Direct Tax

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February 2016

CA. Paras K. Savla & CA. Lalchand Choudhary

Supreme Court Decisions

S. 36(1)(iii) Interest free funds to subsidiary/associates

Once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximise his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.

It was also held that no interest to be disallowed when in respect of advances to Directors of ` 34 lakh where the company had reserve/surplus to the tune of almost 15 crore. It was observed that the assessee company could in any case, utilise those funds for giving advance to its Directors Hero Cycles (P) Ltd. vs. CIT Civil Appeal No. 514 of 2008 Order dated 5/11/2015.

S. 256 Reference to High Court & Powers

It is the Tribunal which is the final fact-finding authority and it is beyond the power of the High Court in the exercise of its reference jurisdiction to reconsider such findings on a reappraisal of the evidence and materials on record unless a specific question with regard to an issue of fact being opposed to the weight of the materials on record is raised in the reference before the High Court. The difference in the approach between the Tribunal and the High Court, therefore, is not one relating to determination of new or additional facts but was merely one of emphasis on facts on which there is no dispute. This is surely an exercise that was within the jurisdiction of the High Court in the exercise of its reference power under the provisions of the Act as it then existed – Ganapathy & Co. vs. CIT [2016] 65 194 (SC).

High Court & AAR decisions

S. 24 Interest on House Property

The plot was purchased by four persons and their shares were not specified in the sale deed and the housing loan had also been taken jointly by the same four persons. It was held that since the individual shares were not specified in the sale deed, everyone had equal share in the property. Accordingly it was held that deduction of interest is restricted to 25% only per owner – Priya Mahajan vs. CIT ITA No. 384 of 2015 Order dated 26/11/2015 (P & H HC).

Ss. 28, 45 Compensation received in lieu of waiving right to sue

It was held that assessee FII was not in the business of purchase and sale of shares and the object of the investment is not to have business profit. The investors entered into a settlement agreement with Company considering the time, effort and costs involved in litigation and the agreement provided for a full, final and complete resolution of all claims asserted or which could have been asserted with respect to the released claims. The investors fully, finally and forever waived, released, discharged and dismissed each and every of their legal claims against Company and Auditor. This was also agreed vice versa. It was therefore held that the settlement amounts have been received not as part of business profit or to compensate the future income but as a result of surrender of the claim against Company and Auditor. It was concluded that the settlement amount received by assessee investors is not taxable under the provisions of the Income-tax Act either as capital gains or as income from other sources. Aberdeen Claims Administration Inc., In re [2016] 65 246 (AAR-New Delhi); Lead Counsel of Qualified Settlement Fund (QSF), In re [2016] 65 197 (AAR-New Delhi).

S. 32 Depreciation on increase in authorised capital

The fees paid to Registrar of Companies was held to be includible in the amount to be capitalised towards plant and machinery assessee and also entitled to depreciation under section 32(1) – Rana Polycot Ltd. vs. CIT [2016] 65 125 (P&H HC).

S. 36(1)(ii) Commission to Directors

The assessee is a private limited company and had agreed to pay the commission to the directors by passing Resolution in this regard before the close of year. Where the directors had given services and in recognition thereof, there was proposal to pay commission to the said directors, then the same could not be questioned merely on the basis of speculation by the Revenue that the same was to avoid payment of dividend tax. It was held that the assessee was entitled to claim of deduction of commission paid to directors under section 36(1)(ii) of the Act – Arihantam Infraprojects (P.) Ltd. vs. JCIT [2015] 64 404 (Pune-Trib.).

Ss. 119, 139A PAN allotment and error in type of assessee

The petitioners applied for PAN in the name of AOP in 2005. The Department, however, while granting PAN registered it as a partnership firm. It was held that if there was any inaccuracy, the petitioners ought to have got it corrected within a reasonable time and this is not a case where the hardship can be removed under section 119 of the Act. Merely because PAN was issued by the Department erroneously, there cannot be any insistence that return should be filed in the same capacity. Erroneous description in the PAN would not change the reality that no such partnership firm ever existed. High Court also refused to entertain the question about grant of credit of TDS to members of AOP after long period – Tulsi Mall (Association of Person) vs. CIT [2016] 65 115 (Gujarat).

