Rental income taxable as business income if main object of Co. as per MOA is to earn income by letting out properties

Where in terms of memorandum of association, main object of assessee-company was to acquire properties and earn income by letting out same, said income was to be brought to tax as business income and not as income from house property.

Facts:

a)The assessee-company was incorporated with main object, as stated in the Memorandum of Association (MOA)of acquiring the properties and letting out of those properties.

b)It had rented out such properties and shown the rental income received therefrom as income from business.The Assessing Officer (AO) held that since the income was received from letting out of the properties, it was in the nature of rental income. He, thus, treated it as income from house property and taxed accordingly.

c)Assessee filed appeal before CIT(A) who treated such rental income as income from business, which was confirm by the Tribunal. d)On further appeal, the High Court set-aside orders of lower authorities. The aggrieved-assessee filed instant appeal before the Supreme Court.

The Supreme Court held in favour of assessee as under:

1)The main object of the company was to acquire and hold the properties and to let out those properties.

2)In 'Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal' [44 ITR 362 (SC)] the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income received from letting out of those mining leases was shown as business income. Department took the position that it was to be treated as income from the house property. The Court pointed out that the deciding factor was not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. It held that such income was to be treated as business profits.

3)The judgment in case of Karanpura Development Co. Ltd (Supra)was squarely applied to the facts of the present case. Thus, after applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property.

4)In the instant case, in the return of income that was filed by the assessee,the entire income was shown through letting out of properties. There was no other income of the assessee except the income from letting out of these two properties.Thus, assessee had rightly disclosed the income under the Head Income from Business as it could not be treated as 'income from the house property'. - CHENNAI PROPERTIES & INVESTMENTS LTD. V. CIT[2015] 56 taxmann.com 456 (SC)

Assessee can be prosecuted anytime when exonerated in penalty proceedings on ground of limitation and not on merits

Where exoneration in adjudication/penalty proceedings is not on merits but on ground of limitation, assessee-accused cannot take shelter thereof to avoid prosecution proceedings; since there is no time-limit for launching prosecution, same can be launched despite recovery/penalty becoming time-barred.

Facts:

a)Department initiated prosecution proceedings for wrongful credit.

b)Revisional court discharged assessee on ground that penalty proceedings were decided in its favour and department's appeal thereagainst before High Court was dismissed.

c)Department argued that penalty was dropped on ground of limitation and not on merits and appeal before High Court was dismissed for non-appearance; hence, same cannot be relied upon in criminal matters, where there is no time-limitation.

High Court held in favour of revenue as under:

1)Proceedings for recovery of duty with penalty and prosecution/ punishment are separate proceedings. For recovery, there is time-limit of 1 year/5 years in section 11A, but, for prosecution there is no time-limit in section 9.

2)In this case, despite arguments on merits, adjudication/recovery/penalty was dropped on ground of limitation and not on merits and appeal thereagainst was dismissed on ground of non-appearance and not on merits.

3)Since exoneration in adjudication/penalty proceedings is not on merits, assessee-accused cannot take shelter thereof to avoid prosecution proceedings. Since there is no time-limit in section 9, prosecution proceedings can be launched despite recovery/penalty becoming time-barred. Hence, prosecution was valid - Superintendent (Prosecution) Central Excise & Customs Department v. Ashok Leyland Ltd. (2015) 56 taxmann.com 309 (Rajasthan).

Editor's Note:

In adjudication, the appellate authority may decide appeal on grounds of limitation and not on merits despite strong case on merits. In such cases the prosecution may be initiated by the department since there is no adjudication on merits. It appears that in adjudication proceedings on huge tax demand, the assessee must press more on merits (if they are strong enough) and not on limitation to avoid prosecution.

No TP adjustment by treating share application money as loan to AE merely due to delay in issuance of shares

Share application money could not be treated as loan amount merely because there was delay in issuance of shares by subsidiary in name of assessee, particularly when cause for delay was duly explained by assessee

Facts

a)The assessee advanced certain sum to its subsidiaryat Philippines, in the form of share application money. However, shares were not allotted till two subsequent years and subsidiary continued to use those funds.

b)TPO was of the view that the share application money was actually in the nature of loan as there was considerable delay in issuance of shares by subsidiary in name of assesse. Accordingly, TPO made addition to assessee’s income by determining the arm's length interest rate on the said transaction.

c)Commissioner (Appeals)confirmed the addition made by TPO. Aggrieved by the order, assessee filed the instant appeal before the tribunal.

d)On appeal, the assessee submitted that the delay was due to obtaining necessary approval from the Securities and Exchange Commission, Phillipines and finally, the shares were issued as per the share certificate, which had been produced by the assessee as additional evidence before the tribunal.

