Direct Tax

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June 2016

CA Paras Savla & CA Hemant Shah

S. 10(23C) (iiiab) Fees received from students not part of government grants/contributions

For grant of exemption u/s 10(23C)(iiiab) for educational institution, one of the condition is that such institution should be wholly or substantially financed by the Government. The funds received from the Government contemplated under Section 10(23c)(iiiab) of the Act must be direct grants/contributions from governmental sources and does not includes any fees collected from students even though same is authorised under the relevant statute - Visvesvaraya Technological University v. ACIT [2016] 68 taxmann.com 287 (SC)

148 – Reassessemnt in respect of increased rent

Assessee was entitled for enhanced rent on retrospective basis. It was observed that no right to receive the rent accrued to the assessee at any point of time in earlier years. Right came to be vested only in the year in which it was crystallised. It has to be held that the notice seeking to reopen the assessment for the year assessment year is without jurisdiction and authority of law P.G. & W. Sawoo (P.) Ltd. v. ACIT [2016] 69 taxmann.com 188 (SC)

S. 263 Revision power of CIT

Unlike the power of reopening an assessment under Section 147 of the Act, the power of revision under Section 263 is not contingent on the giving of a notice to show cause. In fact, Section 263 has been understood not to require any specific show cause notice to be served on the assessee. Rather, what is required under the said provision is an opportunity of hearing to the assessee.

There can be no doubt that so long as the view taken by the Assessing Officer is a possible view the same ought not to be interfered with by the Commissioner under Section 263 of the Act merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority.

Making a claim which would prima facie disclose that the expenses in respect of which deduction has been claimed has been incurred and thereafter abandoning/withdrawing the same gives rise to the necessity of further enquiry in the interest of the Revenue. The notice issued under Section 69-C of the Act could not have been simply dropped on the ground that the claim has been withdrawn. In these circumstances suo motu revisional juristdiction of C.I.T. under Section 263 of the Act was held valid. CIT v. Amitabh Bachchan [2016] 69 taxmann.com 170 (SC)

158BE(2) Exclusion of period of stay from time limit of assessment

During the course of the block assessment, Assessing Officer has order for special audit. However such request for special audit was squashed down by appellate authority. It was held that even if such request for special audit has been squashed, benefit of explanation 1 to section 158BE(2) is available i.e. the benefit of exclusion of the period during which there was a stay order is to be given to the Revenue. In other words Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted - VLS Finance Ltd. v. CIT [2016] 68 taxmann.com 368 (SC)

192 Payment of TIP collected by hotel to employees not salary

Payment of TIP collected by hotel to the employees is not subject to TDS, since such sums are payment of salary to employees - ITC Ltd. v. CIT [2016] 68 taxmann.com 323 (SC)

High Courts

S. 2(15) r.w.s. 11(4A) Rent received by education trust is not business income

It is well-settled principle of law that the test to determine as to what would be a charitable purpose within the meaning of section 2 (15) of the Act, is to ascertain what is the dominant object of the activity; whether it is to carry out a charitable purpose or to earn profit. If the pre-dominant object is to carryout a charitable purpose and not to earn profit the purpose would not lose its charitable character merely because the some profit arises from the activity. Letting out certain floors of educational institution was incidental and not the principle activity of the assessee-trust. It was held that rent as received by the assessee for the assessment year have been received from educational activity which is the dominant activity of the assessee-trust. The separate books of accounts cannot be insisted upon as the said activity becomes part and parcel of the educational activities carried out by the assessee-trust. In such a case, the benefit of exemption under section 11 (4A) cannot be denied DIT(E) v. Lala Lajpatrai Memorial Trust [2016] 69 taxmann.com 158 (Bombay)

S.10(38) transfer of shares in off market transaction does not descent assessee from claiming loss

Assessee transferring shares in an off market transacted to enjoy claim set off and carry forward of such a loss arising on such transaction is a glaring example of tax planning rather than the tax avoidance. Accordingly it was held that the loss suffered on such transactions is a genuine loss which cannot be disallowed as it does not fall within the ambit of section 10(38) because of non-payment of STT - Mridu Hari Dalmia Parivar Trust v. Assessing Officer [2016] 68 taxmann.com 376 (Delhi - Trib.)

