(ITR) HIGHLIGHTS ISSUE DATED 15-8-2011 Volume 336 Part 2

INCOME TAX REPORTS (ITR) HIGHLIGHTS

ISSUE DATED 15-8-2011

Volume 336 Part 2

F Delivery of goods to a foreign buyer in India not export and not entitled to exemption u/s. 10B : Swayam Consultancy P. Ltd. v. ITO (AP) p. 189

F Notice based on subsequent decision of High Court reversed by Supreme Court : Notice not valid : Commercial Co-operative Bank Ltd. v. ITO (Guj) p. 196

F Sales tax and excise duty not to form part of total turnover : CIT v. Falcon Tyres Ltd. (Karn) p. 200

F AO to consider membership fee payable to club whether revenue expenditure : CIT v. Falcon Tyres Ltd. (Karn) p. 200

F Part of tax deposited before request for time to pay taxes and entire amount paid subsequently : Prosecution not valid : Sushil Kumar Saboo v. State of Bihar (Patna) p. 202

F Presumptive taxation : No discussion in Tribunal's order regarding correctness of CIT (A) order : Matter remanded : Kesar Singh v. CIT (P&H) p. 205

F Tribunal finding price paid for raw materials not unreasonable : Part of price could not be disallowed : CIT v. V. S. Dempo and Co. P. Ltd. (Bom) p. 209

F Notice based on subsequent two-judge decision of Supreme Court which was overruled by a larger Bench : Notice not valid : Surat People Co-op. Bank Ltd. v. ITO (Guj) p. 218

F Legal position clarified in 1985 : Rectification based on SC decision in 1994 valid : Shahbad Co-operative Sugar Mills Ltd. v. Deputy CIT (P&H) p. 222

F Source of purchase of jewellery satisfactorily explained : Not undisclosed income of assessee : Sonia Magu v. CIT (Delhi) p. 227

F Duty drawback scheme : No accrual of income till claim of assessee quantified and verified by competent authority : CIT v. Sriyansh Knitters P. Ltd. (P&H) p. 235

F IPRS incentive received in next accounting year : Amount did not accrue and not assessable in AY 1993-94 :CIT v. Manav Tools (India) P. Ltd. ( P&H) p. 237

F Precise details about persons to be searched mentioned in warrant of authorisation : Search legal : Jose Cyriac v. CIT (Ker) p. 241

F Tribunal finding transfer of goods between units of same undertaking at market value : Section 80-I(8) not applicable : CIT v. Punjab Concast Steels Ltd. ( P&H) p. 248

F Cancellation of registration by order passed in March 2009 by Commissioner not valid : CIT v. Manav Vikas Avam Sewa Sansthan (All) p. 250

F Satisfaction regarding undisclosed income of such person recorded before completion of assessment of person searched : Assessment proceedings of third person valid : CIT v. Girdhari Lal Bassi (P&H) p. 255

F Tribunal finding there was no material from which concealment of income could be inferred : Penalty could not be imposed : CIT v. Careers Education and Infotech P. Ltd. (P&H) p. 257

F Bona fide claim for deduction not concealment or furnishing of inaccurate particulars : CIT v. Raj Overseas (P&H) p. 261

F Global distribution of services to airlines by NRI : Tribunal finding 15 per cent. of revenue accruing in respect of bookings made in India : Finding of fact : Director of I. T. v. Galileo International Inc. (Delhi) p. 264

F Small scale undertaking in rural area : AO denying relief on ground unit situate within fifteen kilometres from municipal limits not proper : CIT v. Friends Salt and Allied Industries (Guj) p. 272

F Part performance under agreement prior to amendment : No transfer giving rise to capital gains : CIT v. Rakesh Gupta (All) p. 277

F Trading in shares or investment : Two separate portfolios permissible : CIT v. Gopal Purohit (Bom) p. 287

F No satisfactory explanation of investment : Addition justified : Hazari Lal v. CIT (P&H) p. 290

F Gift discovered to be bogus : Penalty leviable : CIT v. Deep Chand ( P&H) p. 292

F Details furnished by assessee supported by material documents : Assessee entitled to relief u/ss. 32A and 80-IA : CIT v. Aicam Engineering P. Ltd. (Mad) p. 294

F Undertaking by managing director to get additional income surrendered by assessee but not declared in return by assessee : Levy of penalty justified : Shveta Nanda v. CIT (P&H) p. 298

F Procedural requirement complied with : Assessee to be assessed in capacity of a firm : CIT v. Nand Lal Labhu Ram ( P&H) p. 303

F Amount of gifts almost equal to difference in gross profit declared : Gifts received undisclosed income of assessee : CIT v. Deepak Iron and Steel Rolling Mills ( P&H) p. 307

F Provision that income-tax payable by MLA on salary and allowance will be paid by State : Law within competence of State Legislature : Manmohan Singh v. State of Punjab (P&H) p. 312

F Book profits : Losses brought forward deductible : CIT v. Sumi Motherson Innovative Engineering Ltd. (Delhi) p. 321

F No discussion on material justifying enhancement : Matter remanded : Aggarwal Engineering Co. v. Asst. CIT ( P&H) p. 332

STATUTES AND NOTIFICATIONS

F C. B. D. T. Circulars : Circular No. 4 of 2011, dated 19th July, 2011-Prior permission under section 281 of the Income-tax Act, 1961 to create a charge on the assets of business-Issuance of guidelines p. 1

F Notifications : Income-tax Act, 1961 : Notifications under section 120(1) and (2) : Jurisdiction of Income-tax authorities : Amendments p. 10

JOURNAL

F Is interest on an interest-free deposit obtained in addition to the stipulated rent, "rent receivable" under section 23(1)(b) ? (M. S. Prasad, IRS (Retd.), Director (A&PAC), CBDT) p. 10

NEWS-BRIEF

F Income-tax waived on wrongly paid amount

Tax cannot be levied on an amount wrongly paid to a person because of a mistake made by the payer, according to a recent order by a division bench of the Income-tax Appellate Tribunal (ITAT).

In this case, the taxpayer company, Tata Investment Corporation, moved the ITAT after it was levied tax on dividend it received on the shares it had already transferred to other entities. The taxpayer is a non-banking finance company. Since the transfer of shares was not entered in the records of the company whose shares were sold by taxpayer company, the dividend for a particular year was wrongly issued to the taxpayer company.