The tribunal held in favour of assessee as under-

1)Though there was delay in issuance of shares against the share application money given by the assessee to its subsiary, however, the assessee had duly explained the cause of delay and it was not a deliberate delay for using the money by subsidiary in the garb of share application money

2)Since share certificates were not before the authorities below, for limited purpose of considering the said certificates, the issue was remanded to Assessing Officer/TPO to consider the same.

3)As far as the re-characterization of the share application money as loan was concerned, the High Court in the case of DIT, International Taxation v. Besix Kier Dabhol S.A. [2012] 26 taxmann.com 169 (Bom.) had considered an identical issue and held that there were at the relevant time and even on relevant day no thin capitalization rules in force to consider debt as an equity.

4)Accordingly, subject to verification of the share certificates by the Assessing Officer, the share application money could not be treated as loan amount merely because there was a delay in issuance of shares by the subsidiary in the name of the assessee, particularly when cause for delay was duly explained by assessee- ADITYA BIRLA MINACS WORLDWIDE LTD. V. DCIT [2015] 56 taxmann.com 317 (Mumbai - Trib.)

CIT(A) should adopt market rates in valuers directory/stamp duty reckoner in absence of sale instances in same area

Where no sale instances were available of same area, Fair Market Value of land could be determined by relying upon rate mentioned in Indian Valuers Directory and Reference Book and Stamp Duty Ready Reckoner and by adopting annual rate of appreciation method

Facts

a)The assessee-company sold its factory land. The assessee reported fair market value (FMV) of land as on 1-4-1981 at Rs. 14.12 crore on the basis of report of a registered valuer and, accordingly, it computed the capital gains;

b)As no instances of sale of similar property in same area were available, registered valuer determined the value of property by presuming the value it would fetch if residential flats were constructed and sold on that land in 1981, utilising the maximum Floors Space Index (FSI);

c)The Assessing Officer (AO) referred matter to Departmental Valuation Officer (DVO) who determined the value of land, taking into account rate of land in undeveloped industrial area as on 1-4-1981 as per Indian Valuers Dictionary and Reference Book (IVDRB), at Rs. 1.7 crore;

d)The Commissioner (Appeals)rejected the valuation made by registered valueras he determined the value of land on the basis of some imaginary situations. He also did not agree with the DVO’s valuation as land was situated in a developed industrial area;

e)The CIT(A) taking into account the rate quoted in IVDRB and Stamp Duty Ready Reckoner and by adopting annual rate of appreciation method worked out FMV at Rs. 2.78 crore;

f)Aggrieved by the order of CIT(A), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of revenue as under:

1)It is true that for valuation purposes some kind of assumption has to be taken especially if valuation is to be done in the year 2001 for the year 1981. But, assumption should have some basis. In the instant case, the very base adopted by the valuer was totally improper as concept of FSI was not prevalent in the year 1981;

2)The value determined by DVO was also improper as land was situated in developed industrial area and not in under-developed industrial area;

3)CIT(A) determined the value of property by referring to IVDRB and stamp duty Ready Reckoner and by adopting annual rate of appreciation method. So, the method adopted by him was a better 'guess work' than the guess work done by the registered valuer. His estimation was also very near to the valuation made by the DVO;

4)Therefore, FMV adopted by the CIT(A) was more reasonable as compared to the FMV quoted by the registered valuer- PFIZER LTD. V. DCIT [2015] 56 taxmann.com 260 (Mumbai - Trib.)

No denial of sec. 54F relief on pretext of two houses when assessee had gifted one of them orally under Muslim law

Facts:

a)The assessee had sold a vacant site and purchased another vacant site. She deposited the balance capital gain in the Capital Gains Account Scheme to claim deduction under section 54F.

b)The Assessing Officer (AO) denied relief under Section 54F on the ground that the assessee was owner of two residential houses at the time of sale of vacant land.

c)The assessee contended that she was not owner of two houses as she had made an oral HIBA by which one of the properties was given as a gift to her daughter before the date of transfer of land.

d)The AO rejected the explanation taking a view that gift had not been executed by a registered document.On appeal, the CIT (A) confirmed the order of AO. The aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:


2)However, the assessee herein was a Muslim andunder the Mohammedan Law, essentials of a gift are declaration of gift by the donor and acceptance of the gift by the donee and delivery of possession. This rule of Mohammedan Law was unaffected by the provision of section 123 of the Transfer of Property Act, 1882.

