Monday, March 28, 2016

Replies to Queries on Income – Tax
By Subash Agarwal, Advocate
 My regular feature on income tax in   Feb 2016 issue of Anmi Journal - published every month by the Association of National Exchanges Members of India !

Query No. 1:
Contract Farming – tax implications
Snow White P Ltd is engaged in “Contract Farming” for production of seeds wherein the list of farmers together with land is prescribed by Government Agency. The assessee-company purchases the foundation seed and deposits the tag with certifying agency. These foundation seeds are given to farmers for cultivation and in exchange of full crop a contract price for cultivation cost alongwith 10% above market price is given. The income generated is 150% of investment. In the return of income filed by the assessee, it has shown the income as Agricultural Income. The case was selected under scrutiny and the assessee is in receipt of notice under section 143(3) and in which AO has enquired as to how the income from contract farming will qualify as Agricultural Income?

The assessee company is into contract farming for production of agricultural seeds. The assessee company purchases foundation seeds and gives them to the farmers. Then the full grown crops are purchased from the farmers at a pre-determined price i.e. cultivation cost + 10% above market price and then the crop are sold in the market. The land on which the crop is being cultivated is neither owned by the assessee nor taken on lease basis.
The assessee company must carry out any one or more activity as per Section 2(1A) to be eligible for the exemption u/s 10(1). The assessee is not involved in any of the activity as mentioned in sec 2(1A) of the Act. The assessee company needs to own the land on ownership or lease basis for the agricultural produce.
Reliance is placed on the following decisions:
1)      CIT vs Raja Benoy Kumar Sahas Roy, 32 ITR 466, 508, Supreme Court,
2)      Consolidated Coffee Estates (1943) Ltd. vs. C. Agri. IT (1970) 76 ITR 29, 33, Mysore High Court,
3)      Bharat Timber Trading Co. v CIT, (2008) 296 ITR 676, Karnataka High Court

The income earned by the assessee company from the contract farming cannot be categorised as an agricultural income since it is not involved in the agricultural activity and does not own the land on which the agricultural activity is being done and hence, is not covered under any of the sub-section which categorise an income earned as an agricultural income.

Query No. 2:
Income from installation of tower on the roof
Rajiv Anand has filed his return of income for the A.Y. 2008-2009 declaring a total income of Rs. 10,23,000/-. Assessee has given the roof of his house on rent for installation of tower to BSNL. Assessee has received a sum of Rs. 1,36,000/- from BSNL as rent and declared the said amount under the head “income from house property” after claiming deduction under Section 24. During the course of regular assessment, AO stated that the amount received from BSNL was chargeable to tax as income from other sources and the standard deduction claimed by the assessee u/s 24 was disallowed by AO relying on the case of Mukherjee Estate P Ltd vs CIT, 244 ITR 1 by Calcutta High Court. Whether the Assessing Officer is right in his view that the assessee is not entitled to deduction under Section 24?

Assessee has given the roof of his house for installation of tower and the amount received is declared in the return under head "income from house property" and claimed standard deduction u/s 24. AO made the addition of the amount relying on the case of Mukherjee Estate P Ltd vs CIT, 244 ITR 1 by Calcutta High Court.
In the instant case, the assessee has let out the roof for installation of tower whereas in the case relied by the AO, the roof was let out for placing the hoardings.
Reliance can be placed on the decision of the Delhi HC in the case of Niagara Hotels & Builders P Ltd vs CIT (ITA 43/2014) and decision of Kolkata Tribunal in the case of Taramani Jalan vs ITO (ITA No. 886/Kol/2015), where it was held that the rent received by the assessee for giving top terrace of his house property for installing space antenna is chargeable to tax under the head "income from house property". It was held in these cases that terrace cannot exist in air and it is very much a part of the building, which has been constructed on the land beneath to super structure. Hence, the space given on rent is considered to be a part of the building or land appurtenant thereto, therefore the income received from such letting out is to treated as income from house property u/s 22.

