Decided by ITAT Mumbai in the case of G.K. Ramamurthy vs. JCIT S. 10 (38) inserted w.e.f. 1.10.2004 provides that long-term capital gains (LTCG) on which security transaction tax (STT) is paid shall not be included in total income. The assessee earned long term capital gain (LTCG) of Rs. 33,01,57,200 on sale of shares after 1.10.2004 in respect of which STT was paid. The LTCG was exempt u/s 10 (38). In the period prior to 1.10.2004, the assessee suffered a long term capital loss of Rs. 9,23,55,945 on redemption of units. The assessee claimed that the said long term capital losses were not liable to be set off against the exempt capital gains. The AO & CIT (A) took the view that in computing income under the head "capital gains", the said loss had to be set off against the capital gains. On appeal by the assessee, HELD deciding in favour of the assessee:
(i) Under the scheme of the Act, income which does not form part of the total income as per Chapter-III does not enter the computation of total income at all. (N.M. Raiji 17 ITR 180 (Bom) followed where it was held that exempt share income of a partner could not be taken into account even for rate purposes);
(ii) S. 70 (3) which provides that long-term capital gains shall be set off against long-term capital loss does not apply because the exempt capital gains do not enter the computation of total income at all and the question of aggregating them under Chapter VI and setting them off u/s 70 (3) does not arise. Consequently, the right of carry forward the loss u/s 74(1) is unaffected;
(iii) S. 10(38) was inserted with the object to grant exemption to LTCG as tax has already been levied on a different footing (STT). The revenue's contention thatlong term capital loss should be adjusted against exempt LTCG will be contrary to the intention, object and purpose of enacting s. 10 (38). Further, the revenue's view will result in absurdity if the facts are reversed because then LTCG earned before 1.10.2004 (which is taxable) will be eligible forset off against (exempt) long term capital loss suffered after 1.10.2004. This will result in a loss from an exempt source being set off against taxable gain which is contrary to law .
(iv) Consequently the long term capital loss is not liable to be set off against exempt income long term capital gains.
Note: In CIT vs. Harprasad 99 ITR 118 (SC) it was held capital loss incurred in a year when capital gains were not exigible to tax cannot be set against capital gains in subsequent years. In Ramjilal Rais 58 ITR 181 (All) & Thiagarajan 129 ITR 115 (Mad) it was held that loss from sources that were exempt from tax cannot be set off. A contrary view has been taken in Royal Calcutta Turf Club 144 ITR 709 (Cal).
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Supreme Court Ruling: After 1 April 1989 the Taxpayer is not required to demonstrate that the debt has become bad debt once it is written off in the books of account [TRF Ltd. v. CIT (2010-TIOL-15-SC-IT)]
Supreme Court Ruling:
In order to claim a bad debt as a deduction under section 36(1)(vii) of the Income tax Act (Act) it has been a long drawn controversy between the Taxpayer and the Revenue whether in addition to write-off the debt in the books of account, it is obligatory on the Taxpayer to establish that such debt has become a bad debt, especially after the amendment brought in by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1 April 1989.
This controversy has now been put to rest by the Supreme Court in the case of TRF Ltd. v. CIT wherein it has been held that after 1 April 1989 it is not necessary for the Taxpayer to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the Taxpayer.
Our View:
The Direct Tax Laws (Amendment) Act, 1987 substituted the words "any bad debt or part thereof" in place of "any debt, or part thereof, which is established to have become a bad debt in the previous year" in section 36(1)(vii) of the Act w.e.f. 1 April 1989. Subsequent to the above amendment the Central Board of Direct Taxes (CBDT) has issued Circular 551 dated 23 January 1990. The issue pertaining to bad debt is set out in para. 6.6. and the relevant portion reads as under :-
"In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee."
The Circular of the CBDT clearly spells out that the amendment is to eliminate the disputes in the matter of determining the year in which the bad debt is written off as irrecoverable. If we apply the Rule of interpretation as spelt out in Hyden's case, it would lead to an irresistible conclusion, that the Legislature by the amendment has sought to exclude the burden on the Taxpayer to prove that the debt is bad debt and leaves it to the commercial wisdom of the Taxpayer to treat the debt as bad, once it is written off as irrecoverable in the accounts of the Taxpayer. Inspite of this clear provision the Taxpayer was again called upon to establish that the debt has become bad debt.