In its order on July 15, ITAT pointed out that section 72 of the Indian Contract Act, 1872 stipulates that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it and therefore amounts received by the mistake of the paying party cannot be construed as income of the receiver and therefore not liable to be taxed.

All income cannot be taxed, but only those incomes on which the taxpayer has a legitimate and enforceable right is liable to tax, the ITAT held. The ITAT held that income can be considered "accrued" only when the taxpayer has a right to receive the income. Without a legally enforceable right, there cannot be an accrual of income. [Source :www.economictimes.com dated August 5, 2011]

F Government promote convenience of tax offices in foreign countries

Under pressure to bring back unaccounted money stashed abroad, the Government said it will set up tax overseas units in eight countries, including the US, France and Germany, this financial year.

"The proposal is being processed and (eight) Income-tax Overseas Units (ITOUs) are likely to be set up within the present financial year 2011-12," the Minister of State for Finance told the Lok Sabha in a written reply.

Cyprus, Japan, UK, the Netherlands and United Arab Emirates are the other countries where the Government wants to establish ITOUs.

The Government, the Minister said, had earlier set up ITOUs at Mauritius and Singapore.

He said the Government has framed a five-pronged strategy to fight the menace of tax evasion that include joining hands with international bodies like G-20 and United Nations, besides forming appropriate legislations, setting up domestic institutions, and manpower training.

The Government has also approved the cadre restructuring of the Directorate of Enforcement for increasing its effectiveness in implementing the provisions of the Prevention of Money Laundering Act and the Foreign Exchange Management Act.

"The approval includes increase in staff strength from 745 to 2,064 and the number of offices from 22 to 39. This is likely to involve an expenditure of about Rs. 60 crore annually. The restructuring process of the Directorate of Enforcement is likely to be completed in 2-3 years," the Minister said.

The Minister also informed Lok Sabha that Government has commissioned a study to estimate the quantum of unaccounted wealth, both inside and outside the country, and its ramifications on the national security based on recommendations of the Standing Committee on Finance. [Source : www.economictimes.com dated August 5, 2011]

F Government reviewing DTAA with Mauritius for wider tax awareness

The Government is working to review the Double Taxation Avoidance Convention (DTAC) with Mauritius to further strengthen its provisions and have better exchange of information on tax matters with the island nation, which accounts for almost 36 per cent. of FDI inflow to India.

In a written reply to the Lok Sabha, the Minister of State for Finance said the Government has proposed to review the India-Mauritius DTAC to incorporate appropriate changes in the agreement for prevention of treaty shopping and to strengthen the mechanism of exchange of information of tax matters between the two countries.

"There was unwillingness on the part of Mauritius to cooperate in addressing this problem. However, recently it was agreed to convene the next meeting of the joint working group on the DTAC. We have now proposed next round of discussion to which Mauritius is yet to respond," the Minister said.

Mauritius contributed to 35.96 per cent. of the total Foreign Direct Investment (FDI) that came to India in 2010-11. It was 40.16 per cent. in 2009-10 and 41.01 per cent. in 2008-09.

"Accurate estimate of the volume of alleged 'revenue loss' is difficult as the tax on capital gains depends on the difference between the sale and purchase prices, factor of cost inflation index, cost of transfer, the set off of loss suffered in one transaction against the gains in the other and the carried forward losses of earlier years," he said.

He was replying to a question of whether the Government had found some loopholes and revenue leakages in the DTAA with Mauritius.

"Since the tax on capital gains from Mauritius-based entities was exempt, a large number of them did not file the returns unless they had other streams of income as well. The exact amount of revenue loss due to non-taxation of capital gains cannot be quantified," the Minister said.

The India-Mauritius DTAA provides for taxation of income from capital gains arising from sale of shares only in the country of residence of the investor.

Therefore, an investor routing his investments through Mauritius into India does not pay tax on capital gains here.[Source : www.economictimes.com dated August 5, 2011]

Whether, for levy of FBT, meaning of word 'construction' in Sec 115WC is re

Whether, for levy of FBT, meaning of word 'construction' in Sec 115WC is restrictive and includes only civil construction within its realm - NO, rules ITAT

THE issue before the Bench is - Whether, for the levy of FBT, the connotation of the word 'construction' in Sec 115WC is restrictive and includes only civil construction works within its realm. And the final ruling goes in favour of the assessee.

Facts of the case

Assessee Company is engaged in the business of manufacturing of specialized equipment of solid and waste and a liquid waste treatment for industries and communities and these equipments were known as Twin Wire Belt Filter Press for Sludge Management - Major portion of the assessee's activities included construction of civil structures - AO while framing the assessment rejected the submission of the assessee for levyng FBT @ 5% and levied 20% rate. CIT(A) affirmed the order of the AO.

On appeal, the Tribunal held that,

++ as per provisions of sec. 115WC(2)(b) in the case of an employer who is engaged in the business of construction, the value of fringe benefit shall be taken @ 5%. The question before us is that whether or not assessee engaged in the business of construction. The word "construction" has not been defined in the Act. Therefore, its ordinary meaning in common parlance has to be taken. The definitions as given in aforementioned two dictionaries have already been reproduced. If those definitions are kept in mind, the word "construct" cannot be restricted only to civil construction. It includes in its ambit pile or put together, build, make, to form by putting together parts; frame; devise; to draw, as a figure, so as to fulfill given conditions, the result of intellectual perception and consideration of things and ideas receive through the senses. It also includes construction of a housing estate/construct a bridge build, erect, put up, set up, raise, elevate, establish, assemble, manufacture, fabricate, make, construct a plan/theory form, formulate, put together, create, devise, design, invent, compose etc;

++ the word "construction" though mainly connected to the building but it includes within its ambit a bridge under construction building, erection, elevation, establishment, assembly, manufacture, fabrication. It also includes an impressive construction structure, building, edifice, assembly, framework. Therefore, its ambit has not been restricted to only to construction of building. It includes impressive construction structure, building, edifice, assembly, framework etc. The nature of plants made by the assessee-included fixation of certain equipments on land for managing waste and it included also certain degree of civil construction. A structure is created through which the waste is managed by those equipments. It also requires land to establish such erections and to put plant thereon. Therefore, it cannot be said that assessee's activity does not involve business of construction.

