Illegally encroached land is not a capital asset; profit arising on its sale is taxable as income from other source

Property illegally encroached by assessee would not be considered as 'Capital asset' under section 2(14) and, consequently, gain arising from transfer of such property could not be assessed as capital gain but as income from other sources.

Facts:

a)      The assessee had shown long-term capital gain from sale of unauthorisedly encroached school land for which he had no title/right.

b)      The Assessing Officer held there was no capital assest owned by assessee as he did not have legal right or title over the asset and, therefore, the income declared was not chargeable under section 45 but under section 56 as income from other sources.

c)      On appeal, CIT (A) reversed the findings of AO. Aggrieved with the CIT(A) order, revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

1)   The assessee pleaded that the definition of capital asset under Section 2(14) has used words property of 'any kind' and it is not necessary that it should be lawfully acquired property. This proposition could not be accepted because the legislature in its wisdom has used this word for lawful property only.

2)      If the plea of the assessee was allowed, then any person will encroach upon a Government land by showing the same in his balance sheet and shall claim capital gains, which is not permissible.

3)    Under the charging section of capital gains, the crucial requirements are that there must be a transfer and such transfer must be of a capital asset. The primary school land was encroached upon/illegally occupied by the assessee and there was no transfer of any capital asset.

4)      Capital gains under section 45 accrue only if there is a sale or any transfer of the capital asset. But in the instant case, there was no transfer as such the assessee encroached upon the school land. Accordingly, the said land could not be called as capital asset owned by assessee.

5)     Since it was nota case of sale or transfer of capital asset, there was no question of capital gains. Hence, profit arising on sale of encroached land would be taxable as income from other source.- ITO v Bhagwan T. Fatnani[2015] 58 taxmann.com 227 (Mumbai - Trib.)

Uniform allowance paid to employees isn’t exempt if no dress code has been specified for employees

No exemption under section 10(14) shall be granted in respect of uniform allowance paid to employees if there was no dress code and the employees were free to wear any dress.

Facts

a)  Assessee paid uniform allowance to its employees. The allowance so paid was claimed as deduction under Section 10(14) and not included in the salary of the employees for the purpose of deduction of tax at source under Section 192;

b)  The Assessing Officer disallowed the claim and included the allowance for purpose of deduction of tax at source;

c)  CIT(A) affirmed the disallowance.

The Tribunal held in favour of revenue as under:

1)  The following two conditions must be satisfied to avail exemption under Section 10(14):

a)  the allowance should be given to meet expenses incurred for performance of official duties;

b)  the expenditure must be actually incurred.

2)  In the instant case, the assessee was unable to satisfy any of the conditions as there was no dress code for the employees and they were free to wear any dress;

3)  Therefore, allowance could not be said to be granted to meet the expenses incurred for official purposes. Further, assessee was unable to establish that the expenditure was actually incurred;

4)  Hence, uniform allowance paid to employees must be included in their salary for the purpose of deduction of tax at source under Section 192 - Facets Polishing Works (P.) Ltd. v. ITO [2015] 58 taxmann.com 373 (Ahmedabad - Trib.)

Auditor's certificate can't be a substitute for TP study to benchmark international transaction

Facts:

a)    Assessee reimbursed certain costs and expenses to its associated enterprises (‘AEs’) for coordination and liaison works.

b)   Transfer Pricing Officers (TPO) determined the ALP of transactions relating to “reimbursement of Head office overheads” as NIL.

c)    The assessee argued that he had claimed expenditure as per the certificate issued by auditors which spelled out Head office overheads as a percentage of revenues.

d)  TPO rejected the claim of assessee and made additions, which was further confirmed by CIT(A). Aggrieved-assessee filed the instant appeal before Tribunal. 

Tribunal held in favour of Revenue as under:

1)      Assessee had not conducted any transfer pricing study forbenchmarkingof head officer expenditure. He had benchmarked this transaction on basis of certificate issued by the auditors.