Query No.3:
Rent received for putting stalls by non-members in trade fair organized for charity.
Kolkata Rubber Trade Association is an association duly registered u/s 12A of the Income Tax Act, 1961. Assessee holds a certificate u/s 80G of the Act. The prime object of the assessee is to promote rubber trade. Assessee has organized its 19th trade fair in the A.Y. 2009-2010. The stalls at fair were booked by members and non members. The fair generated a business of Rs. 2crores. The non-members contributed only the rent of the fair amounting to Rs. 10lacs and members contributed a total sum of Rs. 15lacs towards stalls whereas the expenditure incurred was  almost Rs. 12lacs. AO was of the view that the assessee was allowing non members to participate in the trade fair by selling their stalls. AO therefore concluded that the assessee is deriving income by carrying on activity in the nature of trade, commerce and business within the meaning of proviso to Section 2(15) of the Act. Accordingly, AO denied the benefit of exemption u/s 11. Pl. give your view.

Assessee is an Association duly registered u/s 12A. Assessee holds a certificate u/s 80G. The prime object of the association is to promote rubber trade.
The organisation of trade fair is one of the declared object of the assessee on the basis of which it has been registered u/s 12A and the donation to it are eligible for deduction u/s 80G.
In this regard, following recent decisions are worth noting-
1)      India Trade Promotion Organisation vs DGIT (371 ITR 333, Delhi High Court)
2)      ITO vs Indian Leather Products Association (ITA No. 735/K/2013, Kolkata ITAT)
It was held in these decisions that proviso to Section 2(15) will be attracted only when the assessee is found to be involved in advancement of any other object of general public utility doing activities in the nature of trade, commerce and business but where it is seen from the bye-laws of the assessee trust that the dominant and prime objective of the assessee is not profit making and actually it is seen that a part of the activity/ service rendered is in the nature of trade, commerce and business but the same is incidental to the  dominant and prime objective of the trust, the benefit of exemption u/s 11 cannot be denied. In the instant case, assuming that the dominant and prime objective of the assessee is not profit making as per its bye laws, the contribution that assessee received from the non-members cannot be said to have constituted major receipts. This is substantiated by the actual income received on operations and the expenditure incurred. The proviso to Sec 2(15) is not applicable in this case. Assessee is entitled to the benefit under Sec 11. AO has not disputed the conditions necessary for allowing exemption u/s 11 except proviso to Sec 2(15). Hence, the income is not includible in the total income.

Query No. 4:
Applicability of Section 2(47)(v)
Siya Transport Finance is a non banking financial company. The fixed assets schedule as on 31.03.2015 shows ‘building and flat’. In fact and in effect the head of accounts includes one flat and one parking lot in one deed and subsequent acquisition of further one parking lot by another deed which are registered.  The assessee company intends to sale the said assets under two deeds separately. The company has received 50% as advance towards sale and has entered into two agreements of sale on 10.01.2015. The company wants to know the applicability of section 2(47)(v) of the Income Tax Act.

In the instant case, the assessee is holding a flat and two parking lots. The same is held under two registered deeds of conveyance. The definition of transfer u/s 2(47) of the Act includes a situation where there is handing over of possession of an asset as per sec 53A of the Transfer of Property Act even if the sale deed is not registered .
The provision of sec 2(47)(v) is reproduced hereunder
            (v) Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882)
As per the above provision, it is clearly evident that even if the assessee does not register the conveyance deed but enters into an agreement or does any act which results in allowing the possession of the said assets to be taken in part performance of a contract as referred to in sec 53A of the Transfer of Property Act, 1882, the asset will be deemed to be transferred for the purpose of Income Tax Act and capital gain on the same would be computed and taxed.

It is pertinent to note here that as per Supreme Court decisions in CIT Vs Bhurangya Coal Co. 34 ITR 802 and Alipati Venkataramiah Vs CIT 57 ITR 185, transfer of immovable property was considered to have been taken place upon conveyencing and not on the date of agreement for sale. But the scenario has changed after the insertion of clause (v) to section 2(47) which has been explained here-in-above. So the capital gains tax liability will accrue in the A.Y : 2015-16.