Issue No. 257 / March 17, 2022

Dear Professionals,   

We are glad to present to you the 257^th edition of ‘Taxsutra Database Bulletin’, where we keep you updated with current trends in the tax arena! 

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Expert Column

CBDT issued Circular No. 3/2022 to clarify its position on applicability of the Most Favoured Nation (MFN) Clause in the Protocol to India’s Double Taxation Avoidance Agreements with several countries.
Mr. S.P. Singh (Ex-IRS & Ex-Senior Director, Deloitte) and Mr. Sharad Goyal (Founding Partner, GSAP & Associates LLP) discuss the concept of MFN, its applicability, controversies, finer points of the Circular and a few relevant decisions by various judicial authorities. Discussing the definition of MFN Clause, the authors highlight that that MFN Clause is not part of the OECD Model Convention however, finds place in the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries 2019. They opine that while the CBDT Circular intends to provide an understanding of how MFN Clause should apply and give clarity to the taxpayers, the issue regarding its applicability still remains as the Circular is binding on tax authorities but not on taxpayers thus, “the taxpayers can still resort to the judicial interpretation on this matter.” 

The authors highlight that MFN Clause has gained prominence in the recent past following abolition of DDT. They discuss various decisions rendered on this matter and also the most recent Pune ITAT ruling in GRI Renewable Industries which specifically dealt with the applicability of the Circular. While signing off, the authors opine that “Going by the accepted legal process it is likely that other judicial authorities will be guided more by the preceding judicial decisions rather than the Circular.” 

Click here to read, “CBDT Clarification on MFN Clause – Impact Analysis”

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Key Takeaways from Handpicked Rulings

1) HC: Interest on funds invested under Govt. directive, used for infrastructural development scheme, are capital receipts - Karnataka HC holds unutilized funds invested in FDs and mutual funds used for Government scheme on infrastructural development to be capital receipts; Assessee-Company wholly owned by Govt. of Karnataka received funds during AY 2007-08 which were deposited in FD and mutual funds earning interest and dividends; Assessee contended that dividend income on mutual funds were exempt u/s 10(35) and claimed short term loss of Rs. 5.02 Cr arising out of redemption of units with mutual funds; Revenue held income of Rs. 10.30 Cr earned on deposits as taxable which was upheld by the CIT(A) and reversed by ITAT; Before HC, Revenue relied on Tuticorin Alkali Chemicals and Fertilizers ltd, and submitted that if the capital of the company is fruitfully utilized instead of keeping it idle, income generated will be revenue and liable to tax; Further contended that profit motive was germane to the project undertaken by Assessee; Assessee argued that it was a SPV acting as nodal agency for Govt and not carrying out any business of its own but purely for public use; Also that interest earned on deposits of unutilized funds cannot be income of Assessee………….……….. Click here to read and download HC Judgment

2) HC: Allows deduction as expenditure incurred for purpose of earning income, not necessary to actually earn income - Karnataka HC holds Section 57 requires expenditure to be incurred for purpose of earning income and not necessarily result in actual income; Assessee, engaged in development and purchase, lease and sale of properties was sanctioned a loan for Rs. 35 Cr from Union Bank of India; Assessee paid Rs. 33.5 Cr to PEPPL as advance for purchase of properties and subsequently withdrew from transactions with a request for refund of earnest money; Thereafter, Assessee lent money to shareholders and made inter corporate deposits of Rs.35.62 Lacs; Assessee declared income of Rs. 5.34 Cr for AY 2009-10 after claiming loss of Rs. 81.95 lacs under head “income from other sources” after reducing interest payable on loan of Rs. 2.84 Cr against interest income of Rs. 2.02 Cr earned from inter corporate deposits and loans to shareholders; Revenue disallowed Rs. 81.95 lacs u/s 37 which was upheld by CIT(A) and ITAT dimissed Assessee’s appeal..……….……….. Click here to read and download HC Judgment

3) HC: Holds reassessment due to change of opinion based on Revenue Audit to be invalid - Karnataka HC allows Assessee’s (Co-operative Society) appeal, holds reassessment to be pursuant to change of opinion pursuant to raising of audit query; Assessee-society is a Regional Rural Bank, engaged in banking services was subjected to reassessment whereby its total income was determined at 44.53 lakh; On appeal CIT(A) partly allowed Assessee’s appeal whereas ITAT dismissed the appeal held against by the Assessee by the CIT(A); Before HC Assessee submitted that reopening of assessment was made on mere change of opinion and that there was no reason recorded that income has escaped assessment which is required as per Section 147; HC notes that Audit Officer had made enquiry on 25^th July 2006 regarding short assessment of tax due to deduction of capital gains u/s 80P and Assessing Officer replied stating that Assessee was eligible for exemption u/s 80P and had earned profit of Rs. 44.53 lacs from sale & purchase of Govt securities and was entitled to deduction u/s 80P as the said income was derived from banking business only…….………….. Click here to read and download HC Judgment

