ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS ISSUE DATED 22-3-2010 Volume 2 : Part 3

ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS

ISSUE DATED 22-3-2010 Volume 2 : Part 3

REPORTS	STATUTES	JOURNAL	NEWS BRIEFS

REPORTS

F In absence of vouchers AO justified in estimating 10 per cent. of total expenditure as not relatable to business : Addi Industries Ltd. v. ITO (Delhi) p. 236

F Interest on fixed deposits not business income : Addi Industries Ltd. v. ITO (Delhi) p. 236

F Deduction for export not allowable prior to adjustment of brought forward losses : Addi Industries Ltd. v. ITO (Delhi) p. 236

F Addition of 5 per cent. for sum normally said to be spent for sham transactions, proper : Dy. CIT v. Pawan Kumar Malhotra (Delhi) p. 250

F Commissioner (Appeals) restricting disallowance of expenses incurred on telephone and vehicle on estimate justified : Dy. CIT v. Pawan Kumar Malhotra (Delhi) p. 250

F Where assessee claiming deduction wrongly under bona fide belief based on advice of tax consultant, penalty to be deleted : Yogesh R. Desai v. Asst. CIT (Mumbai) p. 267

F Documents relating to undisclosed sales found during search : Expln. 1 u/s. 271(1)(c) applicable : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Where assessee provided adequate opportunity to rebut charge in search cases, penalty valid : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Penalty leviable on difference between income declared in return filed u/s. 153A and that in original return : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Assessment or reassessment relating to year falling in six year period prior to search abates : Original return filed does not abate : Dy. CIT v. K.Natarajan (Bangalore) p. 273

F Surplus earned on sale of investments is capital gains : Paresh D. Shah v. Joint CIT (Mumbai) p. 311

F Deduction u/s 80HHC cannot be granted to non-residents : Mustaq Ahmed v. Asst. DIT (Chennai) p. 315

F Deduction u/s 80HHC to domestic companies and residents not affected by non-discrimination clause of para (4)(a) under art. 26 of DTAA (Singapore) : Mustaq Ahmed v. Asst. DIT (Chennai) p. 315

F Plant kept ready for use but not actually used due to lack of raw material : Entitled to depreciation : Asst. CIT v. Chennai Petroleum Corporation (Chennai) p. 325

NEWS-BRIEFS

F Long-term capital gains remain still a hard nut to crack

The Government is likely to maintain the distinction between short-term and long-term capital gains to encourage long-term savings, as it deliberates the Draft Direct Taxes Code.

The Finance Minister said in his Budget speech that the new direct taxes law could be rolled out from April 1, 2011.

Long-term capital gains are taxed at concessional rates while short-term gains are taxed at the marginal rate of the taxpayer and could be as high as 30 per cent. for those in the highest slab.

The tax treatment of shares is different from other assets. Currently, any stock market asset held for more 12 months is considered long-term capital assets but for all other assets have to be held for more than 36 months to be considered a long-term asset. Moreover, shares held for the long-term attract only the securities transactions tax while others assets are levied a long-term capital gains tax of 10 per cent.

The Draft Direct Taxes Code has proposed to tax capital assets irrespective of the period of holding. The entire capital gains of the assessee is proposed to be added to his income and taxed at the marginal rate.

The Finance Minister has asked the CBDT to rework the Draft Code based on the feedback received from stakeholders before it is introduced in the Monsoon Session, as different factors including market conditions, requirement of funds, future expected realisations have an impact on financial decision.

However, in case of stock market transactions, concessional rate of tax has been in place for some time now and long-term gains could be completely tax free except for small amount on securities transaction tax (STT). Even industry chambers have advocated continuing the existing regime for taxation of capital gains. [Source : www.economictimes.com dated March 10, 2010]

F Government clears cloud over NGO tax breaks

The Income-tax Department has got the power to cancel any charitable organisation's registration that accords it the benefit of tax exemption, if the organisation is found to violate the norms for registration, according to Budget 2010-11. By this move, the Government has made its intent to prevail over a series of court judgments, which held that the Income-tax Department did not have the right to cancel registration of organisations with it.

However, the Budget proposal has said, "The power of cancellation of registration is inherent and flows from the authority of granting exemption".

Many organisations that are registered under the section of the income-tax law have had a tiff with the Department that sought to cancel their registration on alleged violations of the rules.

Such organisations have to maintain books of account for any commercial activity undertaken by them and if they fail to do so, the taxman enjoys the authority to question the concerned entity on the issue. The Budget proposal now gives the taxman the additional power to cancel the registration.