2)    Under transfer pricing study, what is required to be seen is whether any other independent entity would have charged or the independent entity receiving the services would have paid to the extent that were charged by the AEs.

3)      This kind of study had not been carried out by the assessee as he was under the impression that the certificate issued by the auditors would satisfy the tests of Transfer Pricing study.

4)   In transfer pricing study, what is required to be done is to validate the claimwith an external comparable. Certificate issued by the auditors only spelled out the percentage of overheads over the revenue and, hence, it was only a factual aspect of internal figures.

5)     Accordingly,certificate issued by auditorscould not be used as a substitute for Transfer Pricing study to benchmark international transaction. - Metro Tunneling Group v. JCIT- [2015] 58 taxmann.com 372 (Mumbai - Trib.)

Mumbai ITAT interprets Article 5 of India-Singapore DTAA to decide constitution of installation PE in India

Facts:

a)  The assessee was tax resident of Singapore. It had undertaken installation and construction activity in respect of certain projects. The DRP held that the presence of assessee in India in excess of90 days constitutes PE in India under Article 5(6) of India-Singapore DTAA (‘treaty’).

b) The Ld. Counsel of assessee submitted that assessee was purely into installation and construction activity, which would clearly fall within Article 5(3) of treaty. Thus, activities of assessee would not constitute PE due to its presence in India for less than 183 days under Article 5(3) of DTAA.

The Tribunal held in favour of assessee as under:

1)  Article 5(3) of DTAA provides that -

“A building site or construction, installation or assembly project constitutes a permanent establishment only if it continues for a period of more than 183 days in any financial year.”

2)  Article 5(6) of DTAA provides that -

“An enterprise shall be deemed to have a permanent establishment in a contracting State if it furnishes services , other than services referred to in paragraphs 4 and 5 of this Article and technical services as define in Article 12, within a contracting State through employees or other personnel, but only if…..

…..”

3)  Article 5(3) is a specific provision dealing with ‘Service PE’, on account of construction, installation or assembly project. Service PE would constitute if project continues for a period of more than 183 days in any fiscal year. WhereasArticle 5(6) envisages that, if an enterprise is “furnishing services” in the contracting State through its employees for a period of 90 days or more, then it is deemed to have Service PE, except for the services referred to in paras 4 and 5.

4)  The threshold period under Article 5(6) is 90 days and more; if such activities are carried out for a related enterprise, then threshold period is more than 30 days. The Article 5(6) explicitly provides that it applies to “services” other than those covered by Articles 5(4) and 5(5), however, the said article is silent as regards its relationship with Article 5(3). Thus, Article 5(6) covers various services which are not covered by paras 4 and 5 of article 5 and technical services as defined in Article 12.

5)  In contradistinction, para 3 of article 5 is very specific and, therefore, such specific activities cannot be read into para 6 of article 5. There cannot be overlapping of activities carried out within the ambit of Article 5(3) and furnishing of services as stated in Article 5(6). Both should be read independent of each other, or else there would be no requirement of enshrining separate provisions.

6)  If the activities related to construction or installation are specifically covered under Article 5(3), then one need not to go in for Article 5(6). Thus, the activity of the assessee which is purely installation services has to be scrutinized under Article 5(3) only and not under Article 5(6). - Kreuz Subsea Pte. Ltd vs DDIT - 58 taxmann.com 371

SEBI proposes to reduce listing time by half and relax listing norms for startups

The SEBI has taken a number of key policy decisions in its Board meeting held on June 23, 2015. This includes streamlining the process of public issues,simplifyingthe framework of raising capital bystart-ups and other companies, etc.Key decisions taken in board meeting are enumerated here under:

1)Reduction ofIPO timeline: SEBI has proposed to reduce the time as required between listing and closing of an initial public offering (IPO) by half, i.e., from T+12 days toT+6 days.

