RECENT UPDATES (A) JUDICIAL PRONOUNCEMENTS:

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1 RECENT UPDATES (A) JUDICIAL PRONOUNCEMENTS: (1) Godrej Industries Ltd. v/s DCIT [2015](Bombay) The return of income filed by the assessee for the assessment year was scrutinised u/s 143(3). Thereafter a notice u/s 148 was issued as on 29 th March 2007 to reopen the assessment on the ground that unascertained liabilities of provision for doubtful debts and provision for depletion in longterm investment were required to be added back to the net profit for arriving at book profit. The impugned notice at the time of its issue places reliance upon clause (c) to the Explanation to section 115JA (viz. section 115JB at present). But, it is undisputed that the provision for doubtful debts and provision for depletion of long-term investment are not liabilities. These provisions are made to take care/cover the likely fall in the value of assets. This was so held by the Apex Court in CIT v/s HCL Comnet Systems & Services Ltd. [2008]. Further, it is submitted by the revenue that the impugned notice is sustainable on the clause (g) of the Explanation to section 115JA (viz. clause (i) of the Explanation to section 115JB at present), inserted by Finance Act, 2009 retrospectively with effect from , which provides the amount or amounts set aside as provision for diminution in the value of any asset shall be added in computing book profit. However the reasons as recorded by the Assessing Officer for issuing the impugned notice is that provisions for bad and doubtful debts and for depletion/diminution of value of long-term investment are unascertained liabilities. The High Court has held that the position of Law on the date of issue of notice u/s 148 must be looked into and accordingly the validity of a reopening notice has to be tested and the retrospective amendment to issue of notice could not validate a notice issued earlier. Accordingly, the Court has held that the impugned notice is not sustainable. (2) Hyosung Corporation v/s AAR[2016] (Delhi) The petitioner company, incorporated in South Korea., supplied equipments to customers all over the world including India. For the assessment year , notice u/s 143(2), in a standard pre-printed format, was issued before the date of filing of application with the AAR and notice u/s 142(1) along with a questionnaire, in respect of the equipments supply contracts, was served on the assessee after the date of filing of filing of application with the AAR. AAR rejected said application holding that with the issue of notice u/s 143(2), claims of the assessee in the return were pending for adjudication before the AO. Therefore, bar created 245R would operate. On writ before the High Court: The Court has held that as far as the notice u/s 143(2), in the instant case, is concerned, it is seen that it is in a standard pre-printed format which merely states that 'there are certain points in connection with the return of income on which the Assessing Officer would like some further information. In any event 1

2 the question raised in the applications by the petitioner before the AAR do not appear to be forming the subject matter of the notices u/s 143(2). Consequently, the mere fact that a notice u/s 143(2) asking for certain information from assessee though issued prior to filing of application before AAR will not constitute bar in terms of section 245R, on AAR entertaining and allowing application. However, issue of notice u/s 142(1) along with a questionnaire, in respect of the equipments supply contracts would nevertheless make the proceedings pending but since it was issued after the date of filing of application therefore it will not result in the proceedings being already pending on the date of filing of the application before the AAR. Thus the application can t be rejected by the AAR. (3) Taparia Tools Ltd. v/s JCIT [2015](SC) The assessee issued debentures and as regards payment of interest, two options were given to debenture holders. As per terms of issue, the debenture holders could either receive interest periodically i.e. half yearly at 18% per annum over a period of five years, or else, the debenture holders could opt for one time upfront interest payment of ` 55 per debenture. The assessee was following mercantile system of accounting. It filed its return claiming deduction of upfront interest charges paid during the relevant year. However, said upfront payment of interest on debentures were shown by the assessee as deferred revenue expenditure in, accounts to be written off over a period of five years. The Assessing Officer taking into consideration assessee's books of account, treated said payment as the deferred revenue expenditure to be written off over a period of five years and, therefore, he allowed only 1/5th of the payment made, though the entire payment was made in the relevant year. On appeal to the Supreme Court: Court observed that as per one mode, interest was payable every year and in that case it was to be paid on half yearly basis at the rate of 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. In the present case not only the liability had arisen in the relevant year, it was even quantified and discharged as well in that relevant year. In other words, the recurring liability of interest for the remaining life of debentures has been saved because for the remaining period the assessee was not required to pay interest on the borrowed amount. By allowing only 1/5th of the upfront payment, though the entire amount of interest is actually incurred in the very first year, the Assessing Officer, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the Assessing Officer, in fact, tempered with the terms of issue, which was beyond his domain. Merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. In view of the aforesaid, it was held that the assessee would be entitled to deduction of the entire expenditure in the year in which the amount was actually paid. 2

