Taxsutra Database Bulletin : Insight on Prosecution Proceedings for Default in Payment of Tax Deducted at Source
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Issue No. 132 / Apr 16, 2018
Taxsutra Database Insight on Prosecution Proceedings for Default in Payment of Tax Deducted at Source
While penalties and interests for various non-compliances are a common scenario in India, taxpayers have, in the past one year, witnessed a steep surge in prosecution proceedings for offences under the Income Tax Act. A whopping 2225 prosecution complaints have been filed, with 1052 complaints compounded and 48 defaulters convicted by Courts during the period of April to November 2017 as per press release issued by the Finance Ministry on 12 January 2018. Some of the lapses which can attract prosecution provisions are wilful attempt to evade tax or payment of any tax, wilful failure in filing returns of income, failure or delay in depositing tax deducted/collected at source etc.
This edition of our newsletter is exclusively on one of the most discussed topics of the day namely Prosecution for defaults in payment of TDS dealt with by Sec. 276B of the Income Tax Act. The duration of delay in payment of TDS is not specified in the Act. So technically, a delay as small as one day can attract prosecution proceedings. Defaults by companies result in prosecution proceedings against the ‘principal officer’ of the company. Madras HC recently rejected Revenue’s treatment of Mr.Kalanithi Maran as the ‘principal officer’ of Spicejet [TS-5215-HC-2018(Madras)-O]. There is sufficient jurisprudence on what constitutes ‘reasonable cause’, who is the ‘principal officer’, ‘sanction’ for initiation of prosecution etc.
In this edition, we have garnered columns from experts in the field, giving insight on the provisions, procedures and current trends. We have also compiled some recent and important rulings by High Courts on various issues pertaining to prosecution besides the insightful commentary by Chaturvedi and Pithisaria on some of the consequential and litigated issues.
Click here to read the insight on prosecution for default in payment of tax deducted at source.
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Expert Column:
 Sanjay Sanghvi (Tax Partner, Khaitan & Co.) and Ashish Mehta (Principal Associate) discuss the changing trends and multi-fold increase in prosecution cases by Tax Administration. The authors discuss what should be done when one receives a prosecution notice and various defences available to taxpayers. Compounding of offence can be used as a last resort in case none of the defences are available to the taxpayer, but such an action should be used with caution in accordance with various guidelines on the issue. The authors discuss on whether issues like lack of financial capacity / financial difficulties, status of tax refunds, age or health of the defaulter etc can be termed as ‘reasonable cause’ to mitigate the punishment risk. Click here to read the article titled “Income Tax Prosecution- Need for Balancing Act!”.
  M.P. Lohia (Advisor & former Senior Revenue officer) and Rajendra Agiwal (Senior Manager, SRBC & Associates LLP (Member firm of EY Global)) in their article elaborate on the provisions and practical aspects relating to prosecution along with procedure followed by the Department to initiate the same. Speaking of the recent trends and developments, the authors explain how initiation of prosecution is being adopted as a tool to realise additional revenue by means of compounding. Explaining the entire procedure for compounding, the authors caution that TDS default u/s. 276B committed for third time cannot be compounded. Based on their experience, the authors also provide answers to certain FAQs in a lucid tabular format.Click here to read the article titled “Prosecution – A Tool to Prevent Tax Evasion and Ensure Compliance”.
