TAX UPDATES

The Punjab and Haryana High Court has quashed a February 2, 2011, notification of the Punjab Government for levying institution tax. A Division Bench held the notification was violative of the Constitution of India.

VAT 15 POST LAUNCH ISSUES

1. In Miscellaneous Information: Information regarding payment to contractors and tax deducted in being called for while at the same time separate return Vat 27 is required to be filled in thus information is being repetitively called for without scrapping Vat-27

New Vat 15 launched on 31-01-2013

Finally Excise and Taxation Department of Punjab has launched Vat 15 on 31-01-2013
It is required to be submitted till 5th March 2013
Following issues were raised before Vat Department before launch:

Surplus generated was utilised for the educational activities assessee being educational institution , cancellation of registration was not justified.(

Surplus being generated is utilized for the purpose of objects of the institution. It is nowhere provided that the trust cannot be constituted by a family and it is also not provided under the Act that trust will not have number of institutions. Education itself is charitable object and if the surplus is utilized for the purpose of charitable activities then it cannot be said that registration is to be disallowed. Chief CIT has allowed exemption under s. 10(23C) on finding that the activities of the assessee are genuine and as per its object. Assessee has explained the reasonableness is respect of the payments made to the persons covered under s. 13(3). Reasonableness is actually to be seen by the AO and not by the CIT while allowing registration or cancelling the registration. CIT was not justified in cancelling the registration.
Rajasthan Vikas Sansthan v. CIT (2012) 78 DTR 411 (Jodhpur) (Trib.)

Object remained same even after amendment – No cancellation of registration without giving any contrary finding

Mere finding that objects of trust has been altered without consent of department would not be sufficient to exercise power under section 12AA(3) without giving a finding that objects of trust are no longer charitable. Where assessee education‐trust was formed with main object of imparting education, mere fact that it amended clause of trust deed to include technical and medical education within its ambit and it paid commission to persons who solicited students for studying in assessee's education, it could not lead to conclusion that assessee was not imparting education. Therefore, Director (Exemption) was not justified in cancelling registration under section 12AA(3).
Krupanidhi Educational Trust v. DIT(IT) (2012) 139 ITD 228 (Bang)(Trib.)

Director is not required to examine whether the Trust has actually carried on charitable activities

Statute does not prohibit or enjoin the CIT from registering trust solely based on its objects, without any activity, in the case of a newly registered trust. Statute does not prescribe a waiting period, for a trust to qualify itself for registration. Tribunal was therefore right in holding that while examining the application u/s. 12AA(1)(b) r.w.s. 12A, the CIT/Director is not required to examine the question whether the trust has actually commenced and has, in fact, carried on charitable activities.
DIT v. Foundation of Opthalmic and Optometry Research Education Centre (2012) 79 DTR
178(Delhi)(High Court)

Received shares as corpus and subsequent sale there is no violation the assessee is eligible for exemption

Assessee trust received 11,47,110 equity shares of M. Ltd and 2,01,500 equity shares of S Ltd.from another trust towards corpus donation. There is no restriction on accepting shares by a charitable institution. However, cl.(iia) of the proviso to s. 13(1)(d)(iii) entitles an assessee trust to hold the shares for a maximum period of one year before which they have to be converted into the modes of investment as prescribed in s. 11(5). Contention of the Dept. Representative that the assessee has violated the provisions of s. 11(1)(d) by selling the shares suffers from the basic fallacy in not recognizing that the assessee has merely converted one form of investment into another viz. Money by selling the shares. The corpus donations received by the assessee could not be considered as general donations merely on the ground of its utilization in the subsequent year for giving corpus donations to other charitable institutions. (A.Y. 2006 – 07 & 2007‐08)
Sera Foundation v. ITO (2012) 79 DTR 210/150 TTJ 537 (Delhi) (Trib.)

