An association of regional stock exchanges sets up to ensure secured trading and safety of funds gets trust registration

Where main object of assessee-trust was to protect investors by way of creating a fund, which was a public charitable fund set up to advance an object of general public utility, assessee became entitled to get registration under section 12AA

Facts:

a) The assessee-trust was formed by coming together of 23 regional Stock Exchanges of India to provide a common platform for trading in shares and securities;

b) Its main object was to protect investors by way of creating a fund, which could provide compensation to them in case of loss on account of default by any member of a participating recognized Stock Exchange;

c) The assessee made an application under section 12A for grant of registration which was rejected by competent authority. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) An object beneficial to a section of the public is an object of general public utility. To serve a charitable purpose, it is not necessary that the object leads to the benefit of the whole mankind or all persons in a particular Country or even State;

2) It would be sufficient if the intention is to benefit a section of the community, sufficiently defined and identifiable by some common quality of a public or impersonal nature;

3) What is to be seen is the intention to benefit a section of the public as distinguished from a specified individual or group;

4) Once it was decided that the assessee’s principal object was the advancement of an object of any general public utility, it would not be material if the income by way of contributions from the member stock exchanges was otherwise exempt under section 10(23EA) or not;

5) Thus, the fund created by assessee was a public charitable fund having been set up to advance an object of general public utility, assessee was entitled to get registration - Inter-connected Stock Exchange Investors Protection Fund ( ISE IPF) v. Director of Income-tax (Exemption) [2013] 38 taxmann.com 329 (Mumbai - Trib.)

Moisturex cream meant for curing skin is medicament; SC lays down principles to identity medicament products

'Moisturex' cream having medicinal ingredients and meant for curing of skin ailments/diseases is a medicament (duty 15%) and not cosmetic (duty 70%)

Facts:

The assessee was engaged in manufacture of product 'Moisturex', which it sought to classify as 'medicament', liable to duty at 15% under Heading 30.03. However, the Department classified product as cosmetics liable to duty @ 70% under Tariff Heading 33.04.

The Supreme Court held in favour of assessee as under:

1) For deciding whether a product is 'medicament' following principles are relevant :

a) Presence of pharmaceutical ingredients that have therapeutic or prophylactic or curative properties, is relevant and proportion of such ingredients is not decisive;

b) Even if a product is sold without a prescription of a medical practitioner or over/across counter, it may be 'medicament';

c) People who actually use such products must understand it to be 'medicament';

d) Its primary function has to be "cure" and not "care", i.e., it must be used mainly in curing or treating ailments or diseases.

2) Accordingly, 'Moisturex' cream having medicinal ingredients, though in small quantities, is not primarily intended for protection of skin but for curing of skin ailments/diseases, is a medicament (duty @15% : Tariff Heading 30.03) and not cosmetic (duty @70% : Tariff Heading 33.04) - Commissioner of Central Excise, Mumbai-IV v. Ciens Laboratories [2013] 38 taxmann.com 337 (SC)

Inevitable TDS obligation even if deduction for impugned exp. is not claimed

Assessee is liable to deduct tax at source on interest payments, even if it has not claimed same as deduction while computing its total income

Facts:

a) The assessee-company credited interest to its sister concern’s account without deducting tax under section 194A. The Assessing Officer treated assessee as an 'assessee-in-default' and levied interest on it under section 201(1A);

b) On appeal before the CIT (A), the assessee contended that it could not be treated as an 'assessee-in-default', when it had not claimed interest amount as expenditure. The CIT (A) dismissed the assessee's appeal. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) Provisions of section 194A(1) provide that the person responsible to pay the interest is liable to deduct tax at source at the time of credit or payment, whichever is earlier. Since the section uses the term 'any income by way of interest', it should be viewed from the angle of the payee and not from the angle of the person making the payment;

