ITAT highlights lacuna in Rule 10B; it doesn't mandate and merely provide an option to apply Comparable PSM

Rule 10B(1)(d) of Income-tax Rules provides an option but not a compulsory mandate to apply a comparable Profit Split Method.

The Tribunal held as under:

1)  Comparable Profit Split Method (‘PSM’) is rarely used internationally, in view of lack of reliable external data with respect to third party behavior to split profits;

2)  OECD and UN clearly gives taxpayers an option to adopt any one of the three sub-methods under the overall PSM, namely, contribution PSM, residual P'SM and comparable PSM, without requiring the contribution and residual PSMs to mandatorily pass through the sanity of comparable PSM, being a mandate given under the Indian transfer pricing regulations, in the form of rule 10B(I)(d) of the Income-tax Rules (I-T Rules);

3)  The requirement contained in IT Rules of mandatory adoption of comparable PSM in all cases of PSM is a lacuna, which renders the entire scheme or mechanism of PSM virtually redundant, otiose and impossible to comply with even in the most deserving cases.

4)  Such lacuna is curable through interpreting rule 10B(1)(d) in a manner that the same provides an option and not compulsorily mandate to apply a comparable PSM in a case where reliable external data to gauge third party behavior is impossible to be obtained.- Global One India Ltd. V. ACIT [2014] 44 taxmann.com 100 (Delhi - Trib.)

TRO couldn't declare sale of property void under sec. 281 and attach property even if tax was overdue from seller

TRO had no power to declare sale transaction as void and attach property even when several demand notices were issued against the seller of such property

Facts

a)    The assessee purchased a property from one 'M' who had defaulted in making payment of income tax dues even after issuing with several demand notices by AO.

b)    Consequently, TRO attached the said property and passed the order without giving any notice to the assesse about recovery of the tax dues of ‘M’.

c)    Consequently, assessee preferred a writ with Gujarat High Court.

Held

1)   Section 281 provides that if during pendency of any proceedings under the Act or after completion thereof, an assessee creates a charge on or parts with the possession of any of his assets in favour of any other person, such charge or transfer shall be held void if any tax was payable by the assesse as a result of completion of the said proceedings unless such charge or transfer was made-

a)   For adequate consideration and without any notice of pendency of such proceedings or tax payable by assesse; or

b)   With prior permission of AO.

2)    The above two exceptions are equally applicable to the transferor as well as to the transferee. Therefore, even if the transferor had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice of such proceeding against the transferor.

3)    The Bombay High Court in the case of GangadharVishwanathRanade v. T.R.O. [1989] 177 ITR 176 held that under section 281, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO v. GangadharVishwanathRanade [1998] 100 Taxman 236 confirmed the view of the Bombay High Court.

4)    Since the issue involved in the instant case is squarely covered by the decision of the Supreme Court in the case of GangadharVishwanathRanade (supra), the order passed by the Tax Recovery Officer under section 281 was liable to be set aside- KarsanbhaiGandabhai Patel v.Tax Recovery Officer [2014] 43 taxmann.com 415 (Gujarat)

ITAT exempts capital gain on sale of self-generated trademark as its cost of improvement isn't ascertainable

The self-generated trademark is not capable of improvement at an ascertainable cost in terms of money, therefore, it is outside the scope and ambit of the charge envisaged under section 45(1).

Facts:

a)  The assessee-firm had sold some 'trademarks'. The Assessing Officer denied claim of deduction of 'cost of improvement' on the ground that 'cost of improvement' was liable to be taken as 'Nil' in view of section 55(1)(b).

b)  The assessee contended that it was not liable to pay any capital gains tax in respect of sale of trademarks because such asset did not have any cost of improvement as same could not be ascertained.

c)  On appeal, the CIT(A) disallowed the claim of assessee. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The term 'cost of any improvement' for the purposes of section 48 has been explained in section 55(1)(b) and the same does not include a capital asset in the shape of trademark. A conjoint reading of section 55(2)(a) and section 55(1)(b), ascribes the meaning of 'cost of acquisition' and 'cost of any improvement' respectively for the purposes of section 48;

2)  Section 55(2)(a) prescribes cost of acquisition of a trademark for the purposes of section 48 at Nil, whereas no such prescription is contained in section 55(1)(b) defining the 'cost of any improvement' of a trademark for the purposes of section 48;

3)  Therefore, the plea of the assessee that a self-generated trademark was not capable of improvement at an ascertainable cost in terms of money and 'cost of any improvement' thereto has not been defined for purposes of section 48 in section 55(1)(b), was well founded;

4)  The self-generated trademarks are not capable of improvement at an ascertainable cost in terms of money and therefore, the computation of capital gains fails and, accordingly, it is outside the scope and ambit of the charge envisaged under section 45(1);

5)  Therefore, there was no capital gain exigible to tax under section 45(1) on transfer of the impugned trademark by the assessee and the lower authorities had erred in taxing the same while computing the total income of the assessee. - Institute For Micronutrient Technology v. DY. CIT [2014] 43 taxmann.com 426 (Pune - Trib.)