S. 14A No disallowance of interest when interest free funds used to invest in shares and other tax free instruments

It was observed that the entire investment in shares, mutual funds and tax free bonds were not made out of borrowed funds but made out of issue of fresh capital at a premium and same could also be observed on examining the resolutions of the Board of Directors as well as the balance sheet for the relevant period. Thus it was held that since the entire investment made in shares, mutual funds and tax free bonds were from its own interest free funds, there could be no question of disallowance of interest payable on the borrowed funds – CIT v. Nicholas Piramal (India) Ltd. [2016] 69 taxmann.com 164 (Bombay)

S. 37(1) Expenditure to close one unit and shifting to another unit allowable as business expenses

Assessee manufacturing multiple products at multiple locations. It was observed that manufacturing at each location constitutes one business. The business of manufacturing at ‘T’ had not ceased but had been shifted to other locations/units. It was held that expenditure incurred for closing down of one unit and shifting its activity to other units, would be expenditure incurred was for the purposes of business and allowable as deduction u/s 37(1) – CIT v. Nicholas Piramal (India) Ltd. [2016] 69 taxmann.com 164 (Bombay)

S. 69 r.w.s. 132, 147 Reassessment

In a proceeding under the Act, the Evidence Act is not applicable as it applies only to the judicial proceedings. The principle of natural justice stands complied with when an opportunity was given to the assessee to explain the entries in the loose sheet. Having chosen not to answer during the relevant assessment year and attributed the burden on his father in the subsequent year will not debar the Assessing Officer to rely upon such documents to return a finding that the income of the assessee has escaped assessment - Ashok Kumar v. CIT [2016] 69 taxmann.com 129 (Patna)

S. 119 Instruction to withheld refunds in case of scrutiny assessment notice issued is bad in law

The real effect of the instruction No.1 of 2015 dated 13th January 2015 is to curtail the discretion of the AO by 'preventing' him from processing the return, where notice has been issued to the Assessee under Section 143(2) of the Act. The impugned Instruction is unsustainable in law and it is quashed. It was also directed that the said instruction shall not hereafter be relied upon to deny refunds to the Assessees in whose cases notices might have been issued under Section 143(2) of the Act. The question whether such return should be processed will have to be decided by the AO concerned exercising his discretion in terms of Section 143 (1D) of the Act - Tata Teleservices Limited v. CBDT W.P.(C) 12304/2015 & CM 32604/2015 (Delhi HC) Order dt. 11.05.2016

S. 147 Challenging reassessment proceedings

From the conduct of the assessee it was observed that assessee seems to delay the proceedings so as to leave very little time for the Assessing Officer to complete the reassessment proceedings. Hence it was held that assessee was disentitled for the extraordinary relief under Article 226 of the Constitution of India i.e. challenging reopening - Amaya Infrastructure Pvt. Ltd vs. ITO W.P. No. 787 of 2016 Order Dt. 20/04/2016

No addition can be made on account of non-conciliation of professional receipts with TDS certificates

The professional income declared by the assessee far exceeds the professional fees as per AIR information. There may be so many reasons such as low deduction of tax, non-deduction of tax, deduction on account of reimbursement of expenses etc., for which the figure as per the AIR may not tally with the income declared by the assessee on account of professional fees from various clients. Further, it has categorically been explained by the assessee that it is not practically possible to give detailed party wise breakup of fees receipts since the assessee received his fees either directly from the clients or from the instructing advocates or CAs, if they have collected the amounts from the clients Accordingly it was held that no addition is called for on account of incomplete reconciliation – CIT v. S Ganesh Income Tax Appeal No.1930 of 2011 (Bombay HC) Order Dated 18/03/2014

Binding precedence of jurisdictional High Court decision

The decision of Bombay Court stands it is not open to the Tribunal or any other Authority in the State of Maharashtra to disregard it while considering a like issue. In case High Court is wrong, the aggrieved party can certainly take it up to the Supreme Court and have it set aside and / or corrected or where the same issue arises in a subsequent case the issue may be re-urged before the Court to impress upon it that the decision rendered earlier, requires reconsideration. It is not open to the Tribunal to sit in appeal from the orders of this Court and not follow it. In case the doctrine of precedent is not strictly followed there would complete confusion and uncertainty. It was also observed that the Tribunal not following binding decision of Bombay High Court is a clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by the decision of this Court - HDFC Bank Ltd. v. DCIT [2016] 67 taxmann.com 42 (Bombay)

