Recent Reported Direct Taxes' Judgements (Part V)

          Adv. Subash Agarwal

CA Swati Baid

[A]       SUPREME COURT

1.         CIT vs. M/s. Dawoodi Bohara Jamata (SC), Civil Appeal No. 2492 of 2014, Order dated 20.02.2014,

Charitable and religious trust which does not benefit any specific religious community is not hit by s. 13(1)(b) & is eligible to claim exemption u/s 11

Facts

The assessee filed an application for registration before the CIT for registration u/s 12A/ 12AA to avail exemption u/s 11. The CIT held that though the assessee was a charitable trust, since its object and purpose was confined only to a particular religious community (Dawoodi Bohra), the bar in s. 13(1)(b) was attracted. On appeal, the Tribunal held that as the objects of the trust are wholly religious in nature, the provisions of s. 13(1)(b) which are otherwise applicable to charitable trusts was not applicable. The assessee was held entitled to claim registration u/s 12A & 12AA. On appeal by the department, the High Court declined to entertain the appeal on the ground that the Tribunal had given a finding of fact that the assessee was a religious trust. On further appeal by the department the Supreme Court had to consider (i) whether the issue as to whether the assessee was a charitable/ religious trust was a finding of fact & (ii) whether the assessee was hit by the bar in s. 13(1)(b).

Held

(i) Normally a finding of fact as decided by the last fact finding authority is final and ought not to be lightly interfered by the High Court in an appeal. The exceptions to the said rule have been well delineated by this Court and for the present case do not require to be noticed. The appellate Courts however ought to be cautious while weeding out such questions and should the question in examination involve examination of finding of fact, ex cautela abundanti the appellate Courts would require to examine that whether the question involves merely the finding of fact or the legal effect of such proven facts or documents in appeal. While the former would be a question of fact which may or may not be interfered with, the latter is necessarily the question of law which would require consideration. It is often that the questions of law and fact are intricately entwined, sometimes to the extent of blurring the domains in which they ought to be considered and therefore, require cautious consideration. The question where the legal effect of proven facts is intrinsically in appeal has to be differentiated from the question where a finding of fact is only assailed;

(ii) The legal effect of proved facts and documents is a question of law. The determination of nature of trust as wholly religious or wholly charitable or both charitable and religious under the Act is not a question of fact. It is but a question which requires examination of legal effects of the proven facts and documents, that is, the legal implication of the objects of the trust as contained in the trust deed. It is only the objects of a trust as declared in the trust deed which would govern its right of exemption u/s 11 or 12. It is the analysis of these objects in the backdrop of fiscal jurisprudence which would illuminate the purpose behind creation or establishment of the trust for either religious or charitable or both religious and charitable purpose. Therefore, the High Court has erred in refusing to interfere with the observations of the Tribunal in respect of the character of the trust;

(iii) In certain cases, the activities of a trust may contain elements of both: religious and charitable and thus, both the purposes may be over lapping. More so when the religious activity carried on by a particular section of people would be a charitable activity for or towards other members of the community and also public at large;

(iv) On facts, the objects of the assessee are not indicative of a wholly religious purpose but are collectively indicative of both charitable and religious purposes. The fact that the said objects trace their source to the Holy Quran and resolve to abide by the path of godliness shown by Allah would not be sufficient to conclude that the entire purpose and activities of the trust would be purely religious in color. The objects reflect the intent of the trust as observance of the tenets of Islam, but do not restrict the activities of the trust to religious obligations only and for the benefit of the members of the community. In judging whether a certain purpose is of public benefit or not, the Courts must in general apply the standards of customary law and common opinion amongst the community to which the parties interested belong to. Customary law does not restrict the charitable disposition of the intended activities in the objects. Neither the religious tenets nor the objects as expressed limit the service of food on religious occasions only to the members of the specific community. The activity of Nyaz performed by the assessee does not delineate a separate class but extends the benefit of free service of food to public at large irrespective of their religion, caste or sect and thereby qualifies as a charitable purpose which would entail general public utility. Even the establishment of Madarsa or institutions to impart religious education to the masses would qualify as a charitable purpose qualifying under the head of education u/s 2(15). The institutions established to spread religious awareness by means of education though established to promote and further religious thought could not be restricted to religious purposes. The assessee is consequently a public charitable and religious trust eligible for claiming exemption u/s 11;

(v) The interpretation of the Tribunal & High Court that s. 13(1)(b) would only be applicable in case of income of a trust for charitable (& not religious) purpose established for benefit of a particular religious community is not correct. S. 13(1)(b) applies also to composite trusts set up for both religious and charitable purposes if it is established for the benefit of any particular religious community or caste.