Income accruing or arising in India to a non-resident (US company) on t

IT/ILT : Income accruing or arising in India to a non-resident (US company) on transfer of a capital asset situate in India to an Indian company would be income deemed to accrue or arise in India to said non-resident and can be assessed in hands of the non-resident or in hands of Indian company as agent of that non-resident under section 163 [Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India]

l Transfer of Indian company's share constitutes transfer of a capital asset situate in India and income from such transfer of capital asset even if accrues or is received in India within the meaning of section 5 such income being specifically enumerated under section 9 would be income deemed to accrue or arise in India

l The capital gains accruing or arising to a non-resident on transfer of a capital asset situate in India apart from being taxed in hands of non-resident, can be taxed in hands of agent of non-resident under section 163 read with section 9 because the income accruing to the non-resident falls within the category of deemed income specified in section 9

l The CBDT circulars No. 682 & 789 explaining the DTAA between India & Mauritius would not apply where the investments are made in India by entities other than the entities incorporated in Mauritius - [2011] 12 taxmann.com 141 (Bom.)

Digital Signature:Signing the digital way

Digital Signature

Signing the digital way

Introduction

The Central Board of Direct taxes announced on 1^st July 2011, that all Individuals, HUFs and Partnership Firms who are liable to get their accounts audited under the Income Act 1961 will have to file their Income-Tax return online compulsorily using Digital signature for the financial year 2010-11.

Many people confuse a Digital Signature with an e-signature. An e-signature is a scanned image of your physical signature while Digital Signature is not a facsimile of a person's physical signature. A document with a Digital Signature will not contain any traditional signature but it will simply state that it has been digitally signed by (name of the person signing it). To know about Digital Signatures we will first have to understand what Digital Signature Certificates are.

What is a Digital Signature Certificate?

A Digital Signature Certificate, like hand written signature, establishes the identity of the sender filing the documents through internet which sender can not revoke or deny. Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or paper certificates. Examples of physical certificates are drivers' licenses, passports or membership cards. A digital certificate can be presented electronically to prove your identity, to access information or services on the Internet or to sign certain documents digitally. In simple words, a document can be Digitally Signed using a Digital Signature Certificate.

Why is Digital Signature Certificate (DSC) required?

Like physical documents are signed manually, electronic documents, for example e-forms are required to be signed digitally using a Digital Signature Certificate. The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the only secure and authentic way that a document can be submitted electronically. Moreover a Digital Signature is the on­ly way one can authenticate electronic or online transac­tions "legally". The potential for Digital Signatures is huge in services like e-procurement, filing of returns, filing of export-import licenses, financial transactions, digitization of land records, while using e-commerce web-sites and other transactional portals and other online trans­actions like internet banking. You can even encrypt information in your e-mail using a private key of a Digital Signature.

Types of Digital Signature Certificates:

There are basically 3 types (or classes) of Digital Signature Certificates Class-1, Class-2 & Class-3, each having different level of security.

Class 1 signatures are used for identification of username/email ID. However it cannot be used to sign any Statutory / Business Documents whereas Class 2 & Class-3 -DSCs are issued to the Individuals and can be used for either Personal or Business Purposes.

Class 2 signatures can be availed from Dealers / Re sellers of Certifying Authority, by submitting the prescribed documents. Here, the identity of a person is verified against a trusted, pre-verified database.

Class 3 signature is the highest level where the person needs to present himself or herself in front of a Registration Authority (RA) and prove his/ her identity by submitting the documents.

How does it work!!

TECHNICAL ASPECTS: Digital signatures are an application of asymmetric key cryptography. Cryptography is primarily used as a tool to protect national secrets and strategies. It is extensively used by the military, the diplomatic services and the banking sector.

CRYPTOGRAPHY: Cryptography is the science of using mathematics to encrypt and decrypt data. It enables a person to store sensitive information or transmit it across insecure networks (like the Internet) so that it cannot be read by anyone except the intended recipient.

Data that can be read and understood without any special measures is called plain text or clear text. Data which requires some special function to be performed on it before it can be read and understood, is called cipher text. The same plaintext, encrypted by using different keys, will result in different cipher text. The security of encrypted data is entirely dependent on two things: the strength of the cryptography algorithm and the secrecy of the key.

Encryption is used to ensure that information is hidden from anyone for whom it is not intended, even those who can see the encrypted data. The process of reverting cipher text to its original plain text is called decryption.

A cryptographic algorithm, or cipher, is a mathematical function (known as hash function) used in the encryption and decryption process. This hash function works in combination with a key (private key) to encrypt the plaintext (the original message).

The hash function software produces a fixed length of alphabets, numbers and symbols for any document. This is known as the hash result. However, the contents of this fixed length are never the same for two different documents. If even one letter in the document is altered, an entirely different hash result will be generated. The hash function software will always produce the same hash result for a particular message & it is practically impossible to reconstruct the original message from the hash result.

Customers are given two codes for verification —private and public keys. The public key and private key are nothing but extremely large numbers. Although the keys are mathematically related, it is almost impossible to obtain the private key by using the public key. If a particular private key was used to "sign" a message, then only the corresponding public key will be able to verify the "signature". A Digital Signature usually contains owners name, company name and address, public key, certificate serial number, expiry date of the public key, certifying company ID, and Certifying Company's Digital Signature.

Illustration

1) CHETAN wants to digitally sign emails and electronic contracts. So he would use computer software (asymmetric crypto system) to generate two keys, a public key and private key. CHETAN will give his public key to the whole world but will keep his private key to himself. Once he has done that, he can use his private key to sign contracts etc. Anyone can use CHETAN's public key to verify his signature. That's where the problem begins. How can anyone be sure which is CHETAN's public key? What if Mr. CHETAN denies that a particular public key is actually his? To solve this problem digital signature certificates are used. CHETAN would apply to a licensed CA (Certifying Authority) for a digital signature certificate.

As part of the application process he would submit identification documents as discussed earlier. He would also send his public key to the CA. The CA would then "certify" the public key as belonging to Mr. CHETAN and issue a digital signature certificate that contains Mr. CHETAN's public key along with information identifying him.

Now CHETAN wants to enter into a transaction with Pankaj. He composes an electronic document containing the words:

I, CHETAN owe Pankaj the sum of Rs. 500 only.

Using his computer CHETAN runs this document through a hash function. The computer then performs the process on the document as discussed above.

CHETAN now uses his computer to "sign" the hash result of his document. His computer software uses his private key to perform some calculations upon the hash result. This produces a signature, which consists of some digits. This set of digits is attached to the hash result.

CHETAN now sends the original message and the signed message digest (hash result) to Pankaj. Pankaj has the same hash function software on his computer. He also has his (CHETAN's) public key. When Pankaj receives CHETAN's email, he runs the original document through the hash function software and generates a hash result. The computer compares this hash result with the one that was sent to him by CHETAN. If the two hash results are the same, it means that the message is unaltered.

Pankaj also verifies whether CHETAN's private key was actually used to sign the hash result. For this Pankaj's computer uses CHETAN's public key. Only a message signed by CHETAN's private key can be verified using CHETAN's public key.

Cost and validity :- A Digital Signature certificate has to be purchased from a gov­ernment- licensed Certification Agency known as "Certifying Authority (CA)". Certifying Authority (CA) means a person who has been granted a license to issue a digital signature certificate under Section 24 of the Indian IT-Act 2000. At present, there are eight such agencies (CAs) namely, IDRBT, iCERT (Customs and Central Excise) and MTNL. Tata Consultancy Services (TCS), Safe­scrypt (from Sify), (n)Code So­lutions (from GNFC), and e­-Mudhra (from 3i Infotech).

The Digital Signature Certificates come with a validity peri­od of one-two years, implying there is a cost attached. We are not used to paying for our own signature.

While Digital Signatures are estimated to cost CAs Rs 175-225, individuals typically end up paying anyway between Rs 1,500 and Rs 3,000 —and sometimes even up to Rs 7,000 for the high-level Class-3 security certificates. The prices include a one-time payment for a crypto (USB) e-token, which contains the software. Typically, if you want to use a digital signature for sensitive transactions like e-filing of returns or internet banking & broking then the costs are between Rs. 2,200 (without token) to 3,200 (with token). Much depends on the bundling schemes & packages offered by the distributors.--
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ITR Volume 336 : Part 1 Issue dated 8-8-2011

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))
Volume 10 : Part 6 (Issue dated : 08-08-2011)
SUBJECT INDEX TO CASES REPORTED IN THIS PART
Appeal to Appellate Tribunal --Powers of Tribunal--Power to restore appeal--Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)--Income-tax Act, 1961, s. 254--Income-tax (Appellate Tribunal) Rules, 1963, r. 24-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

Cash credits --Genuineness of gifts--Addition to income on ground that credits cannot be explained--Assessee failing to show creditworthiness and genuineness of donors and gifts--Additions justified--Income-tax Act, 1961, s. 68-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

Company --Book profits--Computation--Power of Assessing Officer to examine--Amount claimed as deduction in first year of assessment as net prior period charges/credits--Assessee not able to substantiate claim--Amount not deductible--Provision for terminal benefits of employees calculated on basis of actuarial valuation--Deductible--Income-tax Act, 1961, s. 115JB-- Eastern Power Distribution Company of A. P. Ltd. v. Asst. CIT (Visakhapatnam) . . . 594

Income --Diversion by overriding title--Retirement benefits payable to retiring partner for a period of five years in terms of partnership deed--Charge on profits of firm--Amounts diverted before receipt by firm--Cannot be included in total income of assessee--Income-tax Act, 1961-- RSM and Co. v. Addl. CIT (Mumbai) . . . 614

Interest on borrowed capital --Advancing to company as interest free loan where assessee is director--No proof that given for commercial expediency of his business--Not allowable--Income-tax Act, 1961, s. 36(1)(iii)-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

Penalty --Concealment of income--Claim for deduction of bad debt--Claim based on device to mislead Assessing Officer--Full facts regarding claim not furnished in return--Penalty leviable--Income-tax Act, 1961, s. 271(1)(c)-- Asst. CIT v. Kanchenjunga Advertising P. Ltd. (Delhi) . . . 649

Reassessment --Notice--Notice after four years on mere change of opinion--No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible--Income-tax Act, 1961, ss. 147, 148-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

Revision --Powers of Commissioner--Limitation--Issues considered by Assessing Officer--No evidence of error--Commissioner cannot revise order--Issues not subject-matter of reassessment--Order of revision to be reckoned from date of original assessment order--Barred by limitation--Income-tax Act, 1961, s. 263-- D. Arunachalam v. ITO (Chennai) . . . 625

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART
Income-tax Act, 1961 :

S. 36(1)(iii) -- Interest on borrowed capital--Advancing to company as interest free loan where assessee is director--No proof that given for commercial expediency of his business--Not allowable-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

S. 68 --Cash credits--Genuineness of gifts--Addition to income on ground that credits cannot be explained--Assessee failing to show creditworthiness and genuineness of donors and gifts--Additions justified-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

S. 115JB -- Company--Book profits--Computation--Power of Assessing Officer to examine--Amount claimed as deduction in first year of assessment as net prior period charges/credits--Assessee not able to substantiate claim--Amount not deductible--Provision for terminal benefits of employees calculated on basis of actuarial valuation--Deductible-- Eastern Power Distribution Company of A. P. Ltd. v. Asst. CIT (Visakhapatnam) . . . 594

S. 147 -- Reassessment--Notice--Notice after four years on mere change of opinion --No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

S. 148 -- Reassessment--Notice--Notice after four years on mere change of opinion --No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

S. 254 -- Appeal to Appellate Tribunal--Powers of Tribunal--Power to restore appeal --Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

S. 263 -- Revision--Powers of Commissioner--Limitation--Issues considered by Assessing Officer--No evidence of error--Commissioner cannot revise order--Issues not subject-matter of reassessment--Order of revision to be reckoned from date of original assessment order--Barred by limitation-- D. Arunachalam v. ITO (Chennai) . . . 625

S. 271(1)(c) -- Penalty--Concealment of income--Claim for deduction of bad debt--Claim based on device to mislead Assessing Officer--Full facts regarding claim not furnished in return--Penalty leviable-- Asst. CIT v. Kanchenjunga Advertising P. Ltd. (Delhi) . . . 649

Income-tax (Appellate Tribunal) Rules, 1963 :

R. 24 --Appeal to Appellate Tribunal--Powers of Tribunal--Power to restore appeal --Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

.......

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Dear Friends : The emails are schedule to be posted in the blog (itronline.blogspot.com)and will sent to the group on various dates and time fixed. Instead of sending it on one day.

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ITR (TRIB) Volume 10 : Part 6 (Issue dated : 08-08-2011)

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))

Volume 10 : Part 6 (Issue dated : 08-08-2011)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

Appeal to Appellate Tribunal --Powers of Tribunal--Power to restore appeal--Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)--Income-tax Act, 1961, s. 254--Income-tax (Appellate Tribunal) Rules, 1963, r. 24-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

Cash credits --Genuineness of gifts--Addition to income on ground that credits cannot be explained--Assessee failing to show creditworthiness and genuineness of donors and gifts--Additions justified--Income-tax Act, 1961, s. 68-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

Company --Book profits--Computation--Power of Assessing Officer to examine--Amount claimed as deduction in first year of assessment as net prior period charges/credits--Assessee not able to substantiate claim--Amount not deductible--Provision for terminal benefits of employees calculated on basis of actuarial valuation--Deductible--Income-tax Act, 1961, s. 115JB-- Eastern Power Distribution Company of A. P. Ltd. v. Asst. CIT (Visakhapatnam) . . . 594

Income --Diversion by overriding title--Retirement benefits payable to retiring partner for a period of five years in terms of partnership deed--Charge on profits of firm--Amounts diverted before receipt by firm--Cannot be included in total income of assessee--Income-tax Act, 1961-- RSM and Co. v. Addl. CIT (Mumbai) . . . 614

Interest on borrowed capital --Advancing to company as interest free loan where assessee is director--No proof that given for commercial expediency of his business--Not allowable--Income-tax Act, 1961, s. 36(1)(iii)-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

Penalty --Concealment of income--Claim for deduction of bad debt--Claim based on device to mislead Assessing Officer--Full facts regarding claim not furnished in return--Penalty leviable--Income-tax Act, 1961, s. 271(1)(c)-- Asst. CIT v. Kanchenjunga Advertising P. Ltd. (Delhi) . . . 649

Reassessment --Notice--Notice after four years on mere change of opinion--No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible--Income-tax Act, 1961, ss. 147, 148-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

Revision --Powers of Commissioner--Limitation--Issues considered by Assessing Officer--No evidence of error--Commissioner cannot revise order--Issues not subject-matter of reassessment--Order of revision to be reckoned from date of original assessment order--Barred by limitation--Income-tax Act, 1961, s. 263-- D. Arunachalam v. ITO (Chennai) . . . 625

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Income-tax Act, 1961 :

S. 36(1)(iii) -- Interest on borrowed capital--Advancing to company as interest free loan where assessee is director--No proof that given for commercial expediency of his business--Not allowable-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

S. 68 --Cash credits--Genuineness of gifts--Addition to income on ground that credits cannot be explained--Assessee failing to show creditworthiness and genuineness of donors and gifts--Additions justified-- Vivek N. Jajodia v. ITO (Mumbai) . . . 581

S. 115JB -- Company--Book profits--Computation--Power of Assessing Officer to examine--Amount claimed as deduction in first year of assessment as net prior period charges/credits--Assessee not able to substantiate claim--Amount not deductible--Provision for terminal benefits of employees calculated on basis of actuarial valuation--Deductible-- Eastern Power Distribution Company of A. P. Ltd. v. Asst. CIT (Visakhapatnam) . . . 594

S. 147 -- Reassessment--Notice--Notice after four years on mere change of opinion --No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

S. 148 -- Reassessment--Notice--Notice after four years on mere change of opinion --No failure to disclose material facts necessary for assessment--Reassessment proceedings after four years invalid--Failure to record reasons--Reassessment within four years not permissible-- GlaxoSmithKline Pharmaceuticals Ltd. v. ITO (Mumbai) . . . 631

S. 254 -- Appeal to Appellate Tribunal--Powers of Tribunal--Power to restore appeal --Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

S. 263 -- Revision--Powers of Commissioner--Limitation--Issues considered by Assessing Officer--No evidence of error--Commissioner cannot revise order--Issues not subject-matter of reassessment--Order of revision to be reckoned from date of original assessment order--Barred by limitation-- D. Arunachalam v. ITO (Chennai) . . . 625

S. 271(1)(c) -- Penalty--Concealment of income--Claim for deduction of bad debt--Claim based on device to mislead Assessing Officer--Full facts regarding claim not furnished in return--Penalty leviable-- Asst. CIT v. Kanchenjunga Advertising P. Ltd. (Delhi) . . . 649

Income-tax (Appellate Tribunal) Rules, 1963 :

R. 24 --Appeal to Appellate Tribunal--Powers of Tribunal--Power to restore appeal --Strike by lawyers and chartered accountants--Appeals dismissed for want of prosecution--Appeals not considered on merits--Tribunal has power to restore appeals under section 254(2)-- Nawal Kishore and Sons Jewellers v. Asst. CIT (Lucknow) . . . 659

Whether assessee is entitled to interest on deposit with Revenue from end

I-T - Whether assessee is entitled to interest on deposit with Revenue from end of 120 days from date of last of authorisations for search or from date when sum is transferred into AO's account from PD Account - after 120 days: HC

NEW DELHI, JULY 12, 2011: THE two issues before the Bench are - Whether the interest u/s 234A, 234B, 234C & 220(2) is rightly levied on the demand for various years when the department is having huge deposit on account of the assessee in PD account and the assessee repeatedly requested to adjust the said amount against the demand – Whether the assessee is entitled to interest on the deposit with the department u/s 132D from the end of 120 days from the date on which the last of the authorizations for search under Section 132 or requisition under Section 132A and not from the date when sum is transferred into AO's account from PD a/c. And the verdict goes in favour of the assessee.

Facts of the case

Assessee is a proprietor of `F', started in the year 1993 to trade in gold, silver and bullion – a search and seizure action was conducted whereby cash and silver were restrained initially but subsequently seized – ACIT, investigation circle passed order u/s 132(5) that the cash found during search as unexplained was retained and not released. Subsequently, vide another order u/s 132(5), various disputed additions were made and tax and penalty @200% was levied - the entire silver seized was retained and was not released.

The department disputed the status of the concern as it was an unregistered partnership firm and intended to tax it as firm. AO made assessment u/s 143(3) in the name of `F' after making additions on protective basis. In appeal before CIT (A), partly additions were deleted and partly confirmed. Before the protective assessment orders were passed in the case of `F', assessee approached the department to allow him to sell the seized silver after deposing the amount of equal value. As no heed was paid to this request, the assessee filed Writ Petition and the Court directed the department to release seized silver after depositing rotational deposits of Rs.50 lacs or equal amount of silver to be released. Accordingly the entire silver was released against total payment of Rs.4,20,50,000/- deposited by the petitioner from time to time on the sale of released silver.

After various orders / developments, against the deposit of Rs.4,70,36,500/- lying with the Department, liability of the assessee was ascertained to Rs.17,22,608/- and thus, he was entitled to refund of the balance amount along with interest.

Assessee approached the Settlement Commission u/s 245C to determine his income. The application was admitted. According to the assessee, the amount deposited with the department was much more than the tax liability and therefore, he had been making request for refund of the same and till it was refunded, to keep the same in the fixed deposit bearing interest. That was not done. The assessee was supposed to file the income tax return for the successive years. Assessee was required to pay the advance tax due and payable in respect of these income tax returns. Since he was facing cash flow problems in his business and there was sufficient surplus money lying with the Department which belonged to the petitioner, he made request for adjusting the advance tax payable out of the aforesaid amount lying with the Department. These requests of the assessee remained unattended. However, AO while passing the assessment order imposed interest u/s 234B, 234C and 220 of the Act for making deposit of advance tax.

The Settlement Commission finally disposed of settlement application and the income of the assessee was determined. After this order was passed, the assessee again requested for release of the amount as the final tax payable was only Rs.17.22 lacs - Assessee approached various authorities in this behalf including the ITO, CBDT, Commissioner of Income Tax, etc. However, no action was taken.

Insofar as interest payable to the assessee on the deposit, the department calculated the same w.e.f the date when the amount transferred into the account of PD account. Assessee contended that he was entitled to interest u/s 132B at least till the time order is passed by the Income Tax Settlement Commission. The claim of the assessee was that u/s 132B of the Act, he was entitled to interest after six months from the date of order passed under Section 132(5) of the Act on initial seized amount minus tax due/payable and on further deposits in P.D. Account from the date of such deposit.

The issues raised by the assessee were (i) Whether interest u/s 234A, 234B, 234C and 220 (2) of the Act could be charged when according to the assessee, sufficient amount of the assessee was lying deposited with the Department wherever advance tax could be adjusted? (ii) From which date the assessee is entitled to interest on the amount which became refundable after giving effect to the orders passed by the Income Tax Settlement Commission?

Assessee contended that no interest could be charged for non-payment of advance tax as there was sufficient amount already lying with the Department. Revenue contended that it was not permissible for the assessee to seek adjustment from the amount lying with the Department, which in fact belonged to `F' which was assessed as unregistered partnership and not as the sole proprietorship of the assessee. There was a dispute about the amounts seized and/or rotational payments either belonged to `F' or the assessee in his personal capacity which was settled u/s 245D(4) by the Income Tax Settlement Commission vide its order dated 07.07.2003. Hence, no amount was available for adjustment of the demands raised in the case of assessee upto 07.07.2003.

After hearing both the parties, the High Court held that,

++ no doubt, `F' was assessed as unregistered partnership. However, the assessee was clamouring that it was his sole proprietorship concern and had submitted proofs in respect thereof. If the plea of the assessee was not accepted erroneously by the Department, it cannot take advantage of its own wrong. Ultimately, the assessee was vindicated when the Settlement Commission accepted that he was the sole proprietor of `F'. The arguments of the department that it is only on 07.07.2003 when the Settlement Commission passed the orders u/s 245D(4) of the Act that the amount became available to the petitioner, is without any substance. The request of the assessee to adjust the advance tax from the amount lying deposited with the Department in the accounts of `F' was justified, which was unnecessarily turned down by the Department. Therefore, the revenue would not be justified in levying interest, as the amount of advance tax payable by the assessee for these assessment years could be adjusted from the amount lying with the Department in the assessee's own account;

++ insofar as the assessee's entitlement to interest on the amount which became refundable after giving effect to the orders passed by the Settlement Commission, it cannot be disputed that the assessee is entitled to interest on such an amount u/s 132D(4) of the Act. This provision clearly mandates the Central Government to pay simple interest @ 1 ½ % for every month on amount by which the credit money seized under Section 132, etc. of the Act. Clause (b) sub-Section (4) of Section 132B of the Act stipulates that such interest shall run from the date immediately following the expiry of the period of 120 days from the date on which the last of the authorizations for search under Section 132 or requisition under Section 132A was executed to the date of completion of the assessment. In accordance with this provision, from the date of search and seizure of the gold, 120 days would be calculated and from the expiry of this period, the interest shall become payable. In the present case, even after giving effect to the orders of the Settlement Commission, the excess amount was not refunded to the petitioner. The assessee has demanded interest u/s 132A of the Act and would be entitled to interest u/s 244A of the Act from the date of amount transferred into the account of AO from PD account after adjusting the tax due/payable.

Whether when assessee, a charitable body, has already claimed ded

Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets by application of money, a further claim of depreciation on same assets would amount to double benefits - YES, rules ITAT

THE issue before the Tribunal is - Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets as application of money, the further claim of depreciation on the same assets would amount to double benefits. And the verdict goes against the assessee.

Facts of the case

Assessee is a charitable trust registered u/s 12A of the Act. In the return of income filed, it claimed depreciation on the assets, the cost of which were already claimed as application of money u/s 11(1). AO disallowed the depreciation claimed u/s 32 stating that the cost of asset/s having been allowed, its WDV was nil, so that there was no amount available on which depreciation could be claimed. The same would even otherwise amount to a double deduction, prohibited by law.

In appeal before ITAT, the assessee contended that the decision in the case of Escorts Ltd. & Othrs was not applicable as was held in the case of CIT vs. Marketing Committee, Pipli, 330 ITR 16 (P&H) and CIT v. Tiny Tots Education Society (2010-TIOL-550-HC-P&H-IT) which provided that there was no double deduction. Further, the law stood amended w.e.f. 1.4.1989 by co-option of clause (d) to s. 11(1) of the Act, so that there was no requirement in law for applying the said income, i.e., as covered by s. 11(1)(d), for claiming exemption in this respect. In view of the decision of the Lissie Medical Institutions, where the amount was voluntarily received with a direction that the same shall form part of the corpus, the assessee would stand to be allowed depreciation on the capital asset/s acquired out of the said funds. However, in case of no specific directions, it would not be though in both the cases, the amount was applied or utilised in the similar manner. A mere direction by the donor would alter the donee's assessable income, even as the same stood utilized by the donor in the same manner, and which was not comprehensible and, in any case, could not be the intent of law. In reply to the query raised by the Bench, that why could not the assessee take a specific direction from the donor(s) where it proposed to acquire capital asset(s) there-from, the assessee contended that it might not be practical always and secondly, the corpus was not for acquiring capital assets alone, and may well be maintained in the form of liquid assets. The two claims were different - the depreciation was a charge against the profits `an above-the-line item' and the acquisition of capital asset(s) was an application of income, determined thus, `a below-the-line item'.

Revenue relied on the decision of Lissie Medical Institutions and contended that the assessee could not point out any infirmity in the said order, so that there was no ground or occasion for the Tribunal to review or re-visit the said order.

After hearing both the parties, the ITAT held that,

++ the argument that the allowance of depreciation and deduction qua the application of income (on the assets on which the same is claimed), does not amount to or result in a double deduction is not acceptable. If the capital asset/s is a part of the asset base of the charitable trust, used for its purposes, it only forms a part of the capital structure or the apparatus of the entity, and only on the strength of which the claim qua depreciation is maintainable, i.e., as a charge against profits/income thereof. Could the same expenditure be considered as being toward `income' and, at the same time, an application of it, or, to put it in the same graphical manner, could an expenditure be considered as both above and below the line, and simultaneously at that. The two are mutually exclusive. While an expenditure is necessarily incurred for the purposes of income, i.e., as a part of the income generating process, directly or indirectly, the other is an application of the income so generated, and has nothing to do with either income generation or the maintenance of the capital structure or the income generating apparatus;

++ even where the income arises only out of voluntary contributions, recognising the need to maintain corpus, as in the case of any business activity, the law provides therefor, so that the trust/institution is not required to apply the same to claim its exemption from tax u/ss. 11 & 12. That is, the very fact that the said contribution is toward capital or corpus, is by itself sufficient to accord it exclusion, and is, thus, not liable for, or is free from the requirement of, it's application toward the object/s of the trust. Income of a charitable trust, it may be noted, is not per se exempt from tax, but only on its application toward its objects. The same, thus, is only in the nature of a deduction, i.e., required to a allowed for computing income subject to tax under the Act, which also finds support from the insertion of s. 11(1)(d). It is, as such, not a question of a mere direction, but of classifying the receipt of the trust into two distinct categories, i.e., `regular' and `toward capital'. The difference, i.e., depreciation being allowable in one case and not in the other, amount as it does to a double deduction, arises out of the very nature of the source of funding. The same rather than being prejudicial to a charitable trust, is beneficial thereto, inasmuch as the law `recognises' capital receipt as the principal source of funding of a charitable trust/institution not engaged in any business, i.e., voluntary contributions, or its need to maintain capital. In any normal case, While a capital asset acquired for and put to use for business purposes would entitle it to a claim for depreciation, i.e., whatever be the source of funding, and whether the same is acquired from `income' or from 'capital', it is only the `income' which is, where otherwise not exempt, liable to tax. Would that in any manner be considered as prejudicial or leading to a dichotomy with reference to the source of funding, as sought to be made out in respect of a charitable trust?

++ the income that is exempt is only that computed applying the normal principles of commercial accounting, i.e., net of expenses, which would thus stand to be deducted, even where the income of the trust is not from business, determined by applying the provisions of Chapter IV-D (refer s. 11 (4A)), and which expenses would include a charge toward depreciation on capital assets deployed or maintained by the trust as well. The differential treatment qua depreciation is only due to the difference in law attending the two scenarios, which rather seeks to bring the same (law) at par with that qua any other entity acquiring and using a capital asset for its purposes. No infirmity, thus, inflicts the tribunal's order qua the differential treatment of the claim for depreciation, i.e., w.r.t. the application or otherwise of the provision of s. 11(1)(d). The assessee's argument or contention for a uniform treatment (qua depreciation) seeks to eliminate the difference that the law itself specifically provides for, i.e., is contrary to the express provisions of law. The user of an asset for the intended purpose/s, a pre-requisite for a claim of depreciation in its respect, is also necessary to validate the claim (in respect of the capital expenditure) qua the application of income, as no charitable purpose would stand to be served where the capital asset acquired thus, and retained, is not used for the objects of the trust;

++ while the claim for depreciation arises following the accrual basis of accounting for determining `income', the cash method is applied for reckoning its application. Accordingly, the two claims amount to a double deduction is purely factual. The assessee/s has not been able to show, any infirmity in the said findings by the tribunal, which is affirmed;

++ without prejudice to the foregoing, both the assessee-trusts are not undertaking any business activity. As such, the claim of depreciation would be, if at all, exigible only with reference to the normative rate(s) of depreciation, i.e., as determined with reference to the useful lives of the relevant asset(s) under its given state of user. In fact, even if business activity was being undertaken, the claim for depreciation u/s. 32(1) would obtain only in respect of business asset(s). The assessee has, however, claimed depreciation in terms of the rate(s) prescribed under the Act and, as such, is not maintainable at the claimed amount/s;

++ no Legislation would have intended a double deduction in respect of the same business outgoing, and it was impossible to conceive otherwise, i.e., unless clearly so expressed. In other words, the intention of non double deduction is the given status, and is to be presumed, unless there is an express provision to the contrary in a particular case, and which was not so in the case(s) before it. The assessee's contention is, thus, not valid. Thus, the findings given in the case of Lissie Medical Institutions are endorsed.

Revenue's appeal allowed.

Some case laws

2011-TIOL-313-ITAT-MUM

Trigyn Technologies Ltd Vs DCIT, Mumbai (Dated: January 28, 2011)

Income tax – Section 36(1)(iii) – Whether when the survival of the subsidiary is vital for the assessee's business, AO can even then disallow the interest paid on borrowed funds advanced to the subsidiary on interest-free basis - Assessee's appeal allowed: MUMBAI ITAT;

2011-TIOL-312-ITAT-MUM

Mrs Nandita Khosla Vs ITO, Mumbai (Dated: May 13, 2011)

Income tax – Sections 50C, 154 – Whether where the assessee objects to stamp duty valuation, the AO is required to call for the report of DVO, and even if the valuation report is received after the assessment, the value determined may be rectified u/s 154 of the Act – Whether the value adopted by DVO is to be considered as correct as the valuation done by approved valuer is based on carpet area instead of super built up area - Assessee's appeal partly allowed: MUMBAI ITAT;

Chargeability of gifts made to HUF u/s 56 of I.T Act 1961

Chargeability of gifts made to HUF u/s 56 of I.T Act 1961

GAURAV PAHUJA
CA

In this article the author has made an attempt to distinguish between the exemption benefits granted to Individual or HUF on gift received by them, although both of them are covered by the Act under the same section i.e. 56(2)(vii), leaving other categories of assessees e.g AOP and BOI which are not covered altogether under this section.

The present section 56(2) after insertion of clause (vii) by the Finance (No. 2) Act 2009, Which is effective from October 1, 2009 and provides for the taxability of a sum of money or Property either movable or immovable, received without consideration by an "Individual or HUF" under the said section, in case it exceeds the monetary limit of Rs.50,000 during the previous year.

Thus the provisions of existing section 56(2)(vii) are attracted once the following conditions are satisfied:

(i) Sum of money or property (movable or immovable) is received on or after 1.10.2009 by an Individual or HUF either without or insufficient consideration.

(ii) Such sum of money or property is not exempted under the said section.

Now from the above mentioned, it is understood that certain exemptions are provided by the section for providing the relief where the nature and intention of the gift given is such that it satisfies the exemption criteria laid down for this purpose. Amongst the various exemptions, the very first exemption is being given in case the sum of money or property is received from any relative.

This exemption criterion made it necessary to define the meaning of the term "Relative" expressly to avoid litigation and undesired exemptions. Further even under the new clause (vii), the meaning of the term "Relative" was kept unchanged as it was understood under the existing explanation to clause (vi) of sub-section (2) of section 56 which is reproduced below:

(a) Spouse of the individual

(b) Brother or sister of the individual

(c) Brother or sister of the spouse of the individual

(d) Brother or sister of either of the parents of the individual

(e) Any lineal ascendant or descendant of the individual

(f) Any lineal ascendant or descendant of the spouse of the individual

(g) Spouse of the person referred to in clauses (ii) to (vi).

Thus the above mentioned persons are deemed to be the relatives of an Individual and hence are allowed to give any sum of money or property without consideration to the individual who is considered to be his/her relative without attracting the taxability in the hands of the recipient. These provisions cover the relatives of an individual only and not that of HUF, which is self explanatory from the way the relation is established between persons (who are considered to be relative) and an Individual.

An individual, being a natural person can reasonably be assumed to have same relatives with whom his/ her relation is established merely by birth and blood relation. But the position is not made crystal clear in the case of HUF by section 56(2), which gives the rise to the below mentioned questions:

i. Whether HUF can have relatives?

ii. Whether the relatives of an Individual (who are defined in the explanation) can be assumed to be the relatives of HUF also which is formed by such Individual (in the capacity of Karta) or not? Or if we say in other way, can the relatives of Karta be assumed to be the relatives of HUF too for the purpose of claiming exemption?

As these questions challenge the benefit of exemption granted by section 56 with respect to gifts made to HUF in the absence of necessary explanation or coverage of HUF while defining relatives of an Individual but at the same time providing for the chargeability of both "Individual" as well as "HUF'' in the same section, it calls for the interpretation of the basic intention of the section.

No doubt, The basic intention of the clause (vii) of section 56(2) is to expressly cover the "Individual" and "HUF" (and covering companies and firms in other clauses) and brought them under tax net, however while granting exemptions on gifts received from the relatives, the benefit seems to be restricted to individuals only due to the following reasons:

** ** **

(ii) The relatives of Karta cannot be assumed to be the relatives of HUF, until and unless the HUF is assumed to be as Karta's Individual ignoring the separate capacity of HUF from the Karta but which cannot be done due to the independent recognition of HUF as a person under 2(31) (ii) and thus treating HUF as an independent assessee. And when an "Assessee" is recognized independently, its relatives should also have a relation with it directly and not through the Individual or person who formed it e.g. Karta of HUF. Another example in this regard is that where a company is formed by an Individual promoter, the relatives of such Individual cannot be said to be the relatives of the company after incorporation.

** ** **

The assessee received a gift of Rs.60 lakhs from HUF of which he was a member. The AO & CIT(A) held that as HUF was not covered by the definition of "relative", the gift was chargeable to tax u/s 56(2)(v). Further the alternate submission of the assessee that gift was exempt u/s 10(2) was rejected on the basis that sec. 10(2) could be applied only to amounts received "out of income of the estate" on partial or total partition of the HUF.

The conclusion of Hon'ble Rajkot bench of ITAT in the above said case is reproduced below:

** ** **

The above judgment seeks to provide the relief to the assessee from the tax liability that would have been imposed if the case was decided on the basis of the literal meaning of the section and its explanation being reasonably interpreted keeping in view the fact of HUF being an artificial person (which is managed and controlled by its karta & other coparceners) instead of a natural one and that it is considered as a separate and independent assessee under the Income Tax Act, 1961 by recognizing it as "Person " under section 2(31) of the Act.

** ** **

Keeping in view the above, the aforementioned judgment of ITAT cannot be given regarded as conclusive and the literal meaning of the section and other facts mentioned above cannot be ignored. Thus in order to avoid undesired litigations it shall be in the interests of the assessee if one can avoid taking the gifts directly in HUF and should prefer to route it through the account of individual donor into the account of another individual i.e. donee, who shall be the relative of the former and then transfer the amount to the account of HUF, if required from the account of such individual.