2)SEBI does away with requirement of issuing cheques for IPO: SEBI mandatesfiling of Application Supported by Blocked Amount (ASBA) applications. It does away with requirement of issuing cheques for IPO. All investors, including retail ones, will now have to come in through the ASBA route.

ASBA route enables the investors to give an authorization of payment of application money in the form itself.Application made through ASBA route also ensures hassle-free of refund, if any,payable by the issuer.

3)Simplified framework for raising of capital by start-ups: Now start-up companies would be able to raise capital through Institutional Trading Platform (ITP), the platform will be accessible to:

i.Companies which are intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology andnano-technology. [If these companies provides products, services or business platforms with substantial value addition and with at least 25% of the pre-issue capital being held by QIBs] or;

ii.Any other company in which at least 50% of the pre-issue capital is held by QIBs.

4)Fast Track Issuances - Follow on Public Offerings and Rights Issues: In order to enable more number of listed companies to raise further capital using fast-rack route, SEBI approved the proposal to reduce the minimum public holding requirement from Rs 3,000 to Rs 1,000 crore in case of Follow on Public Offerings (FPOs) and Rs.250 crore in case of rights issue.

5)Re-classification of Promoters as Public: SEBI has decided to provide proper framework for addressing the issue relating to reclassification of promoters in listed companies under various circumstances. Now an existing promoter of a listed entity may cease to be a promoter and/or re-classify itself as public in the following circumstances, on compliance with conditions stated there under:

i.Pursuant to change in promoter:

a)When a new promoter replaces the previous promoter subsequent to an open offer or in any other manner, re-classification shall be permitted subject to approval of shareholders in the general meeting.

b)Shareholders need to specifically approve whether the outgoing promoter can hold any Key Management Personnel (“KMP”) position in the company. In any case, the outgoing promoter may not act as KMP for a period of more than 3 years from the date of shareholders’ approval.

c) The outgoing promoter cannot hold more than 10% shares of the company.

ii.In case of transmission/succession/inheritance, the inheritor shall be classified as promoter.

iii.Existing promoters may be re-classified as public in case the company becomes professionally managed and does not have any identifiable promoter

Scrutiny of refurbished return forms for Assessment year 2015-16

The ITR Forms 1, 2 and 4S were notified for the assessment year 2015-16 vide Notification No. 41/2015, Dated 15-04-2015. In view of various representations received it was announced that these ITR forms will be reviewed. Having considered the responses received from various stakeholders, new ITR forms have been notified. Key changes made in ITR forms are specified hereunder:

1)Introduction of new Form 2A : At present individuals and HUFs having income from more than one house property or capital gains are required to file Form ITR 2. It was observed that majority of taxpayers who file Form ITR 2 do not have capital gains. With a view to provide a simplified version of this form for these individuals and HUFs, a new Form ITR 2A is notified which can be filed by an individual or HUF who does not have capital gains, income from business/profession or foreign asset/foreign income.

2)Details of foreign trips : It shall not be mandatory to furnish details of foreign trips in new Form ITR 2. Only Passport Number, if available, would be required to be furnished in the Form 2.

3)Details of bank accounts : Now only the IFS Code, account number of all current/savings accounts which are held at any time during the previous year have to be furnished. The balance in accounts will not be required to be furnished. Details of dormant accounts which have not been operational during the last three years are not required to be furnished.

4)ITR 1 for Individuals earning exempt income : It is further provided that individuals having exempt income without any ceiling (other than agricultural income exceeding Rs. 5,000) can also file return in Form ITR 1. If taxpayer has agricultural income the return shall be filed in ITR 2 or ITR 2A, as the case may be.

Editor’s Note : It is to be noted that every individual or HUF whose total income exceeds five lakh rupees or who is required to file return in Form ITR-3 or ITR-4 shall have to file return of income electronically. It is also mandatory for taxpayer (except super senior citizen) to file return of income electronically so as to claim refund of tax from the department.