There were instances where the exemptions were being misused by the organisations, official sources said, adding that the object of the organisation stated in the registration was often changed without any knowledge of the Tax Department.

The Budget proposal has pointed out that judicial rulings in some cases have held that Commissioner does not have the power to cancel the registration obtained by a trust or institution as it is not specifically mentioned in section 12AA.

"It is therefore, proposed to amend section 12AA so as to provide that the Commissioner can also cancel the registration obtained under section 12AA", the Finance Bill, 2010-11 has said.

Charitable organisations would, however, be given a chance to be heard by the tax Commissioner before he decides to cancel the registration. [Source : www.financialexpress.com dated March 8, 2010]

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Bom HC decison in favour of Revenue

Netting of Interest receipt not allowed for Calculating deduction u/s. 80HHC: Bombay HC

CIT vs. Asian Star Co Ltd (Bombay High Court), ITA No. 200 OF 2009, Judgment Delivered on : 19^th March 2010

Explanation (baa) to s. 80HHC provides that 90% of interest, rent etc has to be reduced from the "Profits & gains" for purposes of s. 80HHC. In Lalsons Enterprises 89 ITD 25, the Special Bench of the Tribunal held that in computing the said interest, rent etc, the assessee was permitted to net off the interest receipt against the interest expenditure (having a nexus with the receipt) and only the balance could be reduced. This view was affirmed by the DelhiHigh Court in Shri Ram Honda Power Equipment 289 ITR 475 (Delhi).

In an oral judgement delivered today (19th March 2010) in CIT vs. Asian Star Co Ltd ITA No. 200 OF 2009 and other cases, the Bombay High Court has dissented from the judgement of the Delhi High Court and held that the language of Expl. (baa) to s. 80HHC did not permit such netting off. It held that the Special Bench had traversed the limits of interpretation and virtually legislated in giving the deduction. It held that merely because s. 80HHC was an incentive provision was no ground for giving more deduction that what the statute permitted. It held that for purposes of Expl. (baa) to s. 80HHC, 90% of gross interest has to be reduced from business profits.

Decisions in favour of Rvenue

1.Is the capital gains on distribution of assets (among the partners, on dissolution of the firm) on which depreciation had been claimed, assessable u/s 45(4) or u/s 50(1)?
2.Does the sale of an asset on which depreciation had been claimed for 21 years, but not for the latest 2 years, give rise to short term capital gains?

ITAT decisions in favour of Revenue- 2 nos.

Dear Comrade,
Attaching 2 recent decisions in favour of Revenue. Hope you find them useful.
R.Rajagopalan
Kerala

Edifice of assessment cannot be created on foundation of a time-barred notice issued u/s 143(2)

Edifice of assessment cannot be created on foundation of a time-barred notice issued u/s 143(2)

The service of notice within a period of twelve months from the end of month in which return is filed is sine qua non for proceeding with the block assessment; if an assessment, in contravention of the provisions of proviso to section 143(2), is made, the same will be a nullity and not an irregular assessment.

ITAT, MUMBAI BENCHES 'B', MUMBAI

DCIT v.  National Refinery Pvt. Ltd.

IT(SS) A. No. 347/Mum/2003

March 5, 2010

RELEVANT EXTRACTS:

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5. Section 158BC(b) provides that where any search has been conducted u/s.132 or books of account, other documents or assets are requisitioned under section 132A, in the case of any person, then the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be, apply. One of the important questions raised in this appeal is whether the proviso to section 143(2) applies to the block assessment also. In other words is it incumbent upon the AO to issue notice u/s 143(2) within the prescribed period of twelve months from the end of the month in which the block return is filed?

8. As against the above view in favour of the assessee that the issuance of notice within the time prescribed under proviso to section 143(2) is a mandatory requirement for framing of block assessment, a contrary view also came to be