3 (4) CIT v/s V.S. Dempo & Co. (P.) Ltd. [2016] (Bombay) In the appellate proceedings, the question came up for consideration was if section 172 dealt with shipping business of non-residents and contained a non obstante clause and applied for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident which carried passengers etc. shipping at a port in India, then, was there any obligation to deduct the tax at source in terms of section 195. On appeal to the High Court: The Court observed that sections 172 devise a scheme for levy and recovery of tax. Section 44B denotes as to how the amounts paid to or payable would include demurrage charges or handling charges or any other amount of similar nature. The sub-sections of section 172 read together and harmoniously would reveal as to how the tax should be levied, computed, assessed and recovered. Therefore, there is no warrant in applying the provisions in Chapter XVII of Act for collection and recovery of the tax and its deduction at source vide section 195. The scheme as above operates only to cases covered by section 172 and none else. (5) CIT v/s Henkel Spic India Ltd. [2015](SC) The assessee opened a public issue of shares on i.e. in financial year (A.Y ). The date of closure is Application money received from intending subscribers were kept in bank (as per requirement of section 73 of the Companies Act) for 46 days and on this the assessee earned an interest of `1,83,31,363/-. The assessee allotted shares in financial year (June 1992). The Assessing Officer wanted to tax the aforesaid interest income in the Assessment Year as the money was received between and and the interest earned thereupon in the said Financial Year. The assessee argued that interest had accrued to it only on the allotment of shares as before that the amount was kept in trust by it which belonged to the applicants. Hence, interest income was taxable in assessment year On appeal to the Supreme Court: Court observed that as per section 73 of the Companies Act, the assessee was required to keep the money in separate bank account, and sub-section (3A) of Section 73 prohibits utilization of moneys standing (including interest) to credit in a separate bank account. Infact, the interest so earned cannot be regarded as an amount which is fully available to the company for its own use from the time the interest accrued, as that interest is an amount which accrues on a fund which itself is held in trust, (which belonged to the applicants who wanted to subscribe for the shares), until the allotment is completed and moneys are returned to those to whom shares are not allotted. It is only after the allotment process is completed and all moneys payable to those to whom moneys are refundable are refunded along with interest wherever interest becomes payable, Balance remaining out of the interest earned on the application money can be regarded as belonging to the company. 3

4 Thus, the interest income has accrued only in the assessment year and was taxable in that year only and not in the assessment year (6) CIT v/s NDR Warehousing (P.) Ltd. [2015](Madras) Assessee was engaged in business of warehousing, handling and transport business. It showed income earned from letting out of warehouses and godowns as income from business. Assessing Officer treated said income as income from house property. In actual, in the instant case, a perusal of the profit and loss account of the assessee-company and the objects clause of the memorandum of association of the company clearly show that the assesseecompany was incorporated with an object of carrying on the business of warehousing and letting / renting of godowns and providing facilities for storage of articles or things and descriptions whatsoever. The profit and loss account of the assessee-company shows that its main source of income is storage charges and maintenance or user charges. Even substantial part of the expenses also relate to the salaries of the employees engaged in the maintenance and upkeep of the godowns and warehouses. Means, primary source of income of assessee was letting out of godowns and warehouses to manufacturers, traders and other companies carrying on warehousing business and it was a case of warehousing business. Based on above, therefore, the Court has held that the income of the assessee from letting out of warehouses and godowns is chargeable under the head "Business Income" and not 'Income from house property'. (7) Shyam Burlap Company Ltd. v/s CIT [2015] (Calcutta) The appellant company having a main object as specified in its Memorandum of Association were to acquire and develop properties and to deal with the same by way of sale, lease, letting out, etc. During relevant year, assessee paid certain amount as compensation to two tenants for obtaining vacant possession of space occupied by them, in order to earn higher rent by re-letting out the same. The assessee claimed deduction of said payment as revenue expenditure. The Assessing Officer opined that since the payment was made for acquiring a benefit of enduring nature, the expenditure was to be considered as capital expenditure which could not be allowed as deduction under section 37(1). On appeal to the High Court: Court observed that since the object in the Memorandum permitted the assessee to carry on business in letting out properties and as 85 per cent of the income of assessee was by way of deriving rent and lease rentals, income from rent constituted the business income of the appellant. Since compensation was paid by the appellant, the landlord of the premises, to obtain possession from the lessee/tenant so as to earn a higher rental income, it had arisen out of business necessity and commercial expediency. Since there was no question of acquiring a property it cannot be said that the payment made was for having a benefit of enduring nature. Rather the compensation was paid to the existing tenants to have their portions vacated to have new tenants with higher rent and thus to have a higher rental income which was 4