2) The accounting or tax treatment given by the payer in respect of interest paid by him may not be relevant at all for the purposes of section 194A. So long as the interest amount constitutes "income" in the hands of recipient, the payer shall be liable to deduct tax at source on the interest amount so paid;

3) Thus, even if the payer had disallowed the expenditure under section 40(a)(ia) or did not claim the same as expenditure at all, he would still be liable to deduct tax at source under section 194A on the interest amount so paid, if the said payment was liable to TDS;

4) Further, the provisions of section 40(a)(ia) do not override the provisions of section 201. It provides only for deferment of the allowance and does not provide for absolute disallowance. Its objective appears to be to compel the assessee to deduct tax at source in order to claim the relevant expenditure as deduction;

5) Section 201 provides for treating an assessee as an assessee-in-default who has failed to deduct or pay the TDS amount. Its objective is only to compensate the Government for the failure of an assessee to deduct or pay the TDS amount;

6) Thus, the provisions of section 40(a)(ia) and section 201 operate on different objectives. Accordingly, the assessee was liable to deduct tax at source on interest payments, even if it had not claimed the same as deduction while computing its total income. The revenue was entitled to initiate proceedings under section 201 for such failure. Thus, the order of CIT(A) was to be upheld  - Agreenco Fibre Foam (P.) Ltd v. ITO(TDS) [2013] 38 taxmann.com 155 (Cochin - Trib.)

100% EOU carries on its business in India, its source of income is in India; technical service used by it is FTS

The Tribunal held as under:

1) Irrespective of the fact whether an India based business is one hundred per cent export oriented unit or not, it is still a business carried on in India, and it cannot, therefore, be covered by the first limb of exception envisaged in section 9(1)(vii)(b);

2) Even if entire products are sold outside India, the fact of such export by itself does not make business having been carried outside India;

3) Once the manufacturing facilities are outside India and the customers are also outside India, such a situation will indeed be covered by the exception visualized in section 9(1)(vii)(b), however, merely because the user of services was a one hundred per cent export unit, it couldn’t be said that the technical services were used "for the purpose of making or earning any income from any source outside India", and, accordingly, would be outside the ambit of fees for technical services under section 9(1)(vii) - Metro & Metro v. ACIT [2013] 39 taxmann.com 26 (Agra - Trib.)

Sec. 54EC exemptions allowable despite deeming fiction of sec. 50 treating capital gains as short-term ones

Where capital gain arose out of long-term capital asset and was invested in specified assets, exemption under section 54EC could not be denied due to deeming fiction created under section 50

The High Court held in favour of assessee as under:

1) There is nothing in Section 50 to suggest that the fiction created in it is not only restricted to Sections 48 and 49 but also applies to other provisions;

2) Section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of Section 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49;

3) It is well-established, in law, that a fiction created by the Legislature has to be confined to the purpose for which it is created. The fiction created under Section 50 is confined to the computation of capital gains only and cannot be extended beyond that;

4) Legal fiction created under section 50 is restricted to computation of capital gains; such deeming fiction cannot restrict application of section 54EC which allows exemption of capital gains, if assessee makes investment in the specified asset;

5) Exemption provided under section 54EC couldn’t be denied to the assessee due to deeming fiction created under section 50. Thus, the assessee couldn’t be charged to capital gains when short-term gains of long-term capital assets were invested in the areas specified under the law – CIT v. Aditya Medisales Ltd [2013] 38 taxmann.com 244 (Gujarat)

HC grants extra time to assessee for repatriation of forex realizing economic crisis in Russia

Due to disintegration of the USSR and economic crisis in Russia, the buyers were unable to remit payment within time and, therefore, assessee's application seeking extension of time to realize convertible foreign exchange in India was allowed

Facts:

a) The assessee, engaged in manufacture and export of certain goods, had exported almost 100 per cent of its produce to erstwhile Russia or USSR. For the purpose of taxation, it wanted to claim benefit of Section 80HHC in respect of profits derived from exports;

b) As per section 80HHC, to avail of the said benefit, the assessee was required to receive the sale proceeds in convertible foreign exchange within a period of six months from the end of the previous year;

c) During relevant period, on assessee’s failure to receive part of sale proceeds in convertible foreign exchange within stipulated period, it filed an application seeking extension of time to realize such proceeds;

d) The Commissioner rejected assessee's application.  Against said order, assessee filed the instant writ.

