Database NewsLetters

Taxsutra Database Bulletin : CIT(A)’s powers to adjudicate on issue(s) not dealt with by AO; Referral-fees paid by Indian-Branch to overseas-branch; CBDT updates and more…!

Issue No. 180 / March 28th, 2019

Key Takeaways from Handpicked rulings

1. [TS-5699-ITAT-2019(DELHI)-O] : CIT(A)’s powers to adjudicate on issue(s) not dealt with by AO : CIT(A) does not have jurisdiction to make an addition on an issue which was never considered by the AO - ITAT grant relief to assessee, deletes addition made by CIT(A) u/s 56(2)(viib) on account of share premium; Explains that although the powers of the CIT(A) are co-terminus with that of the powers of the AO, yet, he has jurisdiction only on those items which have been considered by the AO irrespective of the fact whether the issue is subject matter of appeal or not; States that “In case it is accepted that the ld.CIT(A) has power to consider an issue which was not considered by the Assessing Officer, then, the provisions of section 263 or 147 will become otiose”;

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2. [TS-5692-ITAT-2019(MUMBAI)-O] : Taxability of clients Referral-fees paid to overseas branch, Interest paid by India branch to overseas HO : Referral-fees paid by Indian-Branch of Credit Suisse to Dubai-Branch for referring clients not FTS; Interest paid by Indian-branch to overseas head-office is neither deductible in the hands of Indian Branch nor chargeable to tax in the hands of head office - ITAT rules in favour of assessee; Relies on coordinate bench decision in assessee’s own case for AY 2011-12 [TS-5573-ITAT-2018(MUMBAI)-O] and Special Bench decision in Sumitomo [TS-187-ITAT-2012(MUMBAI)-O]

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3. [TS-5701-ITAT-2019(MUMBAI)-O] : Sec.54-Use of sale proceeds for investment in new house property : Sec. 54 does not require that the sale proceeds from transfer of original capital asset must be used for meeting cost of new asset - ITAT allows assessee’s appeal appeal for AY 2005-06, allows deduction u/s. 54 to assessee rejecting AO’s reason for denying that the investment made towards purchase of new flats was not out of assessee’s own funds; Notes that assessee has made investment in a new property within the period stipulated u/s. 54(1) and states that “There being no pre–condition under section 54(1) of the Act providing for investment of the long term capital gain in purchase of new house for claiming deduction under section 54 of the Act, the departmental authorities cannot import such restriction/condition to the statutory provision”;

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4. [TS-5026-SC-2019-O] : Remuneration to Directors u/s. 40A(2)(b); Disallowance u/s. 14A : AO having accepted remuneration paid to directors in preceding year, cannot make disallowance u/s. 40A(2)(b) by comparing the payments made in earlier years; No deduction u/s. 14A when assessee is having enough surplus funds - SC dismisses Revenue’s SLP against HC order deleting addition u/s. 40A(2)(b) and Sec. 14A r/w Rule 8D

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CBDT Updates:

1. Income tax exemption for gratuity enhanced Up to Rs. 20 lakhs

2. Income Tax Department continues to hit at terror financing activities in J&K Region

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Taxsutra Database Bulletin : Essential Prerequisite For Invoking Section 14A: Satisfaction Of AO; Operation of stay by Courts; Deduction u/s 54/54F-Reference to DVO; CBDT updates and more…!

Issue No. 179 / March 18th, 2019

Key Takeaways from Handpicked rulings

1. [TS-5524-SC-2018-O] : Operation of stay by Courts; Civil and Criminal : Stay granted by Courts, in all the civil and criminal matters, shall come to an end after expiry of six months, unless the Court extends the same by way of a speaking order in exceptional circumstances - SC lays down law in respect of stay while dealing with criminal case; Rules that “In all pending matters before the High Courts or other courts relating to PC Act or all other civil or criminal cases, where stay of proceedings in a pending trial is operating, stay will automatically lapse after six months from today unless extended by a speaking order on above parameters. Same course may also be adopted by civil and criminal appellate/revisional courts under the jurisdiction of the High Courts”; Clarifies that to give effect to the legislative policy and the mandate of Article 21 for speedy justice in criminal cases, if stay is granted, matter should be taken on day-to-day basis and concluded within two-three months and where the matter remains pending for longer period, the order of stay will stand vacated on expiry of six months, unless extension is granted by a speaking order showing extraordinary situation where continuing stay was to be preferred to the final disposal of trial by the trial Court

