Sec. 40(a)(ia) contemplates actual tax deduction and not mere debit entry in account of payee

The Tribunal held in favour of revenue as under:

1)  Deduction of tax at source as contemplated by section 40(a)(ia) needs to be real and not illusory;

2)  Deduction of tax at source implies subtraction of the amount of tax from the amount payable by the assessee to the payee out of which tax is deductible at source before it is paid to the payee or is credited to the account of the payee;

3)  It is after deduction of such tax from the amount payable to the payee that the assessee can pay/credit the remaining amount;

4)  The law contemplates real deduction of tax at source out of amount payable by the assessee and not mere book entries by which such tax is debited to the running account of the payee in the books of the assessee, unless such entries are supported by actual deduction;

5)  There was no evidence before the revenue that tax was actually deducted by the assessee at source out of the amounts paid or credited by it to the payees, although such tax was deductible at source;

6)  Unless the assessee proves that it has actually deducted the tax at source out of amounts paid/credited in favour of the payees, it was not possible to delete the impugned disallowance. Therefore, the appeal of the assessee was liable to dismissed. - Atul Auto Ltd. v. JCIT [2013] 40 taxmann.com 394 (Rajkot - Trib.)

Freezing bank account not akin to seizure of currency; assessee can't ask for de-freezing of bank account under Customs Act

Though 'goods' defined under section 2(22) of Custom  Act include currency, yet, freezing of bank account cannot amount to seizure of currency and hence, assessee couldn’t seek de-freezing of bank account under section 110, if no notice was issued within 6 months of such freezing.

Facts:                                    

a)  The petitioners were importing high value pesticides/insecticides/ hazardous products in guise of Sodium Bi-Carbonate;

b)  Said transactions were pending investigation. The Department freezed petitioner's bank account;

c)  The petitioner argued that since no show-cause notice was issued against it under section 124 even after expiry of 6 months from freezing of account, it was liable to be de-freezed as per section 110.

The High Court rejected petitioner’s claim with the following observations:

1) If notice required under section 110(2) was not served within 6 months or extended time-limit, goods were liable to be returned;

2) Sections110 and 124 are independent, distinct and exclusive of each other. Even if any seized goods are returnable in terms of section 110, proceedings for confiscation of goods under section 124 may still continue;

3) Section 110(3) deals with seizure of documents or things which in opinion of concerned officer would be relevant to any proceedings under Act;

4) Freezing of bank account was not seizure of any document or thing useful or relevant to any proceedings under the Act; rather freezing of account was only with a view to stop petitioner from withdrawing proceeds of alleged violations under the Act;

5) Though 'goods' as defined under section 2(22) include currency, yet, there is no precedent to show that freezing of bank account would amount to seizure of currency. Since freezing of bank account was not seizure of 'goods' as envisaged under section 110, petitioner was not entitled to de-freezing of bank account unconditionally;

6) Hence, the amount deposited in said bank account after date of freezing account was to be released, subject to furnishing of a bank guarantee in respect of such amount. -  Ravi Crop Science v. Union of India [2014] 41 taxmann.com 69 (Delhi)

LO promoting sales of foreign-co. is taxable; incentivising sales force is sales promotional deed, held ITAT

Facts:

1)    The assessee, M/s Brown & Sharpe Inc. incorporated in USA,had started a LO in India for which permission of the RBI was taken.

2)    The Assessing Officer held that since LO was promoting sales of assessee’s product, income attributable to LO’s activities was taxable in India.

The Tribunal held in favour of revenue as under:

1)  The assessee-company was registered with the Registrar of Companies in India for carrying on the business. The LO, apart from having Chief Representative Officer and other staff, was also having a technical expert;

2)  The employees of LO were promoting the sales of the goods of the assessee-company as per service conditions.There was a sales incentive plan by which employees were provided the incentive for achieving the sales target and the performance of the employees was being judged by the orders secured by the assessee-company;

3)  All these activities established that the LO of the assessee was promoting the sales of the assessee-company in India and, therefore, the revenue was fully justified in holding that the income attributable to LO was taxable in India;

4)  The liaison office received more amount than the expenses actually incurred by it. Thus,the sum received by it over and above the expenses actually incurred, year after year, were rightly treated as income by revenue. - Brown & Sharpe Inc. v. ACIT (2014) 41 taxmann.com 345 (Delhi - Trib.)