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Taxsutra Database Bulletin : Binding Nature of Jurisdictional HC Post Amalgamation; Taxability of JV as AOP; CBDT Updates and Other Handpicked Rulings
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Issue No. 131 / April 10, 2018
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CBDT Updates:
2. CBDT issues notification withdrawing tax exemption of transport allowance of Rs. 1,600 per month, granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty : Notification No. 17/2018
3. CBDT amends Income-tax Rules, 1962, to include Transgender as an option in Gender in Form number 49A and Form number 49AA : Notification No. 18/2018
4. Ministry of Finance extends date of submission of Aadhaar, PAN or Form 60 to such date to be notified subsequent to pronouncement of final judgement in [TS-5259-SC-2017-O] : Notification No. 01/2018
5. CBDT notifies procedure for submission of Form No. 60 by any person who does not have a Permanent Account Number and who enters into any transaction specified in Rule 114B of the Income-tax Rules, 1962 : Notification No. 01/2018
6. CBDT notifies procedure for registration and submission of Form No. 61 as per Rule 114D of Income-tax Rules, 1962 : Notification No. 02/2018
7. CBDT notifies procedure for registration and submission of statement of financial transactions (SFT) as per section 285BA of Income-tax Act, 1961 read with Rule 114E of Income-tax Rules, 1962 : Notification No. 03/2018
8. CBDT notifies procedure for registration and submission of Statement of Reportable Account as per section 285BA of Income-tax Act, 1961 read with Rule 114G of Income-tax Rules, 1962 : Notification No. 04/2018
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Key Takeaways from Handpicked rulings
1. [TS-5180-HC-2018(DELHI)-O] : Software payment not taxable as royalty; Binding nature of jurisdictional HC post amalgamation : Software payments by assessee to its US-parent company not taxable as royalty – Delhi HC rules in favour of assessee; Holds software licence fees paid by assessee to its parent company in US not covered under definition of ‘royalty’ both u/s. 9 of Income Tax Act and under Article 12 of the India-USA DTAA; Notes the change of jurisdiction of assessee company from Bangalore to Delhi pursuant to amalgamation of GE India Technical Centre (assessed in Bangalore) into GE India Industrial Pvt. Ltd., (assessed in Delhi); HC reverses ruling of Bangalore ITAT which following the Karnataka HC ruling in Samsung Electronics [TS-5706-HC-2011(KARNATAKA)-O] held against the assessee…
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Editorial Note : Delhi HC had held in Infrasoft Ltd [TS-592-HC-2013(DEL)-O] that income from licensing of computer software earned by assessee, a US Company (distributed as a part of system through Indian Branch), not taxable in India since there was no transfer of copyright or right to use copyright involved, but transaction involved limited right to use 'copyrighted' material & hence does not give rise to any royalty income.
Madras HC in Vinzas Solutions India (P) Ltd [TS-5079-HC-2017(Madras)-O] had held that domestic software purchase payments by assessee (an Indian company engaged in buying and selling software), not royalty.
Karnataka HC in Samsung Electronics Co Ltd [TS-5706-HC-2011(KARNATAKA)-O] and Bangalore ITAT in ANZ Operations Technology Pvt Ltd [TS-6175-ITAT-2018(Bangalore)-O] had held that payment for import of shrink-wrapped computer software amounts to royalty.
Mumbai ITAT had ruled that payment by Reliance Communication Ltd. (‘assessee’) [TS-6221-ITAT-2018(Mumbai)-O] to non-resident vendors (based in Australia, Israel, Sweden, Singapore and USA) for supplying software is not royalty under respective DTAA, further held it as payment for 'copyrighted article' and not ‘copyright’ itself.
Kolkata ITAT had, in the case of ITC Ltd [TS-5380-ITAT-2017(KOLKATA)-O], held that software payments by assessee to a Singaporean company, not royalty under Article 12(3) of India-Singapore DTAA for AY 2010-11, because by virtue of the software license agreement, assessee had a right to use the computer software and not right to use copyright in the computer software.