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2. [TS-5611-ITAT-2019(MUMBAI)-O] : Deduction u/s 54/54F; Reference to DVO : Deduction u/s. 54/54F allowable on 2 flats comprising of two adjacent units, on the first and second floor of the same building ; Reference to DVO when FMV is alleged to be higher than claimed by assessee is bad in law - ITAT rules in favour of assessee for AY 2010-11; Explains that for the purpose of claiming deduction u/s 54/54F, there is no such requirement that, two units constituting of one residential house property, should not have separate main doors or they should be adjoined together or there should be inside staircase between two units, etc; Further, holds reference to DVO made by the CIT(A) u/s. 55A (upon opining that the value of the property as on 1.4.1981 declared by the assessee is higher than the FMV as on the date) bad in law, notes that prior to amendment vide finance act 2012, wherein the word “is less than its fair market value” is substituted by the word “is at variance with fair market value”, the AO could make a reference only when the AO is of the opinion that the value as claimed by the assessee is ‘less’ than fair market value and not in the case when in his opinion value claimed by assessee is ‘higher’ than actual fair market value

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3. [TS-5587-ITAT-2019(DELHI)-O] : Sec. 68 - credit of share capital/premium : Cheques issued for share capital and premium being backed by deposits in applicants’ bank accounts and absent creditworthiness and genuineness of transaction, addition u/s. 68 justified - Allows Revenue’s appeal, confirms AO’s addition of Rs.4.85 crores share application money received as unexplained credit u/s. 68; Opines that share applicant entities are paper entities created by some individuals for providing entries to the persons including the assessee, not having tax paid capital for promoting their venture; Takes note of issue of cheques backed by deposits in bank accounts of the share applicant and companies are not having creditworthiness for making such huge investment and the persons who invested were not produced before AO;

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4. [TS-5084-HC-2019(KERALA)-O] : Loss on revaluation of obsolete inventory : HC allows PSU-assessee’s appeal, allows its claim of loss on revaluation of inventory; Notes that the revaluation was made based on technical evaluation made by a Committee pursuant to audit objection on account of obsolescence of stores and spares; Observes that when the assets were put to use, the written off value was being debited to the P&L A/c and when they were stopped being used, they were being revalued which was as per accounting principles and though the same caused prejudice to Revenue, it cannot be the reason to disallow the loss on revaluation; Also observes that there is no change in accounting policy and the assessee had been consistently writing off the stores and spares when it actually become obsolete after having put it to use; Notes that the revaluation was in line with the AS-2 issued by ICAI; Relies on precedent and allows assessee’s claim;

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CBDT Updates:

1. CBDT directs CIT(e-verification) to exercise concurrent powers to call for information/statement u/s. 133/133C/285BA (75) - Notification No.19/2019

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Expert Column:

Ashish Chadha (Chartered Accountant) discusses one of the most recurrent and significant controversies surrounding the interpretation and application of Section 14A viz. ‘recording of satisfaction’ by the Assessing Officer (‘AO’) as to the incorrectness of claim made by an assessee. The author discusses latest rulings by High Courts and Supreme Court which have rendered the much needed clarity on the aspect. One of the most recent decisions is by Delhi HC in the case of Vedanta Ltd. [TS-7345-HC-2018(Delhi)-O] where, referring to the landmark decision of SC in Godrej & Boyce it was held that Rule 8D cannot be invoked unless AO records his dissatisfaction regarding the correctness of claim made by assessee in relation to expenditure incurred to earn exempt income. It was similarly held by Gujarat and P&H HCs in the cases of Shreno Ltd. [TS-7227-HC-2018(Gujarat)-O] and Punjab Tractors Ltd [TS-5087-HC-2017(Punjab & Haryana)-O] respectively. Author then refers to Delhi HC and Gujarat HC rulings in cases of Indiabulls Financial Services [TS-6361-HC-2016(Delhi)-O] and Devarsons Industries [TS-5782-HC-2017(Gujarat)-O] which have held that non-recording of dissatisfaction by AO about assessee’s calculation of disallowance could not be a ground for rejection of disallowance where the AO has carried out an elaborate analysis and followed the steps enacted in the statute in determining the disallowance. The author states that while most decisions provide relief to the taxpayers regarding the disallowance made by tax authorities u/s. 14A in the absence of recording of satisfaction, “the principles laid down by the High Courts in the cases of Devarsons and Indiabulls are still needed to be tested before the Supreme Court, which may entail further litigation on this aspect.”