5 a business activity permitted by the Memorandum. Hence, as the appellant, being the owner of the property, was carrying on business and had paid compensation for deriving higher rent which was in tune with the Memorandum a fact which was not at all considered by the Revenue, is deductible as revenue expenditure. (8) CIT v/s Alcatal Lucent Canada [2015](Delhi) Assessee, a French company, used to manufacture, trade and supply equipments and services for GSM Cellular Radio Telephones Systems. Assessee had supplied hardware and software to various entities in India. Software licensed by assessee embodied process which was required to control and manage specific set of activities involved in business use of its customers. Department opined that consideration for supply of software amounted to royalty u/s 9(1)(vi). Observations and Decision of Court: We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. Based on above, the Court has held that where payment is made for hardware in which the software is embedded and the software does not have independent functional existence, no amount could be attributed as royalty for software in terms of section 9(1)(vi). (9) CIT v/s Parrys (Eastern) (P.) Ltd. [2016] (Bombay) The assessee had disclosed deemed short-term capital gain under section 50 arose on account of the sale of depreciable assets which was held for a period more than three years. This deemed short-term capital gain was set-off against brought forward long-term capital losses. The Assessing Officer, in view of section 74, disallowed the set-off of brought forward long-term capital losses against such deemed short-term capital gain. On appeal to the High Court: The Court observed that the deeming fiction u/s 50 is restricted only to the mode of computation of capital gains contained in sections 48 & 49. It does not change character of the capital gain from that of being a long-term capital gain into a short-term capital gain for purpose other than section 50. Thus, for purposes of section 74, deemed short-term capital gain continues to be long-term capital gain. Thus, the assessee was entitled to claim set-off said gain against brought forward long-term capital losses. 5

6 (10) ITC Ltd. v/s CIT [2016](SC) Assessee was engaged in business of owning, operating, and managing hotels. Surveys conducted at business premises of assessee revealed that they had been collecting tips from their customers and paying such tips to their employees but not deducting taxes thereon. Assessing Officer treated the assessee as assessee-in-default under section 201(1). On appeal before the Supreme Court: The Court has observed that tips being purely voluntary amounts that may or may not be paid by customers for services rendered to them would not, fall within the scope of salary. Since tips were received by employer in a fiduciary capacity as trustee for payments that were received from customers which they disbursed to their employees for service rendered to customer, therefore, there was no reference to contract of employment when these amounts were paid by employer to employee. Contract of employment not being proximate cause for receipt of tips by employee from a customer, same would be outside dragnet of sections 15 and 17. Thus tips so disbursed to employees couldn't be chargeable to tax as salary and thus employer was not liable to deduct tax at source from such payments. (11) Vipin Walia v/s ITO [2016] (Delhi) A notice under section 148 dated 27 th March 2015 was addressed to assessee seeking to reopen the assessment for Assessment Year The above notice was returned unserved with the postal authorities endorsing on it the remarks "Addressee expired", as the assessee had expired on 14th March The ITO initiated the reassessment proceedings against the legal heirs after the limitation period (i.e. 31 st March, 2015). On writ, against the validity of Notice as issued u/s 148, before the High Court: The Court took a note of section 159(2) which provides that for the purpose of making an assessment (including section 147) of the income of the deceased, (a) any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased; and (b) any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative. By taking the above legal position into consideration, the Court has held that what was sought to be done by the ITO was to initiate proceedings under section 147 of the Act against the deceased Assessee for A.Y The limitation for issuance of the notice under section 147/148 of the Act was 31st March On 27 th March 2015, when the notice was issued, the Assessee was already dead. If the Department intended to proceed under section 147 of the Act, it could have done so prior to 31st March 2015 by issuing a notice to the legal representative (LRs) of the deceased. Beyond that date it could not have proceeded in the matter even by issuing notice to the LRs of the Assessee. Accordingly, the impugned notice dated 27th March 2015 and all proceedings consequent thereto are hereby quashed. 6