The Supreme Court has now given a ruling in favour of the Taxpayer that it is not obligatory on the Taxpayer to prove whether the debt has become bad debt once such debt has been written off in the books of account. This is a welcome decision and would give a substantial relief to the Taxpayer. It seems that the judgement of the Rajasthan High Court in the case of Kashmir Trading Co. v. DCIT (291 ITR 228) is overruled, while judgements of High Courts in the case of DIT v. Oman International Bank (313 ITR 128)(Bom) and CIT v. Global Capital Ltd. (306 ITR 332) (Del) are approved.
Although the aforesaid judgement of the Supreme Court does not clearly spell out, we believe that after the amendment, though it is neither obligatory nor is there burden on the Taxpayer to prove that the debt written off by him is indeed a bad debt; the write-off needs to be bona fide and should be based on commercial wisdom or expediency.
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INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 1-3-2010
Volume 321 : Part 2
STATUTES
F Budget Speech of Minister of Finance for 2010-11 : Part - A 1 Part - B 21 F FINANCE BILL, 2010 33 Notes on Clauses 79 Memorandum explaining the provisions in the Finance Bill, 2010 110
HIGHLIGHTS OF FINANCE BILL, 2010
DIRECT TAXES Rates of income-tax for A. Y. 2011-12 F individuals, HUFs, AOPs and BOIs : up to Rs. 1,60,000 (Rs. 1,90,000 for women residents and Rs. 2,40,000 for senior citizens), nil ; Rs. 1,60,001 to Rs. 5,00,000, 10 per cent. ; Rs. 5,00,001 to Rs. 8,00,000, 20 per cent. ; and above Rs. 8,00,000, 30 per cent. F no change in rate of tax for firms, co-operative societies, local authorities and companies ; surcharge on domestic companies reduced to 7.5 % Charitable purpose F "the advancement of any other object of general public utility" remains "charitable purpose" if total receipts from activity in nature of trade, commerce or business, etc. do not exceed Rs. 10 lakhs in previous year : s. 2(15) : wref 1-4-2009 Registration of trusts F Commissioner can cancel registration granted under section 12A : s. 12AA : 1-6-2010 Weighted deduction for scientific research and development F for expenditure on approved in-house research and development facility, increased from 150% to 200% : s. 35(2AB) F for payment to approved scientific research association or approved university, college or other institution and payment to a National Laboratory or a university or an Indian Institute of Technology, increased from 125% to 175% : s. 35(1)(ii), (2AA) : 1-4-2011 Weighted deduction on payments to associations engaged in research in social science or statistical research F approved association undertaking research in social science or statistical research included : ss 10(21), (23C), 35(1)(ii), (iii), 80GGA : 1-4-2011 Investment-linked deduction for specified business F business of building and operating a new hotel of two-star or above category, anywhere in India included : s. 35AD : 1-4-2011 Deduction for subscription to long-term infrastructure bonds F subscription to long-term infrastructure bonds notified by Central Government up to Rs. 20,000 deductible for individuals and HUFs in addition to existing limit of Rs. 1 lakh for tax saving investments : new s. 80CCF : 1-4-2011 Deduction of contribution to Central Government Health Scheme F contribution made to CGHS deductible : s. 80D : 1-4-2011 Developing and building housing projects F period for completion of project increased from 4 years to 5 years ; built-up area of shops and commercial establishments in housing project to be three per cent. of aggregate built-up area of the housing project or 5000 sq. ft., whichever is higher : 80-IB(10) : 1-4-2010 Deduction of profits of hotel or convention centre in National Capital Territory F date by which hotel has to start functioning or convention centre to be constructed extended from 31st March, 2010 to 31st July, 2010 : 80-ID : 1-4-2011 Limit of turnover or gross receipts for compulsory audit of accounts and presumptive taxation F threshold limit for compulsory audit of accounts from Rs. forty lakh to Rs. sixty lakh for business and from Rs. ten lakh to Rs. fifteen lakh for persons carrying on profession ; maximum penalty for failure to get accounts audited or to furnish audit report increased from Rs. one lakh rupees to Rs. one lakh fifty thousand : ss. 44AB, 271B : 1-4-2011 F threshold limit of total turnover or gross receipts for presumptive taxation increased from Rs. forty lakh to Rs. sixty lakh : s. 44AD : 1-4-2011 Non-resident providing services or facilities in connection with prospecting for, or extraction or production of, mineral oil F s. 44BB not to apply to income covered under s. 44DA : ss. 44BB(1), 44DA, 115A : 1-4-2011 Non-resident F income deemed to accrue or arise in India under section 9(1)(v) or (vi) or (vii) whether or not non-resident has a residence or place of business or business connection in