expressed by some judicial forums. The stand of the Revenue remained that the proviso to section 143(2) did not apply to the block assessment proceedings inasmuch as clause (b) of section 158BC included the words "so far as may be" in the context of applicability of section 143(2) and hence even if no notice was issued within twelve months from the end of the month in which the return was furnished, the assessment proceedings could validly go on. Eventually this issue has been recently set to rest by the Hon'ble Apex court in the case of ACIT Vs. Hotel Bluemoon [2010-TIOL-08-SC-IT]. The facts of the case are that search action was taken against that assessee u/s.132 of the Act. Whereas the assessee argued that issuance of notice u/s.143(2) of the Act within the prescribed time for the purpose of block assessment was mandatory for the assessing authority, the department took a view that the notice u/s.143(2) was not an essential requirement in the block assessment. The Tribunal affirmed the decision of the CIT(A) that non-issuance of notice u/s.143(2) was only a procedural irregularity and the same was curable. The Hon'ble Gauhati High Court did not concur with the view expressed by the Tribunal that the issuance of notice u/s.143(2) within the prescribed time limit was not an essential requirement for the purposes of making block assessment. The Revenue took up the matter before the Hon'ble Supreme Court. Vide judgment dated 2.2.2010, the Hon'ble Apex Court has held that if an assessment is to be completed u/s.143(3) r.w.s. 158BC, notice u/s.143(2) should be issued within one year from the end of the month in which block return is filed. It has further been held that the omission on the part of the assessing authority to issue notice u/s.143(2) cannot be a procedural irregularity and the same is not curable. With the advent of this judgment from the Hon'ble Summit Court, now it becomes unambiguous that the provisions of section 143(2) are applicable to the block assessment. Since issuance of notice u/s 143(2) is an essential requirement for making block assessment, such notice has necessarily to be issued with the time prescribed under proviso to section 143(2). Thus the service of notice within a period of twelve months from the end of month in which return is filed is sine qua non for proceeding with the block assessment. If no notice is issued u/s.143(2) within the prescribed period, the Assessing Officer will have to accept the returned income and he cannot be allowed to go ahead with the assessment. If an assessment, in contravention of the provisions of proviso to section 143(2), is made, the same will be a nullity and not an irregular assessment.

9. Adverting to the facts of the instant case it is found as an undisputed fact that the assessee filed its return for the block period on 15.5.2000. Going by the mandate of proviso to section 143(2), notice u/s.143(2) could have been validly issued on or before 31.5.2001. If the Revenue's contention is accepted that notice u/s.143(2) issued on 16.5.2000 was served upon the assessee through registered post, then of course such notice will be in time and no infirmity can be found in the block assessment order on this count. If however the view point of the assessee is accepted that the notice u/s.143(2) was issued for the first time on 24.12.2001, then such a notice would be time barred. Now we need to examine if any notice u/s.143(2) dated 16.5.2000 was issued and served on the assessee. The Revenue's  view point is that notice u/s.143(2) dated 16.5.2000 was issued and served on the assessee by registered post acknowledgement due. In support of this claim the Revenue has placed on record a copy of Postal Department acknowledgement at pages 6 and 7 of the paper book. On the perusal of these two pages it is found that the name of the assessee is mentioned against Sl.no.A-715. On the right side of this

page there is stamp impression of the Department of Posts which bears the date of 22.5.2000. The learned Departmental Representative canvassed the view that since the notice u/s.143(2) dated 16.5.2000 was sent through registered post, it may be deemed to be proper service. He relied on the following cases to bolster his submission that service of notice through Registered Post A.D. which was not received back unserved, raised the presumption of the service of notice on the assessee :-

(i) CIT Vs. Vins Overseas India Ltd. [(2008) 305 ITR 320 (Del.)]

(ii) CIT Vs. Yamu Industries Ltd. [(2008) 306 ITR 309 (Del.)]

(iii) CIT Vs. Madhsy Films P.Ltd. [(2008) 301 ITR 69 (Del.)]

(iv) CIT Vs. Shanker Lal Ved Prakash [(2008) 300 ITR 243 (Del.)]

 

14. Certain salient features of this case need to be taken note of –

(i). Block return was filed on 15.5.2000. According to section 143(2) at the relevant time : `Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return'. Ordinarily it is only on the perusal of the return of income filed by the assessee that the Assessing Officer requires the attendance or production of some evidence in support of the assessee's claim. The filing of return on a Receipt counter on one day and the issuance of notice u/s.143(2) on the very next day would mean that all the steps from the receipt of return on the Receipt counter till the issuance of notice got completed within one day's time. Such steps would include the receipt of return on the Receipt counter of the department; the Receipt clerk, after entering the necessary particulars in the relevant register, handing over the same to the office of the concerned Assessing Officer; the office of the AO receiving it from the receipt clerk; placing of such return before the AO; the AO pursuing the return and all the accompanying documents; jotting down the points on which the explanation of the assessee is required ; finalizing such points and accordingly sending the notice. It is vital to note that it is a case of block assessment and the return was filed pursuant to the search action. It is but natural that before issuance of notice u/s.143(2) the Assessing Officer will take note of Appraisal Report of search and other relevant documents vis-à-vis the particulars disclosed in the return. It is difficult, if not impossible, to issue notice u/s.143(2) on the very next

day of the filing of the block return.