7 (12) CIT v/s S.R.Jeyashankar [2015] (Madras) The assessee had entered into an agreement dated for purchase of undivided share of land as well as for construction of home (which was registered on ) by a project promoted by M/s.Vishranthi Homes Pvt. Ltd. Thereafter, the assessee sold the entire unit by a sale deed dated and claimed the difference between the cost of acquisition and sale consideration as long term capital gains. The Assessing Officer however, took a view that since the property was purchased in the month of August, 2005 and sold in April, 2008, the capital gains arising from sale would be assessed as short term capital gain. On appeal before the High Court: The Madras High Court took a note of decision of the Punjab and Haryana High Court in the case of Mrs. Madhu Kaul v/s CIT (2014) in which the High Court held that the allottee gets the title to the property on issuance of allotment letter and the payment in instalments is only a consequential act upon which delivery of possession to the property flows. In the light of the above said decisions, it was held that where assessee had entered into an agreement with builder for purchase of undivided share of land and construction, date of allotment of undivided share in land was to be adopted as date of acquisition for computing capital gain instead of date of sale deed. (13) CIT v/s Avenue Super Chits (P.) Ltd. [2015] (Karnataka) The assessee-company was engaged in the business of chit fund. The assessee has several chit groups which are formed by having 25 to 40 customers to make one chit group. Assessee has paid amounts to its subscribers who had participated in its chit scheme. The said amount was called as dividend. Under the scheme, the unsuccessful members in the auction chit would earn dividend and the successful bidders would be entitled to retain the face value till the stipulated period under the scheme. The Assessing Officer held that the amount paid by assessee to its members by way of dividend was liable for deduction of tax under sections 2(28A) and 194A. On appeal to the High Court: The Karnataka High Court took a note of decision of the Delhi High Court in the case of CIT v/s Sahib Chits (Delhi) (P.) Ltd. (2010) in which it was decided that the amount paid by way of dividend cannot be treated as interest under section 2(28A). Further, section 194A has no application to such dividends and, therefore, it was held that there is no obligation on the part of the assessee to make any deductions under section 194A before such dividend is paid to subscribers of the chit. The aforesaid judgment squarely applies to the facts of present appeal. (14) Fibre Boards (P.) Ltd. v/s CIT [2015](SC) The assessee company sold its industrial unit at Thane, as the assessee intended to shift its industrial undertaking from an urban area to a non-urban area. Out of the capital gain so earned, the assessee paid by way of advances various amounts to different persons for purchase of land, plant and machinery, 7

8 construction of factory building etc. The assessee claimed exemption under section 54G on entire capital gain since the advances made were more than capital gains earned. However, the Assessing Officer imposed a tax on capital gains, refusing to grant exemption to appellant under section 54G. On appeal by the assessee to the Supreme Court: Court observed that u/s 54G(1), the assessee is given a period of three years after the date on which the transfer takes place to purchase new machinery or plant and acquire building or land or construct building for the purpose of his business in the said area. The expression used in section 54G(2) is 'which is not utilized by him for all or any of the purposes aforesaid.'. It is clear that the key words 'not utilized' in sub-section (2) which would show that it is enough that the capital gain made by the assessee should only be 'utilized' by him in the assessment year in question towards purchase and acquisition of plant and machinery, and land and building. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilization by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets. Accordingly, it was held that assessee is eligible to avail his claimed exemption. (15) CIT v/s Kotak Securities Ltd. [2016] (SC) The assessee company, being a member of the Bombay Stock Exchange (BSE), has paid transaction charges to the BSE for fully automated online trading facility and other facility. Revenue contented that tax is deductible at source u/s 194J considering such transaction charges as fees for technical charges. But on appeal, the Court has observed that- The service made available by the Bombay Stock Exchange [BSE Online Trading (BOLT) System] for which transaction charges in question had been paid by the appellant assessee are common services that every member of the Stock Exchange is necessarily required to avail of to carry out trading in securities in the Stock Exchange. The above features of the services provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to member(s). Therefore, the Supreme Court has held that transaction charges paid by members of BSE to BSE are in nature of payments made for facilities provided by Stock Exchange and no TDS on such payments would be deductible under section 194J. (16) CIT v/s Meghalaya Steels Ltd. [2016] (SC) Assessee received amounts on account of (a) transport subsidy; (b) interest subsidy; (c) power subsidy; and (d) insurance subsidy and claimed deduction for said subsidies treating them as profits derived from business. Revenue contended that subsidies so received had no close and direct nexus with assessee's business and thus could not be treated as profits derived from business. On appeal before the Supreme Court: 8