The High Court held as under:

1) The Commissioner had not rebutted or denied that assessee was factually correct when it had stated that due to economic crises, fall or depreciation in value of Russian currency payments were not being received by the Indian exporters from buyers in the USSR or countries which were earlier part of the USSR;

2) He had also not adverted to fact that RBI had realized said problem and had taken notice of unprecedented situation and hardships faced by exporters from India;

3) It was also undisputed fact that assessee had realized entire export proceeds before expiry of time-limit for completing assessment. Thus, the impugned order was to be set aside and assessee's application seeking extension of time was to be allowed - York Exports (P.) Ltd. v. CIT [2013] 38 taxmann.com 205 (Delhi)

Presumption as to valid service of notice holds good if same is not returned back to department

Where revenue dispatched notice under section 143(2), and the fact that notice was not received back raise a presumption of service under Section 27 of the General Clauses Act, 1897

Facts:

a) Notice under section 143(2) was claimed to have been issued by revenue under section 143(2);

b) The assessee raised an objection that notice was not served within 12 months from end of month in which return was furnished and, thus, it was null and void;

c) Despite this objection, revenue proceeded to finalized assessment. Thus, the dispute, in the present case, revolves around the issuance and service of notices issued under Section 143(2) of the Act.

The High Court held as under:

1) The averments in the reply, duly supported by copy of the notice and the fact that notice was not received back raised a presumption of service under Section 27 of the General Clauses Act, 1897;

2) The onus to rebut the presumption of service of notice sent by post, lies upon the petitioner;

3) The petitioner has failed to discharge this onus. Mere denial by the petitioner that notice was never received, was insufficient, to record a finding in favour of the petitioner;

4)  Thus, the instant petition was dismissed as there was no error in the impugned order or proceeding - Shahbad Cooperative Sugar Mills Ltd. v. Dy.CIT [2013] 38 taxmann.com 204 (Punjab & Haryana)

Voluntary disclosures don’t absolve one from concealment penalty; plea as to ‘buy peace’ is irrelevant

Voluntary disclosure does not lead to assessee being free from mischief of penal proceedings under section 271(1)(c)
The Supreme Court held as under:

1) Explanation to section 271(1) raises a presumption of concealment, when a difference is noticed by the Assessing Officer, between reported and assessed income. The burden then shift on the assessee to show otherwise, by cogent and reliable evidence;

2) When the initial onus placed by the Explanation, has been discharged by assessee, the onus shifts on the revenue to show that the amount in question constituted the income and not otherwise;

3) The Assessing Officer shall not be carried away by the plea of the assessee like ‘voluntary disclosure’, ‘buy peace’, ‘avoid litigation’, ‘amicable settlement’, etc., to explain its conduct;

4) Assessee had only stated that he had surrendered the additional sum with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income-tax department. Statute does not recognize those types of defences under the Explanation 1 to section 271(1)(c);

5) It is trite law that the voluntary disclosure does not free the assessee from the mischief of penal proceedings under section 271(1)(c). The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he has to be absolved from penalty;

6) The surrender of income in this case was not voluntary in the sense that the offer of surrender was made in view of detection made by the Assessing Officer in the search conducted in the sister concern of the assessee;

7) The Assessing Officer had to satisfy whether the penalty proceedings were initiated or not during the course of the assessment proceedings and the Assessing Officer was not required to record his satisfaction in a particular manner or reduce it into writing. Thus, there was no illegality in action of department in initiating penalty proceedings - MAK Data (P.) Ltd. v. CIT (2013) 38 taxmann.com 448 (SC)