Click here to read the article titled “Essential Prerequisite For Invoking Section 14A: Satisfaction Of Assessing Officer”

Taxsutra Database Bulletin : Payments to heirs of deceased partner, Gift by firm to partners; CBDT updates and more…!

Issue No. 178 / March 11th, 2019

Key Takeaways from Handpicked rulings

1. [TS-5514-ITAT-2019(COCHIN)-O] : Payments to heirs of deceased partner by partnership firm: Sum paid by a CA-firm to legal heirs of a deceased partner, qualifies as diversion of income by overriding title, allowable as a deduction - ITAT allows assessee’s appeal, holds that the amount paid by the assessee firm to the legal heirs of the deceased partners could not be assessed as income of the firm; Follows Bombay HC decision in Mulla & Mulla & Craigie Blunt wherein it was explained that the amount paid to the legal heirs of the deceased partner was under legal obligation and the amount was never received by the assessee-firm as its income but was diverted at source; ITAT explains that the underlying test is whether the income in question ever reaches to the assessee, explains that “where obligation is undertaken by the assessee to apply the income in a particular way before being received by the assessee or its accrual, the same results in the diversion of income. On the other hand, where the obligation to apply income is undertaken after being received or accrued to the assessee, it will be the case of application of money and will be liable to be taxed in hands of assessee”;

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2. [TS-5066-HC-2019(BOMBAY)-O] : Condonation of delay in filing appeal before High Court: Non-intimation of ITAT order by ex-employee, not a sufficient cause for condonation of delay in filing appeal before HC - Bombay HC dismisses assessee’s notice of motion seeking condonation of delay of 507 days in filing an appeal against Tribunal order; Rejects assessee’s reasoning for non-filing of affidavit from the ex-employee as him being a part-time employee who was not traceable post leaving his service; States that “It is intriguing that the applicant - company had entrusted such an important task of receiving Court's order to a part-time employee whose whereabouts within short time of his leaving the service are not be available with the company”;

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3. [TS-9629-ITAT-2018(CHENNAI)-O] : Gift by firm to its partners : Property gifted by partnership-firm to its partners pre-October 2009, not colourable device, not liable to tax - ITAT reverses AO’s action of bringing to tax, capital gains in respect of the lands gifted by the assessee-firm to its partners for AY 2010-11, by alleging assessee resorted to colourable device in order to overcome tax liability u/s.45(4) (distribution of capital assets of the firm to its partners) and probable tax liability in the hands of its partners u/s.56(1)(vii) (taxation of assets received without consideration); Points that Sec. 47(iii) specifically provides that such gifts are not to be considered as a transfer for the purpose of sec 45; Further, noting that gift has been given by the firm to all its partners before the effective date of introduction of sec. 56(1)(vii), states that “Just because the date of effective introduction of provisions of the Section 56(1)(vii) of the Act is in the public knowledge, would not make the gift given by the assessee firm to its partners as colourable devices for tax evasion”; Rejects Revenue’s stand that assessee has attempted to evade the payment of capital gains tax,

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4. [TS-5527-ITAT-2019(CHENNAI)-O] : Interest earned during plant-construction period : ITAT allows assessee’s appeal; Holds that interest income and other incidental income earned by the assessee (a Special Purpose Vehicle under Industrial Infrastructure Upgradation Scheme of Government of India) during the construction period should only go to reduce the capital cost of the plant and it cannot be brought to tax as revenue income; Relies on coordinate bench decision in Bank Note Paper Mill India which was further affirmed by HC and also on SC ruling in Bokaro Steel Ltd and Karnal Co-operative Sugar Mills Ltd.

