending that since the expenditure did not yield any desired result, the character of the expenditure had to be decided on the basis of the result that would yield benefit in assessee's business. The AO and the CIT (A) disallowed such expenses. The Tribunal also affirmed the view of the AO. Aggrieved assessee filed the instant appeal.

The High Court held in favour of revenue as under:

1) The impugned expenses were incurred by the assessee for the purpose of widening its capital base. The assessee, admittedly, took steps to go
in for public issue and after incurring expenditure, just before the public issue, by reason of the orders from the SEBI, the assessee could not go in for public issue. Thus, the efforts were aborted;

2) There was no justifiable ground to accept the plea of the assessee that on account of the abortive efforts, the expenditure incurred would lose its character as capital expenditure for the purpose of allowing it as a revenue expenditure - Mascon Technical Services Ltd. v. CIT [2013] 37 taxmann.com 253 (Madras)

NR can claim benefit of first proviso to Sec. 48 along with Sec. 112 concessional rate; HC quashes Cairn India ruling

Proviso to section 112(1) doesn’t deny benefit of lower tax rate of 10% to a non-resident investor availing benefit of exchange rate neutralization under first proviso to section 48. It is incorrect to say that 10% rate under proviso to section 112(1) applies only where indexation benefit under 2nd proviso to section 48 applies and still assessee opts to not avail it.

The High Court held as under:

1) The proviso to Section 112(1) doesn’t state that an assessee, who had availed benefit of the first proviso to Section 48, was not entitled to benefit of lower rate of tax. The said benefit couldn’t be denied because the second proviso to Section 48 was not applicable;

2) The stipulation for taking advantage of the proviso to Section 112(1) is that the aggregate of long term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48.;

3) First proviso to Section 48 stipulates that on sale of the securities by the non-resident, the consideration received in Indian rupee should be reconverted into the same foreign currency;

4) For a non-resident who has utilized foreign currency for purchase of securities in Indian rupee, inflation in India was immaterial and inconsequential. He is most concerned with exchange rate fluctuation and his true and actual gain should take into account the exchange rate fluctuation;

5) The second proviso is applicable to all others including non-residents, who are not covered by the first proviso and they are entitled to benefit of cost of indexation which neutralize inflation;

6) It is a misnomer and wrong to state that inflation alone contributes and is the determinative factor in exchange rate fluctuation. Inflation by itself cannot be the sole or even a primary factor in exchange rate depreciation. These are several others complex factors and parameters which can affect the foreign exchange rate fluctuation.

7) The first and second proviso to section 48 cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective. Thus, it couldn’t be deemed that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose;

8) Thus, it was to be held that assessee was taxable at concessional rate of 10% as per proviso to section 112(1) - Cairn UK Holdings Ltd. v. DIT [2013] 38 taxmann.com 179 (Delhi)

Software license for one year doesn’t confer any enduring benefit; licensing fee held as revenue expenditure

In the instant case the assessee had incurred expenses towards software license and claimed the same as revenue expenditure. The AO disallowed the claim of the assessee. On appeal, the CIT (A) reversed the order of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) When the assessee had acquired the license to use the software and the license was valid only for one year, it might be useful to the assessee for various functions like sales, finance, logistics operations and use of ERP system and it might confer certain benefits to the assessee but it couldn’t be said that there was enduring benefit to the assessee;

2) Thus, respectfully following the decision of the Bombay High Court in the case of CIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 taxmann.com 507 and taking into consideration the facts of the case, it was to be held that the expense incurred by the assessee to acquire the software license was revenue expense – Dy. CIT v. Danfoss Industries (P.) Ltd. [2013] 37 taxmann.com 240 (Chennai - Trib.)

IPL in FEMA violation; Special Director had to form an opinion before calling BCCI President for personal hearing

Special Director was directed to first form his opinion whether to proceed against petitioner President of BCCI, for remittances in violation of FEMA before calling petitioner for personal hearing as per rule 4 of Adjudication Rules

Facts:

1. The petitioner was President of BCCI during years 2008 to 2011. In 2009, after the second edition of IPL at South Africa, the Assistant Director, Directorate of Enforcement filed a complaint with Special Director alleging that the provisions of FEMA had been violated by the Board and its officers while conducting second edition of IPL;
2. On basis of the complaint, show-cause notices were issued to the Board and its office bearers calling upon the Board to show cause in respect of a particular conduct/transaction amounting to violation of the Act;
3. The petitioner was also called upon in each of the notices to show cause as to why penalty should not be imposed upon him in his capacity as the President of the Board in terms of section 42. Special Director issued notice to petitioner for personal hearing according to rule 4 of Adjudication Rules;
4. Petitioner filed writ petition contending that he had no role in remittances and receipts of foreign exchange in 2009 and a separate committee had been constituted to administer IPL with a separate bank account to be operated by Treasurer, BCCI.