Depositors can file complaint before CLB until NCLT is constituted; MCA clarifies

This Ministry has received representations seeking clarification regarding processing of the deposits related complaints received from investors in respect of defaults made by companies in repayment of deposits accepted by them before the commencement of the Companies Act, 2013.

The Ministry hasnow clarified that Company Law Board (‘CLB’) would dispose of the complaints received from investors until the National Company Law Tribunal (NCLT) is constituted.Further, Companies can approach CLB for granting extension of time for making repayment of deposits accepted by it before the commencement of the Companies Act, 2013.It is also clarified that there is no bar on the Registrar of Companies for filing of prosecution against a company if such company fails to make repayment of deposits accepted by it under the provisions of the Companies Act, 1956 or Companies Act, 2013.

ITAT makes Sec. 43B disallowance even when assessee opts for presumptive taxation scheme

IT: Non-payment of statutory liability before due date of filing of return would attract disallowance under Section 43B even if assessee had offered his income on presumptive basis.

Issue

Whether disallowance of Section 43B could be made even when assessee opted for presumptive taxation Scheme?

The Tribunal held in favour of revenue as under:

a)Under the presumptive taxation scheme, income of an assessee is computed at a fixed percentage of turnover and it would be deemed that that all deductions allowable under the head business or profession have already been allowed to assessee. In other words deductions allowable under Sections 28 to 43C are deemed to have been granted to assessee.

b)Perusal of provisions of Section 43B shows that said provision is a restriction on allowance of particular expenditure, inter-alia, statutory liability, as it allows deduction of such liability on actual payment basis, i.e., expenditure shall not be allowed to be deducted unless same has been paid before the due date of filing the return.

c)Section 44AF starts with the words “notwithstanding anything to the contrary contained in Sec. 28 to 43C”, whereas section 43B starts with the words “notwithstanding anything contained in any other provisions of this Act”.

d)The non-obstante clause in Sec. 43B has a far wider amplitude because it uses the words “notwithstanding anything contained in any other provisions of this Act”. Therefore, even assuming that the deduction is permissible or the deduction is deemed to have been allowed under any other provisions of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still holds precedence over such allowance.

e)Hence, disallowance could be made by invoking the provisions of Sec. 43B in respect of the statutory liabilities, even though the assessee offered his income to tax on presumptive basis.

Editor’s Note:

In the instant case, assessee has offered his income to tax on presumptive basis under Section 44AF. Provisions of Section 44AF are not applicable from assessment year beginning on or after the April 1, 2011. Thus, it can be inferred that the principal laid down by the ITAT would squarely apply when taxpayer has opted for presumptive taxation scheme under Section 44AD or Section 44AE.

Tax returns of MPs/MLAs can't be disclosed under RTI to compare them with info in election affidavit

Income-Tax Returns filed by MPs/MLAs are exempted from disclosure under RTI Act.Copies of the same cannot be furnished for comparing the information therein with disclosures made by MPs/MLAs in election affidavits.

Facts:

a)The Petitioner made an application under the RTI Act requesting certain information, more particularly the Income Tax Returns of one of the Member of Parliament (respondent).

b)The information was sought to crosscheck the affidavit filed by the respondent to the Election Commission. The Petitioner sought information on the ground of larger public interest.

c)The RTI application was dismissed by lower authorities on the ground that information sought for had no relationship with any public activity or interest and, therefore,would not qualify in view of the provisions of Section 8(1)(j) of the RTI Act.

d)The instant writ was filed to challenge the order of lower authorities.

The High Court dismissed the writ petition by holding as under:

1)As per Section 8(1)(j) of the RTI Act, personal information of an individual has no relationship to any public activity or interest and could not be disclosed unless larger public interest was involved.However, the proviso to said section carves out an exemption that the information which cannot be denied to the Parliament or the State Legislature shall not be denied to any person.