(vi) On facts, though the objects of the assessee-trust are based on religious tenets under Quran according to religious faith of Islam, the perusal of the objects and purposes of the assessee would clearly demonstrate that the activities of the trust are both charitable and religious and are not exclusively meant for a particular religious community. The objects do not channel the benefits to any community if not the Dawoodi Bohra Community and thus, would not fall under the provisions of s. 13(1)(b)

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[B]       HIGH COURTS

1.         Mrs. Madhu Kaul vs. CIT 363 ITR 54 (P & H):

Period of holding for the purpose of determination of LTCGs/STCGs should be reckoned from the date on which the assessee is allotted a flat and first instalment is paid. Identification of a particular flat and delivery of possession is just a consequential act.

Facts

The assessee was allotted a flat on June 7, 1986, by letter, conveyed on June 30, 1986. The assessee paid the first instalment on July 4, 1986 but the flat was identified and delivery of possession was given only on November 30, 1988. The assessee sold the flat on July 5, 1989 and treated the gain from such sale as long term. The claim of the assessee was rejected, and the same was treated as short term capital gain. The Commissioner (Appeal) and the Tribunal confirmed the disallowance stating that the specific flat was allotted on  November 30, 1988 and  allotment letter or payment of the first instalment did not entitled the assessee to claim that the gains were long term capital gains.

Held

The Hon’ble High Court allowed the appeal of the assessee. The Hon’ble High Court held that the assessee was allotted flat on June, 7 1986, by a letter conveyed on June 30, 1986. The first instalment paid by the assessee on July 4, 1986 conferred the right upon him to hold a flat. The mere fact that possession was delivered on a later date did not detract from the fact that the allottee was conferred a right to hold the property on issuance of an allotment letter. The payment of balance instalments, identification of a particular flat and delivery of possession were consequential acts, which related back to and arose from the rights conferred by the allotment letters. Thus the gain from the sale of the said property was long term and not short term as contended by the  authorities below. Same issue was dealt in the case of Vinod Kumar Jain vs. CIT [2012] 344 ITR 501 (P&H).

Circular no. 471 dated 15.10.1986 clearly states that the allottee gets the title to the property on issuance of an allotment letter and the payment of instalments is only a consequential action upon which the delivery of possession flows.

2.         CIT vs. K. Ramakrishnan 363 ITR 59 (Delhi):

The date of allotment of plot to the assessee should be considered as relevant date for determining the period of holding of the property rather than date of execution of conveyance deed.

Held

The decision taken by the Hon’ble High Court of Punjab and Haryana in the case of Madhu Kaul (Mrs.) vs. CIT [2014] 363 ITR 54 was followed. It was held by the Hon’ble High Court that the assessee had acquired the beneficial interest in the property on payment of 96% of tentative cost of the plot. Thus the relevant date for computation of period of holding of the asset was October 3, 1999, by which time the assessee had made  major payments and the allotment letter was also received by the assessee and the gain was long term capital gain. It was also stated in the order that as per sec 47 of Registration Act, the registration of a document operates retrospectively.

3.         Madhav Marbles and Granites vs. ITAT 362 ITR 647 (Raj):

After 1.4.1989, as per the amendment made in sec 36(1)(vii) the assessee is no longer required to prove that the debt or advance has become bad. Merely writing it off in the books of accounts and debiting it in the profit and loss would be sufficient compliance of the Act

Held

The Hon’ble High Court held that as per the amendment made to the sec 36(1)(vii), after 1.4.1989, the assessee is no longer required to prove that the debts or the advances shown in his books of accounts have turned bad. Merely writing off such advances or debts as bad debts in books of accounts and debiting it to profit and loss account is sufficient compliance of the Income Tax Act 1961. The requirement on the part of the assessee to establish that the debts in question had really turned bad is no longer there after April 1, 1989, and it is left to the business prudence of the assessee to claim such deduction. A simple book entry to write off the debts is enough to entitle the assessee to claim such a deduction. It was further stated that, if even after such writing off, the assessee recovers any part of such bad debts, it will be credited to his books of accounts and will be taxed in the year of its receipt on recovery. Therefore going into the requirement of the assessee not establishing the nexus of the advances with his business and computation of profit in the relevant year is of no consequence.