9 The Court has held that subsidies were reimbursed to assessee for elements of cost relating to manufacture or sale of their products and, thus, there was certainly a direct nexus between profits of assessee's business and reimbursement of such subsidies therefore, deduction was admissible on such subsidies. (17) CIT v/s Bhagat Construction Co. (P.) Ltd. [2015] (SC) The assessment order in case of assessee did not contain any direction for the payment of interest but I.T.N.S. 150 (i.e. Income tax Note Sheet) contained a calculation of interest payable on tax assessed. On appeal of assessee, Appellate Authorities has held that that interest could not be levied under section 234B in absence of any direction actually given in the assessment order for payment of interest. On appeal to the Supreme Court: The Court has held that section 234B applies the moment an assessee, who is liable to pay advance tax, has failed to pay such tax or there is shortfall in payment of tax. Levy of such interest is automatic when the conditions of section 234B are met. Form I.T.N.S. 150 must be treated as part of assessment order in wider sense and when this Form contained a calculation of interest payable on tax assessed, it could not be said that no direction had been given in assessment order for charging of interest u/s 234B. (18) CIT v/s Girish L. Ragha [2016](Bombay) Where assessee sold residential property and entered into an agreement with a builder for purchasing flat for which he invested sale proceeds within prescribed period of two years. However, the assessee got the occupancy certificate of the property after 4 years and such delay was beyond control of assessee. The department rejected the claim of deduction under section 54 as made by assessee. On appeal to the High Court: The Court has held that as the payment of the total consideration was paid by the assessee, merely because the residential premises were not occupied, as the possession was not delivered to the assessee by the developer and the deed of conveyance was not executed within such period would not by itself be a ground to deprive the assessee from availing the deduction of payment of capital gain under section 54. In other words, merely because assessee got occupancy certificate after 4 years and such delay was beyond control of assessee, assessee's claim for deduction under section 54 was to be allowed. (19) CIT v/s Jyotsna Holdings (P.) Ltd. [2016] (SC) On completion of assessment, an amount was found refundable to assessee but was not immediately refunded. Such amount was, later on, adjusted against demand for earlier assessment year. The assessee claimed the interest on refundable amount, which request was rejected by the Revenue. On appeal to the Supreme Court: Amount refundable to assessee was utilized by department and, therefore, interest was payable under sub-section (1A) of section 244A. 9

10 SATISH MANGAL ( , RECENT CIRCULARS (B) LATEST CIRCULARS & NOTIFICATIONS: CIRCULAR NO.6/2016 DATED : Section 45, Read with section 28(i): Issue of taxability of surplus on sale of shares and securities - Capital gains or business income - Instructions in order to reduce litigation:- Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following: (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years. Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head 'Capital Gain', irrespective of period of holding, with a view to avoid disputes / litigation and to maintain uniform approach. LETTER F.NO.225/12/2016 CIRCULAR NO.5/2016) DATED : Section 194H read with section 194C: TDS on payments by television channels and publishing houses to advertisement companies for procuring or canvassing for advertisements:- It is noted that there are two types of payments involved in the advertising business: (i) Payment by client to the advertising agency, and (ii) Payment by advertising agency to the television channel/newspaper company. 1