(ii). The Revenue has made out a case that the notice dated 16.5.2000 was issued u/s.143(2). The copy of said notice is available at page 4 of the paper book. No doubt such notice is shown as dated 16.5.2000, but against Column No.1 giving the date on which the return for the block period was filed, it has been mentioned as 15.11.2000. It is axiomatic that notice u/s.143(2) can be issued only when the return has already been filed. It is an admitted position that the assessee filed the block return on 15.5.2000. As against that the said notice dated 16.5.2000 mentions the date of return as 15.11.2000. Moreover the notice containing reference to return filed on 15.11.2000 can be issued only after such date and not prior to that. Hence it is impossible for the said notice dated 16.5.2000 to have reference to the return filed on 15.11.2000, which is a later date.

(iii). Even if we go ahead with the presumption that the notice, as contended by the Revenue, was actually issued on 16.5.2000 then it would have contained some requirements of the Assessing Officer supposed to be furnished in support of certain claims made by the assessee. Along with the said notice u/s.143(2) dated  16.5.2000, copy of which is available in the Departmental Paper Book, there is no reference for the production of any accounts / document or any particular information. Except for mentioning the date on which the attendance is required on 6.6.2000, it is silent on the documents or evidence required from the assessee in support of the claims made in the block return. On the contrary we find that the

notices dated 20.12.2001 issued on 24.12.2001, copy placed at pages 1 to 3 of the paper book, has a questionnaire requiring the assessee to tender explanation on various documents found at the time of search. This questionnaire is running into two pages.

(iv). According to the department it issued second notice u/s.143(2) on 24.12.2001 whereas according to the assessee that was only the first and the only notice. It is not understandable as to how the swiftness shown by the Assessing Officer in issuing notice u/s.143(2) on the very next day from the filing of the return on 16.5.2000 came to halt all of a sudden and it was only after a time gap of more than one and half years that the so called second notice was issued on 24.12.2001, against which the assessment was completed on 31.1.2002. If the Assessing Officer had been genuinely so fast in examining the return of the assessee and issuing notice u/s.143(2) on the next day, then he would have taken some action against the assessee for non-compliance and not kept quiet for such a long period in issuing the second notice requiring compliance by the assessee just a week ahead of the limitation period for the completion of block assessment.

(v). There is no reference, in the assessment order, to the said alleged notice dated 16.5.2000 issued u/s.143(2). Further when the assessee was called upon to be present on 6.6.2000, there should have been some reference, at least to the non- attendance of the assessee, in the assessment order.  (vi). Order sheet is a record of proceedings, which is placed in the beginning of the file recording various dates on which the proceedings for assessment continued along with the requirements called for by the Assessing Officer from

time to time during the course of assessment. It is obligatory on the part of the Assessing Officer to mention the gist of proceedings in the Order sheet starting with the date of filing of the return up to the finalization of the assessment. Wherever some details are called for or case is adjourned to next date, the signature of the assessee or its representative is taken. This Order sheet also contains reference of all the notices issued from time to time by the A.O. In order to conclusively resolve the controversy about the issuance of the said notice u/s 143(2) on 16.5.2000, the Bench directed the learned Departmental Representative to produce the assessment record. Such record was produced before the Bench. Albeit the order sheet is there but the learned Departmental Representative could not point out any entry in the Order sheet of the A.O. for the issuance of the alleged notice on 16.5.2000. 15. The above discussed points in the foregoing para do go to show that no notice u/s.143(2) , as claimed by the Revenue authorities, was issued on 16.5.2000. Only the notice dated 20.12.2001 was served on the assessee on 24.12.2001. As the block return was filed on 15.5.2000 and according to the Hon'ble Supreme Court in Hotel Bluemoon (supra) the provisions of section 143(2) are attracted in the block assessment, it was mandatory for the AO to serve notice on the assessee on or before 31.05.2001. Since the only notice dated 20.12.2001 issued by the A.O. u/s.143(2) was served upon the assessee on 24.12.2001, the same became time barred. It is simple and plain that the edifice of the assessment cannot be created on the foundation of a time barred notice issued u/s.143(2). The resultant proceedings flowing out of such invalid notice cannot have legal legs to stand on. We, therefore, hold that the consequential block assessment order passed in this case deserves to be and is hereby quashed. In view of our decision on this legal ground raised by the assessee in its Cross objection, there is no need to dispose off the departmental appeal on merits.