4.         DCIT vs. Seervi Samaj Tambaram Trust 362 ITR 199 (Mad)

(i)                   A Charitable Trust will not be disqualified from registration even   if it is having both charitable and religious objects.

(ii)    The authority cannot deny registration of the trust on the ground that the trust has not commenced its activities on the date of filing of application.

Facts

The trust came into existence on August 13, 2010 but has not yet commenced it activities. The trust was formed to carry both charitable and religious purpose. The assessee filed an application for registration under sec 12AA of the Income Tax Act, 1961, before the Director of Income Tax (Exemption). The authority rejected the application of assessee stating that the activities of the trust were both charitable and religious in nature which is not in conformity with the provision of sec 11(1)(a) of the Act. The authority further stated that the trust came into existence on August 13, 2010 but was yet to commence its activities. The Tribunal relied on the decision taken in the case of CIT vs. Arulmigu Sri Kamatchi Amman Trust 260 Taxman 69 (Mad) and held the case in favour of the assessee stating that there was no bar in granting registration though the trust had objects of both charitable and religious. Reliance was also placed on the decision taken in the case of Kutchi Dasa Oswal Moto Pariwar Ambama Trust 262 ITR 194 (Guj) wherein it was held the application u/s 12AA cannot be rejected merely on the ground that the activities of the trust have not yet commenced.

 Held

The Hon’ble High Court held that the sec 12AA(1) contemplates satisfaction of the Commissioner about the objects of the Trust and the genuineness of the activities and to make such enquiry as may be necessary for the purpose of grant of registration. It was further stated that Sec 12AA(3) empowers the Commissioner to cancel the registration, if he is satisfied that the objects of such trust are not genuine or are not being carried out in accordance with the objects of the trust. When such a power is vested with the Commissioner to cancel the registration, the Commissioner was not correct in not granting the registration to the assessee trust merely on the fact the activities were not yet commenced on the date on which application was made without doubting the genuineness of the objects of the trust. The Hon’ble High Court followed the case of CIT vs. Arulmigu Sri Kamatchi Amman Trust [2012] 206 Taxman 69 (Mad).

5.         CIT vs. Ankleshwar Taluka ONGC and Land Loser Travellers Co-operative Society 362 ITR 92 (Guj)

The payments made by the assessee, on behalf of ONGC, to the farmer were not expended and would not come within the meaning of expenditure and the payments will not be disallowed by invoking the provisions of sec 40(a)(ia) and sec 40A(3).

Facts

ONCG formulated a scheme to acquire the land from the framers where crude oil and natural gas was found. According to the scheme, the illiterate farmers were provided with one jeep which would be taken on rent by the ONGC. As the number of farmers was increasing day by day, the ONGC formed a co-operative society consisting of farmers whose land was acquired by the ONGC. The society was a non profit making organisation and would maintain the individual account of each farmer and would be one-step entity co-ordinating all matters with the ONGC on behalf of the farmers. ONGC paid lump sum money, after deduct TDS, to the assessee – society. The AO was of a view that the society was functioning as a sub-contractor and that it ought to have deducted TDS on payments made to each of the farmers. Thus the AO disallowed the expenditure by invoking sec 40(a)(ia). AO also disallowed 20% of the expenditure u/s 40A(3) as the entire payment was made in cash.

Held

The CIT(A) deleted both the additions made by the AO. The CIT(A) was of the view that the society was formed to facilitate receipts and distribution of income and accounting of the expenses. The functions performed by the society had no profit motive and were more in the nature of a welfare activity. The CIT(A) found that there was no element of work contract in terms of the provisions of sec 194C and the original agreement always remained between the ONGC and the individual farmers and the society acted as an interface between the farmers and the ONGC. Thus the provisions of sec 40(a)(ia) cannot be invoked for non deduction of TDS. The CIT further held that there was no case for disallowance under sec 40A(3) as no expenditure was incurred by the society in distributing the rentals to the farmers. The Tribunal upheld the decision of the CIT(A).

Hon’ble High Court held that similar issue has been dealt with in the A.Y. 2005-06 in case of same assessee. The Court has adverted to the issue in the context of the findings of the CIT(A) and the Tribunal and has approved the same. The court held that the payments in question were not expended by the assessee and therefore would not come within the meaning of expenditure and the tax appeal was dismissed.