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5. [TS-5519-SC-2018-O] : Retrospective benefit of second proviso to Sec 40(a)(ia) : SC dismisses Revenue's SLP against HC order for AY 2009-10 wherein it was held that second proviso to Sec. 40(a)(ia) retrospective in nature and no disallowance for non-deduction of TDS u/s. 40(a)(ia) is called for if the payee has paid tax on the amounts paid by assessee - HC had affirmed ITAT order wherein the issue of disallowance u/s. 40(a)(ia) for non-deduction of TDS was set aside to the file of the AO in the light of applicability of second proviso (inserted vide Finance Act, 2012 which provides that Sec 40(a)(ia) will not be attracted where payee has deposited tax) in the light of decision of the Delhi HC in the case of Ansal Land Mark Township wherein Sec 40(a)(ia) disallowance was deleted by holding second proviso to Sec 40(a)(ia) to be retrospective in nature

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CBDT Updates:

1. CBDT: Issues fresh 'angel tax' notification pursuant to recent DPIIT notification, applicable from February 19, 2019 - Notification No.13/2019

2. CBDT enhances income tax exemption limit for gratuity u/s. 10(10)(iii) to Rs. 20 lakhs - Notification No.16/2019

3. IT Dept reminds PAN holders to complete PAN - Aadhaar linking by 31.03.2019

4. TIEA between India and Brunei signed on 28.02.2019

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Taxsutra Database Bulletin : Delay in payment under IDS, 2016, Expenses in foreign currency by Trust; CBDT updates and more…!

Issue No. 177 / Feb 23rd, 2019

Key Takeaways from Handpicked rulings

1. [TS-5373-ITAT-2019(MUMBAI)-O] : Share application money/ Unaccounted money: Sec 68 addition unsustainable absent evidence indicating that unaccounted money was routed as share application; Proviso to Sec. 68 prospective, applicable from AY 2013-14 - ITAT deletes addition of share application money received by assessee for AY 2011-12, notes that Revenue did not bring anything on record to indicate that cash got exchanged between the assessee and the investor to suggest that the unaccounted money belonging to the assessee was routed in the accounts as Share Application Money; Refers to the documents submitted by assessee to hold that assessee has established the identity of the investor and genuineness of the transaction, further considering no immediate cash deposits in the bank account of the share applicant, negates Revenue’s stand that the investor does not have creditworthiness to make those investments;

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2. [TS-5030-HC-2019(CALCUTTA)-O] : Delay in payment under IDS, 2016: Calcutta HC dismisses assessee’s writ challenging order of the IT Authorities refusing to regularise the delay in payment of the third installment under Income Declaration Scheme, 2016; Notes the authorities reasoning that in the event, the regularisation is allowed, the same will demotivate compliant taxpayers; Notes assessee’s plea for regularisation on the ground of his mother’s illness; Finds that the assessee did not make true and correct disclosure of his income during the relevant period prior to the scheme which was brought about to allow non-compliant assessees one opportunity to make true and correct disclosure;

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Editorial Note :- Recently, SC has issued a notice to the Department upon assessee’s SLP against HC order rejecting assessee’s plea for extension of time for payment of the third instalment stating no extraordinary case has been made out by the assessee and mere involvement in office work and marketing activities cannot be a good justification and ground to seek extension of time. SC has listed the case for hearing after two weeks of the above order and is due for hearing soon.