2. [TS-6185-ITAT-2018(Delhi)-O] : Taxability of JV as AOP : Joint ventures (JV) which have been formed only to secure the contract cannot be subjected to tax as Association of Person (AOP) - ITAT rules in favour of assessee; Holds that no net profit on percentage basis can be taxed since the JV is merely a pass through entity with minimal expenses, formed for the basic purpose of jointly becoming eligible for the tender as individually none of the two constituents could have bagged the same; Holds thereby that disallowance u/s.40A(2) is not applicable…
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3. [TS-5181-HC-2018(Delhi)-O] : Society vs. Government : Organizing Committee Common Wealth Games 2010 (OC CWG) is a society registered under the Societies Registration Act and not a Government entity; Tax on amount paid by OC CWG to the consortium (between assessee and EKS, a /Mauritian company) to be deducted at 42.23% and not 10%; The functional office provided by OC CWG to assessee constituted a PE in India – HC dismisses assessee’s appeal; Holds that Section 2 (37A) (iii) r/w Finance Act, 2009 (which provides that where income by way of FTS is payable by the Government of India, the rate of tax is 10%) is not applicable as assessee is not a Government entity; Notes that the Arbitral Tribunal held that the income fell in the category of “other income” and not FTS and thereby the applicable rate was 40% as provided under cl. 2(b)(ix) of the 1st schedule to the Finance Act 2009…
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4. [TS-6294-ITAT-2018(Chandigarh)-O] : Accumulated income in excess of actual accumulation : Deduction on account of permissible accumulation of 15% as provided u/s. 10(23C)(iv) cannot exceed actual accumulation made by the assessee-Trust – ITAT allows Revenue’s appeal for AY 2008-09; Denies carry forward of loss arising on account of deduction of accumulation u/s. 10(23C)(iv) in excess of the actual accumulated amount; Gross receipts earned by the assessee for the year was Rs. 149.14 crores against which the total expenditure of Rs.136.48 crores resulting in a surplus of Rs.12.66 crores; Assessee claimed a carry forward of loss of Rs. 9.7 crores byfirst claiming a deduction of flat 15% (amounting to Rs. 22.37 crores) permissible accumulation on the gross receipts; Rejecting the claim made by the assessee, ITAT holds that “...it is the actual accumulation made by the assessee which is to be seen while determining its eligibility for claiming exemption and there is no provision for allowing deduction on account of accumulation exceeding the actual accumulation made by the assessee.”…
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Taxsutra Database Bulletin : Share Transfer to 'Step-Down' Subsidiary - Tracing Tax Impact; TDS deducted and deposited under wrong TAN and Other Handpicked Rulings
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Issue No. 128 / Mar 27, 2018
Expert Column:
Mr Gaurav Bhauwala, (Director, Tax & Regulatory Services at EY India) in his detailed column analyses recent Kolkata ITAT ruling in Emami Infrastructure Ltd. [TS-101-ITAT-2018(Kol)] wherein capital gains exemption u/s 47(iv) was allowed to a company upon transfer of capital asset to its wholly-owned "step-down" subsidiary. The author highlights that the moot point before ITAT was absent definition of the word “subsidiary company”, whether a step-down subsidiary is included in the definition of a “subsidiary company” u/s 47. The author states that " This ruling reiterates the principle that terms which are not specifically defined under the provisions of the Act, definitions given under other statutes (such as in the Companies Act) can also be imported into the Act." The author also ponders over two issues - i) computation of sale consideration for an off market transaction using the average share price on the stock exchange; and ii) Applicability of GAAR and Sec. 56(2)(x) to such transactions.
Click here to read the article titled “Share transfer to 'step-down' subsidiary - tracing tax impact”.
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Updates:
CBDT: Income-tax offices to remain open on 29th , 30th and 31st March, 2018to facilitate belated / revised returns filing
GOI issues clarification regarding requirement for furnishing of CbCR u/s 286(4) of Income Tax Act, 1961
Union Cabinet approves revision of DTAA between India - Qatar for preventing double taxation & exchange of information
CBDT invites suggestions from general public on new direct-tax law, issues questionnaire
Click here to read more lastest news.