The High Court held as under:

1. The petitioner was not in charge of and responsible to BCCI for aforesaid matters, as far as opening and operating of bank account of IPL or obtaining permission of Reserve Bank of India for making remittances or receipts of foreign exchange was concerned;
2. It would be necessary for adjudicating authority to form an opinion whether petitioner could at all be considered as covered by substantive part of section 42(1), since petitioner himself was not in charge for opening and operating bank accounts involving receipts and remittances of foreign exchange to parties outside India;
3. That communication calling petitioner for personal hearing was to be set aside since adjudicating authority had not considered aforesaid aspects before forming an opinion to proceed further with inquiry under sub-rule (4) of rule 4 of Adjudication Rules;
4. The Special Director was to be directed to first form his opinion, after recording reasons before proceeding against petitioner with regard to impugned show-cause notices in accordance with rule 4(3) of Adjudication Rules – Shashank Vyankatesh Manohar v. Union of India [2013] 37 taxmann.com 151 (Bombay)

Institution-wise aid of about 45% entitles a society for sec. 10(23C) exemptions

For computing 'substantial government aid' so as to avail section 10(23C) exemption, receipts of individual institution are to be considered, not aggregate receipts of various institutions run by a society; 45 per cent government aid is substantial for such purpose

In the instant case two issues that came for consideration of the Tribunal were as under:

a) Whether the aggregate gross receipts of various institutions run by the assessee-society were to be considered for the purpose of section 10(23C)(iiiab) or the individual receipts of each institution run by the assessee are to be considered?

b) Whether the assessee had received substantial Govt. aids to be eligible for exemption under 10(23C)(iiiab)?
On first issue, it held as under:

For purpose of applying provisions of section 10(23C), receipts of individual institution are to be considered, and not aggregate gross receipts of various institutions run by assessee.

On second issue, it held as under:

1) The percentage of grant was within the range of 41% to 82% if considered individually for each institution. If the percentage was considered for the society as a whole even then the percentage was 44.52% and 45.15% in the two years;

2) The Hon'ble Court in case of CIT v. Deshiya Vidyashala  [I.T.A. No.1133 of 2008, dated 8.2.2011] has considered 34.33% as substantial aid for the purpose of eligibility under the above said sections;

3) In the instant case the percentage of grants in aid with respect to total receipts are more than 34.33%. Thus, following the case of Deshiya Vidyashala (supra) with respect to definition of substantial interest, aid of more than 34. 33% was to be considered as substantial aid.

Therefore, the assessee’s institutions were substantially aided by the Govt. and, hence, were eligible for exemption under section 10(23C)(iiiab) - Jat Education Society v. ITO [2013] 37 taxmann.com 187 (Delhi - Trib.)

School to apply sec. 194C and not sec. 194I on transport contract if transporter incurs running cost and keeps possession of vehicle

Contract awarded by assessee-school to transporter for carrying students would be covered by sec. 194C and by not sec. 194I if bus remained in possession of transporter and all running and maintenance costs were incurred by him

In the instant case the assessee-school awarded contracts to various transporters for carrying its students from their homes to school and from school back to homes. It had deducted tax under section 194C for making payments to bus owners. The AO held that the assessee should have deducted tax under section 194I on such payments. On appeal, the CIT(A) reversed the order of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The object of the assessee to enter into such agreement was a simple activity of carrying its students from their homes to the school and similarly from school back to their homes;

2) The assessee had no responsibility whatsoever regarding the buses to be utilized for that purpose which was the sole responsibility of the transport contractor;

3) The transport contractor only was liable to keep and maintain the required number of buses for such activity at its own expenses with the specified standards;

4) Therefore, the said contract was purely in the nature of services rendered by the transport contractor to the assessee. The assessee was not having any responsibility whatsoever regarding the transport vehicles used in such activity;

5) The assessee itself had not utilized the buses but they were used by the transport contractor for fulfilling the obligations set out in the contract. Thus, the aforesaid payments were not covered in the definition of 'rent' which was defined in Explanation to section 194-I,;

6) Therefore, the provisions of section 194-I could not be applied in the instant case. The assessee had rightly deducted tax at source under the section 194C on the aforesaid payments – ACIT (TDS) v. Delhi Public School [2013] 37 taxmann.com 211 (Delhi - Trib.)

Transactions among Indian subsidiaries pursuant to contract with their parent co’s out of purview of TP

Assessee sold its medical imaging business to another Indian Co. namely, 'C' Ltd. in pursuance of a transaction whereby holding co. of assessee sold its imaging business to holding co. of 'C' on global basis. Both transactions were independent of each other, therefore, revenue authorities were not justified in making TP adjustment to such transaction.

In the instant case, assessee, an Indian company sold its medical imaging business to ‘C’, Indian company disclosing sale transaction as normal domestic transaction. On perusal of documents, AO concluded that such transaction was on global basis, wherein holding company of assessee sold its imaging business to C Inc. TPO proceeded to determine ALP based on worldwide revenue break up amongst countries submitted by assessee.

The Tribunal held as follows:

a) It was undisputed that the transaction involved two domestic companies who were individual and independent subsidiaries of their own and independent holding companies;

b) Transaction could only become international transaction, if either both of the associated enterprises (‘AE’) or one of the AEs was non-Resident.

c) As per the wordings of section 92B, there had to be an AE, with whom there existed international transaction, only then it could be examined as to whether international transaction with ‘such other person’ existed or not;

d) Transactions entered into by holding foreign companies and subsidiary Indian companies were independent of each other. Though the instant transaction was as a consequence of the global agreement entered into by the holding companies, yet the entire exercise of transfer of imaging segment was independently done on its own terms by the assessee and the other party, i.e, 'C' India.

e) No element of international transaction was involved in sale of imaging segment by assessee of its business to C and it was purely a domestic transaction.

f) Therefore, the impugned adjustment made by revenue authorities was to be set aside - Kodak India v. Addl.CIT [2013] 37 taxmann.com 233(Mumbai –Trib.)