3. [TS-5374-ITAT-2019(MUMBAI)-O] : Govt. directed expenditure by PSU: Expenditure incurred by assessee-PSU (engaged in business of mining of Rare Earth Minerals) for running a school as per Govt Directive deductible business expenditure - ITAT dismisses Revenue’s appeal, notes that assessee was incurring expenses on running and maintenance of a school for children of its employees and local residents as per the directives of the department of atomic energy; Observes that “We find ourselves to be in agreement with the view taken by the CIT(A) that as the obligation to bear the aforesaid expenses for running the school was pursuant to a government directive, therefore, the assessee being a public sector undertaking (PSU) had to mandatorily abide by the said direction, and the expenditure incurred for maintenance of the said Central school was clearly in the nature of a revenue expenditure that was to be allowed as a deduction while computing the income of the assessee”;

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4. [TS-5310-ITAT-2019(BANGALORE)-O] : Expenses/Application of income by a Trust: Foreign travel expenses incurred in foreign currency in furtherance of assessee-trust’s objectives to be considered as application for charitable purpose in India; Prior to 2014, depreciation allowable on assets, acquisition of which was also claimed as application of income; Assessee-trust entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years

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5. [TS-5016-SC-2019-O] : Treatment of customs duty payable/provision in accounts: SC dismisses Revenue’s appeal against HC upholding ITAT order wherein it was held that Sec. 43B can be invoked only when the assessee claims deduction for any amount payable by way of a tax or duty; ITAT had observed that the assessee had merely included the total customs duty provision in the cost of raw material and customs duty payable in the value of the closing stock ;Thus, noting that the customs duty got reflected on both the debit and credit side of the account, ITAT had held that this treatment did not in any way reduce assessee’s profits since the assessee himself did not claim deduction of the customs duty liability from the taxable profits;

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CBDT Updates:

1. CBDT clarifies the correct position of admissibility of deduction u/s. 80TTB - Circular 275/19212018-IT(B)

https://ci5.googleusercontent.com/proxy/cICQffTpQFTthn9CGLXCqLTzFer_Z4qyAIy5uUxuIWkIFdHxPkHeZ2egMZDwjgyfoEtqCU8vTxYfAyNrQYwGDp9hWUY=s0-d-e1-ft#https://ymlp86.com/imgz/f33j_unnamed--10.jpg

2. CBDTprovides definition of a 'Startup' and procedure for application u/s. 56(2)(viib) - Notification 5(91)/2015-BE-I , 5(4)/2018-SI, 5(4)/2018-SI

3. Ministry of Finance : Equalisation levy collection exceeded Rs.550 Cr, further tax collection expected by significant economic presence introduction

4. IT Dept reminds PAN holders to complete PAN - Aadhaar linking by 31.03.2019

5. Commerce Ministry proposes comprehensive proposal to ease angel tax pain

6. The Finance Act, 2019

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Taxsutra Database Bulletin : An inquest into the proposed amendment to Sec. 54; HC’s Writ Jurisdiction when issue pending before CIT(A); CBDT Updates and more...

Issue No. 176 / Feb 14th, 2019

Expert Column:

Budget 2019 has left the stake-holders perplexed as to applicability of some of the proposed amendments. Mr. J V Kodhandapani, FCA and CWA (Pani & Associates), in this article, evaluates one such amendments viz., benefit of re-investment of capital gains in two residential houses. Probing into some of the moot questions in the stake-holders’ minds, the author evaluates the retrospective application or otherwise of the amendment and opines that “The amendment being a substantive amendment and takes effect from AY 2020-21 and cannot be treated as procedural amendment giving retro effect replacing the earlier provisions of law allowing investment in one property only”. Further, in case where a person chooses to buy one house and construct another, the author warns that care should be taken to adhere to the separate time limits specified for purchase and construction. Another interesting scenario that author discusses is when there is increase in capital gains amount beyond Rs 2 Cr in the course of assessment owing to disallowance of expenses etc.In such situation, the author cites various implications like huge capital gains tax liability, consequential interest u/s 234B, etc.