Sec. 80G approval denied to a society working for upliftment of Sikh community explicitly

Approval under section 80G could not be given to a society working only for upliftment of Sikh community and barring an outsider from becoming its member.

Facts:

a)  The assessee-society had applied for approval under section80G(5)(vi).

b)  The commissioner rejected the application of approval on ground that society was created for the benefit of a particular religious community and, thus, it did not fulfill the conditions of clause (iii) of section 80G(5).

c)  The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1)  The assessee-society was working only for upliftment of Sikh community and was imparting various types of education to them;

2)  Only a Sikh could become a member of the general community of the assessee-society who was controlling the entire administration of the institutions run by the society; which was contrary to the provisions of section 80G(5)(iii);

3)  The assessee had not filed any documentary evidence to establish that it was not only working for upliftment of the Sikhs but also for general community. There was no evidence to establish that a non-Sikh could become member of General Council of the assessee-society;

4)  The objects of the assessee-society and its name (i.e. ‘Sangat Sahib Bhai Pheru Sikh Educational Society, Faridkot’), clearly established that it was not doing any charitable work for general community and it was using its funds only for Sikh community;

5)  The assessee-society did not fulfill the conditions prescribed under section 80G(5)(iii) and, therefore, it was not entitled to the approval under section 80G(5)(iv). - Sangat Sahib Bhai Pheru Sikh Educational Society v. CIT [2014] 43 taxmann.com 368 (Amritsar - Trib.)

Exp. on construction of temporary structure on leasehold land to meet business needs was revenue exp.

Expenditure on construction of temporary structure was allowable as revenue expenditure if such structure was made by assessee on leasehold land to run its business.

Facts:

a)  The assessee had entered into lease agreement with Ahmedabad Urban Development Authority [‘AUDA’] to run its AMUL milk parlour in the land of AUDA. As per the agreement,  the assessee would maintain a small garden and would permit access to the public.

b)  On such structure put up by assessee, it claimed depreciation at the rate of 100 per cent. The Assessing Officer held that the parlour was run in a pukka constructed building. He, therefore, reduced depreciation to 10 per cent;

c)  The Tribunal allowed full depreciation at the rate of 100 per cent to the assessee. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  Part A of Appendix I to the Income-tax Rules, 1962 provides for 100 per cent deduction on 'purely temporary erections such as wooden structures';

2)  The arrangement between the assessee and AUDA was purely temporary in nature. It did not derive any enduring benefit from putting up such construction;

3)  Under the agreement, the assessee was given certain rights by the AUDA to use land on the terms and conditions set out therein. Combined reading of the said conditions would establish that the assessee had the right to use the land for putting up its parlour for a period of five years;

4)  Thereafter, only upon mutual agreement between the assessee and the AUDA, the period could be extended. During the period of the agreement, the assessee had to maintain the garden and permit full access to the members of the public. The assessee did not have any right to develop any part of the land or put up construction without the permission of AUDA;

5)  Such conditions would establish that the assessee had a limited right to use the land for the limited purpose and the limited period. In the next year due to non-renewal of the agreement, the assessee's structure was demolished;

6)  Therefore, expenditure incurred on construction of structure was allowable as revenue expenditure. – CIT v. Gujarat Co-op Milk Marketing Federation Ltd [2014] 43 taxmann.com 398 (Gujarat)

Sum paid to foreign co. for transmitting bulk SMS was not a 'fee for technical service'; no withholding of taxes

No technical skill was required to render services for transmission of bulk SMS data, thus, payments for said services could not be regarded as 'fee for technical services'.

Facts:

a)  The assessee had made carrier payments to Clickatel (‘NR Company’) for transmission of bulk SMS data without withholding any taxes.

b)  The Assessing Officer disallowed such payments by invoking provisions of section 40(a)(i). On appeal, the CIT(A) deleted  such disallowance. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The nature of services rendered by NR Company was only for transmission of bulk SMS data. No technical skill was required for transmission of such data;

2)  The CIT(A) had rightly held that carrier was a medium for sending bulk SMS and, thus, it could not be considered as technical services.

3)  Since the payments made by assessee to NR Company were not 'fee for technical services,' they were not liable for taxation in India;

4)  Thus, assessee was not required to deduct tax at source while making such payments. The CIT(A) was justified in deleting impugned disallowance.- Dy. CIT v. Velti India (P.) Ltd [2014] 43 taxmann.com 425 (Chennai - Trib.)

Sec. 54F relief couldn't be withdrawn if residential property was subsequently put to use for commercial purpose

Subsequent change in usage of property does not disentitle assessee to relief under section 54F, if what was acquired was originally a residential property.