3)Thus,oral gift made by the assessee could not be disregarded by the revenue authorities.The requirements of a valid gift as per Mohammedan Law were duly satisfied inasmuch as there had been a declaration of gift by the donor and acceptance of gift by the donee and delivery of possession. The delivery in this case would only be constructive.

4)Since the gift satisfied all the requirements of Mohammedan law it had to be held as valid in law. Assessee could not be regarded as owner of two properties as one of themwas gifted by him before the transfer of vacant land. Thus, restriction placed under the proviso to section 54F(1) would not be attracted in the instant case - SMT. SAJIDA BEGUM V. ITO[2015] 56 taxmann.com 269 (Bangalore - Trib.)

Sec. 11 relief available to Indian Medical Association if it was endorsing health products to promote public health

Where assessee, Indian Medical Association, engaged in promoting public health, endorsed products of various companies due to their health and nutritional benefits, said activity could not be regarded as violative of provisions of section 2(15) and, thus, assessee's claim for exemption of income was to be allowed.

Facts:

a)The assessee-society was formed to promote public health and medical education in India.

b)The Assessing Officer (AO) noticed that assessee had received endorsement money for making endorsement of products of various corporate entities. Thus, he took the view that assessee society failed to comply with requirements of section 2(15) and rejected its exemption claim.

c)The CIT (A) opined that assessee had been able to demonstrate that it was engaged in promotion and advancement of the public health. Hence, its activities fell within the meaning of section 2(15).

d)The Aggrieved-revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of assessee as under :

1)It was not the case of revenue that endorsement of healthy nutrition wasn't medically/scientifically incorrect. The assessee as per the mandate of its objects had endorsed products due to their health and nutritional benefits.

2)Therefore, activities of assessee to promote public health by endorsing products of various companies due to their health and nutritional benefits could not be said as violative of provisions of section 2(15).

3)Accordingly, assessee's claim for exemption of income was to be allowed. - ADIT V. INDIAN MEDICAL ASSOCIATION - (2015) 56 taxmann.com 271 (Delhi - Trib.)

Parking charges collected on vacant land were taxable even if developer was following project completion method

Where assessee-developer was following project completion method for payment of taxes, parking charges collected by him on vacant land had nothing to do with the completion of his project; he was obliged to pay on parking charges in year of receipt of parking charges.

Facts:

a)The assessee, being a builder and developer was following project completion method for purposes of paying taxes.

b)He had generated income in assessment year 2000-01 on account of parking charges collected on the vacant land. Since assessee had not filed his return of income of AY 2000-01, a notice under section 148 was issued and income received from parking charges was assessed to tax.

c)On appeal, the CIT (A) set-aside the order of AO on the ground that the amount earned by assessee by exploiting vacant land was an amount relatable to costs of the project and therefore, was taxable in subsequent years. Further the Tribunal set aside the order of the CIT(A)

d)Consequently, AO charged interest u/s 234A and 234B in respect of default in payment of advance tax for the assessment year 2000-01. CIT (A) and Tribunal upheld AO action of AO. The aggrieved-assessee filed the instant appeal before High Court.

The High Court held in favour of revenue as under :

1)The non-filing of return of income by assessee was on the ground that the income earned on parking charges would have to be returned when the project would be completed. This was not accepted as the amount received on account of parking charges was not a part of any project. Thus parking charges was brought to tax in Assessment Year 2000-01.

2)It had been held by the Tribunal that the amount received on parking charges had nothing to do with the appellant's project and was assessable to tax in Assessment Year 2000-01. This has been accepted by the assessee. Thus, the assessee was obliged to pay advance tax and non-payment of the same would carry with it the further burden on interest under Section 234B of the Act.

3)Therefore, the AO was right in charging interest in respect of default in payment of advance tax for the assessment year 2000-01. - SUDHIR G. BORGAONKAR V. ACIT - (2015) 56 taxmann.com 188 (Bombay)

Even investment in name of partners would provide sec. 54EC relief to partnership firm

Facts: a)Partners of assessee-firm introduced land and building as their capital contribution to firm.

b)The firm carried out its operation from such land and building after its formation. Subsequently, firm sold said land and building and earned capital gain.

c)Sale consideration of property was credited directly to bank account of partners of firm and bonds specified under Section 54EC were also purchased in names of those partners.