Capital gain applied for charitable purpose ‐Not by acquiring a new asset but for other charitable purpose – Claim for exemption is allowed

If capital gain is applied for charitable purpose of assessee not by acquiring a new asset but for other charitable purpose, then there is no reason why it should not be considered as application of income for
charitable purpose enabling assessee to claim exemption under section 11(1). (AY 2006‐07)
Al Ameen Education Society v. DIT (Ex) (2012) 139 ITD 245 (Bang.)(Trib.) (2006‐07

Absence of charitable activities -Trust is not entitled to exemption

An assessee that engages itself only or predominantly in activities relating to its ancillary or incidental objects which are not related to any charitable purpose and does not carry on any activity relating to its main object of charitable nature is not entitled to exemption u/s. 11 ; assessee institution having never carried out any scientific research, and applied a very insignificant portion of its income towards research and development activities, it is not entitled to exemption u/s. 11; claim for exemption u/s. 11 is also not sustainable in view of cl. (b) of sub s(4A) thereof as the leasing business carried on by the assessee was not wholly for the charitable purposes. (A.Y. 1989 – 90 & 1990 – 91)
M. Visvesvaraya Inds. Research and Development Centre vs. CIT (2012) 79 DTR 387 (Bom.) (High
Court)

Educational Institution- Profit Motive

An educational institution would not cease to exist solely for educational purpose and for purposes of profit merely because it has generated surplus income.(A.Y.2009‐10)
Santan Dharam Shiksha Samiti v. Chief C IT(2012) 253 CTR 518(P&H)(High Court)

Income earned from termination of forward contract – Capital gain treated as exempt

Assessee was a Singapore based bank registered in India as FII. It took loan in foreign currency to invest in debentures. To safeguard itself from foreign exchange fluctuation risk it entered into forward contracts. Before selling debentures, it terminated forward contracts on which it earned profit. It was held that gain arising from early settlement of foreign exchange forward contract was not income from other sources but had to be treated as capital gain exempt under Article 13 of DTAA. (A.Ys. 1998‐99 & 2005‐06)
Citicorp Investment Bank (Singapore) Ltd. v. Dy. DIT (2012) 54 SOT 119(Mum)(Trib.)

Treatment of Deferred Guarantee Commisison

Income from deferred guarantee commission did not accrue or arise in the year in which guarantee agreements were entered and such income should be spread over the period to which the guarantee commission related and should be assessed proportionately. (A.Y. 2002 – 03 & 2003 – 2004) BNP Paribas Sa v. Dy. DIT (International Taxation) (2012) 79 DTR 310/150 TTJ 395 (Mum.) (Trib.)

Guranatee Commision to be recognized when guarantee is issued and not over period of guarantee

Assessee, as a part of its banking business provided bank guarantees and charged guarantee commission on the same. Guarantee commission was being recognized by assessee over life of guarantee on accrual basis. Guarantee commission received for year under consideration to some extent was not recognized by assessee as its income on ground that guarantee period relating to said commission was subsequent to 31‐3‐2004. It was held that addition made by Assessing Officer on the basis that period of guarantee had nothing to do with assessee's right to receive commission and accordingly, said amount was brought to tax for assessment year in question holding that said income accrued to assessee at time when corresponding guarantees were issued. [A.Y. 2004‐05 to 2006‐07)
Shinhan Bank v. Dy.DIT (2012) 54 SOT 140 (Mum.)(Trib.)

Debenture Interest income calculated on amortization basis is accepted on the basis of matching principle.

The assessee has computed his interest income arising on the difference between purchase price of the debenture and redemption price after six years and calculated the income on amortization basis .The issue before the Apex court was whether such interest should be taxed on accrual basis in the year of allotment of debenture it self or whether it should be taxed on spread over basis. The Apex court referring the Judgment of Bombay High Court in Taparia Tools Ltd v. Jt.CIT (2003) 260 ITR 102(Bom.)(High Court), which refers to matching principle , order of Tribunal up held and order of High Court was set aside.(A.Y. 1995‐96)
Rakesh Shantilal Mardia v. Dy.CIT ( 2012) 210 Taxman 565 /254 CTR 338(SC)

Compensation received from landlord for delay in actual delivery of leased premises is not taxable as revenue receipt.