2)It was held by the Apex Court in the case of GirishRamchandra Deshpande v. Central Information Commission &Ors. (2013) 1 Supreme Court Cases 212 that the details disclosed by a person in his Income Tax returns is a personal information which stands exempted from disclosure under Section 8(1)(j) of the RTI Act, unless larger public interest is involved.

3)As per Section 33A and 33B of the Representation of the People Act, 1950, a candidate standing for the elections has to submit an affidavit to the Election Commission. Further, Section 125-A of the said Act provides for prosecution if the candidate fails to furnish the information or gives false information which he knows to be or has reason to believe to be false.

4)As the Parliament has deemed it appropriate to limit the information in respect of the candidate to the extent mentioned in Section 33A of the Representation of the People Act, 1950, it is not open for a citizen to contend that he seeks certain information to cross check the information which has been revealed by the candidate at the time of filing of his nomination.

5)In the instant case, the petitioner sought information furnished by respondent in his income-tax return to cross check the information furnished by the respondent at the time of filing of his nomination with Election Commission. Therefore, the said reason can hardly said to satisfy the test of the same being in public interest.

6)The petitioner also placed reliance on proviso to section 8(1)(j) to contend that the information couldn’t be denied to him as same could not be denied to the Parliament. In this regard, it is important to note that the Parliament has its own rules of business and, therefore, it cannot be presumed that the information in respect of the Income Tax Returns of a Member of Legislature would be sought by the Parliament. Hence, the proviso to section 8(1)(j) of RTI Act cannot be extended to mean that each and every information is to be provided to the Parliament or to the State Legislature as same would render the enactment of section 8(1)(j) meaningless-SHAILESH GANDHI V. CENTRAL INFORMATION COMMISSION[2015] 58 taxmann.com 147 (Bombay)

Govt. issues ordinance to allow filing of complaint on cheque bouncing at place where payee maintains the account

Recently, there had been a dispute relating to the place of jurisdiction for filing complaint against dishonouring of cheque. The dispute arose mainly in those cases where complaint was filed in jurisdiction of that Court where cheque was presented even if drawer-bank was located in different jurisdiction.

The Supreme Court in case of Dashrath Rupsingh Rathod v. State of Maharashtra [2014] 49 taxmann.com 497 (SC) cleared air on this issue and it interpreted provisions of Negotiable Instrument Act relating to place of jurisdiction for filing complaint. It ruled that complaint for dishounouring of cheque can be filed only at territorial jurisdiction of that Court where cheque is dishonoured by bank on which it is drawn.

Various stakeholder expressed difficulties on Supreme Court’s verdict with regard to the legal interpretation regarding place of jurisdiction in case of dishonouring of cheque. In order to address the difficulties of stakeholders the Government has issued Negotiable Instrument (Amendment) Ordinance, 2015 (‘NI Ordinance, 2015’).

The NI Ordinance, 2015 provides that the offence of cheque dishonour shall be enquired into and tried only by a court within whose local jurisdiction –

(a)the bank branch of the payee (viz, the place where the payee presents the cheque for payment) is situated, if the cheque is delivered for collection through an account; or

(b)the branch of the drawee bank where drawer maintain the account is situated, if the cheque is presented for payment by the payee or holder in due course otherwise through an account.

Further, all cases arising out of Section 138* which are pending in any court before the commencement of the Negotiable Instruments (Amendment) Ordinance, 2015 shall be transferred to the court having jurisdiction as per revised position. Also, in case of more that one prosecution filed by the same payee against the same drawer of cheques is pending before different courts, upon bringing the said fact to the notice of court, such court shall transfer the case to the court having jurisdiction under norms. *The Section 138 of the Negotiable Instrument Act, 1881 (‘NI Act’) deals with the offence relating to cheque dishonour for insufficiency, etc., of funds in the drawers account on which the cheque is drawn for the discharge of any legally enforceable debt or other liability. The section 138 of the NI Act provides for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque.