ITAT (Mum): Derivatives are speculative transactions if not for bona fide hedging.

ACIT vs. Dinesh K. Mehta HUF (ITAT Mumbai)(ITA No. 976/Mum/2009) S.43(5): Derivatives are speculative transactions if not for bona fide hedging - A.Y. 2005-06

 

In respect of AY 2005-06, the assessee, a dealer in shares, entered into transaction of purchases of Nifty Futures, which being a derivative instrument, was settled by payment of differences and not actual delivery of shares. The assessee argued that the transactions were hedging transactions meant to minimize the loss due to fluctuation of price of shares held as stock-in-trade and could not be regarded as speculative transactions u/s 43(5) so as to disallow the loss from being set off against other income.

 

The AO took the view that a derivatives transaction could be regarded as a hedging transaction u/s 43(5)(b) only to the extent of the inventory of shares held by the assessee and that the excess would be regarded as a speculative transaction. As, on the date the Nifty Futures were purchased, the inventory of shares held by the assessee was less that the value of the Futures, the loss was treated as a speculation loss.

 

The CIT (A) allowed the appeal on the ground that the s. 43(5)(d) inserted by FA 2005 w.e.f. 1.4.2006 (which provides that derivatives are not speculation transactions) was clarificatory).

 

On appeal by the Revenue, HELD reversing the CIT (A):

 

(i) In Shree Capital Services 121 ITD 498 (Kol) it has been held by the Special Bench that the amendment to s. 43(5)(d) is neither clarificatory nor retrospective in operation. Consequently, derivatives can be considered non-speculative u/s 43(5)(b) only to the extent they are for hedging purposes;

 

(ii) The argument of the assessee that to constitute a hedging transaction u/s 43(5)(b), a transaction need not be in the same shares held by the assessee as inventory or that the value of hedging transactions should be equal to or less than the value of inventory held by the assessee is not acceptable. Circular No. 23D dated 12-9-1960 makes it clear that bona fide hedging transactions shall not be regarded as speculative provided that the hedging transactions are up to the amount of his holdings and confined to shares in his holding. The value and volume of hedging transactions should be in equal proportion and the hedging transaction should be in respect of the same scripts held by the assessee;

 

(iii) If the arguments of the assessee are accepted, it will lead to a situation where all speculative transactions will be claimed as hedging transactions and the purpose behind s. 73 of not permitting set off of speculative loss against business income will become redundant. The fact that in Nifty futures and index futures there cannot be any identification of shares does not change the position in law till the insertion of s. 43(5)(d);

 

(iv) As the AO has gone by the overall value of inventory without individual script wise tally (though required to be done), the plea of the assessee that the loss in purchase of Nifty Futures should not be considered as speculative to the extent of the value of inventory held by the Assessee on a particular day is acceptable.

 

[Note: From 2006-07 such transactions would be non-speculative due to section 43(5)(d)]

 

 

 

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Compulsory Maintenance of books of account under Income Tax Act 1961

Compulsory Maintenance of books of account under Income Tax Act 1961

It is generally seen that there is confusion among taxpayers about maintenance of books of accounts under Income Tax Act like who is required compulsory to maintain the books of accounts and for how many years one has to keep his books of accounts.  Some views are expressed on this topic as follows:

Maintenance of books of accounts by Professionals: Section 44AA of Income Tax Act and rule 6F of Income Tax rules deal with the provisions regarding maintenance of books of accounts under Income tax Act. As per section 44AA(1) read with rule 6F the persons carrying on any of the profession as mentioned below are required to maintain books of accounts and other documents as may enable the assessing officer to compute his total income, if yearly gross receipts of the profession exceeded  Rs 150000
1) Legal
2)Medical
3)architectural
4)engineering
5)accountancy
6)technical consultancy
7)interior decoration
8)authorised representative
9)film artist
10)any other profession as is notified by the board

When no books of accounts are required to be maintained by professionals covered u/s 44AA(1): Proviso to Rule 6F(1) provides that if the gross receipts of a profession do not exceed Rs 150000 in any one of the three years immediately preceding the previous year or where the profession has been newly setup in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount, then such professional need not to maintain any books of accounts as mentioned in sub rule 2 of rule 6F.

It means that if the gross receipts of a profession exceed Rs 150000 in all the three years preceding the previous year only then the books of accounts will be required to be maintained, if the gross receipt exceed the prescribed limit in the two preceding years but not in the third preceding year then there will be no need to maintain books of accounts as contemplated in sub rule 2 of rule 6F.

Maintenance of Books of accounts by other Persons covered u/s 44AA(2): In relation to any other persons engaged in any other profession or carrying on any business other than section 44AA(1), the requirement of compulsory maintenance of books of accounts applies if- either the income from business or profession exceeds Rs 120000 or the turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years immediately preceding the previous year.

When no books of accounts are required to maintained by other persons covered u/s 44AA(2): If the Income or the gross receipts or gross turnover of a person carrying on business or profession other than profession as mentioned u/s 44AA(1)  do not exceed in any one of the three years preceding the previous year then no books of accounts will be required to be maintained u/s 44AA(2).
Presumptive Income scheme: The  persons who are filling their return of income under the presumptive income scheme like under section 44AD or 44AE or 44AF etc are not require to compulsory maintain books of account u/s 44AA. However where the profits and gains from the business are deemed to be profits and gains u/s 44AD or 44AE or 44AF or 44BB or 44BBB as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed, then the books of accounts will be required to be maintained u/s 44AA.

Maintenance  of books of accounts in case of new 44AD section: A new clause IV has been added to sub section 2 of section 44AA w.e.f. 01-04-2011 which provides that where the profits and gains from a business are deemed to be profits and gains of the assessee under new section 44AD which is also applicable w.e.f 01-04-2011 and the assessee has claimed such income to be lower than the profits and gains so deemed i.e below 8% and the income of the assessee exceeds the maximum amount which is not chargeable to income tax during previous year then in such case such person shall keep and maintain such books of accounts and other documents as may enable the assessing officer to compute his total income.

Thus it means that if a person declares his income below the 8% of his total turnover or gross receipts as required u/s 44AD which is applicable w.e.f 01-04-2011 and his income is above the exempted limit then he will have to compulsory maintain his books of accounts. But if his total income is below the exempted limit and profits are also declared below 8% of gross turnover or gross reciepts then he will need not to maintain compulsory books of accounts.

What books of accounts are required to be maintained by persons covered u/s 44AA(1): As per Rule 6F(2) the following books of accounts and documents are required to be maintained:
1) cash book,
2)Journal, if the accounts are maintained as per mercantile system of accounting,
3)ledger
4)carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts issued in respect of sums exceeding Rs 25,
5)original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses upto Rs 50.

Persons engaged in medical profession are, in addition, required to maintain daily case register in the prescribed proforma (Form No. 3C) and inventory, as at the beginning and end of the year, of stock of drugs, medicines and other consumables accessories used for the purpose of the profession.

Books or books of accounts have also been defined u/s 2(12A) as including ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy,disc, tape or any other form of electro-magnetic data storage device.

Document has been u/s 2(22AA) as including an electronic record as defined in clause (t) of sub section (1) of section 2 of the Information Technology Act, 2000.

For how many years books of accounts are required to be preserved: Every year the record of books of accounts grows up and the cupboards filled up more and more. Every assessee wants to know for how many years he should keep the records of his books of accounts.
Rule 6F(5) provides that the books of accounts and other documents  are to be kept for at least 6 years from the end of relevant assessment year. That means from the assessment year 2009-10 one should keep books of accounts up to the assessment year 2003-04 i.e books of accounts of financial year 2002-03.
The time limit for issuing notices for assessment or reassessments have been prescribed u/s 149, after the end of such prescribed time no notice can be issued and no assessment can be framed, therefore the assessee will not need books of accounts of the concerned year. Keeping in mind the time limit as provided u/s 149 for issuing notice the following suggestions are made regarding preservation of books of accounts:

1) If the assessee has made an appeal against any assessment order of any year then the books of accounts of such year should be preserved until the final decision of such appeal
2) Where the assessment in relation to any Year has been reopened u/s 147 within time u/s 149, in such case all the books of account and documents shall continue to be kept till the assessment so reopened has been completed. 
3)Books of accounts for only 7 financial years should be preserved. Therefore the taxpayers should keep books of accounts of only financial year 2002-03 and onwards.

Where the books of accounts should be kept: The current year's books of accounts should be maintained and kept at the principal place of business or profession as per Rule 6F(3). There is no specific rule as to where the books of accounts of earlier years should be kept.

Consequences for faliure to maintain books of accounts: Failure to maintain books of accounts and other documents or to retain them as required u/s 44AA attracts penalty of Rs. 25000 u/s 271A. The penalty can be imposed by the assessing officer or CIT(Appeal).

Important decisions: The Income Tax Appellate Tribunal Delhi in its decision (1998) 97 Taxmann 273(Magzine)/60T.T.J. 278 has held that there is no rule made to the effect that which books of accounts are required to be made by the persons carrying on business covered u/s 44AA(2), therefore if the assessee has kept the details of Incomes and expenditures then no penalty shall be levied u/s 271A. 

Similar decision was made by Amritsar bench of Tribunal in case of Sujan Singh v. AO [2007] 110 TTJ (Asr.) 818 wherein it was decided that Rule 6F has not been made applicable to the persons carrying on business or Profession other than those mentioned u/s 44AA(1) and covered u/s 44AA(2). The case of the assessee falls u/s 44AA(2), as the assessee was carrying on a business of poultry farm. the board has not specified or notified the books of account to be maintained by persons covered under sub-section 2 of section 44AA.Therefore, rule 6F is not applicable to the case of the assessee- ITO v. Dinesh Paper Mart [1999] 64 TTJ (Nag.) 674 : [1999] 70 ITD 274(Nag.) relied on.

After leving penalty for non maintenance of books of accounts, no penalty can be levied for not getting the books of accounts audited: Guwahati high Court has held in its decision (1996) 222 ITR 691 that if the penalty u/s 271A has been levied on an assessee for non maintenance of books of accounts then thereafter no penalty shall be levied  u/s 271B for not getting the books of accounts audited.

 

SALIENT FEATURES FOR THE BUDGET 2010-11

SALIENT FEATURES FOR THE BUDGET 2010-11

INCOME TAX

RELIEF MEASURES

1. In order to provide relief to large number of taxpayers deriving their incomes from Salary and business, the limit of Basic Exemption is proposed to be enhanced from Rs.200,000/- to Rs.300,000/- in respect of Salaried taxpayers, while in the respect of Non-Salaried taxpayers it has been proposed to enhanced from Rs.100,000/- to Rs.300,000/-.

2. For welfare of industrial & commercial consumers of electricity, the maximum rate of advance tax deductible under section 235 on monthly electricity bills is proposed to be reduced from 10% to 5%, on the amount of the bills payable by them;

3. The Senior Citizens of the age of 60 years or more, are proposed to be eligible for relief of 50% of tax on their income, if their income does not exceed Rs.100,000/- as compared to previous maximum limit of Rs.75,000/-. However this relief shall not be available on income subject to Presumptive Tax Regime.

4. In pursuance of Prime Minister�s Relief Package to rehabilitate the economy of Khyber Paktunkhwa, FATA and PATA, some amendments are proposed to be introduced in the Income Tax Law. These measures provide following reliefs to industrial and commercial taxpayers hailing from most and moderately affected areas, as prescribed:

a) Waiver of entire amount of default surcharge & penalty till 30th June 2010;

b) Exemption from advance tax on electricity for tax years 2010 and 2011;

c) Exemption from withholding tax on exports;

d) Recovery of outstanding income tax arrears through easy installments;

e) Enhancement of income tax exemption limit from Rs.0.1 million to Rs.0.3 million;

f) Annual Audit with the approval of FBR; and

g) Exemption from advance tax on import of plant and machinery upto 30th June 2011;

However these concessions shall not be available to manufacturers and suppliers of cement, sugar, beverages and cigarettes.

5. For the wellbeing of disabled persons, 100% depreciation expense can be claimed on Ramp built to provide access to disabled persons, is proposed through a new provision to be inserted in the law.

. In order to provide relief to employees, exemption from taxation of perquisites on waiver of employees obligation to pay or repay, and amount owed to employer, is proposed.

7. In order to facilitate the withholding agents, instead of e-filing monthly, quarterly and annual withholding tax statements, the e-filing of only quarterly withholding tax statements is proposed;

TAX INCENTIVES FOR FOREIGN AND DOMESTIC INVESTMENTS

1. For the wellbeing of listed company a Tax credit for BMR costs incurred by such a company is proposed to be provided @ 10% for the tax year of its incurrence. This concession has been proposed to be admissible for the tax years 2011 to 2015;

2. With the purpose to encourage enlistment of corporate sector, a 5% tax credit is proposed to be allowed to a company in the tax year of its enlistment.

3. In order to align with rest of the scheme, 10% withholding tax deductible on Government Securities is proposed to be a FINAL tax.

4. Withholding tax deductible on debt instruments is proposed to be a FINAL tax, in order to relieve the non-resident taxpayers of statutory requirement for filing income tax return.

5. For providing incentive to foreign lenders for tax-free repatriation of profits earned on foreign industrial loans, Clause 72(iii) of Part-IV of Second Schedule to the Income Tax Ordinance 2001 is proposed to be re-instated.

6. The maximum rate of withholding tax deductible on payments made to non-resident taxpayers who are not subject to Avoidance of Double Taxation Treaties (other than payments made on account of royalty and fee for technical services) is proposed to be @ 20% instead of 30%;

7. Honoring wide demand, the rate of withholding tax deductible @ 20% on cross-word puzzles is proposed to be reduced to a rate of 10%;

REVENUE MEASURES

1. In order to strengthen the drive for documentation, a uniform tax rate for small companies as well as AOPs is proposed @ 25% of their taxable income.

2. Advance tax deductible on imports made by commercial importers is proposed to be enhanced to @5% being a FINAL tax.

3. Tax on capital gains accruing on account of holdings of stocks/shares/securities for six-months or less is proposed @ 10%, while holdings of stocks/shares/securities exceeding six-months is proposed @ 7.5%. However no tax has been proposed on such capital gains arising held for a period exceeding 12 months.

4. In order to rationalize and simplify slab-rates provided in respect of advance tax deductible on goods transport vehicles under Item (1) of Division-III of Part-IV of Second Schedule to the Income Tax Ordinance 2001 are proposed to be abolished, and tax is proposed @ Re.1 per kilogram of the laden weight capacity of goods transport vehicle. No change has been proposed in the rate of tax on goods forwarding contracts, which remain taxable at the existing rate of 2%.

5. In order to bring clarity on advance tax deductible on Cash Withdrawals from Banks, various banking transactions including modes like withdrawals through Demand Draft, Pay Order, Online Transfer, Telegraphic Transfer, TDR, CDR, STDR and RTC, are proposed to be subject to 0.3% deduction of the advance tax, if such transactions exceed threshold of Rs.25,000/- in a single day. The advance tax is adjustable.

6. Turnover Tax on Loss Making Companies is proposed to be enhanced to @ 1%.

7. Withholding tax on gross value of Inland Air Ticket has been proposed @ 5%. Under the scheme the Inland Air-Ticketing persons shall withholding the tax, which will be adjustable against the tax liability of the purchaser of such ticket;

TECHNICAL MEASURES

1. Section 4 of the Income Tax Ordinance 2001 is proposed to be amended to include a reference regarding tax credit on account of share of profits received by a company from an AOP.

2. In order to bring clarity, expression �CD� appearing in Division-V of Part-IV of First Schedule to the Income Tax Ordinance 2001 is proposed to be replaced by �any electronic medium�.

3. The mandatory requirement of Filing of Wealth Statement by the Taxpayers in FTR cases with yearly tax amounting to Rs.35, 000/- is proposed to be included in section 116 of the Income Tax Ordinance 2001.

4. For enforcing checks on non-compliant taxpayers, and to encourage compliant-taxpayers, a new section 181A is proposed to be inserted in the Ordinance.

5. In order to streamline accounting of Advance Tax payments, certain amendments are proposed in section 147 of the Ordinance, so that quarterly advance tax payments are paid by 25th of last month, as compared to earlier requirement of such payments by 15th of every month after the end of a quarter.

6. Through an editorial amendment, the reference of �minimum tax� on importer of edible oil and packing materials under section 148, is proposed to be incorporated in provisions referring to final tax on the income of an importer.

7. For the purposes of clarity, through an editorial amendment the reference of sub-section (1AA) of section 152 is proposed to be inserted in sub-section (2) of section 152.

8. In order to rationalize the definition of �Prescribed Persons� as given in sub-section (9) of section 153, an individual with turnover of Rs.50 millions or above is proposed to be added.

9. In order to perceive better audit of withholding taxes, the withholding agents shall be required to e-file quarterly statements even in the cases where no-tax was deducted. For the purpose of alignment and uniformity, the words �a person collecting tax� are proposed to be replaced with the words �a withholding agent� in sub-section (2) of section 165.

10. Editorial amendments in Section 236A of the Ordinance are proposed in order to bring clarity and remove confusion about the charge of advance tax on public auction of all kind of property including confiscated or attached goods.

11. On merger of Investment Corporation of Pakistan with Industrial Development Bank, the exemption available to ICP on dividend received from any other company is proposed to be withdrawn.

12. Exemption under clause (52) of Part-IV of the Second Schedule to the Income Tax Ordinance 2001 available to Vanaspati Ghee or Oil is proposed to be withdrawn, in view of demise of SRO. 593(I) 1991 Dated 30th June 1991.

SALIENT FEATURES

CUSTOMS BUDGETARY MEASURES 2010-11

Policy Objectives:

� Relief to general public

� Minimizing the cost of doing business.

� Industrial incentives for growth and expansion.

� Boosting the export oriented sectors.

� Amendments in legal provisions to make them more transparent and simple.

1. Relief Measures:

a. Reduction of customs duty on crude palm oil from Rs.9,000/MT to Rs.8,000/MT to decrease cost of vegetable ghee and oil.

b. Exemption of customs duty on import of photographic plates and film for X-ray to lower cost of medical diagnoses for general public.

c. Reduction of duty to 5% on pharmaceutical raw materials and drugs to provide relief to common man.

d. Reduction of duty on equipment for dedicated use of renewable energy to encourage use of renewable energy resources.

e. Reduction of duty on raw materials for laundry soap and detergent to provide relief to general public.

f. Concession of customs duty on import of Road Sweeping Lorries to increase efficiency of municipal and local governments.

g. Exemption of customs duty on import of fully dedicated LPG buses and dispensing equipment to encourage use of cheaper environment friendly fuel.

2. Incentive to Local Industry:

h. Exemption of customs duty on import of raw materials/components for energy saving lamps to support its local manufacturers.

i. Exemption of customs duty and sales tax on rice processing machinery to boost value addition and export of rice.

j. Reduction of duty on raw materials of leather industry to encourage leather exports.

k. Reduction of duty on raw materials of glass industry to make them more competitive.

l. Reduction of duty on secondary quality tin mill black plate for manufacturers of tin plate to reduce their manufacturing cost.

m. Exemption of duty on milk filters to support dairy industry.

3. Tariff rationalization:

n. Exemption of duty on other than pure bred breeding animals to bring their duty at par with pure bred breeding animals.

o. Rationalization of duty on glucose and glucose syrup to avoid misdeclaration.

p. Rationalization of duty on prepared industrial colours to rationalize their duty structure.

q. Inclusion of LED T.V. in industry specific concessionary regime to encourage their local manufacturing.

r. Levy of 5% concessionary duty on copper & aluminum tubes and electro galvanized steel sheets if imported by manufacturers of evaporators and washing machines.

s. Exemption of duty on silk yarn spun from other than silk waste to rationalize tariff.

t. Rationalization of duty on two PCTs of adhesives.

4. Miscellaneous:

u. Creation of separate PCT code for auto parts scrap in pressed bundles to streamline its clearance process.

v. Correction of PCT code for asphalt paver.

w. Correction in description of PCT codes 6813.2010 & 6813.8110.

x. Rationalization of PCT code 3920.6300 with Pak-China FTA.

5. Legal Changes in Customs Act, 1969

a. Keeping in view the change in rate of exchange of US $ vis-�-vis Pak rupees and increase in prices of gold and other items the limit for taking cognizance under the smuggling related provisions is being enhanced from Rs.50,000/- to Rs.150,000/-.

b. The valuation formula for the goods to be exported is being simplified by including regulatory duty instead of export duty in section 25 in sub-section (15)(b).

c. The customs value determined under section 25A shall be applicable until and unless revised or superseded or rescinded by the competent authority.

d. Section 25D is being elaborated by inserting the words �under section 25A� in order to clarify that review application before Director General Valuation shall lie in cases of the values determined by Director Valuation or Collector of Customs under section 25A. For filing a review application under section 25D, the time period of 30 days from the date of determination of customs value is being fixed.

e. Section 32 is being amended so that cognizance could be taken in cases where revenue is paid through self assessment in order to curb the tendency of mis-declaration and less payment of revenue through computerized clearance system.

f. Section 32A is being amended by inserting words and comma �payment of revenue through self-assessment,� to curb the tendency of deliberate wrong self-assessments on the part of the importers.

g. Proviso to sub-section (1) of section 79 is being amended in order to restrict the facility of filing of goods declaration after examining the goods by the importer to only in case of used goods. Besides, the permission for filing of goods declaration after examination of goods can now only be granted by the Additional Collector.

h. Section 81, sub-section (2) is being amended in order to finalize the cases of provisional assessment within three months.

i. Section 81, sub-section (4) is being amended in order to streamline procedure for passing an order after final determination of provisional assessment.

j. Section 156, sub-section (1), is being amended to enhance the general penalty to the extent of Rs.50,000/-.

k. Section 156, sub-section (1), clause (64) is being amended to enhance the penalty to the extent of not less than twice the value of the offending goods besides the confiscation of goods for violation of section 128 and 129 of Customs Act, 1969. This penalty will create a deterrence vis-�-vis the smuggling of transit trade goods.

l. In section 194A, sub-section (1), a new clause (e) is being added which would enable any person or an officer of Customs to file an appeal before the Appellate Tribunal in cases of review order passed by the Director General Customs Valuation under section 25D provided the appeal is heard by the double bench of the Appellate Tribunal.

SALIENT FEATURES

SALES TAX & FEDERAL EXCISE BUDGETARY

MEASURES (FY 2010-11)

o The budgetary measures pertaining to Sales Tax & Federal Excise are primarily aimed at:

� Enhancing the federal excise and sales tax revenues without inducing any additional burden on the common man and poor segments of society.

� Distributing the burden of extra taxation measures on all sectors of the economy.

� Enhancing tax incidence on cigarettes which are injurious to health.

BRIEF POINTS ON MAJOR FISCAL MEASURES:

RELIEF MEASURES

o Withdrawal of restriction on adjustment of Federal Excise Duty paid on beverage concentrate.

� Withdrawal of restriction on adjustment of FED paid on beverage concentrate is aimed at attracting new investment in beverage industry and reducing the prices of aerated waters in the country.

Enforced through SRO 399(I)/2010 dated 05.06.2010, effective from the 1st July, 2010.

REVENUE MEASURES

o Increase in the rate of sales tax from 16% to 17%.

� Increase in the rate of sales tax from 16% to 17% is aimed at distributing the burden of extra tax measures on all sectors of the economy.

Enforced through amendment in Section 3 of the Sales Tax Act, 1990, effective from the 1st July, 2010 and Notifications Nos. SRO 395 to 398(I)/2010, dated 05.06.2010.

o Increase in rate of Federal Excise Duty on Natural Gas from Rs. 5.09 per MMBTu to Rs. 10/- per MMBTu.

� Enhancement of rate of Federal Excise Duty on Natural Gas is aimed at implementation of the NFC recommendations.

Enforced through amendment in Table I of First Schedule to the Federal Excise Act, 2005, effective from the 1st July, 2010.

o Upward revision of Federal Excise duty structure on cigarettes.

� Enhancement of rate of Federal Excise Duty on locally produced Cigarettes in different slabs is aimed at bringing tax incidence on cigarettes up to the international standards and discouraging smoking.

Enforced through amendment in Table I of First Schedule to the Federal Excise Act, 2005, effective from the 6th June, 2010.

o Levy of Federal Excise Duty @ Rs. 1/- per filter rod of cigarettes.

� Levy of Federal Excise Duty @ Rs. 1/- per filter rod for cigarettes is aimed at realization of revenue on sale of filter rods to unregistered and illicit manufacturers of cigarettes.

Enforced through amendment in Table I of First Schedule to the Federal Excise Act, 2005, effective from the 6th June, 2010.

o Levy of 10% Federal Excise Duty on electricity intensive home appliances

� Levy of Federal Excise Duty on electricity intensive home appliances is aimed at reducing the consumption of electricity and generation of some extra revenue.

Enforced through amendment in Table I of First Schedule to the Federal Excise Act, 2005, effective from the 6th June, 2010.

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ITAT(MUM): Tests laid down to determine whether income from shares is "business" income or "capital

Smt. Sadhana Nabera vs. ACIT (ITAT Mumbai)(ITA No. 2586/ Mum/2009)

Tests laid down to determine whether income from shares is “business” income or “capital

gains”

 

The assessee, a director and shareholder in a company engaged in share trading, returned income of Rs. 78,89,499 earned by her on transfer of shares as a “short-term capital gain”. The AO took the view that as there were voluminous transactions, the assessee was engaged in share trading and the income was assessable as “business income”.

 

This was upheld by the CIT (A). On appeal, HELD dismissing the appeal:

 

(i) The legal principles are well settled viz. that:

 

(a) Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and facts,

 

(b) It is possible for an assessee to be both an investor as well as dealer in shares,

 

(c) Whether a particular holding is by way of investment or of stock-in-trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investment and those held as stock-in-trade,

 

(d) The treatment in the books by an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive then it becomes business profit not capital gain,

 

(e) Purchase with intention to resale can constitute capital gains or business profit depending on circumstances like quantity of purchase and nature of activity,

 

(f) No single fact has any decisive significance and the question must be answered depending on the collective effect of all relevant material brought on record.

 

(ii) These principles have to be applied to the following facts:

 

(a) The assessee entered into transaction of purchases and sale of shares of about 32 companies totaling Rs.1,87,83,440 which were sold for Rs.2,69,71,368. Though most transactions were effected by actual delivery, the holding period was less than 6 months. Most of the gain was earned in shares held for a period for short periods;

 

(b) In the earlier years the assessee has nil or small long term capital gain which indicates that holding investments for a longer period is not the main intention except few scrips which are carried over without any transactions year after year. Accordingly to the extent of investment activity in shares one can see that the assessee has invested in some 5 to 6 companies scrips which have been carried over from year to year in which there are no frequent or large number of transactions and these investments in shares can be considered as assessee’s proper“investments”;

 

(c) Purchase and sale of shares in short period indicates that the assessee purchased the shares with a motive to earn profit in short period;

 

(d) The assessee undertook daily transactions without delivery in a few select scrips;

(e) The assessee borrowed funds to purchase shares;

(f) The dividend received was meager;

(g) The assessee’s group companies were involved in share trading.

 

(iii) These facts indicate that the intention of the assessee was to gain profits by dealing in short term period only. Consequently, the income from sale of shares was assessable as “income from business” and not “short-term capital gains”;

 

(iv) The decision in Gopal Purohit 122 TTJ 97 (affirmed in 228 CTR 582 (Bom)) is distinguishable because there the assessee had consistently been investing in shares and the ratio of sales to investment was very less and the LTCG was more than the STCG. Similarly Janak S. Rangwalla 11 SOT 627 (Mum) is also distinguishable on facts.

 

Let pass this mails , and invite other friends to join the group.

 

Regards

 

 

 

Imp decision , time sharing membership fee is taxable : ACIT vs. Mahindra Holidays & Resorts (ITAT Chennai Special Bench)

ACIT vs. Mahindra Holidays & Resorts

(ITAT Chennai Special Bench)

(ITA Nos.2412 to 2416/Mds/2005)

Timeshare membership fee is taxable only over the term of contract The assessee, a time-share company having resorts at tourist places granted membership for a period of 33/25 years on payment of certain amount. During the currency of the membership, the member had the right to holiday for one week in a year at the place of his choice from amongst the resorts of the assessee.

 

The membership fee was received either in lump sum or in installments to the prospective member. In addition to the membership fee, the member was liable to pay maintenance charges or subscription fees irrespective of whether he made use of the resort or not. If the resort was utilized, additional payment towards utilities like electricity, water, etc was payable. Though the assessee was following the mercantile system of accounting and treated the membership fee as revenue receipt, only 40% of the amount received was offered for taxation in the year of receipt. The balance was equally spread over the period of membership of 25 or 33 years on the ground that it was relatable to the services to be offered to the members.

 

The AO took the view that as per the accrual system of accounting, the entire receipt had to be assessed as income in the year of receipt.

 

The CIT (A) upheld the stand of the assessee.

 

On appeal by the department, the matter was referred to the Special Bench. HELD by the Special Bench:

(i) In E.D. Sassoon & Co. Ltd. v. CIT 26 ITR 27, the Supreme Court held that two conditions are necessary for income to have "accrued to" or "earned by" an assessee viz. (i) the assessee has contributed to its accruing or arising by rendering services or otherwise, and (ii) a debt has come into existence and he must have acquired a right to receive the payment. In the present case, though a debt is created in favour of the assessee immediately on execution of the agreement, it cannot be said that the assessee has fully contributed to its accruing by rendering services because the assessee has a continuing obligation to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfils its promise, income has not accrued to it;

 

(ii) The argument of the assessee that the balance amount of membership fees has to be spread over the tenure of membership on the ground that heavy expenditure for the upkeep and maintenance of the resorts has to be incurred is not acceptable because separate charges are collected for maintenance and use of utilities and therefore the matching concept cannot be pressed into service with regard to the membership fee. The principles laid down in Calcutta Co. Ltd 37 ITR 1 (SC) and Rotork Controls India 314 ITR 62 are not applicable because though there is a liability, it is difficult not only to quantify but also to reasonably estimate it on a scientific basis. If the assessee had chosen to provide for the liability every year to comply with the matching concept, it would have been wholly unscientific and arbitrary;

 

(iii) Recognizing the entire receipt as income in the year of receipt can lead to distortion. Following the principles laid down in Madras Industrial Investment Corporation 225 ITR 802 (SC), where it was held that allowing the entire expenditure in one year might give a distorted picture of the profits of a particular year, recognizing the entire receipt in one year can also lead to distortion;

 

(iv) Consequently, the entire amount of timeshare membership fee receivable by the assessee up front at the time of enrollment of a member is not chargeable to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract.

INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 7-6-2010 Volume 324 : Part 1

INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 7-6-2010

Volume 324 : Part 1

 

 

SUPREME COURT JUDGMENTS

 

 

>> Rule dealing with valuation of perquisites valid : BHEL Workers Union v. UOI p. 26

>> Form in which to be submitted is to be prescribed by statutory authority : UOI v. Income-tax Bar Association, Lucknow p. 80

>> NTT Act, 2005 : Constitutional validity : Madras Bar Association v. UOI p. 166

>> Penalty leviable even if return discloses no income : Joint CIT v. Saheli Leasing and Industries Ltd. p. 170

HIGH COURT JUDGMENTS

>> Unabsorbed depreciation of amalgamating company cannot be deducted while taking WDV of assets taken over of amalgamated company : CIT v. Silical Metallurgic Ltd. (Mad) p. 29

>> Amalgamation does not affect claim for special deductions u/ss. 80HH, 80-I : CIT v. Silical Metallurgic Ltd. (Mad) p. 29

>> Commissioner (Appeals) can consider grounds not raised before AO : Binny Ltd. v. Asst. CWT (Mad) p. 34

>> Roads, gardens etc. would be land appurtenant to house : Binny Ltd. v. Asst. CWT (Mad) p. 34

>> Amount received as capitation fees not entitled to exemption u/s 10(22) : P. S. Govindasamy Naidu and Sons v. Asst. CIT (Mad) p. 44

>> Reassessment after four years on basis of subsequent assessment not valid : Multiscreen Media P. Ltd. v. UOI (No. 1) (Bom) p. 48

>> Reassessment within four years on basis of additional material discovered in assessment proceedings of a subsequent year valid : Multiscreen Media Private Ltd. v. UOI (No. 2) (Bom) p. 54

>> Levy of penalty not sustainable where disallowance deleted by Tribunal and deletion affirmed by court : CIT v. Chakiat Agencies P. Ltd. (Mad) p. 65

>> No power vested with Commissioner to direct AO to complete assessment in a particular manner : CIT v. Smt. Tasneem Z Madraswala (Mad) p. 67

>> Transport corporation contributing to statutory insurance fund towards third party claims : Actual amount paid by way of insurance alone deductible : CIT v. Kattabomman Transport Corporation Ltd. (Mad) p. 71

>> Assessee taking whole profit from export unit as eligible instead of ratio of export turnover to total turnover : No concealment or misrepresentation by assessee : CIT v. Lakhani India Ltd. (P & H) p. 73

>> Issue not taken in assessment order cannot be taken in appeal : Southern Foundation P. Ltd. v. Asst. CIT (Mad) p. 76

>> Remand in respect of non-compete fees justified : Empee Distilleries Ltd. v. Asst. CIT (Mad) p. 82

>> Failure to consider a ground not ground for appeal to High Court : CIT v. Malladi Project Management P. Ltd. (Mad) p. 87

>> Reasons stated by Commissioner (Appeals) and Tribunal inconsistent with each other : Matter remanded : CIT v. Pentagon Industries (Mad) p. 89

>> Whether average cost of total shares held by assessee or actual cost of shares sold : Not a matter which could be rectified u/s 154 : CIT v. Ranbaxy Holdings Co. (Delhi) p. 92

>> Explanation given by assessee accepted by Commissioner (Appeals) as well as Tribunal and additions deleted : Finding of fact : CIT v. Jas Jack Elegance Exports (Delhi) p. 95

>> Ex gratia payment to employees deductible : CIT v. Maina Ore Transport P. Ltd. (Bom) p. 100

>> Tribunal not justified in holding that amount had not accrued : CIT v. Beirsdorf (India) Ltd. (Bom) p. 106

>> Special deduction u/s 80HHC allowable on basis of book profits and not on basis of eligible profits : CIT v. Jumbo Bag Ltd. (Mad) p. 111

>> Tax effect less than prescribed limit and case not falling within exceptions provided in circular : Appeal not maintainable : CIT v. Oscar Laboratories P. Ltd. (P & H) p. 115

>> Sums received on retirement from firm shown as capital receipt in return and treated as such in original assessment : Subsequent deduction of sum in hands of firm as revenue expenditure not a ground for reassessment : Prashant S. Joshi v. ITO (Bom) p. 154

>> Intimation u/s 143(1) cannot be treated as assessment order : WCI (Madras) P. Ltd. v. Asst. CIT (Mad) p. 181

>> Tribunal finding income escaped assessment : Plea of limitation of four years to be rejected : WCI (Madras) P. Ltd. v. Asst. CIT (Mad) p. 181

>> Long-term capital gains : Assessee entitled to benefit of indexation : CIT v. Anuj A. Sheth, HUF (Bom) p. 191

AUTHORITY FOR ADVANCE RULINGS

>> Mauritius company not having PE in India selling equity shares in Indian company to company organised under Mauritius law : Long term capital gains not taxable in India : E*Trade Mauritius Ltd., In re p. 1

STATUTES

>> Notifications :

Income-tax Act, 1961 : Notification under section 90 : Agreement between the Government of the Republic of India and the Government of the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income p. 1

NEWS-BRIEF

>> Prudent taxpayers await DTC in early June

The Government said that the revised draft of the Direct Taxes Code (DTC), which is aimed at simplifying the tax structure, would be made available for public comments in the first week of June.

"Revised discussion note on the Direct Tax Code will be revealed in the first week of June and will remain open for (public comments ) for 15 days, by Budget session, it should be a law", said a confident Union Revenue Secretary at the Bengal National Chamber of Commerce and Industry function.

However, it drew flak from certain quarters for its proposals such as imposing a minimum alternate tax on gross assets and taxing long-term savings at the time of withdrawal.

The silence on giving income-tax rebate on housing loans was also criticised and these grievances are expected to be addressed in the revised draft.

The Finance Minister has said that in all nine concerns were considered while revising the first draft. [Source : www.economictimes.com dated May 24, 2010]

>> Industrial Park Scheme concessions extended further

Under the Industrial Park Scheme, 2008, the undertaking notified under rule 18C of the Income-tax Rules, 1962, which begins to develop and operate or maintain and operate an industrial park anytime during the period beginning the 1st day of April 2006 and ending on the 31st day of March 2009, is entitled to benefits under section 80-IA(4)(iii) of the Income-tax Act, 1961. The Central Board of Direct Taxes (CBDT) has amended the Industrial Park Scheme, 2008 and rule 18C of the Income-tax Rules, 1962 to give effect to the extension of the ending date of operation of the Scheme to March 31, 2011. The Finance Act (No.2) 2009 had extended the ending date of the scheme from March 31, 2009 to March 31, 2011. [Source : www.pib.nic.in dated May 24, 2010]

>> Proposed taxpayer schemes look to expand I-T Department

With the present Income-tax Act proposed to be replaced by the Direct Taxes Code (DTC) next year, the I-T Department is planning to introduce a host of services related to processing of tax returns and refunds in the current fiscal.