On facts compensation of Rs.1,69,71,000 received from landlord, which was in effect refund of rent paid for the period for which property was not ready for start of STP unit. Rent received back by way of compensation is to be credited against the rent paid by the assessee. Thus, refund of the rent of pre operative period was credited to pre operative expenses account and the refund of the rent of post operative period was credited to rent account which was transferred to P & L A/c nature of entire compensation is the same. Merely because the assessee has bifurcated it into two portions, different treatment cannot be given to them. Therefore, no portion of the compensation amount is taxable as revenue receipt. (A.Y. 2003 – 2004)
American Express (India) (P) Ltd. v. JCIT (2012) 79 DTR 127/150 TTJ 316 (Delhi)(Trib.)

Provision of goods/services to non‐ members – Profit from transaction is liable to tax.

When a mutual concern provides goods and services to non‐members also and, some profit flows from
said transactions, it is chargeable to tax. (AY 1996‐97)
Dy.DIT v. Societe International De Telecommunication (2012) 139 ITD 328 (Mum)(Trib.)

Investment of surplus in Bank – Interest/return on such investment not be covered by character of mutuality hence liable to tax.

When a mutual concern invests its surplus funds or makes deposit in bank, return or interest on such
investment/deposits will not be covered by character of mutuality and such an amount will be liable totax. (AY 1996‐97)
Dy.DIT v. Societe International De Telecommunication (2012) 139 ITD 328 (Mum)(Trib.)

Gold bond certificate – Treated as asset, sale consideration liable to be taxed as short term capital gain.

Gold received by assessee on redemption of gold bond certificates issued under Gold Deposit Scheme, 1999, is a new asset. Therefore, when assessee sold said gold within a period of twelve months from date of its acquisition, income arising from sale transaction was to be taxed as short‐term capital gain. (AY 2008‐09)
Shiv Kumar Agrawal v. DCIT (2012) 139 ITD 572 (Agra)(Trib.)

Advance rent – premium for agreement to lease.

On facts “advance rent” received by the assessee from the lessee being the consideration for being let into possession of the leased premises as evident from the report of the assessee’s council of Management and the terms of the lease, it was in fact a premium rather than advance rent and constituted the assessee’s income; leasing out of commercial spaces by the assessee cannot be regarded as sale of properties as the assessee was only a lessee of the land which belonged to the Govt. and it was not even entitled to sell the construction put up on the land. Constituted the assessee’s income. (A.Y. 1989 – 90 & 90 – 91)
M. Visvesvaraya Industrial Research and Development Centre v. CIT (2012) 79 DTR 387(Bom.) (High
Court)

Amount received for transfer of indefeasible right of connectivity for 20 years is assessable over the period of 20 years.

RI Ltd. in terms of the agreement, had only the right to use the network during the tenure of the 20 years agreement. Further, the agreement was liable to be terminated at the sole discretion of RI Ltd. and consequently, the amount received as advance for 20 years lease period would have to be returned on such termination for the balance unutilized period. Tribunal also held that the agreement dated 30th April 2003 was only in the nature/form of a lease agreement. Therefore, the assessee had in terms of AS‐19 correctly spread the entire fee of Rs.3,037 crores over the period of 20 years and to pay tax thereon over the entire period. Entire amount was not assessable during the relevant year. (A.Y. 2004 –2005)
CIT v. Reliance Communication Infrastructure Ltd. (2012) 79 DTR 198 /254 CTR 251(Bom.) (High Court)

S.2(22)(e): Definitions‐ Dividend‐ Deemed dividend ‐ Trade advances to sister concern – Provisions of S. 2(22)(e) is not applicable

Provisions of section 2(22)(e) is not applicable to trade advances given to sister concern in which shareholders of assessee have substantial interest, therefore provision of section 194 cannot be applicable and assessee cannot be treated as assessee in default and levy of interest under section 201 (IA) was deleted .As the Commissioner (Appeals) has passed a reasoned order the matter was set aside. (AY 2005‐06 to 2006‐07) Jaypeem Granites (P.) Ltd. v. ITO (2012) 139 ITD 564 (Hyd.)(Trib.)

Occupancy rights to shareholders are taxable as deemed dividend

The assessee was the substantial shareholder of a closely held company which owned a building. The Articles of the company provided that each shareholder would have occupancy rights to a flat on the ondition that an interest‐free refundable deposit be paid. The occupancy rights were transferable. The AO held that the grant of occupancy rights by the company amounted to a “distribution of assets” and that the same was assessable as “deemed dividend” in the hands of the assessee u/s 2(22)(a) to the extent of the accumulated profits. On appeal, the CIT(A) held that as the occupancy rights were given against payment of a refundable deposit, there was no “distribution of assets” and so no deemed dividend. Instead, he held that the occupancy rights conferred a “benefit/perquisite” on the assessee which was assessable u/s 2(24)(iv). On cross appeals before the Tribunal, held:
(i) U/s 2(22)(a), any distribution by a company of accumulated profits, whether capitalized or not, constitutes “dividend” if such distribution entails the release by the company to its shareholders of all or any part of the assets. As the assessee received the occupancy rights to the flat in perpetuity and could transfer them, it effectively meant that he had full ownership over the flat. Accordingly, the value of the flats was assessable as deemed dividend u/s 2(22)(a);
(ii) However, as the said occupancy rights were given in lieu of holding shares and an interest‐free refundable deposit towards proportionate land cost and development cost and were transferable, there is no “benefit or perquisite” which is assessable u/s 2(24)(iv). (A. Y. 2006‐07 & 2007‐08)
Shantikumar D Majithia v. DCIT ( Mum.)(Trib.)www.itatonline.org

Marathon conducted in commercial sense – Cannot be said to be existing only for charitable purpose

A trust conducts marathon in a commercial manner, then it cannot be said to be existing only for
charitable purposes in view of amended definition of charitable purpose with effect from 1‐4‐2008,
matter remanded. (AY 2012‐13)
Hyderabad Runners Society v. DIT (Ex) (2012) 139 ITD 464/ 20 ITR 675 (Hyd.)(Trib.)

Assessee‐society provided citizen's services to common people ‐ Charged very huge fees, in addition to charges levied by State Government – Activities not treated as charitable purpose

Where assessee‐society provided citizen's services to common people by charging very huge fees which was in addition to charges levied by State Government and was additional burden upon common man, activities of assessee could not be treated as charitable in nature making it eligible for registration under section 12AA, refusal of registration was held to be justified.
Sukhmani Society for Citizen Services v. CIT (2012) 139 ITD 307 (Asr.)(Trib.)

Proviso to section 2(15),introduced by the Finance Act, 2008 with effect from 1‐4‐2008 ,applies to trust which has object of 'advancement of any other object of general public utility' and does not apply to other categories of charitable trust i.e., relief to poor and medical relief.

Krupanidhi Educational Trust v. DIT(IT) (2012) 139 ITD 228 (Bang)(Trib.)

Educational Institution-Investment in Trust publishing magazines dealing with education ancillary to main object of running educational institution ‐ trust is entitled to exemption

The assessee was allowed the benefit u/s. 11 of the I.T Act 1961, till 1985‐86. But, for the asst. years 1986‐87 and 1987‐88, the A.O. denied the exemption for the reason that (i) the assessee was not a public charitable trust; its objects were limited for the benefit of a few people; (ii) the assessee was running educational institution only for the purpose of commerce; and (iii) there was violation of the provisions of section 11(5) of the Act, inasmuch as the assessee invested the monies in two organizations publishing magazines and thereby infringed section 13(1)(c). The Commissioner (Appeals) and the Tribunal held that the assessee was entitled to exemption. On appeal the High Court held that the A.O. did not give any clear finding regarding violation of section 11(5) except making such a comment. Investing monies in the two organizations publishing magazines could not be said to be commercial ventures. They were incidental and ancillary to the main activities of the trust. The assessee was entitled to exemption under sec. 11.The Supreme Court in Yogiraj Charity Trust (1976) 103 ITR 777 (SC) held that if the primary or dominant purpose of a trust is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust from being a valid charity. (A.Ys. 1986‐88, 1987‐88, 1988‐89)
CIT v. Vijaya Vani Educational Trust (2012) 349 ITR 280(AP)(High Court)

Friday, 18 January 2013

Capital Gain on Agriculture Land of area not notified by Central Government

It is contended that land is located within 8 kms. within the municipal limits of Dasarahalli City Municipal Council, in the absence of any notification issued under cl. (b) to s. 2(14)(iii), it cannot be looked in as a capital asset. Capital gains were not therefore chargeable on sale of agricultural land. (A.Y. 2005‐ 2006)
CIT v. Madhukumar N. (HUF) (2012) 78 DTR 391/254 CTR 564(Karn.)(High Court)

Thursday, 17 January 2013

VDIS cases on sale of jewellery favoring assesee

Manoj Kumar Aggarwal ITAT Delhi Special Bench on 25-07-2008 ITA/404/DEL/2003
Tehinder Singh HUF ITA /163/ASR/2003 (However Remanded by Punjab and Haryana High Court on 8-02-2011 in 292 CTR 352 to Special Bench for hearing on 4-04-2011)
Kiran Deepak Kukreja 190 Taxmann 393 Bombay High Court
Uttam Chand Jain 182 Taxmann 243 Bombay High Court
Jagdish Mitter ITA 268/2002
Mohan Lal Aggarwal Allahabad HC ITA 136/2010
Yogesh Chand Sharma ITA 131/Agra/2011
Sanjay Mahipal ITA 452/Delhi/2009

Transaction of Rishi Grover Prop Vishnu Jewellers held genuine by ITAT Amritsar ITA 198 to 202/ASR/2006 26-06-2009.MA 55 to 59/2010 of Department dismissed by ITAT on 26-06-2012

Sunday, 6 January 2013

P&H explains difference between AOP and Individual

ITA No. 463 of 2009

Date of Decision: 26.7.2012 Sudhir Nagpal and others

Penalty for not quoting PAN in Form 16A upheld by ITAT Amritsar

ITA/18/ASR/2012 dated 17-7-2012

On Embroidery Machinery 50% depreciation is allowable

ITA 36 & 37/2011/ASR dated 4-6-12 Amit Embroidery Fair Land Colony
ITA 357/2010/ASR dated 23-4-2012 S.S. Embroiders

The ITAT held that words "processing and garment sector" are wide enough to cover embroidery machinery by inviting refrence to Credit linked Capital Subsidy Scheme

Decision of Coordinate Bench of ITAT when no contrary decision of Bench itself is binding on the ITAT Bench hearing the case

ITA 357/(ASR)/2010 ACIT vs S.S. Embroiders

Friday, 28 December 2012

Capital Gain on Development Agreements

Where assessee enters into agreement with developer to surrender his plot or building in consideration of receiving back cash and/or constructed flat/building, the transaction becomes exigible to capital gain.But the moot point is point of taxation of transaction as to whether it is:
i) Point of entering into agreement
ii) registration of plot/building in favor of developer
iii) when new plot/flat/ building is allotted
iv) when possession of plot/flat/ building is handed over.

Whether road not available for general public is exempted from service tax

As per Apex Court in Bolani Ores vs. State of Orrisa AIR 1975 SC 15, for definition of road we have to look at Motor Vehicles Act which says that public place includes any road, street or or ther place whether a thorugfare or not , to which public have a right of access. If public does not have right to access to any palce which is not road, street or way or thorough fare, it will not be public place

Saturday, 15 December 2012

No remand can be allowed by ITAT to improve upon case of revenue

a) Agra Bench TM ITAT 313 ITR 123 9AT) Laxman Dass Makhija
b) Delhi ITAT TM in Amina 73 ITD 125; In SMC Share Brokers 109 TTJ 700(affirmed by
DHC 288 ITR 345); Chd ITAT in Neena Syal 70 ITD 62; All ITAT TM in 50 ITD 1
c) Zuari Leasing Delhi ITAT TM 112 ITD 205/115 TTJ 721-

Thursday, 13 December 2012

Foreign Travel Expenses allowed by Punjab and Haryana High Court

ITA No. 19 of 2009 Date of Decision: 8.10.2012 Kamal Family Trust Punjab and Haryana High Court

Question relates to the admissibility of expenses on account of foreign travel incurred by Kamal Khanna and his wife which has been allowed to the extent of 50% by the CIT(A) and upheld by the Tribunal. The CIT(A) while allowing 50% deduction on account of expenses incurred on foreign visit by Kamal Khanna and his wife had noted that Kamal Khanna was a heart patient and was looking after the business of the firm. is wife had to accompany for looking after him on visit to the foreign country. It was also recorded that the visit resulted in increase in the business and after analyzing the factual matrix had allowed 50% expenses as revenue expenditure which was wholly and exclusively expended for business purposes. The said finding was
affirmed on appeal by the Tribunal. It would basically be a question of fact as to how much expense is reasonable and is allowable in a given case. In the present case, on appreciation of evidence, it was recorded
by the CIT(A) and affirmed by the Tribunal that it was 50% which was reasonable and was to be allowed as revenue expenditure. An effort was made by the learned counsel for the revenue to submit that 50% had been allowed without any basis. He, however, could not substantiate the said plea. Accordingly, question (A) is answered against the revenue and in favour of the assessee.

No dis allowance for non deduction of TDS on capital expenditure

Punjab and Haryana High Court held that :
"Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know how which was capitalized and
no amount was claimed as revenue expenditure, the deduction could be
disallowed under Section 40(a)(i) of the Act."
ITA 57/2009 decided on 8-10-2012 in case of M/s Mark Auto Industries Limited

Registration to family controlled Trust allowed by Punjab and Haryana High Court

BKK Memorial Trust ITA 5/2012 Order dated 16-10-2012
Followed Punjab and Hryana High Court in ITA No.881 of 2010 The Commissioner of Income-tax, Bathinda Vs. M/s Baba Deep Singh Educational Society, SCF 23, Bharat Nagar, Bathinda

7% Rate without allowing interest and salary applied to contractor

Punjab and Haryana High Court
M/s. Competent Construction Company ITA No. 646 of 2010 (O&M) Date of decision: 01.11.2012

ITAT Amritsar
ITA 493/2010 dated 11-5-2012 Construction Engineers

Employee Contribution paid after due date under PF/ESI law still allowable if paid before due date under 139(1)

Punjab and Haryana High Court in
Hemila Mills Embroidery Private Limited ITA 16/2009 decided on 27/9/2012.
Mark Auto Industries Limited ITA 57/2009 decided on 8/10/2012

Followed: Alom Extrusions Ltd. [2009] 319 ITR 306 (SC)
ITA 663/2005 CIT v. M/s Rai Agro Industries Limited (P&H) decided on 30-11-2010

wherein it has been held that Second Proviso to Section 43B of the Act omitted by Finance Act, 2003 with effect from 1.4.2004 was clarificatory in nature and was to operate retrospectively. The above mentioned proviso provided that employee contribution is deductible only if amount is paid before due date under 36(1)(va) Explanation

Wednesday, 12 December 2012

S. 194A TDS: Discounting Charges Is Not “Interest”

CARGIL GLOBAL TRADING PRIVATE LIMITED

The assessee paid Rs. 3.97 Crores to an associate concern in Singapore on account of discounted charges for getting the export sale bills discounted. The AO held that that the discounting charges was “interest” u/s 2(28A) and that as there was no TDS, the expenditure had to be disallowed u/s 40(a)(i). This was reversed by the CIT (A) and Tribunal. The High Court (335 ITR 94 (Del) included in file) relied on Circular No.65 dated 2.09.1971, Circular No.674 dated 22.03.1993 & Vijay Ship Breaking 219 CTR 639 (SC) held that as the discounting charges were not in respect of any debt incurred or money borrowed and were merely discount of the sale consideration on sale of goods, it was not “interest” u/s 2(28A) and there was no obligation to deduct TDS thereon. On appeal by the department to the Supreme Court, HELD

The special leave petitions of Revenue are dismissed by Supreme Court on 10/5/12 against ITA 331/2011 of Delhi High Court dated 17/2/2012

Friday, 7 December 2012

Molasses produced in sugar factory is Scrap exigible to TCS

ITAT ASR in Nawanshahar Co-op. Sugar Mills Ltd; I.T.A. Nos. 311, 312, 313 & 314(Asr)/2012 upheld the decision of CIT A quated below:

Transport Subsidy is not eligible for Deduction u/s 80IB

Maken Cement Industries 7-11-2012 ITAT ASR ITA 63/2011
Followed: Sterling Foods(SC) 237 ITR 579 and Pandian Chemicals Ltd 262 ITR 278 (SC)

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