Facts:

a)  The assessee had purchased a piece of land. He gave property to a developer to construct a residential property. The municipal permission had also been obtained for such purposes.

b)  The assessee had received possession of such residential property but said property was subsequently used for commercial purposes. He claimed exemption under section 54F.

c)  The Assessing Officer (‘AO’) noticed that the income chargeable to tax had escaped assessment and completed assessment by working out-long term capital gains.

d)  The CIT (A) denied exemption under section 54F to assessee. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The intention of the parties was to construct a residential property when the development agreement was entered. The municipal permission had also been obtained only for construction of a residential complex;

2)  The assessee had received possession of such residential property but the said property was subsequently used for commercial purposes;

3)  Merely because of change in the use of such property for non-residential purposes, it could not be held that what was acquired was not a residential property, but a commercial one;

4)  The assessee was entitled to relief under section 54F, if what was originally acquired was a residential property. Thus, the impugned order of the CIT (A) was set aside, and the matter was restored to the AO, with a direction to consider the assessee's claim for exemption under section 54F. -  Shyamlal Tandon v. ITO [2014] 43 taxmann.com 155 (Hyderabad - Trib.)

Sums received in excess of capital account by retiring partner were capital receipts

Additional amounts paid to retiring partners in excess of the capital account are not in nature of any profit or income; hence not taxable

Facts:

a)  The assessees (i.e. partners) retired from the firm and at the time of retirement, they were paid amounts in addition to the amounts lying in their capital accounts.

b)  The Assessing Officer invoked section 28(va) and held that the amount received by partners in excess of the capital account was to be treated as business income on ground that while retiring from the firm, partners had agreed not to carry on any activity in relation to any business.

c)   The additional amount was, thus, brought to tax in the respective hands of the assessees. On appeal, the CIT (A) allowed the appeal of assessees.

The Tribunal held in favour of assessees as under:

1)  The retirement deeds executed by the parties were not in the nature of any agreement restraining the parties from carrying on business activities. Therefore, section 28(va) was not applicable if partners were retiring from the business. That clause was more applicable to situations like non-competition agreement, etc;

2)  The character of additional amounts paid to the retiring partners represented the share of the retiring partners in the worth and value of the business in which they were partners. The worth and value included the standing of the business, the goodwill and many other intangible virtues;

3)  So, what was paid to the retiring partners was their rightful share in that worth and value of the firm. The only thing was that their shares in worth and value of business had been separately computed;

4)  Therefore, the additional payments made to the retiring partners were not in the nature of any profit or income within the meaning of section 28(va); They were non-taxable capital receipts. Thus, the CIT(A) was right in holding that the amounts were not taxable. – ACIT v. P. Sivakumar (HUF) [2014] 43 taxmann.com 211 (Chennai - Trib.)

No sec. 10(23C) relief to Govt. approved educational unit if it was not funded by Govt.

Where assessee-institute was approved as Government autonomous body for educational purpose but was not wholly or substantially financed by Government, exemption under section 10(23C) (iiiab) could not be allowed.

Facts:

a)  The assessee, an educational institution, claimed its income as exempt under section 10(23C)(iiiab) by contending that institute was approved by the Punjab Government and it was 100% funded Govt. Autonomous Body.

b)  The Assessing Officer disallowed exemption claimed by assessee on ground that assessee-society had been granted exemption under section 10(23C)(vi).

The Tribunal held in favour of revenue as under:

1)  The assessee-institute was an educational institute but his main motto was profit. It was also approved as the 100 per cent Govt. autonomous body;

2)  The Government had not financed any paisa to the institute in the last 5 years because the institute was already having a good amount lying in Fixed Deposits with Banks;

3)  The assessee was not fulfilling the conditions regarding the institutions ought to have been wholly or substantially financed by the Government. The assessee had not produced any documentary evidence to prove that the assessee had got approval from the prescribed authority for the exemption under section 10(23C)(iiiab);

4)  Therefore, the assessee was not entitled to exemption under section 10(23C)(vi).- Dy. CIT v. Malout Institute of Management & Information Technology [2014] 43 taxmann.com 228 (Amritsar - Trib.)

Exp. on installation of traffic signals to ensure timely presence of employees in office was allowable u/s 37(1)

Where assessee incurred expenditure on installation of traffic signals at various parts of city in order to secure free movement of its employees so that they reached office in time, amount so spent being a part of its corporate responsibility, was to be allowed as business expenditure under section 37(1)

Facts

·         The assessee paid certain amount for installation of traffic signals in a particular part of the city.

·         The assessee claimed that the traffic signals had been installed to ensure that employees would reach office in time without facing any traffic problems and, hence, it should be allowed as revenue expenditure.

·         The Assessing Officer held that benefit from installation of traffic signals derived by assessee being very remote, the expenditure could not be allowed under section 37(1).

·         The Tribunal, however, allowed the assessee's claim.

·         On revenue's appeal:

Held

Expenditure incurred by the assessee was allowed by the High Court in the light of the following grounds:-

1)    Payment made by aseessee couldn’t be considered as illegal as it wasn’t paid to the police or rowdies to keep them away from the business premises.

2)    Payment made by assessee couldn’t be disallowed on the ground that expenditure was incurred voluntary and without any necessity and pubic was also benefited from such expense.

3)    To allow an expense the term ‘for the purpose of business’ shouldn’t be limited to meaning of earning the profits only.

4)    Expense incurred by assessee had to be allowed because late coming of employee due to severe traffic congestion was seriously affecting the business of the assessee.

5)    Expense couldn’t be disallowed on the ground that it was the responsibility of the State and in particular, the police department either to install the traffic signal or control the traffic because it was also the corporate Social responsibility of the assessee.