India or non-resident has rendered services in India : s. 9, Expln. : 1-6-1976 Conversion of company into limited liability partnership F transfer of assets on conversion of company into LLP not transfer for purposes of capital gains tax subject to conditions ; cost of acquisition for LLP to be cost for which company acquired asset : ss. 47, 47A, 49 : 1-4-2011 F depreciation allowable to company and LLP not to exceed depreciation calculated as if conversion had not taken place ; actual cost of block of assets of LLP to be written down value of block of assets of predecessor company on date of conversion : ss. 32, 43(6) : 1-4-2011 F carry forward and set-off of business loss and unabsorbed depreciation to the successor LLP which fulfills conditions : s. 72A : 1-4-2011 F no tax credit under section 115JAA allowable to successor LLP : ss. 115JAA : 1-4-2011 Transactions without consideration or for inadequate consideration F transactions in shares of private company for inadequate consideration or without consideration where recipient is firm or private company included : transactions for business reorganization, amalgamation and demerger excluded : s. 56(2)(vii) : 1-6-2010 F value of such shares included in definition of income : s. 2(24) : 1-6-2010 F stock-in-trade, raw material and consumable stores of business of recipient excluded : s. 56(2)(vii) : 1-10-2009 F receipt of immovable property for inadequate consideration excluded : s. 56(2)(vii) : 1-10-2009 F transactions in bullion included : s. 56(2)(vii) : 1-6-2010 F reference to Valuation Officer for estimate of value of property received without consideration or for inadequate consideration : s. 142A(1) : 1-7-2010 Minimum alternate tax F rate increased to eighteen per cent from fifteen per cent : s. 115JB : 1-4-2011 Disallowance of expenditure for failure to deduction tax at source F no disallowance if after deduction in previous year, it is paid on or before due date of filing return under section 139(1) : s. 40(a)(ia) : 1-4-2010 F rate of interest for non-payment of tax after deduction increased from 1% to 1½% per month : s. 201(1A) : 1-7-2010 Deduction of tax at source F threshold limit of payments for deduction of tax at source raised : sections 194B (winnings from lottery or crossword puzzle from Rs. 5,000 to Rs. 10,000), 194BB (winnings from horse race from Rs. 2,500 to Rs. 5,000), 194C (payment to contractors from Rs. 20,000 30,000 for single transactions and 50,000 to Rs. 75,000 for aggregate of transactions in a year), 194D (insurance commission from Rs. 5,000 to Rs. 20,000), 194H (commission or brokerage from Rs. 2,500 to 5,000), 194-I (rent from Rs. 1,20,000 to Rs. 1,80,000) and 194J (fees for professional or technical services from Rs. 20,000 to Rs. 30,000) : 1-7-2010 Certificate of tax deduction and tax collection at source F deductor/collector to continue to furnish TDS/TCS certificates to the deductee/collectee after 1st April, 2010 : ss. 203(3), 206C(5) : 1-4-2010 Settlement of cases F proceedings as result of requisition of books of account or docu-ments or assets included : additional amount of income-tax payable on income disclosed in application should exceed Rs. fifty lakh : time for completion of proceedings : ss. 245A(b), 245C, 245D(4A) (ss. 22A, 22D, Wealth-tax Act, 1957) : 1-6-2010 Power of High Court to condone delay in filing appeals and reference applications F High Court may admit appeal or application for reference after expiry of period specified, for sufficient cause shown : s. 260A(2) (s. 27A, Wealth-tax Act, 1957) : 1-10-1998 ; s. 256(2A) (s. 27, Wealth-tax Act, 1957) : 1-6-1981 Document identification number F required to be issued on or after 1st July, 2011 : s. 282B : 1-10-2010 SERVICE TAX New services to be included F permitting commercial use or exploitation of any event organized by a person or organization F copyright on cinematographic films and sound recording F health services namely health check up for the employees of business entities ; health services health insurance schemes offered by insurance companies where payment made directly by business entity or insurance company to hospital or medical establishment F maintenance of medical records of employees F service provided by Electricity Exchanges F additional services provided by builder to prospective buyers on extra charges excluding provision of vehicle-parking space F promoting "brand" of goods, services, events, business entity etc. F promotion, marketing or organizing of games of chance, including lottery Existing services expanded or altered F air passenger transport service to include domestic and international journeys in any class F information technology software service to cover all cases irres-pective of its use F commercial training or coaching service to mean any training or coaching provided for consideration, whether or not for profit (wref 1-7-2003) F sponsorship service to include sponsorship pertaining to sports F construction of complex taxable unless entire consideration for property is paid after receipt of completion certificate from competent authority F renting of immovable property F rent of vacant land where there is an agreement for undertaking construction on land for furtherance of business F services provided entirely within the airport/port premises F auctioneer's service : auction by Government to mean auction involving sale of Government property and not when Government acts as an auctioneer for sale of private property F management of investment under ULIP service : value of taxable service to be actual amount charged by insurer for management of funds under ULIP or maximum amount of fund management charges fixed by the Insurance Regulatory and Development Authority (IRDA), whichever is higher Exemptions F statutory taxes charged by foreign Governments excluded from taxable value under air passenger transport service F services relating to "erection, commissioning or installation" of (a) mechanized food grain handling systems etc. ; (b) equipment for setting up or substantial expansion of cold storage ; and (c) machinery/equipment for initial setting up or substantial expansion of units for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic, marine or meat products F pre-packaged I. T. software, with licence for right to its use F transport by road by goods transport agency to include food grains and pulses in list of exempted goods F Indian news agencies under "online information and database retrieval service" subject to specified conditions F "technical testing and analysis service" and "technical inspection and certification service" provided by Central and State seed testing laboratories, and Central and State seed certification agencies F transmission of electricity Withdrawal or amendments of exemptions F exemption to service provided in relation to transport of goods by rail withdrawn F exemption to group personal accident insurance scheme provided by Government of Rajasthan to its employees, under General Insurance Service withdrawn F exemption to commercial training or coaching service restricted to vocational training courses in the designated trades notified under the Apprentices Act, 1961 F condition in Export of Service Rules that service is provided from India and used outside India deleted F construction and operation of installations, structures and vessels for prospecting or extraction or production of mineral oils and natural gas in the Exclusive Economic Zone and the Continental Shelf of India to be within the purview of the provisions of Chapter V of Finance Act, 1994 Other amendments (Finance Act, 1994) F no penalty where service tax with interest paid before issuance of notice by the Department : s. 73(3), Expln. F "business entity" to include an association of persons, body of individuals, company or firm but not an individual
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>> Where dispute relating to method of billing for supplies, liability arises only on settlement : ITO v. Sicgil India Pvt. Ltd. (Chennai) p. 749
>> Deduction u/s. 80-IB to be worked out after setting off of loss of earlier year : ITO v. Sicgil India Pvt. Ltd. (Chennai) p. 749
>> Where order under appeal not erroneous or based on insufficient material and not needing fresh evidence, restoration of matter not justified : ITO v. Sicgil India Pvt. Ltd. (Chennai) p. 749
>> Assessment cannot be set aside solely on ground that direction for special audit invalid : Jai Bhawani Concast P. Ltd. v. Dy. CIT (Delhi) p. 762
>> Addition in respect of items not mentioned in inventory of closing stock justified : Jai Bhawani Concast P. Ltd. v. Dy. CIT (Delhi) p. 762
>> Charging of interest in respect of advance tax is consequential in nature : Jai Bhawani Concast P. Ltd. v. Dy. CIT (Delhi) p. 762
>> Income from sale of shares held as investment treated as long-term capital gain and not business income : Suresh Kumar Seksaria v. Asst. CIT (Mumbai) p.783
>> Building owned by assessee and building taken on lease treated as building owned by assessee under Expln. 1 to s. 32(1), fall under same block of assets : AO computing depreciation on WDV of block of assets u/s. 43(6)(c) justified : Anand and Anand v. Asst. CIT (Delhi) p. 788
>> Short fall between individual WDV and amount realised on transfer to be reduced from aggregate WDV of block of assets : Anand and Anand v. Asst. CIT (Delhi) p. 788
>> Assessee not entitled to exclusion of capital gains in computation of book profit under Explanation to s. 115JB : S. 54EC not applicable : Growth Avenue Securities P. Ltd v. Dy. CIT (Delhi) p. 807
NEWS-BRIEFS
>> Rajasthan High Court ruling on clamp down of rent arrears irks Supreme Court A Rajasthan High Court ruling, giving retrospective effect of the special provision for assessing arrears of rent provided under section 25B of the Income-tax Act, has irked the Supreme Court.
A Bench comprising Justices of Supreme Court took strong exception to the High Court ruling on the issue. The High Court had said that the provisions of section 25B of the Income-tax Act is clarificatory in nature and should be given retrospective effect.
The advocate on behalf the Trust, said "The High Court failed to appreciate that the question or issue regarding section 25B of the Income-tax Act did not at all arise out of the orders of the Appellate Tribunal and therefore, the High Court did not have the jurisdiction under section 250A of the Income-tax Act to go into or decide that question", in its Special Leave Petition. Section 25B was inserted by the Finance Act, 2000 which lays down that where the owner of the property received any amount, by way of arrears of rent from such property, the amount so received, after deducting a sum equal to one-fourth of such amount for repairs of, and collection of rent from, the property, shall be deemed to be the income chargeable under the head "income from house property" as the income of the previous year in which such rent is received. This will be the position even if the assessee is not the owner of that property in the year of receipt of enhanced rent. It was made effective from April 1, 2001. However, the question was left open whether it can be applied retrospectively.
DMRAWA Trust said, "the High Court completely failed to appreciate that section 25B was inserted into IT Act by the Finance Act, 2000 with effect from April 1, 2001 and therefore, section 25B could not in law be given retrospective effect in respect of any earlier assessment years".
Secondly, "the High Court completely failed to appreciate that legal position prevailing prior to April 1, 2001 as laid down by several High Court judgments was entirely different from that contained in section 25B and that the said previously obtaining legal position was consequently and materially changed by the amendment made by insertion of section 25B in IT Act and therefore, section 25B could not possibly be considered to be a clarificatory provision", said the Trust.
On appeal, the ITAT had said that the amount of retrospective rent increase could not be included in the annual value of the property. It had also held Department's reassessment notices as illegal. It was challenged by the Department in the High Court. [Source : www.economictimes.com dated February 8, 2010]
>> BDT to fight back advance tax payments of top companies
Big corporations will now find it difficult to defer their advance tax payments. In a bid to meet its revenue collection targets, the Central Board of Direct Taxes (CBDT) has decided to monitor advance tax payments by top companies and persuade them not to defer such payment as self-assessment tax for the next financial year.
CBDT convened a meeting of Chief Commissioners of income-tax to discuss strategies for achieving the revenue collection target budgeted at Rs. 3.7 lakh crore for the current financial year (2009-10) and internally reset at Rs. 4 lakh crore. The strategies discussed during the meeting also included monitoring tax payments of loss-making companies, liable to minimum alternate tax (MAT) at an enhanced rate of 15 per cent., and persuading them to make such payment as advance tax during the current financial year. They also decided to monitor tax deducted at source (TDS) deposits by private deductors as well as State Governments and local bodies. The Government said it would also focus on the collection of tax arrears, as well as tax demand raised in scrutiny assessments during 2009-10.
The Revenue Department will have to collect over Rs. 1.2 lakh crore as direct taxes in the next three months to meet its target of Rs. 3.7 lakh crore.
Last year, the Government had missed its target of Rs. 3.45 lakh crore due to the economic slowdown, but this year it is relying on direct tax collections to make up for any shortfall in indirect tax receipts. [Source : www.businessstandard.com dated February 5, 2010]
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In penalty proceedings, assessee can always show that finding recorded in quantum proceedings is neither reliable nor sufficient to impose penalty
ITAT, AHMEDABAD `D' BENCH (THIRD MEMBER)
Dhirajlal Maganlal Shah
v.