SC: Petitioner is stool pigeon of business houses anxious to remove SEBI’s Chairman; writ for his removal dismissed

Writ seeking removal of Mr. UK Sinha from the post of Chairman of SEBI dismissed
The Supreme Court held as under:

1) It couldn’t be said that deputation of Mr. UK Sinha (Mr. Sinha) as a Chairman of SEBI under rule 6(2)(ii) was approved in colourable exercise of power as he was on deputation with UTI AMC since the year 2005 and was in no way responsible for being set on deputation initially under rule 6(2)(iii) and subsequently under rule 6(2)(i);

2) He had no role to play in the grant of approval of deputation, once he had fully disclosed that he had been working as Joint Secretary, Banking;

3) UTI AMC was not a ‘Government company’ under section 617 of the Companies Act and it was for the shareholder to decide what process to follow and whom to appoint;

4) As per the consolidated guidelines, the deputation of Mr. Sinha was covered under rule 6(1)(i) of the IAS Cadre Rules and his recommendation and appointment were not vitiated by mala fide exercise of powers. The search-cum-selection committee, after scrutinizing qualification and experience of the short-listed candidates, unanimously placed his name on top of merit list;

5) He had no role to play in the whole procedure except for accepting the invitation of the search-cum-selection committee for interaction. His appointment was strictly in conformity with the procedure prescribed by service rules, i.e., rules 16 and 26 of the AIS (DCRB) Rules, 1958;

6) The petitioner had not placed on record any material to establish that any conspiracy was hatched to ensure the selection of Mr. Sinha. He had unjustifiably attacked the integrity of the entire selection process. He did not satisfy the test of utmost good faith which was required to maintain public interest litigation;

7) This was not a petition to protect the Fundamental Rights of any class of down trodden or deprived section of the population. It was more for the protection of the vested interests of some unidentified business lobbies;

8) The petitioner was a stool pigeon acting on the directions of the business houses like Sahara and Reliance. It is a well known fact that in recent times, SEBI has been active in pursuing a number of cause célèbre against some very powerful business houses;

9) Therefore, the anxiety of these business houses for the removal of the present Chairman of SEBI was not wholly unimaginable. There was no merit in this petition which was, accordingly, to be dismissed - Arun Kumar Agrawal v. Union of India [2013] 38 taxmann.com 300 (SC)

Converting a leasehold property into a freehold property improves title of asset; holding period reckoned from date of lease

Conversion of rights of lessee in property from leasehold right into freehold right only results in improvement of his or her rights over property and it would not have any effect on taxability of gain from such property, which is related to period over which property is held

Facts:

1) The assessee purchased a property on leasehold basis in year 1984. She got said property converted into freehold property in year 2004 and thereupon sold it. . The capital gain arising therefrom was declared by assessee as long-term capital gain (‘LTCG’);

2) The Assessing Officer held that since the property was acquired by converting the leasehold right into freehold right and was sold within three years, gain arising thereform was taxable as short-term capital gain.

3) On appeal, the CIT(A) held that capital gain arising from sale of such property was to be taxed as LTCG. Further, the Tribunal upheld the order of the CIT (A). The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) The difference between the 'short-term capital asset' and 'long-term capital asset' was the period over which the property had been held by the assessee and not the nature of title over the property;

2) The conversion of the rights of the lessee in the property from having leasehold right into freehold right was only by way of improvement of her rights over the property and it would not have any effect on the taxability of gain arising from such property, which was related to the period over which the property was held by assessee;

3) In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on 31.3.2004, (i.e. after holding it for more than three years) after the leasehold rights were converted into freehold rights on the same property which was in her possession. Thus, gain arising from such property would be taxable as LTCG  -  CIT v. Smt. Rama Rani Kalia [2013] 38 taxmann.com 176 (Allahabad)