S. 119 Condonation in delay of filing return of income

The existence of genuine hardship or sufficient cause for condonation of delay or not, depends upon evaluation of totality of facts and circumstances in a given case. The petitioner has miserably failed to convince that he had any “genuine hardship” in filing his income-tax return late by 30 months, therefore, no benefit whatsoever of the aforesaid authorities can be given to him - Shyam Sunder Nirankari vs. CIT [2016] 65 104 (Punjab & Haryana).

S. 147 Reopening on the basis of information from another Government Agency

There is a long distance to travel between a suspicion that income had escaped assessment and forming reasons to believe that income had escaped assessment. While the law does not require the AO to form a definite opinion by conducting any detailed investigation regarding the escapement of income from assessment, it certainly does require him to form a prima facie opinion based on tangible material which provides the nexus or the link to having reason to believe that income has escaped assessment.

On receiving the information from other agency, Assessing Officer is required to be examined whether what was disclosed in the books of account was also disclosed in the returns filed by the assessee. If it was not disclosed, then possibly the AO could have reasons to believe that the cash deposits reflected in the books of account may have escaped assessment. However, no effort appears to have been made by the AO to examine the returns filed by the assessee in either of these cases. Hence it was held that the jurisdictional requirement of the AO having to form reasons to believe on the basis of some tangible material that income had escaped assessment was fulfilled. CIT vs. Indo Arab Air Services [2015] 64 257 (Delhi).

S. 220 Stay of demand in case of high pitched assessment

It was observed that the tendency of making high pitched assessments may result in serious prejudice to the assessee and miscarriage of justice & sometimes may even result into insolvency or closure of the business if such power was to be exercised only in a pro-revenue manner. Hence, it was held that powers under Sections 220(3) & 220(6) of IT Act pertaining to stay of recovery of the demand have to be exercised in accordance with the letter and spirit of CBDT Instruction No. 95 dated 21/8/1969, which is binding on all the assessing authorities created under the Act. It was also observed that it is incorrect to state that CBDT Instruction No. 1914, dated 2/12/1993 supersedes all previous instructions. Although instruction No. 1914 specifically states that it is in supersession of earlier instructions, the position obtaining after the decision of the case in Volvoline Cummins Limited vs. DCIT [2008] 307 ITR 103 (Del) is not altered at all. This is so, the CBDT Instruction No. 95, dated 21/8/1969 was issued with the consent of the informal consultative committee held on 13th May, 1969 formed under the business rules of the Parliament, which even now holds the field – N. Jegatheesan vs. DCIT [2015] 64 339 (Mad HC).

S. 254 ITAT’s Power to Stay demand beyond 365 days

Tribunal has power to extend the stay even after the substituted third proviso to sub-section 2A to S. 254 of the Act was introduced. Substituted proviso restricting power to grant stay beyond 365 days even when delay is not attributed to assessee has also been struck down in light of decision of Delhi High Court in case of Pepsi Foods (P) Ltd. vs. ACIT 232 Taxmann 78 – CIT vs. Tata Teleservices (Maharashtra) Ltd. Writ Petition (Lodg) No. 3437 to 3637 of 2015 (Bom. HC).

Loss to assessee on account of laches of Revenue Officer

The assessee have been put to a loss of at least Rs.14,69,650/- on account of complete deterioration of quality of split betel nuts solely on account of deliberate laches on the part of the officials of the Custom Department. Court directed officer to pay a sum of Rs.14,69,650/- along with interest at the rate of 9% per annum from the date on which the order of provisional release of the seized article was passed by the competent authority. It was also held that said sums to be recovered from the erring officials and for the purposes of fixing individual responsibility on such erring officials the Court directed the Chairman of CBEC to get an enquiry conducted by an Officer not below in the rank of Chief Commissioner of Customs who must not be posted and/or associated in any manner with Patna Zone of the Custom Department Overseas Enterprises vs. UOI Civil Writ Jurisdiction Case No.13382 of 2014 Order dated 30/11/2015 (Patna HC).