ITAT

S. 10(5) Exemption on LTA

The provision u/s 10(5) exempting leave travel allowance was introduced in order to motivate the employees and also to encourage tourism in India. Therefore, there was no intention of the Legislature to allow deduction to the employees who to travel abroad

It was also observed that nowhere in this clause it has been stated that even if the employee travels to foreign countries, exemption would be limited to the expenditure incurred to the last destination in India - State Bank of India v. DCIT [2016] 67 taxmann.com 81 (Lucknow - Trib.)

S. 37(1) Expenditure on forfeiture of advance

The treatment of sums paid in the hands of the recipient cannot be a determining factor to allow the claim of the assessee either as revenue loss or as capital loss. The forfeiture of advance paid to land owner on which building was the loss has occurred in the course of the business activity for acquiring a stock-in-trade and hence allowable as revenue deduction - Vijayashanthi Builders Ltd. v. JCIT [2016] 69 taxmann.com 31 (Chennai - Trib.)

s. 36(1)(iii) Interest payment on construction project

The loan was borrowed for project ‘T’. There was no restriction for the assessee to use the borrowed funds for other projects. Since the construction of flats was not commenced due to delay in getting approvals from multiple authorities, the assessee carried forward the deferred revenue expenditure and claimed the deduction subsequent year, even if construction was not commenced. It was held that the assessee is very much in the business of construction, therefore, the interest on the borrowed funds is an allowable expenditure while computing the total income. The fact that the assessee deferred the expenditure in the earlier assessment year cannot be reason to disallow the claim of the assessee Vijayashanthi Builders Ltd. v. JCIT [2016] 69 taxmann.com 31 (Chennai - Trib.)

S. 43B Employees contribution to EPF

The employees' contribution to the EPF deposited by the assessee before the due date of filing the return, is an allowable expenses - Vaneet Sood v. ACIT [2016] 69 taxmann.com 130 (Chandigarh - Trib.)

S. 44AD Turnover in case of speculative business

The assessee has entered into speculative transaction on commodity exchange. It was held that for the purposes of audit u/s 44AB read with Section 271B such transaction cannot be considered as actual transaction liable for audit. They are mere speculative profit and transaction value and the entire notional transaction value cannot be treated as turnover of the assessee - Smt. Anju Haldia v. ITO ITA Nos. 883, 884 & 885/JP/2013 Jaipur ITAT, SMC Order pronounced 11/2/2016

S. 55(2)(b)(i) Period of holding assets

The expression "where the capital asset became the property of the Assessee before 1st April, 1981"as used in Sec.55(2)(b)(i) of the Act should not be therefore be equated to legal ownership.

The capacity in which the Assessee was in occupation of the property prior to the sale deed dated 19.4.1994 was as a permissive user and that did create interest over the property in favour of the Assessee. By the deed of sale dated 19.4.1994 such possessory right got enlarged into an absolute ownership rights. It was held that that the sale deed merely recognized the Assessee's ownership with reference to original deed of assignment dated 3.3.1970 and payment of full consideration in respect of the property prior to 1.4.1981. The title of the Assessee to the property can be traced to the original assignment deed dated 3.3.1970. The claim of the Assessee that it was entitled to adopt fair market value of the property as on 1.4.1981 as cost of acquisition and consequent indexation benefit is correct - Stewarts & Lloyds of India Ltd. v. CIT [2016] 67 taxmann.com 41 (Kolkata - Trib.)