6.         CIT vs. Sandur Manganese and Iron Ores Ltd. 362 ITR 160 (Karn)

Held

In the instant case, the assessee had claimed certain deductions under the wrong impression/interpretation of law. The assessee had offered bonafide explanation before the A.O during the penalty proceedings. The penalty u/s 271(1)(c) can be imposed only when there is an attempt to evade tax by offering an explanation which is found to be false or not bonafide. The imposition of penalty is not automatic. Only if the explanation is found to be false or not bonafide, the penalty u/s 271(1)(c) can be imposed.

7.         Gujarat Borosil Ltd. vs. DCIT 363 ITR 293 (Guj)

The AO must record his reasons for making assessment, reassessment, re-computation of income u/s 147 before issuing any notice u/s 148 of the Act. Otherwise the notice u/s 148 will be invalid.

Facts

The AO issued notice u/s 148 to the assessee on March 23, 2012 for re-opening of the assessment. The reasons for reopening the assessment recorded by the AO carried the date March 30, 2012, i.e., after the date of issue of notice.

Held

The Hon’ble High Court held that sec 148(2) requires the AO to record the reasons for reopening of the assessement before the issuance of notice u/s 148(1). When the essential requirement of issuance of notice u/s 148(1) is not fulfilled, the notice itself will be rendered ineffective. Thus the impugned notice was quashed.

8.         CIT vs. Fr. Mullers Charitable Institution 363 ITR 230 (Karn)

As per sec 13(1)(d), when a trust makes an investment or deposit in violation of sec 11(5), the income derived from such investment will be liable to be taxed but the total income of the assessee would not be denied exemption u/s 11.

The Commission can invoke the revisionary power u/s 263 only when the order passed by the AO is erroneous and prejudicial to the interest of the revenue.

Facts

The assessee has advanced a sum of Rs. 30 lacs and Rs. 50 lacs to a company which is running a Kannada daily. The AO denied the exemption on income from such investment being the advance made,which was in violation of sec 11(5). The Commissioner invoked his revisional power u/s 263 and set aside the assessment order with a direction to the AO to assess the entire income of the assessee to tax. The Tribunal set aside the revisionary order of the Commissioner and restored the order of the AO.

Held

The Hon’ble High Court held the Tribunal’s order valid. The Court held that the Commissioner cannot invoke his revisionary power to correct each and every type of mistakes committed by the AO. Moreover, sec 263 can be invoked only if both the conditions i.e, order passed by the AO is erroneous and prejudicial to the interest of the revenue are satisfied. Further, following the decision taken in the case of DIT (Exemptions) vs. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom) and DIT (Exemption) vs. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi), the Hon’ble High Court held that the entire income of the trust cannot be assessed to tax.

9.         CIT vs. Jafari Momin Vikas Co-op. Credit Society Ltd. 362 ITR 331 (Guj.)

Sec 80P (4) (exclusion clause) would apply to credit co-operative banks only. The provision cannot be extended to credit co-operative society.

So, the assessee is entitled to the benefit of deduction u/s 80 P

Held

The assessee is a credit co-operative society and not a credit co-operative bank. Thus the provision of sec 80P(4) will not apply to the assessee. Circular No. 133 of 2007, dated May 9, 2007 has clarified that the Delhi Co-op. Urban Thrift and Credit Society Ltd. was not a co-operative bank and the sec 80P(4) did not apply to it.

10.       CIT vs. Avinash Jain 362 ITR 441 (Delhi)

When an assessee is maintaining two separate portfolios and also  separate dematerialised accounts and bank accounts, the gain from investment account will be either short term or long capital gain and would not be accounted as business income.

Facts

 The assessee is engaged in the sale and purchase of shares and maintains two separate portfolios. One is an investment portfolio and the other is a trading portfolio. This practice of the assessee has been going on for earlier years also and has been recognised by the Revenue. In the current A.Y., the AO treated both the STCG and LTCG as business income by construing the entire activity of the assessee as a business activity and made the addition.

Held

Hon’ble High Court relied on the findings of the CIT and the Tribunal. CIT placed reliance on the CBDT circular no. 4 of 2007, dated June 15, 2007 where it was stated that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio which comprises of securities to be treated as capital asset and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an appellant has two portfolios, the assessee may have income under both head, i.e., capital gains as well as business income.