Bal Bharti School, existing solely for profit motive, aims at charging higher fees; no sec. 10(23c) relief to it

Facts:

a)The assessee, a society registered under the Societies Registration Act, moved an application before the Chief CIT praying for grant of exemption under section 10(23C)(vi). It claimed that it was engaged in the activity of imparting education;

b)The Chief CIT considered the reply of the assessee and rejected the application. Aggrieved by the order of Chief CIT the assessee filed the instant writ.

The High Court dismissed writ with following observations:

1) The Chief CIT was competent to call for such documents including annual accounts or information from the assessee to check the genuineness of the activities;

2)  He has been conferred with powers to ascertain while judging the genuineness of the activities as to whether the assessee applies its income wholly and exclusively to the objects for which it is established;

3)  He recorded his finding that in each year the surplus as shown by the assessee was increasing and was used for activities which were aimed at enhancing the income of the institution. This also suggested that the fees charged from the students was on the higher side as in each year there was an element of profit;

4)  His findings clearly showed that the assessee did not exist solely for educational purposes and its main motive was to make profit. The diversion of fund for personal use had been noted in the impugned order. 

5) Thus, the Chief CIT didn’t commit any error of law or facts to reach the findings that the assessee did not exist solely for educational purposes, as its motive seems to be making profit and it existed for purposes of profit;

6)  The application for grant of exemption under section 10(23C)(vi) was correctly rejected. - Bal Bharti Nursery School v. Chief CIT [2013] 40 taxmann.com 301 (Allahabad)

New beginning in New Year - CBDT exempts deduction of tax from service tax component if it's charged separately

CBDT had issued a Circular no. 4/2008 dated 28-04-2008, wherein it was clarified that TDS under section 194-I was required to be made on the amount of rent paid/payable without including service tax.

Thus, the practice prevalent in the industry till now is that no TDS is charged on service tax component comprised in the rent as per provisions of sec. 194-I. In all other cases, tax is being deducted on sums paid to residents including on service tax component comprised therein.

This position was settled one and then came the verdict of Rajasthan High court in case of CIT (TDS) v. Rajasthan Urban Infrastructure [2013] 37 taxmann.com 154 (Rajasthan) in which it was held that if service tax was paid separately and it was not included in fees for professional services or technical services, no TDS was required to be made on the service-tax component under sec. 194J. Yet this Ruling was applicable to sec. 194J and it could be relied upon by taxpayers only if sum charged was liable for TDS under sec. 194J and not for sums paid under other provisions of the Act.

Thus, CBDT has clarified this position and it issued Circular no. 1/2014 which provides that no tax shall be deductible on service tax component comprised in the sums payable to resident, if service tax is indicated separately.

Editor’s comments:

This is a welcome move from the CBDT as it was much awaited circular.Till now deductors were under obligation to deduct tax from the service-tax component as well so as to avoid the litigations and fears of disallowance of expenditure.

ITAT mistook child birth as an act of god; HC allows sec. 10(23C) relief to maternity hospital

The High Court held in favour of assessee as under:

1)  The expression 'medical attention' in section 10(23C)(iiiae) cannot be read to be confined to medical treatment of persons who are only suffering from an illness or a mental disability;

2)  A hospital which provides for maternity care will fulfill the description of a hospital for the reception and treatment of persons requiring medical attention;

3)  The Tribunal has dealt with at length its own view of the process of child birth. The Tribunal regards child birth as an act of God and a natural process and has proceeded to refer to the fact that in the olden days, deliveries were performed by midwives at individual households;

4)  According to the Tribunal it was only because of the anxiety of people in modern times to be relieved of discomfort or pain during labour, that patients choose hospitals. This was not a correct assessment either of modern science or of statutory interpretation;

5)  It is a matter of common experience that a hospital providing for maternity care has to deal with emergencies and on occasions, such hospitals have to provide emergent care which was often necessary to save the lives of the mother and the child.

