IMPORTANT DECISIONS INCOME TAX

IMPORTANT DECISIONS INCOME TAX S. Sathiyanarayanan Partner 18 Feb 2017 ICAI SIRO

Scheme of Morning Talk Recent Decisions (Dec 2016 to Feb 2017) Section 14A Section 50B

CIT vs. Vinzas Solutions India Private Limited (Madras High Court) S. 9(1)(vi) 'Royalty' on transfer of software rights: There is a difference between sale of a 'copyrighted article' and the 'copyright' itself. S. 9(1)(vi) applies only to the latter and not the former. Explanation 4 inserted by FA 2012 w.r.e.f. 01.06.1976 has to be read and understood only in that context and cannot be expanded to bring within its fold transactions beyond the realm of the provision

CIT vs. G K K Capital Markets (P) Limited (Calcutta High Court) S. 14A Rule 8D: No disallowance with respect to exempt income can be made if the securities are held as stock-in-trade. CBDT Circular No. 5/2014 dated 11.02.2014 referred

CIT vs. Ashish International (Bombay High Court) Bogus purchases: A statement by the alleged vendor that the transactions with the assessee are only accommodation entries and that there are no sales or purchases cannot be relied upon by the AO unless the assessee is given the opportunity to cross-examine the vendor

CIT vs. Green Infra Limited (Bombay High Court) S. 68: Even if the premium at which the shares are issued defies commercial prudence, the receipt cannot be assessed as "unexplained credit" if the identity of the payer, genuineness of the transaction and capacity of the subscriber are not disputed. Interest earned on short-term fixed deposits is assessable as "profits and gains of business" and not as "income from other sources"

CIT vs. Axis Pvt. Equity Ltd (Bombay High Court) S. 28/29: There is a distiction between "setting up of business" and "commencement of business". All expenditure after "setting up" is deductible business expenditure even if the business has not commenced. A business is "set up" when steps are taken to recruit employees and take premises etc

Otters Club vs. DIT (E) (Bombay High Court) S. 254(1)/ Rule 34(5)(c): The Tribunal is mandated to pass orders within 90 days of the hearing. Delay is not justified on the ground that 'administrative clearance' was obtained. The aggrieved party is entitled to seek recall of such an order

Ashish Gandhi Builders & Developers P. Ltd vs. ITAT (Bombay High Court) S. 254(2): Facts recorded by the ITAT have to be accepted as correct and conclusive and cannot be contradicted by affidavit or otherwise. The mere placing of a case law in the paper book does not mean that it was cited before the ITAT and nonconsideration thereof is not a mistake apparent from the record. A MA to rectify such alleged mistake of non-consideration of a judgement must be filed as quickly as possible

Jeans Knit Private Limited vs. DCIT (Supreme Court) S. 147/ 148: A Writ Petition to challenge the issue of a reopening notice u/s 148 is maintainable as per the law laid down in Calcutta Discount 41 ITR 191 (SC). The law laid down in Chhabil Dass Agarwal 357 ITR 357 (SC) deals with the maintainability of a Writ to challenge the reassessment order and does not apply to a challenge to the reassessment notice

Maharao Bhim Singh of Kota vs. CIT (Supreme Court) S. 10(19A): Though principles of res judicata do not apply, the Dept should not endlessly pursue matters which have attained finality in earlier years.

Dharamshibhai Sonani vs. DCIT (ITAT Ahmedabad) S. 50C: The proviso to s. 50C inserted by the Finance Act 2016 w.e.f. 01.04.2017 to provide that the stamp duty valuation of property on the date of execution of the agreement to sell should be adopted instead of the valuation on the date of execution of the sale deed is curative and intended to remove an undue hardship to the assessee and an apparent incongruity. It should accordingly be given retrospective effect from 1st April 2003, i.e. the date effective from which s. 50C was introduced

REDINGTON INDIA LTD. vs.additional COMMISSIONER OF INCOME TAX (2016) 97 CCH 0219 ChenHC substantial questions of law framed by the HC: 1. Whether the Tribunal was right in law in holding that disallowance under Section 14A of the Act r/w.rule 8 D of the Income Tax Rules can be made in a year in which no exempt income has been earned or received by the Assessee?