The Tribunal held that the assessee’s separate activities in shares were supported and endorsed by the fact that separate dematerialised accounts, bank accounts were being maintained and separate trading and investment accounts were maintained in the books. Thus, the assessee was dealing in different activities of trading and investment. The Hon’ble High Court dismissed the appeal of the Revenue and confirmed the order of the Tribunal that the STCG and LTCG were out of the investment account and were not related to the trading account of the assessee. Cases of CIT vs. Associated Industrial Development Co. (P) Ltd. [1971] 82 ITR 586 (SC) and CIT vs. H.Holck Larsen [1986] 160 ITR 67 (SC) were relied on.

11.       CIT vs. CHD Developers Ltd. 362 ITR 177 (Del.)

The amendment to sec 80-IB(10)(a)(ii), requiring the assessee to obtain the  Certificate of Completion of the project within 4 years of approval will be effective from 1.4.2005 and the amendment would not apply to any project approved prior to the said date.

Facts

The assessee, real estate developer, obtained approval for a housing project on March 16, 2005, from the Development Authority. The project was completed in 2008 and a letter dated November 5, 2008 was applied to the competent authority for the issue of completion certificate. The AO denied the claim of the assessee u/s 80-IB(10) on the ground that the assessee has violated the condition stipulated under sec 80-IB(10) inasmuch as it has not obtained the completion certificate from the competent authority within 4 years as stipulated in Explanation (ii) thereto.

Held

Hon’ble High Court upheld the decision taken by the Tribunal. The Tribunal held that the assessee was not required to fulfil the conditions which were not on statue when the approval was granted to the assessee. The High Court held that the assessee was granted approval for the project on March 16, 2005. The said approval related to the period prior to 2005 i.e. before the amendment. The application of the stringent conditions, which are left to an independent body such as local authority who is to issue the completion certificate, would have led to not only hardship but absurdity. Thus, the Tribunal was not in error of law while holding the case in favour of the assessee.

12.       Mahesh Kumar Gupta, Smt. Rukmani Gupta, Yogesh Kumar Gupta vs. CIT 363 ITR 300 (All).

When a notice u/s 148(1) is issued for reopening of an assessment order after a period of 4 years, the AO must record in his reasons the fact that the income escaping assessment is likely to exceed Rs. 1 lac. Sanctioning Authority cannot record satisfaction for reassessment in absence thereof and the notice will be invalid.

Fact

The assessee converted leasehold rights in certain lands into freehold rights on August 27, 1990. The assessee sold a parcel of the land. The assessee filed the return for the A.Y. 2000-01 which was accepted. The assessee received a notice u/s 48 dated March 23, 2007 proposing to bring the gains on the sale to tax as STCG. The assessee filed objection to the initiation of the reassessment proceedings on the ground that the reasons recorded for taking action u/s 148 did not mention that the income escaping assessment was more than Rs. 1 lac. The notice u/s 148 was barred by time in terms of sec 149(1)(b). The objection filed by the assessee was dismissed and the assessee filed a writ petition before the High Court.

Held

Even assuming the income was liable to be taxed as short term gains, the extended period of limitation of 6 years would not be available to the department unless there was any material before the authority that the income likely to taxed exceeded Rs. 1 lac. The contention of the department that the notice was issued after proper sanction of Joint or Additional Commissioner fulfilled the requirement of law was not tenable. In the absence of anything in the reasons recorded to suggest that the income chargeable to tax which has escaped assessment was Rs. 1 lakh, the reassessment notice issued after 4 years of the close of the A.Y. was not valid, being clearly barred by time.

13.       CIT vs Corrtech Energy Pvt. Ltd (Guj.), Tax Appeal No. 239 of 2014, Order dated- 24.03.2014.

No disallowance u/s 14A & Rule 8D can be made if the assessee does not have tax-free income & no claim for exemption is made

Facts

In AY 2009-10, the assessee had investments in tax-free securities on which it had earned no income. It claimed that as there was no tax-free income, no disallowance u/s 14A read with Rule 8D could be made. However, the AO & CIT(A) rejected the claim. On appeal, the Tribunal accepted the claim by relying on CIT vs. Winsome Textile Industries Ltd 319 ITR 204 (P&H) and held that as the assessee had not claimed any exemption, no disallowance u/s 14A & Rule 8D could be made.

Held

Sub-section (1) of s. 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance u/s 14A of the Act could not be made. The Tribunal relied on the decision of the P&H High Court in case of CIT vs. Winsome Textile Industries Ltd319 ITR 204 (P&H) where it was held that s. 14A could have no application to a case where the assessee did not make any claim for exemption. We do not find any question of law arising, Tax Appeal is therefore dismissed.

