ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS, ISSUE DATED 15-2-2010
F Order for special audit without hearing assessee : Assessment cannot be annulled but matter to be remanded and assessee to be permited with an opportunity of being heard : Asst. CIT v. Sushila Milk Specialities P. Ltd. (Delhi) [SB] p.639
F Where contractor working for statutory authority in development of infrastructure facilities not entitled to deduction u/s 80-IA : B.T. Patil and Sons Belgaum Construction P. Ltd. v. Asst. CIT (Mumbai) [LB] p.703
F Hospital reimbursements by TPAs' may be taxed
The forthcoming Budget may have provisions binding on the third party administrators (TPAs), the entities that network between insurers and hospitals to facilitate cashless treatment for policyholders, to deduct tax at source (TDS) before making payments to hospitals.
The rationale for the Finance Ministry to make it mandatory for TPAs to pay TDS before reimbursing that to hospitals is on account of a slew of cases filed by TPAs against the Income-tax (I.T.) Department. Here, the Department took a stand that TDS was payable by TPAs.
The money reimbursed annually to hospitals - for cashless services to policyholders - is estimated to be around Rs. 4,000 crore. Of this, 60 per cent. is facilitated by TPAs, who make the payment out-of-float funds that are parked with them by non-life insurance companies. In return for their services, TPAs receive a commission from insurance companies of about 5 per cent. on the health insurance premium.
The I.T. Department wants TPAs to deduct 10 per cent. tax at source before making payments to hospitals. A Karnataka High Court verdict last year, in the case of Medi Assist, had favoured the I.T. Department's stand, following which a group of TPAs moved the High Courts in Mumbai and Delhi, which at present are hearing these cases. The Karnataka High Court had observed that since it involved TPA, the authority that makes payments to hospitals, it was, therefore, obligated to deduct TDS. The court had also observed that the critical factor in deciding this issue was the fact that the agreement relating to paying the hospitals was between TPA and them. The I.T. Department in Mumbai had raised a tax demand of Rs. 117 crore last year on a host of TPAs that operated out of the city. The Department raised the demand after conducting a survey on TPAs in the city. Here, it was revealed that none of them had deducted TDS, while making payment to hospitals.
This demand was raised under section 194(J) of the Income-tax Act. The rate of tax stipulated under this section is 10 per cent., if the payment is a fee for professional services or a fee for technical services or royalty. [Source : www.economictimes.com dated February 2, 2010]
The Bombay High Court has recently admitted a writ petition that challenges an Income-tax Rule allowing the taxation of expenditure incurred on earning tax-free income like dividends and long-term capital gains. The writ petition was filed by a Mumbai-based exporter, along with Indian Exporters' Grievance Forum, a body under the Federation of Indian Export Organisations (FIEO). The final hearing of the matter is slated for February 15.
The specific rule challenged in the court, according to the petitioners, stipulates a stringent structure for taxing expenditure related to earning income that is exempt from taxation. Rule 8D authorises an Assessing Officer to use a formula for computing expenditure incurred on earning the tax-free income if he is not satisfied with the declaration of the taxpayer. Section 14A provides for taxing the expenditure related to earning the income that is exempt from taxation.
The petitioner stated that at times the rule leads to situations in which a disproportionately huge expenditure incurred on earning a small income was brought into the tax net. In the process, the benefit derived by the taxpayer by earning income which is exempt from taxation is substantially reduced and even leads to double taxation.
Elaborating its stand, the petitioner said when it had earned tax exempt dividend from surplus - not borrowed funds - and which did not form part of the total income, the Assessing Officer could not consider the value of those investments on which no tax-exempt dividend was earned. For instance, the Assessing Officer could not consider as expenditure the interest that the company paid on loans taken for purposes other than earning tax-free dividend.
The petitioners forum representative stated in the writ petition that rule 8D is against the basic principle of taxation which allows levy of tax calculated as gross income minus expenditure. This specific rule is tantamount to double taxation, the petitioner contended. [Source : www.economictimes.com dated February 3, 2010]