S. 115JB Calculation of MAT Credit

The tax liabilities for normal provisions as well as MAT are calculated with surcharge and cess. The MAT credit in row "7" are calculated automatically using the prescribed algorithm, this is nothing but balancing figure i.e., the difference between tax liability as per normal provisions and MAT provisions. Both the above tax liabilities are calculated with surcharge and cess. These are the standard format, which are expected to be followed by all the assessees and also important to note that the above format of ITR 6 was amended w.e.f. AY 2012-13 by CBDT. Moreover, this is more relevant for the department also. These formats are regulated by CBDT. Assessing Officer cannot overlook these formats and (interpret it in his own method of calculating tax credit while making assessment u/s 143(1) of the Act.) proceed to calculate the MAT credit to compute assessment u/s 143(1) applying different methods when the proper and correct method as proposed by CBDT in ITR-6. The Assessing Officer is expected to follow the ITR-6 format to complete the assessment u/s 143(1) or 143(3) of the Act Virtusa (India) (P.) Ltd. v. DCIT [2016] 67 taxmann.com 65 (Hyderabad - Trib.)

S. 194-I Compensation to unit holder for alternative accommodation

The payment made by the assessee builder in the nature of compensation for alternative accommodation cannot be treated as rent. It was also observed that such compensation cannot be treated as rent for the simple reason that not only the assessee is not using any land and building but it may also be a fact that persons to whom such payments have been made may not be incurring any expenditure on account of rent - Sahana Dwellers (P.) Ltd. v. ITO [2016] 67 taxmann.com 202 (Mumbai - Trib.)

S. 194C TDS on cargo handling

The assessee renders services for transportation of goods from shore to the ship and vice versa. The use of containers is incidental to the whole process of transportation of goods between ship and shore and it cannot be considered as a standalone transaction in its own character. The billing on the basis of the size of the container cannot lead to the conclusion that the billing is for container rental rather than transportation of goods contained in the container. It was held that provisions of S. 194C are applicable and not 194I – ACIT v. Pushpak Logistics (P.) Ltd. [2016] 66 taxmann.com 266 (Rajkot - Trib.)

S. 220 Stay of demand

ITAT relying on the CBDT Instruction No.96 dated August 21, 1969 has stayed demand arising out assessment where income assessed was more than 10 times returned income. Demand was stayed till disposal of appeal - Dimension Data Asia Pacific Pte. Ltd v. DCIT I.T.A. No.684/M/16 Mumbai ITAT ‘L’ Bench order pronounced on 8-3-2016

S. 254 Delay in filing appeal condoned

A liberal approach has to be adopted by the appellate authorities, where delay has occurred for “bona fide reasons” on the part of the assessee or the Revenue in filing the appeals. In matters concerning the filing of appeals, in exercise of the statutory right, a refusal to condoned the delay can result in a meritorious matter being thrown out at the threshold, which may lead to miscarriage of justice. The judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so. Hence considering the totality of facts, supported by an affidavit, and the factual matrix, by taking a lenient view, the delay of 2191 days is condoned - Lahoti Overseas Ltd. v. DCIT ITA NO.3786/Mum/2012, (Mum ITAT) Order dtd. 18/03/2016

S. 271C Levy of penalty not non detection of tax at source is not automatic

Only because the assessee before the Tribunal had accepted her liability for deduction of tax at source, cannot be the sole basis for imposition of penalty completely ignoring the primary and fundamental reason shown by the assessee for failure to deduct such tax. Proceedings under sections 201 and 271C, are two independent and separate proceedings. While imposing penalty, the authority concerned is duty bound to examine assessee's explanation to find out whether there was reasonable cause for failure to deduct tax at source - Smt. Aishwarya Rai Bachchan v. ACIT [2016] 68 taxmann.com 324 (Mumbai - Trib.)

S. 271(1)(c) Concealment penalty no levied in case of error committed by online portal

Against the tax authorities using strong words like 'habitual tax evader' for the assessee, it was observed it is not correct observations of the authorities below and ITAT directed that all such words used by the authorities below stand expunged from the orders of the authorities below. The citizens and the tax-payers of this country are participant in the nation/building and also contributor to the exchequer and to use such harsh words against them are not warranted except in exceptional proven cases.

While deleting concealment penalty it was observed that the conduct of the assessee was not mala fide and contemptuous and the assessee had come forward by offering a bona-fide explanation about the error committed by the online tax return filing portal - Mrs. Richa Dubey v. ITO [2016] 68 taxmann.com 268 (Mumbai - Trib.)