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14.       Sadbhav Engineering Limited vs. DCIT, (Guj), Special Civil Application No. 5850 of 2010 and Special Civil Application No .5848 of 2010, Order dated 09.04.2014

Section 147: Reopening, even within 4 years, solely on the basis of a clarificatory retrospective amendment, is not permissible

Facts

In AY 2005-06 the assessee claimed deduction u/s 80IA(4) which was allowed u/s 143(3). Thereafter, within 4 years, the AO reopened the assessment on the basis that the retrospective amendment to s. 80IA(4) w.e.f. 1.4.2000 prohibited deduction to an assessee who was carried on business is in the nature of a works contract. The assessee challenged the reopening on the ground that the retrospective amendment was merely clarificatory of the existing law and amounted to a ‘change of opinion’.

Held

In Katira Construction 352 ITR 513 (Guj) it was held that the Explanation to s. 80IA(4) was purely explanatory in nature and did not mend the existing statutory provisions. If an Explanation is added to a statute for the removal of doubts, the implication is that the law was same from the beginning and the same is further explained by way of addition of the Explanation. Therefore, it is not a case of introduction of new provision of law by retrospective operation, but when all the materials regarding activities of the assessee are available on record and the benefit of the provision is already made available to such assessee, reassessment proceedings cannot be initiated only on account of addition of such Explanation. On facts, as the AO had conducted a detailed scrutiny before allowing the s. 80-IA(4) deduction, the reopening based only on the retrospective insertion of the Explanation is on mere “change of opinion” (Parikshit Industries352 ITR 349 (Guj) & Agrawal J.V. 83 DTR 101 (Guj) followed).

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15.       CIT vs. M/s.Bharat Bijlee Ltd. (Bom), ITA No. 2153 of 2011, Order dated- 09.05.2014.

S. 50B applies only to a “sale” for a “monetary consideration” and not to a case of “exchange” of the undertaking for shares under a s. 391/394 scheme of arrangement.

Held

The definition of the term “slump sale” in s. 2(42C) means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale. In Motors & General Stores (P) Ltd 66 ITR 692 (SC) it was held that a “sale” meant a transfer for a monetary consideration and that an “exchange” would not amount to a “sale”. On facts, scheme of arrangement shows that the transfer of the undertaking took place in exchange for issue of preference shares and bonds. Merely because there was quantification when bonds/preference shares were issued, does not mean that monetary consideration was determined and its discharge was only by way of issue of bonds/preference shares. In other words, this is not a case where the consideration was determined and decided by parties in terms of money but its disbursement was to be in terms of allotment or issue of bonds/preference shares. All the clauses read together and the entire Scheme of Arrangement envisages transfer of the Lift Division not for any monetary consideration. The Scheme does not refer to any monetary consideration for the transfer. The parties were agreed that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was a case of exchange and not a sale. Therefore, s. 2(42C) of the Act was inapplicable. If that was not applicable and was not attracted, then, s. 50B was also inapplicable. The judgement of the Delhi High Court in SRIE Infrastructure Finance Ltd 207 Taxman 74 (Del) is distinguishable on facts. There is no necessity to analyze the circumstances in which s. 50B was inserted in the statute book.

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16.       DIT vs. M/s. Wizcraft International Entertainment Pvt. Ltd. (Bom.), ITA No. 2293 of 2011, Order dated 21.04.2014

Commission paid to an agent for services rendered abroad and payment by way of reimbursement of expenses are not taxable in India

Facts

The assessee, an event organizer, entered into an agreement with “Colin Davie Artiste Services”, a UK company, under which the latter agreed to procure renowned foreign entertainers like “Diana King” & “Shaggy” for performances in India. The assessee agreed to pay a fee to the entertainers as well to Colin Davie & to reimburse expenses incurred. In respect of the fees paid to the entertainers, the assessee accepted that the same was chargeable to tax in India under Article 18 of the India-UK DTAA and deducted tax at source u/s 195. However, in respect of the fees paid to Colin Davie and amounts paid towards reimbursement of expenses, the assessee argued that the same were not liable to tax in India. The AO took the view that as the payment to Colin Davie was high, it was actually meant for payment to the entertainers. He also held that the nature of services agreed to be rendered by Colin Davie were such that it could not be performed without having a presence in India. On appeal, the CIT (A) as well as the ITAT accepted the stand of the assessee.