4) HC: Principles governing cash credit u/s 68 cannot be extended to unexplained investments u/s 69A - Telangana HC finds no infirmity with ITAT’s order, dismisses Assessee’s appeal and factually distinguishes Tilak Raj ruling relied on by Assessee and holds that principles governing cash credit u/s 68 cannot be extended to unexplained investments u/s 69A; During assessment proceedings for AY 2017-18, cash deposits of Rs. 13.16 lacs were found in Assessee’s bank account; Assessee submitted that he had deposited only Rs. 10 lac which were his savings, during demonetization; Revenue rejected explanation and found Rs.2.75 lacs also remained unexplained; Revenue added Rs. 12.75 lacs to returned income as unexplained deposits considered as income u/s 69A; CIT(A) granted relied of Rs. 2.75 lacs which was stated to be on account of withdrawal from his GPF, while confirming addition of Rs.10 lacs; On Assessee’s appeal, ITAT observed from decision of CIT(A) that Assessee’s statement u/s 131 was recorded and that Assessee did not have sufficient money to pay monthly chit instalments…..………….. Click here to read and download HC Judgment

5) HC: Impugned order passed by traversing beyond the SCN violative of natural justice - HC allows writ petition, directs for renewal of approval under Section17(2)(viii) proviso (ii)(b), finds the order rejecting application to be violative of principles of natural justice since it considered various issues not covered in the Show cause notice; Before HC, Assessee submitted that it was granted approval under Section 17(2)(viii) proviso (ii)(b) initially in FY 2011-12 for a period of 3 years which was renewed twice over till 21^st March 2020; It was contended that it filed application for renewal conforming with conditions prescribed under proviso (ii)(b) to clause(viii) of sub-section (2) to Section 17 and Rule 3A (1) of the Income Tax Rules, well in advance but the same was not renewed and is kept pending; Assessee was granted approval for providing treatment for Covid-19 patients which was revoked on 3^rd August 2020 and while pursuing issue of revocation, Revenue had issued SCN calling for Assessee to respond to why cancellation order of State Govt for Covid-19 treatment be not considered for deciding the application filed by the petitioner for recognition u/s 17(2)(ii)(b) to which Assessee responded that at time of application, there was no Covid-19 outbreak and that only permission for Covid treatment was revoked, not other treatments……………….. Click here to read and download HC Judgment

6) HC: Assessee entitled to PMGKY Scheme on 66% fulfilment of requirement - HC holds Assessee eligible for benefit under Pradhan Mantri Garib Kalyan Yojna Deposit Scheme (PMGKY Scheme)as more than 66% compliance for said scheme had been completed; Sum of Rs. 29.98 lakh was seized from Assessee's employee by the Police Department which was taken over by the Income-tax Department and summons were issued under Section 133; Assessee had to comply with Section 199F of Finance Act, 2016 in as much as an amount equal to 25% of the undisclosed income was to be deposited in PMGKY Scheme initially by Mar 31, 2017; Assessee tried to deposit amount by said date when he was informed by the bank that the branch was not permitted to accept deposit PMGKY Scheme and referred the Assessee to another branch but by then the bank terminal was closed and could not accept the deposit; Due to the non-deposit of balance Rs. 7.5 lac, Revenue has held that Assessee is not entitled to PMGKY Scheme and denied him refund of amount held with the department; HC observes the short question to decide is whether the Assessee can be denied benefit of scheme when there is partial fulfilment of requirement of scheme; HC observes Assessee has complied with Section 199D and 199E inasmuch as the tax at rate of 33%, surcharge at rate of 33% on the income tax and penalty at rate of 10% has been received by department; HC notes only Section 199F which requires 25% of penalty to be deposited with the Revenue department for a period of 4 years remains unfulfilled; HC notes Revenue continues to have in its possession Rs. 14.98 lacs; HC notes the scheme is being made burdensome since the amount has already been seized and then Assessee is being required to pay tax, surcharge and penalty as well as deposit………………….. Click here to read and download HC Judgment

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