11 SATISH MANGAL ( , RECENT CIRCULARS The applicability of TDS on these payments has already been dealt with in Circular No. 715 dated , where it has been clarified that while TDS u/s 194C (as work contract) will be applicable on the first type of payment, there will be no TDS u/s 194C on the second type of payment e.g. payment by advertising agency to the media company. However, another issue has been raised in various cases as to WHETHER THE FEES/CHARGES TAKEN OR RETAINED BY ADVERTISING COMPANIES FROM MEDIA COMPANIES FOR CANVASING/BOOKING ADVERTISEMENTS (TYPICALLY 15% OF THE BILLING) IS 'COMMISSION' OR 'DISCOUNT'. It has been argued by the assessees that since the relationship between the media company and the advertising company is on a principal-to-principal basis, such payments are in the nature of trade discount and not commission and, therefore, outside the purview of TDS under section 194H. The Department, on the other hand, has taken the stand in some cases that since the advertising agencies act on behalf of the media companies for procuring advertisements, the margin retained by the former amounts to constructive payment of commission and, accordingly, TDS under section 194H is attracted. The issue has been examined by the Allahabad High Court in the case of Jagran Prakashan Ltd. and Delhi High Court in the matter of Living Media Limited and it was held in both the cases that the relationship between the media company and the advertising agency is that of a 'principal-toprincipal' and, therefore, not liable for TDS under section 194H. The SLPs filed by the Department in these cases have been dismissed by the Supreme Court. Though these decisions are in respect of print media, the ratio is also applicable to electronic media/television advertising as the broad nature of the activities involved is similar. In view of the above, it is hereby clarified that no TDS is attracted on payments made by television channels/newspaper companies to the advertising agency for booking or procuring of or canvassing for advertisements. CIRCULAR NO.4/2016 DATED : Section 194C Read with section 194J: TDS on Payments by Broadcasters or Television Channels to Production Houses For Production of Content or Programme for Telecasting: Disputes have arisen on the issue as to whether payments made by the broadcaster/telecaster to production houses for production of content/programme are payments under a 'work contract' or a contract for 'professional or technical services' and, therefore, liable for TDS u/s 194C or u/s 194J. While applying the relevant provision of TDS on a contract for content production, a distinction is required to be made between: (i) a payment for production of content / programme as per the specifications of the broadcaster/telecaster and (ii) a payment for acquisition of broadcasting/telecasting rights of the content already produced by the production house. In the first situation where the content is produced as per the specifications provided by the 2

12 SATISH MANGAL ( , RECENT CIRCULARS broadcaster/telecaster and the copyright of the content/programme also gets transferred to the telecaster/broadcaster, it is hereby clarified that such contract is covered by the definition of the term 'work' in section 194C of the Act and, therefore, subject to TDS under that section. However, in a case where the telecaster/broadcaster acquires only the telecasting/broadcasting rights of the content already produced by the production house, there is no contract for 'carrying out any work', as required in section 194C. Therefore, such payments are not liable for TDS u/s 194C. However, payments of this nature may be liable for TDS under other sections under Chapter of TDS. CIRCULAR NO.16/2015 DATED : SECTION 37: EXPENDITURE IN CASE OF ABANDONED FEATURE FILMS ALLOW? :- The deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year is provided in Rule 9A of Income Tax Rules, In the case of abandoned films, however, since certificate of Board of Film Censors is not received, in some cases no deduction was allowed by treating the expenditure as capital expenditure. The matter has been examined in light of judicial decisions on this subject. The order of the Hon'ble Bombay High Court in the case of Venus Records and Tapes Pvt. Ltd. on this issue has been accepted. Consequently, it is clarified that the expenditure incurred on such abandoned feature films is not to be treated as a capital expenditure. The cost of production of an abandoned feature film, is to be treated as revenue expenditure and allowed, as per the provisions of section 37. CIRCULAR NO.1/2016 DATED : Section 80-IA: Deductions - Profits and gains from infrastructure undertakings - Clarification of term 'INITIAL ASSESSMENT YEAR':- Section 80-IA(2) provides that the deduction under section can be claimed by the assessee, at his option, for any ten consecutive assessment years out of fifteen years (twenty years in certain cases) beginning from the year in which the undertaking commences operation, begins development or starts providing services etc. as stipulated therein. Section 80-IA(5) provides as under Notwithstanding anything contained in the Act, the profits and gains of an eligible business, for the purpose of determining the amount of deduction, shall be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which determination is made. It has been represented that some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the 3