Held

The CIT(A) and Tribunal rightly arrived at the conclusion that Mr. Colin Davie did not perform any services in India, but they were rendered outside India. Therefore, commission income to the agent is not liable to tax in India and there was no obligation on the part of the assessee to deduct the tax at source at the time of making of payment. In so far as payment or reimbursement of expenses in connection with the visit and performance of the artists in India, the amount reimbursed to them was towards air travel and was supported by documents. On that, tax need not be deducted.

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17.       Radials International vs. ACIT (Del.),  ITA No.485 of 2012, Order dated 25.04.2014,

Gains arising from PMS transactions are capital gains & not business profits

Facts

The assessee offered LTCG & STCG on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The AO, CIT (A) & tribunal held that as the transactions by the PMS manager were frequent and the holding period was short, the LTCG & STCG were assessable as business profits.

Held

(i) The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profit;

(ii) The intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the money;

(iii) Along with the intention of the assessee, other crucial factors like the substantial nature          of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade.

The block of transactions entered into by the portfolio manager must be tested against the principles laid down, in order to evaluate whether they are investments or adventures in the nature of trade. On facts, the source of funds of the assessee were its own surplus funds and not borrowed funds. About 71% of the total shares have been held for a period longer than 6 months, and have resulted in an accrual of about 81% of the total gains to the assessee. Only 18% of the total shares are held for a period less than 90 days, resulting in the accrual of only 4% of the total profits. This shows that a large volume of the shares purchased were, as reflected from the holding period, intended towards the end of investment. The fact that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year is not relevant because the number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of transactions. Moreover, even if only a small number of transactions resulted in a holding for a period longer than a year, the number becomes irrelevant when it is clear that a significant volume of shares was sold/ purchased in those transactions.

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18.       Rashmikant Kundalia vs. UOI (Bom.), W.P No.771 OF 2014, Order dated 28.04.2014,

Section-234E: High Court grants ad-interim stay against operation of notices levying fee for failure to file TDS statement.

S. 234E of the Income-tax Act, 1961 inserted by the Finance Act, 2012 provides for levy of a fee of Rs. 200/- for each day’s delay in filing the statement of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS). A Writ Petition to challenge the validity of s. 234E has been filed in the Bombay High Court. The Petition claims that assessees who are deducting tax at source are discharging an administrative function of the department and that they are a “honorary agent” of the department. It is stated that this obligation is onerous in nature and that there are already numerous penalties prescribed for a default. It is stated that the fee now levied by s. 234E is “exponentially harsh and burdensome” and also “deceitful, atrocious and obnoxious“. It is also claimed that Parliament does not have the jurisdiction or competence to impose such a levy on tax-payers.

The Bombay High Court has, vide order dated 28.04.2014, granted ad-interim stay in terms of prayer clause (d) i.e. stayed the operation of the impugned notices levying the fee.

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19.       Samsung India Electronics Pvt. Ltd vs. DIT (Del.), W.P.(C) 3891 of 2013,  Order dated 25.04.2014,

If it is held by the dept that no income arose to the recipient then notices to payer for TDS default u/s 201 & s. 40(a)(i) disallowance are bad

           

            Held

(a) The key to the decision is the answer to the question whether any income arose or accrued to Samsung Electronics Ltd, Korea (“SEC”) through its PE in India in respect of the sales made in India. If the answer is in the affirmative, both the notices would be good notices; if the answer is in the negative, both the notices would be bad. The answer in our opinion should be in the negative, because even as per the revenue, as reflected in the order passed by the DRP in the reassessment proceedings of SEC, no income accrued to SEC in India. In this regard, the DRP rejected the specific request made by that assessing officer in his remand report that the petitioner be treated as the permanent establishment (PE) of SEC and the income of SEC be computed on that basis. The DRP however held that as regards attribution of income to the “fixed place PE”, a rough and ready basis would be to 10% of the salary paid to the expat-employees of the petitioner as the mark-up, as was done by the assessing officer in the draft assessment order. The remuneration cost in respect of such employees seconded to the petitioner amounted to Rs. 10,72,24,310; this was taken as the base and a mark-up of 10% had been applied by the assessing officer and the income was taken as Rs.1,07,22,431/-. This was approved by the DRP in its order dated 29-9-2012; the other claims made by the assessing officer in the remand report were rejected;