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Key Takeaways from Handpicked rulings
1. [TS-5163-HC-2018(PATNA)-O] : TDS deducted and deposited under wrong TAN : Income Tax Department (IT Dept.) should not take extreme coercive steps of attaching the bank account, if tax is not deposited in correct form - HC allows assessee’s (a Government Department) writ and directs IT Dept. to release assessee’s bank account and thereafter, the Principal Chief Commissioner of IT Dept. and assessee’s Principal Secretary shall sit and resolve the issue and submit a report with regard to action taken to the Registrar General of the Court; Notes that IT Dept. may be right in contending that tax has been deposited in wrong manner because of which the deposit is not recorded and correction is not possible…
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2. [TS-6132-ITAT-2018(Cochin)-O] : Approval of recommendation of a Commission does not become a law : Recommendation of Shetty Commission Report though approved by SC, sumptuary allowance, conveyance allowance, special allowance etc cannot be treated as exempt in absence of consequential amendments in Income Tax Act - ITAT upholds CIT’s action in invoking his revisionary jurisdiction u/s. 263 to direct AO to deny exemption claimed for sumptuary, conveyance and medical allowances etc. to assessees (Officers in the State Judicial Services and functioning as District Judges in the State of Kerala) for AY 2011-12; Holds that allowances claimed as exempt on the basis of recommendation of Shetty Commission Report, which is approved by the SC, has not been exempt under the Income-tax Act…
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3. [TS-6064-ITAT-2018(Cuttack)-O] : Sec. 80P deduction not available to Regional Rural Bank : Assessee being a Regional Rural Bank (RRB) is deemed to be a co-operative society as per the provisions of RRB Act and Income Tax Act and, therefore, not entitled for deduction u/s. 80P - ITAT upholds CIT(A)’s order wherein it was held that assessee is a RRB, which is deemed to be a co-operative society as per the provisions of RRB Act and Income Tax Act and since assessee’s main function is banking business, therefore, it is not entitled for deduction u/s. 80P…
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4. [TS-5968-ITAT-2018(Delhi)-O] : Sec. 68 addition in absence of any evidence : No addition u/s. 68 in absence of any positive material or evidence to indicate that shareholders were benamidars or fictitious persons or that any part of share capital represented the company's own income from undisclosed sources - ITAT rules in favour of assessee; Deletes addition u/s. 68 on share capital and premium based on statement recorded during search proceedings of a third party; Observes that all the additional evidences submitted by assessee to CIT(A) have been examined by AO which clearly prove the identity of the investors, their creditworthiness and genuineness of the transaction…
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Taxsutra Database Bulletin: Validity of Search Proceedings When Warrant is in a Different Name; Finance Bill, 2018 as Passed by Lok Sabha and Other Handpicked Rulings
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Issue No. 127 / Mar 22, 2018
Updates:
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Key Takeaways from Handpicked rulings
1. [TS-5156-HC-2018(ALLAHABAD)-O] : Validity of search proceedings in case warrant contains different assessee’s name : Mention of different title in authorization for search warrant and panchnama not sufficient to hold that proceedings u/s. 132(1) were conducted against different person and not assessee - HC upholds assessment proceedings u/s. 158BC; Holds that “search and seizure actually was conducted at the premises of Assessee and whatever was seized included money and document everything belonged to Assessee.”…
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2. [TS-5124-HC-2018(Madras)-O] : Limitation u/s. 275(1)(a) for imposing penalty : No penalty can be levied u/s. 271(1)(c) when penalty notice is issued beyond the period of limitation fixed by first limb of Sec. 275(1)(a) - HC allows assessee’s writ petition; Holds that “relevant assessment year is 2011-12 and the order of assessment under Section 143(3) was passed on 30.12.2016. Therefore, the limitation for initiation of penalty under Section 275(1)(a) of the Act, is on or before 31.03.2017, as per the first limb of the said provision.”…
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3. [TS-6025-ITAT-2018(Delhi)-O] : Application of mind for recording reasons : Assessment order passed u/s. 147 r.w. Sec. 143(3) is void ab initio in cases of non-application of AO’s mind to the information supplied by Investigation Wing and mechanically relying on the same; Share capital and share premium cannot be added as unexplained cash credit u/s. 68 in case assessee is able to prove the identity, creditworthiness and genuineness of the transaction - ITAT rules in favour of assessee; Holds that though the reasons refer to the search conducted but do not refer to any incriminating material detected as a result of search so as to form a prima facie opinion contrary to the claim made in the original return and accepted as such…
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4. [TS-5155-HC-2018(Punjab & Haryana)-O] : Addition u/s. 69 on cash deposit in joint account with grandfather : Cash deposited in joint account with grandfather added u/s. 69 in absence of evidence to prove that cash deposited belonged to his grandfather and not assessee - HC upholds ITAT’s order, confirms addition u/s. 69 for cash deposit in joint account with grandfather; Rejects assessee claim that his name was added in bank account only for helping his old maternal grand-father for operating the account…
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