The issues that arose before the Tribunal were as under:-

I.Whether capital asset introduced by partners could be said to be the property of the firm and, thus, capital gain arising on sale of such building was taxable in hands of firm?

II.Whether a firm could claim exemption under section 54EC where specified bonds were purchased in name of partners?

On the first issue the Tribunal held that:

By relying upon the judgment of Allahabad High court in the case of K. D. Pandey v. CWT [1977] 108 ITR 214, it was held that where partners of firm introduced land and building as their capital contribution to firm, said land and building would become property of firm and, therefore, capital gain arising on sale of said property was taxable in hands of firm.

On the second issue the Tribunal held that:

1)Partnership is not a legal entity in strict sense and in all the movable and immovable assets which are held by the partnership, there is an interest of every partner, though not specifically defined in terms of their shares.

2)It was not disputed that the sale consideration was directly credited to the Bank accounts of the partners and firm was immediately dissolved subsequently. Therefore, whatever amount was invested by the partners in specified bonds in their individual names was, in fact, from the funds of the firm.

3)Hence, benefit of section 54EC could not be denied to the assessee-firm,even though the bonds were purchased in the name of partners- CHAKRABARTY MEDICAL CENTRE V. TRO [2015] 56 taxmann.com 76 (Pune - Trib.)

Snippets of New ITR Forms and e-Filing requirements: Assessment year 2015-16

CBDT has amended Rule 12 of Income-tax Rules, 1962 relating to return of income which shall be applicable for the assessment year 2015-16 vide Notification No.4, dated 15-4-2015. Several changes have been made in the conditions prescribing the mode of filing of return of income by different categories of taxpayers. CBDT has also notified new ITR-1, ITR-2 and ITR-4S for the Assessment Year 2015-16.The key changes are as under:-

1)Compulsory e-filing to claim tax refund : Till assessment year 2014-15, individuals or HUFs, who were otherwise not liable to file return of income electronically, could claim tax refund by filing return of income in physical form. However, the new provision makes it mandatory for every taxpayer to file return of income electronically so as to claim refund of tax from the department. However, an option is given to super senior citizens claiming income-tax refund, to file return of income in physical form, provided return is furnished in ITR- 1 or ITR- 2.

2)Mandatory reporting of details of bank accounts in India : In new ITR forms, an assessee is required to report details of all bank accounts held by him in India at any time (including opened/closed ones) during the previous year. Further assessee is also required to report the closing balance of accounts as on 31st march of the previous year.

3)Reporting of details of foreign travel : Now details about overseas travel are also required to be furnished in new ITR Forms.

4)Details about foreign income : The new ITR forms seeks more details about the foreign assets. Now details about income from any source outside India are also required to be furnished in new ITR forms.

5)Compulsory e-filing of ITR-3 and ITR-4 : Every individual or HUF who is required to file return in form ITR-3 or ITR-4 shall file the same electronically.

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Now banks can issue FDs exceeding 15 lakhs without option of pre-mature withdrawal at differential interest rates

Earlier, banks were allowed to offer differential rates of interest on term deposits on the basis of tenor of deposits less than Rs. 1 crore and on the basis of quantum and tenor of term deposits of Rs. 1 crore and above. In the sixth bi-monthly monetary policy review held on February 3,2015 the RBI had decided to introduce the feature of early withdrawal in case of term deposits as a distinguishing feature for offering differential rates of interest.

Accordingly, RBI has given discretion to banks to offer differential interest rates based on whether the term depositsare with or without the premature withdrawal facility, subject to riders that:

I.Bank shall provide premature withdrawal facility for Fixed deposits made by Individuals (whether held jointly or singly) for an amount uptoRs. 15 lakh;

II.For fixed deposits above Rs. 15 Lakh, banks can offer deposits without the option of premature withdrawal as well (However, it would be obligatory on part of such banks to provide an option to customers to choose between term deposits either with or without premature withdrawal facility);

III.Banks should disclose in advance the schedule of interest rates payable on deposits; and

IV.The banks should have a Board approved policy relating to interest rates on deposits, including deposits with differential rates of interest and ensure that the interest rates offered are reasonable, consistent, transparent and available for supervisory review/scrutiny as and when required.