13 SATISH MANGAL ( , RECENT CIRCULARS assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years. The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80-IA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen ( or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 80-IA for ten consecutive years beginning from the year in respect of which he has exercised such option. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80-IA. CIRCULAR NO.23/2015 DATED : Section 194A: TDS on interest on fixed deposit made on direction of Courts: Section 194A stipulates deductions of tax at source on interest other than interest on securities. In the case of UCO Bank, the Hon'ble Delhi High Court has held that the provisions of section 194A do not apply to fixed deposits made in the name of Registrar General of the Court on the directions of the Court during the pendency of proceedings before the Court. In such cases, till the Court passes the appropriate orders in the matter, it is not known who the beneficiary of the fixed deposits will be. Amount and year of receipt is also unascertainable. The Hon'ble High Court thus held that the person who is ultimately granted the funds would be determined by orders that are passed subsequently. At that stage, undisputedly, tax would be required to be deducted at source to the credit of the recipient. The Board has accepted the aforesaid judgment. Accordingly, it is clarified that interest on FDRs made in the name of Registrar General of the Court or the depositor of the fund on the directions of the Court, will not be subject to TDS till the matter is decided by the Court. However, once the Court decides the ownership of the money lying in the fixed deposit, the provisions of section 194A will apply to the recipient of the income. NOTIFICATION NO. 18/2016 DATED : Rule 8AA: Method of determination of period of holding of capital assets in certain cases:- In the case of a capital asset, being a share or debenture of a company, which becomes the property of the assessee in the circumstances mentioned in clause (x) of section 47 of the Act, there shall be included the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion." Section 47(x) provides that Any transfer by way of conversion of bonds or debenture or debenture stock or deposit certificates of a company into the shares or debentures of that company will not be regarded as transfers for the purposes of section 45 and therefore, no capital gain will arise. 4

14 SATISH MANGAL ( , RECENT CIRCULARS NOTIFICATION NO.13/2016 DATED : The CBDT has notified that the depreciation rate in respect of OIL WELL will be 15%. NOTIFICATION NO. DATED : Rule 17C read with section 11(5): Mode of investment of Trust Money: Investment in "Stock Certificate" under the Sovereign Gold Bonds Scheme, 2015, shall be treated as an eligible investment u/s 11(5). NOTIFICATION NO.7/2016 DATED : SECTION 80CCD: DEDUCTION in respect of CONTRIBUTION TO PENSION SCHEME OF CENTRAL GOVERNMENT - NOTIFIED PENSION SCHEME: In exercise of the powers conferred in section 80CCD(1), the Central Government hereby notifies the 'Atal Pension Yojana (APY)' as a pension scheme for the purposes of the said section. CIRCULAR NO.11/2016 DATED : Section 244A read with section 195: Payment of interest on refund of excess TDS deposited under section 195:- The procedure for refund of tax deducted at source u/s 195, to the person deducting the tax is set out in CBDT Circular No. 7/2007 dated , which also states that no interest u/s 244A, is admissible on refunds to be granted in accordance with the circular. But, The Hon'ble Supreme Court of India in the case of Tata Chemical Limited, vide order dated , held that, "Refund due and payable to the assessee is debt-owed and payable by the Revenue. Though there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, the Government cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest. " In view of the above judgment of the Apex Court it is settled that if a resident deductor is entitled for the refund of tax deposited u/s 195, then it has to be refunded with interest u/s 244A, from the date of payment of such tax. NOTIFICATION NO. 90/2015 Dated & NOTIFICATION NO. 5/2016 Dated : Amendment in Rules 10THA, 10THB AND 10THC: In exercise of the powers conferred by sections 92CB, the Central Board of Direct Taxes hereby makes the amendments in following Rules: 5

15 SATISH MANGAL ( , RECENT CIRCULARS Rule 10THA: The scope of eligible assessee under this rule has been extended to cover: (1) a co-operative society engaged in the business of procuring and marketing milk and milk products"; (2) a Government company engaged in the business of supply of electricity. Rule 10THB: Accordingly, the scope of eligible specified domestic transaction has been extended to cover: (1) Purchase of milk or milk products by a co-operative society from its members. (2) Supply of electricity by Government Company (It may be noted that the requirement that supply of electricity should be by a generating company has been removed.) Rule 10THC: Where an eligible assessee has entered into an eligible specified domestic transaction in any previous year relevant to an assessment year and the option exercised by the said assessee is treated to be validly exercised under rule 10THD, the transfer price declared by the assessee in respect of such transaction for that assessment year shall be accepted by the income-tax authorities, if it is in accordance with the specified circumstances as given below: S.No. Eligible transaction Circumstances 1. Supply of electricity, transmission of electricity, wheeling of electricity by Government Company 2. Purchase of milk or milk products by co-operative society The tariff in respect of supply of electricity, transmission of electricity, wheeling of electricity, as the case may be, is determined or the methodology for determination of the tariff is approved by the Appropriate Commission in accordance with the provisions of the Electricity Act, The price of milk or milk products is determined at a rate which is fixed on the basis of the quality of milk, namely, fat content and Solid Not Fat (SNF) content of milk; and (a) the said rate is irrespective of, (i) the quantity of milk procured; (ii) the percentage of shares held by the members in the cooperative society; (iii) the voting power held by the members in the society; and (b) such prices are routinely declared by the co-operative society in a transparent manner and are available in public domain. NOTIFICATION NO. DATED : Rule 114B: Monetary limit of specified transactions which require quoting of PAN enhanced w.e.f. 1 st January, 2016:- 6