The event is likely to be inaugurated by the Finance Minister who will also lay out a roadmap of the Department for the future.

The Department, this fiscal, is planning to set up an independent Tax Deducted at Source (TDS) directorate while fast processing of tax returns and technological upgrade of tax refunds are the other core issues, he said.

The revenue accrued from TDS has been constantly growing over the years and with the increase in the number of service organisations across the country, the share from under this category of taxes is bound to grow, the CBDT Member said.

According to estimates, the TDS revenue contributes almost 40 per cent. to the direct taxes kitty.

Programmes like the Refund Banker scheme, presently on in 15 cities of the country, will also be extended to other locations this fiscal.

The DTC, aimed at simplifying the tax structure, is proposed to be introduced in April next year and will ultimately replace the Income-tax Act, 1961, bringing all other direct taxes, including wealth tax, under its purview.

The Finance Minister had said that if a reasonable level of discussion happens on the code, a bill could be placed in the winter session of Parliament. [Source : www.economictimes.com dated May 19, 2010]

>> The Centralized Processing Center (CPC) has potential to deliver : FM

The introduction of electronic filing of I-T returns, e-payment of taxes, establishment of the national network (TAXNET), and consolidation of the Regional Computer Centers into the National Data Center have laid the foundation for the next generation administrative reforms in the Income-tax Department. The recent notification of the SARAL II form by the Department would simplify the task of complying with the income-tax reporting requirements for the taxpayer.

Here is the text of the speech delivered by the Finance Minister on the occasion. "Speech of Hon'ble Finance Minister on the occasion of dedication of the Centralized Processing Center (CPC) of the Income-tax Department, Bengaluru to the Nation on May 29, 2010.

It gives me immense pleasure to be here on this occasion of the dedication to the nation of the Centralized Processing Center (CPC) of the Income-tax Department in Bengaluru. Bengaluru, the IT Capital and Silicon Valley of India, was appropriately chosen as the location for the first CPC. The setting-up of CPC is a big step in the utilization of technology for bringing in administrative reforms within the Income-tax Department.

The Income-tax Department had initiated computerization in the 90s with the establishment of the Regional Computer Centers and distribution of PCs to Officers. However, computerization gained momentum since 2003-04 with the introduction of Processing Software, outsourcing of PAN card services and establishment of the Tax Information Network (TIN) for tax payment and TDS reporting.

The objective for technology induction in the Department has been to enhance the capacity of the Department to handle the increase in numbers of taxpayers and to provide better taxpayer services in a systematic manner. Over the past few years, the Department has increasingly focused on e-governance initiatives and building the technological framework to be able to handle challenges of the changing economic environment.

The introduction of electronic filing of I-T returns, e-payment of taxes, establishment of the national network (TAXNET), and consolidation of the Regional Computer Centers into the National Data Center have laid the foundation for the next generation administrative reforms in the Department.

Bulk processing of returns and redesigning the procedures in a centralized facility was determined to be the most efficient way to increase the processing capacity of the Department. The CPC project at Bengaluru was approved by the Union Cabinet at a total cost of Rs. 255 Crore over a 5-year period. It should be endeavour of the Department to achieve economies of scale by automating non-core processes in partnership with the corporate sector and to attain operational excellence by high quality and service compliance levels.

The success of these kinds of initiative depends upon implementation as well as education. The Department faces a huge task of not only educating its own officers and staff, but also taxpayers. I am informed that the Department has already taken steps to educate the taxpayers as well as important stake-holders like State and Central Government deductors for increasing awareness about the issues, which, if not addressed properly, may act as a barrier in realizing the full potential of this Mega IT-Initiative Project.

The tax-policy making process has also undergone the substantial changes with technology induction. I understand that CBDT is making policies, which are system compatible and can easily be implemented using the information technology tools. The recent notification of the SARAL II form by the Department would simplify the task of complying with the income tax reporting requirements for the taxpayer.

The functioning of CPC has been made possible by reengineering key business processes coupled with automation. The working environment of CPC is different from that in the Government. Government employees here have an opportunity to excel while performing duties in this conducive environment, which is on the lines of the private sector and highly challenging.

Technological innovation is key to success in addressing issues relating to voluminous data and repetitive procedures. However, technological limitations invite criticism from those who are at the receiving end. There has been some criticism of computerization in the Department on issues relating to credit of TDS and refunds to the taxpayers.

The computerization projects involving complex legislative framework and evolving international tax jurisprudence are associated with risks and rewards. We should accept these challenges and should not be disappointed with failures. We should try our best to deliver the quality services to the taxpayers keeping in mind the challenges of technological limitations and continue to innovate to make the existing processes and procedures more efficient.

Taking forward tax administration reforms, I have announced setting up two more Centralised Processing Centers during my Budget speech 2010-11, looking to the successful experience of the CPC at Bengaluru. I am happy to announce that Income-tax Department has identified two more locations for setting up CPC at Pune and Maneasar.

With these words I dedicate the Centralized Processing Center of the Income-tax Department at Bengaluru to the nation and wish it all success in the years to come. [Source : www.pib.nic.in dated May 29, 2010]

 

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