6)  The views of Tribunal couldn’t be accepted as there was considerable reduction of maternal mortality due to availability of expert medical care. Therefore, maternity hospitals which exist solely for philanthropic purposes and not for profit are entitled to tax exemption under section 10(23C)  - Nehru Prasutika Aspatal Samiti v. CIT [2014] 41 taxmann.com 283 (Allahabad)

ITAT applies Nike’s case to hold that no tax leviable on Indian ‘LO’ engaged in procuring goods for export

The Tribunal held in favour of assessee as under:

1)   Tesco Hong Kong was invoiced for the goods and re-invoices the goods to the buyer without any mark up. It charges 5% commission on products sourced. The Indian Liaison office (‘LO’) of Tesco facilitates sourcing of goods by Tesco group companies;

2)   Therefore, in the instant case, other facts being more or less same as in Nike's case, the above facts satisfy the condition "for the purpose of export" in Explanation 1(b) to section 9(1)(i) more precisely than the facts of the Nike case, where Nike LO sourced goods for the affiliates from India as goods were purchased by the affiliates directly from the vendor in India and Nike Inc. didn't purchase by itself and sell to its subsidiaries, but, arranged for the purchase by Nike affiliates from India;

3)   As there was no evidence on record to suggest that Tesco's Indian LO indulged in commercial activities and that it was in fact a PE, exemption under Explanation 1(b) to section 9(1)(i) could not be denied - Tesco International Sourcing Ltd. v. Dy. DIT(International Taxation) [2014] 41 taxmann.com 241 (Bangalore - Trib.)

HC rules out applicability of sec. 43B to employees’ contribution to PF; no deduction if paid after due date of PF Act

Due date under section 43B, i.e., due date of filing income-tax return, is not applicable under section 36(1)(va) to employees' contributions to PF/ESI, etc.

The High Court held as under:

1) Sum received by the assessee from any of his employees as contribution to PF/ESI, shall not be entitled to deduction if such sum is not credited by the assessee to the employees' account in the relevant fund or funds on or before the due date as per Explanation to section 36(1)(va) of the Act;

2) Merely because Second Proviso to Section 43B of the Act in which there is a reference to due date as defined in Explanation below clause (va) of sub-section (1) of section 36, it can’t be held that even section 36(1)(va) has been amended and/or even Explanation below clause (va) of sub-section (1) of section 36 has also been deleted;

3) If employee’s contribution received by the assessee is not credited to the employees' account in the relevant fund, on or before the due date specified under PF Act, ESI Act or any other law, the assessee shall not be entitled to deduction of such amount even if contributions have been deposited on or before due date under section 43B, i.e., due date for filing of income-tax return – CIT v. Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100 (Gujarat)

Interest on belated payments of EMI on home loan doesn't qualify for sec. 24 deductions

Interest on interest paid due to default in payment of home loan instalments is not deductible under section 24.

The High Court held in favour of revenue as under:

1) Income of the assessee under the head "income from house property" is to be computed for the purpose of income tax after making certain deductions as are envisaged in Section 24;

2) Section 24(b) stipulates that amount of interest payable on capital borrowed, inter alia, for construction of the property yielding income, is an admissible deduction;

3) It thus is evident that only interest payable on such borrowed capital is to be deducted while computing income chargeable to income tax under the head "income from house property";

4) Therefore, interest paid on interest levied by the bank, because of non-payment of instalments of borrowed capital to the bank, does not qualify for an admissible deduction - Master Naman Kumar v. CIT [2014] 41 taxmann.com  10 (Punjab & Haryana)

No denial of sec. 54F relief even if construction of new house commences before sale of original asset, rules HC

The High Court held as under:

1) Section 54F(1) if read carefully states that the assessee, being an individual or Hindu Undivided Family, who had earned capital gains from transfer of any long-term capital asset, not being a residential house, could claim benefit under the said section provided any one of the following three conditions were satisfied:

(i) The assessee had, within a period of one year before the sale, purchased a residential house;

(ii) Within two years after the date of transfer of the original capital asset purchased a residential house, and

(iii) Within a period of three years after the date of sale of the original asset, constructed a residential house.

2) For the satisfaction of the third condition, it was not stipulated or indicated in the Section that the construction must begin after the date of sale of the original/old asset;

3) There was no condition or reason for ambiguity and confusion which required moderation or reading the words of the said sub-section in a different manner – CIT v. Bharti Mishra [2014] 41 taxmann.com 50 (Delhi)