16 SATISH MANGAL ( , RECENT CIRCULARS Every person shall quote his permanent account number in all documents pertaining to the transactions specified in the Table below, namely: Sl. Nature of transaction Value of transaction No. 1. Sale or purchase of a motor vehicle or vehicle, as defined in the Motor All such transactions Vehicles Act, 1988 which requires registration by a registering authority under that Act, other than two wheeled vehicles. 2. Opening an account with a banking company or a co-operative bank to which the Banking Regulation Act applies. All such transactions 3. Making an application for issue of a credit or debit card. All such transactions. 4. Opening of a Demat account with a depository, etc. All such transactions. 5. Payment to a hotel or restaurant against a bill or bills at any one time. Payment in cash of an amount exceeding ` 50,000/-. 6. Payment in connection with travel to any foreign country or payment for purchase of any foreign currency at any one time. Payment in cash of an amount exceeding ` 50,000/-. 7. Payment to a Mutual Fund for purchase of its units. Amount exceeding ` 50,000/-. 8. Payment to a company or an institution for acquiring debentures or bonds issued by it. Amount exceeding ` 50,000/-. 9. Payment to the Reserve Bank of India for acquiring bonds issued by it. Amount exceeding ` 50,000/ Deposit with a banking company or a co-operative bank Deposits in cash exceeding ` 50,000/- during any one day. 11. Purchase of bank drafts or pay orders or banker's cheques from a banking company or a co-operative bank 12. A time deposit with, (i) a banking company or a co-operative bank (ii) a Post Office; (iii) a Nidhi referred to in section 406 of the Companies Act; or (iv) a non-banking financial company 13. Payment for one or more pre-paid payment instruments, as defined in the policy guidelines for issuance and operation of pre-paid payment instruments issued by RBI u/s 18 of the Payment and Settlement Systems Act, to a banking company or a co-operative bank or to any other company or institution. Payment in cash exceeding ` 50,000/- during any one day. Amount exceeding ` 50,000/- or aggregating to more than ` 5,00,000/- during a financial year. Payment in cash or by way of a bank draft or pay order or banker's cheque of an amount aggregating to more than ` 50,000/- in a financial year. 14. Payment as life insurance premium to an insurer Amount aggregating to more than ` 50,000/- in a Fin. Year. 15. A contract for sale or purchase of securities (other than shares) Amount exceeding ` 1,00,000/- per transaction. 16. Sale or purchase, by any person, of shares of a company not listed in Amount exceeding 7

17 SATISH MANGAL ( , RECENT CIRCULARS a recognised stock exchange. ` 1,00,000/- per transaction. 17. Sale or purchase of any immovable property. Amount exceeding ` 10,00,000/- or valued by stamp valuation authority at an amount exceeding 10,00,000/ Sale or purchase, by any person, of goods or services of any nature other than above, if any. Amount exceeding ` 2,00,000/- per transaction: CIRCULAR NO.7/2016 DATED : CLARIFICATION REGARDING TAXABILITY OF CONSORTIUM MEMBERS A consortium of contractors is often formed to implement large infrastructure projects, particularly in Engineering Procurement and Construction ('EPC') contracts and Turnkey Projects. The tax authorities, in many cases have taken a position that such a consortium constitutes an Association of Persons ('AOP') i.e. a separate entity for charging tax. The claim of taxpayers, on the other hand, is contrary to this view. This has led to tax disputes particularly in those cases where each member of the consortium, although jointly and severally liable to the contractee, has a clear distinction and role in scope of work, responsibilities and liabilities of the consortium members. The matter has been examined. With a view to avoid tax-disputes and to have consistency in approach while handling these cases, the Board has decided that a consortium arrangement for executing EPC/Turnkey contracts which has the following attributes may not be treated as an AOP. (a) each member is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work i.e. there is a clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work. (b) each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work. However, consortium members may share contract price at gross level only to facilitate convenience in billing. (c) the men and materials used for any area of work are under the risk and control of respective consortium members; (d) the control and management of the consortium it not unified and common management is only for the inter-se co-ordination between the consortium members for administrative convenience. ALL THE BEST 8