Click here to read the article titled “An inquest into the proposed amendment to Sec. 54”

Key Takeaways from Handpicked rulings

1. [TS-5007-SC-2019-O] : HC’s Writ Jurisdiction when issue pending before CIT(A): Issue pertaining to the taxability of anonymous donations received being pending adjudication before CIT(A) for AY 2015-16, HC was justified in denying exercise of writ jurisdiction against Sec. 148 notice for AY 2013-14 - SC affirms HC order disposing off assessee’s writ petition against Sec. 148 notice, denying to exercise jurisdiction under Article 226 and keeping it open to be raised in appropriate legal proceedings; HC had observed that any expression of opinion on the reopening of the assessment will affect the pending appeal before the CIT(A) as the issue pertaining to the taxability of anonymous donations received in Hundies maintained by the temple trust u/s.115BBC was pending determination before the CIT(A) for AY 2015-16;

Click here to read the Ruling Copy

2. [TS-7319-HC-2018(MADRAS)-O] : Delay in filing ROI/Sufficient cause : Change of auditors and non-receipt of NOC from erstwhile auditors sufficient cause for delay in filing returns; CBDT should have condoned the delay - HC allows assessee-company’s writ, sets aside CBDT order refusing to condone the delay of 37 days in filing the return of income for AY 2014-15; Notes that assessee had to change its auditors due to disagreement on issue of valuation of business transfer made during the year post which it had to change it auditors; Notes that assessee could not file its returns until the erstwhile auditors issued a NOC which resulted in delay of 37 days in filing its returns; HC states that “When once the authority has been conferred with discretion to condone the delay, the application seeking condonation of the delay of 37 days cannot be rejected for such reasons as are assigned by the 1 st respondent. The 1 st respondent should exercise its discretion in a proper manner.”;

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3. [TS-6076-HC-2009(KARNATAKA)-O] : Interest-free loans to sister concerns/Commercial expediency : AO is required to verify the business expediency of interest-free loans to sister concerns before making disallowance of interest u/s. 36(1)(iii) - HC sets aside ITAT order upholding disallowance u/s. 36(1)(iii)/37 and remits the matter to AO to consider whether the amount claimed by the assessee comes within the four corners of business expediency or otherwise after providing opportunity to assessee; Observes that SC in the decision of SA Builders has held that Revenue has to step in the shoes of the assessee to decide whether the expenditure incurred was out of commercial expediency or not; AO having not done such exercise of verifying commercial expediency of assessee’s interest-free loans to sister concerns, HC sets aside ITAT order and remits the matter to the AO.

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4. [TS-5275-ITAT-2019(Panaji)-O] : Diversion/Application of Income: ITAT allows Revenue’s appeal, remits the case back to AO to consider the issue afresh; Notes that all the members of the assessee-society purchasing a property from the society have contributed a similar amount to a Trust and states that “It will be too much of a coincidence that almost all the purchasers of the property in the society have suddenly developed interest in yoga and meditation and have voluntarily agreed to contributing to the trust in which the Chief Promoter of the society is sadhak.”; Notes AO’s stand that the payments were mandatory and not in the nature of ‘donations’ to the trust, and the arrangement amounts to application of income by assessee to the Trust and hence taxable as assessee’s income for the year;

Click here to read the Ruling Copy

CBDT Updates:

1. CBDT clarifies official assignee's status as 'artificial juridical person' for return filing & tax computation - Circular No. 4/2019

2. CBDT circular revising appeal-filing monetary limits applicable ‘mutatis mutandis’ to wealth-tax appeals - Circular No. 5/2019

3. CBDT notifies new Centralized Verification Scheme u/s 133C in supersession of earlier scheme - Notification No. 5/2019

4. CBDT recognizes BSE as 'recognized association' u/s 43(5) for commodity derivatives transactions - Notification No. 8/2019

5. CBDT modifies ‘angel tax’ exemption notification pursuant to revised DIPP notification of Jan'19 - Notification No. 9/2019

6. CBDT : Addition made u/s 68 and not u/s 56(2)(viib) of the IT Act, in case of Travel Khana

7. Ministry of Finance : Net Tax Collections during the FY 2017-18 and FY 2018-19 (up to January, 2019)

8. Cabinet approves Abolition of Institution of Income-Tax Ombudsman and Indirect Tax Ombudsman

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