ITO
ITA No. 2522/Ahd/2006
September 25, 2009
RELEVANT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
On careful consideration of relevant facts, I am of the view that important fact stated by the assessee in his reply to penalty notice has not been considered in accordance with law. The revenue authority and the Tribunal in the quantum proceedings proceeded mainly on a presumption that the payment was made through account payee cheque, decided the issue against the assessee and the expenditure claimed was disallowed and added to the income of the assessee. In the penalty proceedings, which admittedly are different and separate from the assessment proceedings, the assessee was entitled to render fresh explanation and accordingly detailed reply dated 8-11-2004 was filed before the AO. In the said reply it was emphasized that payments were made to transporter through "crossed cheques". It was further explained that the transporter had produced evidences of having carried on transport business. He had categorically accepted the payments in question. It was accordingly claimed that the explanation of the assessee could not be treated as non-genuine or false and there was no case for imposition of penalty for concealment. The aforesaid claim of the assessee was rejected merely by referring to the order passed b} the learned CIT (A) and by observing that question of unsigned bills issued by the "SJT" remained unanswered. The aforesaid incorrect finding has also been adopted by the learned AM to confirm the levy of penalty. In addition to the above, the learned AM has further wrongly stated that the assessee has not given any afresh explanation except what has been stated in quantum/ assessment proceedings. This is against record as discussed above. The learned AM, I say with lot of respect, was also not correct in observing that the finding of the ITAT in quantum appeal has become final, nor even disputed before him. The finding of ITAT was vehemently challenged. The learned AM has further observed that certificate from bank relating to issue of cheques was rightly rejected. The explanation of the assessee was held to be not bona fide and that the matter was fully covered by Explanation 1 to section 271(l)(c) of the Act. The premise on above conclusion was arrived at is not correct.
12. Having considered the facts carefully, I am unable to ascribe to the view taken by the learned AM. The question involved in penalty proceedings was whether the claim of the assessee relating to the deduction of Rs.4,68,301/-towards transport charges in the account of "SJT" was false and therefore the assessee was covered by provision of Section 271(l)(c) of the Act. It is settled law that the findings recorded in the assessment proceedings is not conclusive, although it is entitled to great weight. The penalty proceedings being separate and independent proceedings, the assessee can always show that the finding recorded in the quantum proceedings is neither reliable nor sufficient to impose penalty. This is what the assessee has done in this case. Unfortunately, the stand of the assessee has not been appreciated. When the assessee took up the stand that the payment was made through' payee cross-cheques and other evidences relating to the activities carried on by the transport was filed, the AO in remand report filed with the Id. CIT(A) has stated as under:
".. .But as Shree J alar am Transport is not holding any bank accounts, it cannot be ascertained whether the cheques encashed by Shri Mahendra T. Rana Prop. Of Shree J alar am Transport or by another persons. "
Now when the cross cheques were issued in the name "SJT", whether these were encashed by "SJT" or endorsed to somebody-else was not concern of the assessee. The ITAT in quantum appeal did not consider the above facts recorded in the remand report. From the findings of the AO noted above, it could not be inferred that the claim made by the assessee is false. It is further to be appreciated that the payee duly acknowledged the payment and filed an affidavit in support of the work carried out and payments -receipt* He also appeared before the AO and led evidences in support of services rendered. There is no finding that "SJT" could not or did not carry on transport work for and on behalf of the assessee. In the above circumstances, there is absolutely no justification for rejecting the explanation of the assessee. There is no justification to term the explanation of the assessee as false. In my considered opinion, no case for levy of penalty has been made by the revenue as relevant facts stated above were neither considered nor challenged during the course of the proceedings. These were partly accepted and remaining are established on 'the record. For the aforesaid reasons, 1 agree with the view taken by the learned JM in canceling the penalty imposed in his proposed order. The question is answered accordingly.
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S. 14A, Rule 8D & Daga Capital: Bombay High Court to hear arguments
As earlier intimated to you, Writ Petition bearing No. 50 of 2010 (Indian Exporters Grievances Forum & Other vs. CIT) challenging the constitutional validity of Rule 8D has been admitted on 12.1.2010 by Hon'ble Shri Justice Dr. D.Y. Chandrachud and Hon'ble Shri Justice J.P. Devadhar of the Bombay High Court.
The said matter including appeals relating to section 14A which were fixed for final hearing on 15.2.2010 have been adjourned to 23.3.2010.
All those having matters relating to interpretation of section 14A which are pending before the High Court are requested to give the Appeal Nos. to the Associate for grouping matters.
For a round up of the law on s. 14A see Temporary reprieve from Daga Capital. See also: New Rule 8D – A lesson in tight rope walking?
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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 Liaison office securing orders in India for assessee is a business connection : DDIT (Intl. Taxation) v. Jebon Corporation India (Bangalore) p.655
F Where liaison office is permanent establishment of South Korean company, income taxable under art. 7 of DTAA (South Korea) : DDIT (Intl. Taxation) v. Jebon Corporation India (Bangalore) p.655
F Payments made to non-resident for hire of transponders is royalty : Asianet Communicatons Ltd. v. Dy. CIT (Chennai) p. 683
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
NEWS-BRIEFS
FHospital 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]
FHigh Court to decide on taxing expenditure on dividends
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]