Tribunal Decisions

S. 2(15) Charitable purposes

The activity of organising trade fairs and exhibitions and the act of collecting contribution from non-members does not render the assessee as an organisation existing for profit or was doing business or trade. Further it was also observed that prior to the introduction of the proviso to Section 2(15) of the Act, there was no dispute that the assessee was established for charitable purposes – ITO(E) vs. Indian Leather Products Association [2015] 64 406 (Kolkata-Trib.).

2(24)(xviii) Subsidy

Prior to the amendment to S. 2(24)(xviii) by Finance Act 2015, if a subsidy is regarded as revenue subsidy, it would be taxable besides the value of the subsidy getting reduced from the actual cost of depreciable assets for the purpose of allowing depreciation, if the conditions laid down in Explanation 10 to Secs.43(1) of the Act are satisfied. It was also held that said amendment is prospective – Limtex Tea & Industries Ltd. vs. ACIT [2016] 65 222 (Kolkata-Trib.).

S. 10(23C)(vi) Non-disposal of registration application

The assessee is not entitled to the aforesaid deduction under section 10(23C)(vi) of the Act, in the absence of an approval being granted by the prescribed authority. It was held that the assessee be taxed as AOP instead of an institution solely existing for imparting education – Mercedes Benz Education Academy vs. ITO [2016] 65 73 (Pune-Trib.).

S. 32 Depreciation on switches etc.

The printers, switches, networking equipment, UPS and pen drives are held as integral part of the computer system and hence eligible for depreciation @ 60% – GE Capital Business Process Management Services (P.) Ltd. vs. ACIT [2015] 64 156 (Delhi-Trib.).

S. 37 Licence fees for use of software

Considering the restriction in the use of software, payment of Licence fees etc. to the foreign company has been considered as revenue expenditure and allowable deduction u/s 37(1) – GE Capital Business Process Management Services (P.) Ltd. vs. ACIT [2015] 64 156 (Delhi-Trib.).

S. 43(5) Foreign Exchange Derivative Contract

The loss incurred by the assessee company on the contract for transaction in unexpired contracts as on the date of Balance Sheet in derivatives in foreign currency complies with the provisions of Section 43(5) of the Act read with proviso (d) and Explanation 1 of the Section 43(5) of the Act and is exempt to be categorised as speculation loss and further held that the said loss as at the date of financial statement arising due to adverse movement in exchange rate between United States Dollars vis-a-vis in relation to Indian Rupee is not a notional or contingent loss rather it is a ascertained liability which has crystallised on the date of Balance Sheet and can be computed with reasonable certainty and accuracy, hence allowable as non-speculation loss – Inventurus Knowledge Services (P.) Ltd. vs. ITO [2016] 65 94 (Mumbai-Trib.).

Ss. 115JB, 14A Computation of book-profits

Disallowance made u/s. 14A in accordance with Rule 8D is to be added while computing book profits u/s. 115JB of the Act, being expenditure in relation to the earning of exempt income in accordance with clause (f) to Explanation 1 to Section 115JB(2) of the Act – DCIT vs. Viraj Profiles Ltd. [2015] 64 52 (Mumbai-Trib.).

S. 200A, S. 206AA Amending PAN in TDS Statement

It was held that the refusal of the various agencies not to accept change in character in PAN details filed by deductee in its correction TDS statement was not correct and justifiable. It was held that the deductee should be given further opportunity of filing the correction statement to the correct PAN details and which needs to be accepted. – Oil & Natural Gas Corporation Ltd. vs. DCIT [2016] 65 2 (Ahmedabad-Trib.).

S. 263 Proceedings to be quashed

CIT u/s. 263 directed Assessing Officer to reassess TDS liability considering roaming charges paid to another operator. Considering the order of ITAT in the assessee own case on similar point it was held that order of CIT was liable to set aside – Idea Cellular Ltd. vs. CIT [2016] 65 116 (Pune-Trib.).

S. 271C Penalty for non-deduction of TDS

The view adopted by the assessee based upon the certificate of the C.A., was one of the possible views and can be said to be based upon bona fide belief of the assessee. Therefore, under these circumstances it was held that there was reasonable cause as envisaged u/s. 273B for not deducting tax at source by the assessee on the aforesaid payments, and therefore, the assessee was not liable for levy of penalty u/s. 271C – ADIT vs. Leighton Welspun Contractors (P.) Ltd. [2016] 65 68 (Mumbai - Trib.).