2. Whether the Tribunal was right in law in confirming the disallowance under Section 14 A, without appreciating that Section 14 A of the Act envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income?

3. Whether the Tribunal erred in not appreciating that provisions of Rule 8D have to be interpreted within the frame work of Section 14 A and any expenditure which cannot be established to have been incurred in relation to earning exempt income cannot be disallowed?

4. Whether the Tribunal erred in not appreciating that the provisions of section 14 A cannot be invoked in respect of investments made by the assessee in subsidiary/ associated companies out of business expediency and not for the purpose of earning dividend?

5. Whether the Tribunal erred in not appreciating that the Rule 8 D was inserted by Income Tax (fifth amendment) Rules, 2008 with effect from 24lh March 2008 and accordingly can have prospective application? The provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income.

Sec 147: Reopening (even of s. 143(1) assessment) on the ground that a specific aspect requires verification is not permissible. In the present case, the A.O does not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Nivi Trading Limited vs. UOI (Bombay High Court).

CIT vs. Jet Speed Audio Pvt. Ltd (Bombay High Court). Sec 147: The assessee made a claim for deduction for bad debts which was allowed by the A.O u/s 143(3). Subsequently, within four years from the end of the assessment year, the A.O reopened the assessment u/s 148 on the ground that the amount written off as bad debts was a capital loss and could not allowed as a deduction. The Tribunal allowed the assessee s appeal and quashed the reassessment proceedings. Before the High Court, the department urged that the reopening was valid because (a) the A.O acted on an audit objection which constitutes tangible material and (b) as the A.O had not dealt with the issue in the original assessment order, he had jurisdiction as held in Kalyanji Mavji & Co 102 ITR 287 (SC), New Light Trading Co256 ITR 391 (Del) and Dr. Amin s Pathology Laboratory 252 ITR 673 (Bom).

HC held that Sec 143(3) assessment order is not a scrap of paper & A.O is expected to have applied his mind. Reopening on ground of oversight, inadvertence or mistake is not permissible. Kalyanji Mavji & Co 102 ITR 287 (SC), where it was held that oversight, inadvertence or mistake in passing assessment order will give the A.O jurisdiction to reopen the assessment, is not good law in view of the subsequent decision in Indian and Eastern Newspaper Society Vs. CIT 119 ITR 996. An error discovered on a reconsideration of the same material (and no more) does not give him that power. The aforesaid view on the above proportion has been reiterated by the Apex Court in A.L.A.Firm vs. CIT 183 ITR 285.

Section 14A

Claim for Exemption -scenarios InAY2013-14- Mr.A earned dividendincomeofrs.20,000/-which was claimed as exempt u/s10(34) of the Incometax Act,1961. Mr.B earned dividendincomeofrs.20,000/-which was not claimed as exempt but was voluntarily offered to tax. Mr.C has not earned any dividend income during the year although Mr.C is holding securities capable of generating exempt income.

TheBombay High Court in Godrej and Boyce has held that Once a proximate cause for disallowance is established which is the relationship of the expenditure with income which doesnot form part of the total income a disallowance u/s14a has to be effected Whether disallowance can be made under section14a of the Income tax Act,1961read with Rule 8D of the Income-tax Rules,1962 in computing total taxable income of Mr.A, B and C?

Section14A(1)reads as under For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assesse in relation to income which doesnot form part of the total income under this Act

Mr. A s claim for exemption Since Mr.A has earned income which is not included in the total income the provisions of section14a are applicable. The expenditure incurred in relation to earning of income not included in total income shall be disallowed. If Mr.A s claim for incurring of expenditure is not accepted by the AO then the disallowance shall be made as per the method prescribed in Rule8D.

Mr. B s claim for exemption Mr.B has earned dividend income which is exempt under the Act but offered the same to tax thereby making an attempt to convert the exempt income into taxable income which is not in accordance with the Income-tax Act,1961. The Mumbai Tribunal in BinayakTexProcessorsLtd [2014]44taxmann.com179 has held that even if the exempt income is offered to tax the provisions of 14A are applicable and disallowance is to be made as per Rule8D.