(b) Thus the basis of both the notices (section 148 and 201) has been knocked out of existence by the DRP’s order in the reassessment proceedings of SEC for the same assessment year. On the date on which notices were issued to the petitioner under Sections 148 and 201(1)/(1A), there was an uncontested finding by the revenue authorities (i.e., the DRP) in the case of SEC that SEC cannot be taxed in respect of the sales made in India through the petitioner on the footing that the petitioner is its PE. If no income arose to SEC on account of sales in India since the petitioner cannot be held to be its PE in India, two consequences follow: (i) the payments made by the petitioner to SEC for the goods are not tax deductible under section 195(2) and hence they were rightly allowed as deduction in the original assessment of the petitioner and (ii) the assessee cannot be treated as one in default under section 201(1) and no interest can be charged under section 201(1A). It needs mention here that the notice under section 201 is a verbatim reproduction of the remand report of the assessing officer in SEC’s case filed before the DRP.

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20.       CIT vs. Mitesh Impex (Guj). TA Nos. 2560/09 to 2563/09, TA Nos. 2567/09 to 2570 TA Nos. 2602/09 to 2607/09, Order dated 09.04.2014,

(i)                 Concept of “manufacture” explained.

Held

The word “manufacture” implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinct name, character or use. The assessees would put the imported material to series of manual and mechanical processes and through such exercise so undertaken, bring into existence entirely new, distinct and different commodities which are marketable. Thus, the Tribunal, in our opinion, correctly came to the conclusion that this process amounted to manufacturing;

(ii)               Non-claiming of s. 80-IB deduction in return is no bar for claiming it before CIT(A)

Though the assessee did not raise a claim in the return for deduction u/s 80IB & 80HHC, it was entitled to raise the claim before the CIT(A) for the first time. If a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come, merely because it is raised for the first time before the appellate authority without resorting to revising the return before the AO. Courts have taken a pragmatic view and not a technical one as to what is required to be determined in taxable income. In that sense assessment proceedings are not adversarial in nature. The decision in Goetze (India) Ltd. Vs CIT (SC)is confined to the powers of the AO and accepting a claim without revised return and does not affect the power of the CIT(A) or the Tribunal to entertain a new ground or a legal contention.

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[C]       TRIBUNALS

1.         ICICI Bank Ltd. vs. JCIT, ITA Nos. 3643 & 3644/ Mum/2001, ‘C’ Bench, Order dated 02.05.2014,

Assessee is entitled to depreciation on assets given on lease

Held

In so far as the issue relating to the claim of depreciation on leased transactions is concerned, the Supreme Court in ICDS VS CIT 350 ITR 527 had the occasion to consider the question “whether the Assessee is entitled to depreciation on vehicles financed by it which is neither owned by the Assessee nor used by the Assessee?” The Supreme Court after perusing the lease agreement and other related factors held that the lessor is the owner of the vehicles. As an owner, it used the assets in the course of its business satisfying both the requirements of S. 32 of the Act and hence is entitled to claim depreciation. A similar view was taken by the Delhi High Court in Cosmos Films 338 ITR 266 wherein the Delhi High Court considered the implications of S. 19 of Sale of Goods Act, 1930. The Tribunal, Mumbai Bench in the case of Development Credit Bank Ltd  has followed the decision of the Supreme Court in the case of ICDS and the decision of Delhi High Court in the case of Cosmos Films and allowed the claim of depreciation. The Tribunal, Mumbai bench, in the case of L&T has considered a similar issue and followed the findings of the Supreme Court in the case of ICDS and also of the co-ordinate bench in the case of Development Credit Bank Ltd and allowed the claim of depreciation on sale of lease back assets. Considering all these judicial decisions in the light of the facts, we direct the AO to allow depreciation.

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2.         M/s JM Financial Limited vs. ACIT, ITA No. 4521/Mum/2012, ‘J’ Bench       Order dated 26.03.2014

No s. 14A/ Rule 8D disallowance for investment in shares of subsidiaries & Joint       Ventures

Held

In AY 2009-10, the assessee has specifically raised a point before the AO that 97.82% of the investment is in subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. The department has not disputed this fact that out of the total investment about 98% of the investments are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In Godrej & Boyce Mfg. Co it was held that s. 14A(2) does not ifso facto empower the AO to apply the method prescribed by Rule 8D straightaway without considering whether the claim made by the assessee is correct. Also, in Garware Wall Ropes it was held that a disallowance u/s 14A cannot be made if the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Similarly, in Oriental Structural Engineers (approved by the Delhi High Court) it has been held that s. 14A disallowance cannot be made for investment in subsidiaries and SPVs out of commercial expediency.

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