Mr. C s claim for exemption Mr.C has not earned any income which is exempt under the Act but holds securities capable of generating exempt income. CIT vs. Corrtech Energy Pvt Ltd. Appeal no.239 of 2014 (Guj.HC) dated 24.3.2014 Since the Assessee did not make any claim for exemption of any income from payment of tax the disallowance under section14a could not be made. CIT vs. Lakhani Marketing ITA No. 970 of 2008 (P&H) dated 2.4.2014 The Hon ble HC upheld the order of Tribunal wherein it has been held:

That there must be income taxable under the Act; That this income must not form part of total income under the Act; That there must be an expenditure incurred by the Assessee; and That the expenditure must have a relation to the income which doesnot form part of the total income under the Act. Unless and until there is receipt of exempted income for the concerned AY, section14a cannot be invoked.

CIRCULAR NO. 5/2014 [F.No.225/182/2013- ITA.II], DATED11-2-2014: The legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.

Decisions in favour Assessee CCI Ltd vs. Jt.CIT [2012] 206 Taxman 563 (Kar.HC) Dy. CIT vs IndiaAdvantageSecuritiesLtd. [ITAppealNo. 6711(Mum.) of 2011dated 14/09/2012.] Ambit Securities Broking (P.)Ltd. vs. Addl. CIT [ITAppeal No.7856(Mum) of 2011, dated 6-07- 2013]

Decisions Against Dy.CIT vs. Gulshan Investment Co. Ltd. 31taxmann.com 113(Kol.) Jt. CIT vs. American Express Bank Ltd. 24taxmann.com50(Mum.) Dy. CIT vs. Damani Estates and Finance (P.) Ltd. [ITAppealNo.3029(Mum.)of2012,dated17.1.2013] D.H.Securities P Ltd. Vs. Dy.CIT [2014]41taxmann.com352(Mum)(TM) dated 27.11.2013

Investment vs stock in trade Rule8D provides for the method for determining amount of expenditure in relation to income not includible in total income. As per Rule8D(2)(ii)and(iii) the disallowance is based on the average value of investments the income from which doesnot or shall not form part of the total income. Interpretation of the word investment leads to different opinions and views for entities transacting in shares and having investment and trading portfolio or only trading portfolio.

Recent one!! CIT vs. G K K Capital Markets (P) Limited (Calcutta High Court) held that -- No disallowance with respect to exempt income if the securities are held as stock-intrade.

Section 50B

Triune Project Pvt. Ltd. v. DCIT (Delhi)(HC), The fact that certain assets of the "undertaking" are left out of the sale transaction because it would cause inconvenience for the purchaser does not mean that the transaction is not a "slump sale". To expect a purchaser to buy and pay value for defunct or superfluous assets flies in the face of commercial sense.[s. 2(19A), 2(42C)]

Unfortunately, the Revenue s understanding is that in a going concern the buyer is bound to pay good money, transact and purchase bad and irrecoverable debts. Does not suit common and commercial understanding, but it is not even a pre-condition, as is evident from the definition of undertaking, cited in Explanation (1) to Section 2 (19) (A) of the Act.

Allowing the appeal the Court held that (i) The sale transaction was reported for a total consideration of Rs.45.83 crores. The sale was for a going concern, which included ongoing service contracts, employment contracts and other tangible assets, and intangible assets such as technical know-how etc.

(ii) This definition of undertaking is what has been engrafted into by reference, under Section 2(42C) of the Act. Therefore, if certain assets or properties are left out because they would cause inconvenience or lead to some kind of a trouble for the purchasing party, it is well within its right to exclude it from the list of assets.( ITA no. 448/2016, CM Appeal No. 26426/2016)

CIT v. Dharampal Satyapal (2016)380 ITR 552 / 237 Taxman 452 / 283 CTR 37 / 130 DTR 145 (Delhi)(HC) S. 50B : Capital gains Slump sale - Depreciation is to be deducted to ascertain the networth of the undertaking for the purpose of computation of capital gain arising out of slump sale even though no such claim was either made or allowed by the Assessing Officer in the earlier years.

CIT v. Dharampal Satyapal (2016) 380 ITR 527 (Delhi) (HC) Net worth of undertaking-aggregate value of total assets not to be taken at written down value of block of assets- Actual cost to be reduced, inter alia, by depreciation as would have been allowable for years commencing on or after 1-4- 1988 -Depreciation actually allowed for these years not relevant.

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