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INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 15-3-2010 Volume 321 : Part 4

INCOME TAX REPORTS (ITR) HIGHLIGHTS

ISSUE DATED 15-3-2010

Volume 321 : Part 4

 

 

HIGH COURT JUDGMENTS

>> No necessity for assessee to show precise identity of amount of written back to be relating to any particular year : CIT v. Hindustan Zinc Ltd. (Raj) p. 388

>> Matter remanded to Tribunal where lack of details in respect of agreement entered into by assessee and foreign collaborator : CIT v. Elgi Ultra Industries Ltd. (Mad) p. 390

>> Prima facie adjustments : Assessee does not have right to claim that uninformed about judgment : Marlborough Polychem Ltd. v. CIT (Raj) p. 395

>> In a case of rejection of accounts and estimation of net profit on best judgment basis, depreciation allowable : Shri Ram Jhanwar Lal v. ITO (Raj) p. 400

>> Liability for additional tax u/s 143(1B) not abrogated even in the case of revised return filed with audit report : CIT v. Kothari Impex (Raj) p. 404

>> S 35E not applicable where objects of assessee not including mining of ores or minerals or commercial production : CIT v. Acc Rio Tinto Exploration Ltd. (Delhi) p. 426

>> Tribunal finding reassessment on mere change of opinion and without jurisdiction : Finding of fact : CIT v. Goetze (India) Ltd. (Delhi) p. 431

>> Revision u/s 263 not proper where Tribunal finding loan liability never claimed or allowed as deduction by way of loss, expenditure or trading liability : CIT v. Goyal M G Gases Ltd. (Delhi) p. 437

>> Tribunal finding borrowed funds diverted to sister concern without commercial expediency for business exigencies : Finding of fact : Gautam Cable Industries v. Dy. CIT (Delhi) p. 440

>> Disallowance of deduction u/s 80HHC to be worked out on basis of adjusted book profit : CIT v. Ambika Cotton Mills Ltd. (Mad) p. 448

>> Sales commission to directors for purpose of securing orders as well for personal guarantee given by them revenue expenditure : CIT v. Premier Poly Sacks P. Ltd. (Mad) p. 450

>> Interest paid on borrowings allowable where no proof that borrowed amount diverted to investment : CIT v. Premier Poly Sacks P. Ltd. (Mad) p. 450

>> Payment made for title sponsorship and benefits in respect of cricket tournament : Payment does not amount to royalty : Director of Income-tax v. Sahara India Financial Corporation Ltd. (Delhi) p. 459

>> Undertaking entitled to deduction u/s 80-I to be treated as an independent unit : CIT v. Sona Koyo Steering Systems Ltd. (Delhi) p. 463

>> Tribunal finding amount available with assessee as undisclosed income : Finding of fact : Such Chain Chits P. Ltd. v. CIT (P&H) p. 471

>> Reassessment to withdraw deduction not a case of escapement of income but of change of opinion : CIT v. K. K. Palanisamy (Mad) p. 474

>> Tribunal need not blindly follow earlier decision if it did not reflect correct position of law : CIT v. Hi Tech Arai Ltd. (Mad) p. 477

>> Assessee engaged in manufacture of oil seeds, etc., setting up additional wind mill after 31-3-2002 increasing power generation entitled to additional depreciation : CIT v. Hi Tech Arai Ltd. (Mad) p. 477

>> Assessee engaged in production of agricultural motors and pump sets installed new wind mills entitled to additional depreciation : CIT v. Texmo Precision Castings (Mad) p. 481

>> AO having jurisdiction over person searched adding sum on substantive basis in his assessment on account of investment and no satisfaction recorded in case of assessee on investment : Assessment against assessee not justified : CIT v. Anupam Sweets (Delhi) p. 485

>> Service charges paid to mutual funds for undertaking to subscribed to fully convertible debentures of sister concern allowable : CIT v. RBG Investment and Finance Ltd. (Delhi) p. 488

>> Application for stay pending appeal : CIT (A) to pass order on application expeditiously : Smita Agrawal (Individual) v. CIT (All) p. 491

>> Approval of concerned authority before service of notice required : CIT v. Smt. Suman Waman Chaudhary (Bom) p. 495

>> Penalty cannot be imposed where assessment proceedings barred by limitation : CIT v. Pradeep Banker (All) p. 496

>> Interest deductible on borrowed capital where funds utilised for acquiring capital asset : CIT v. Srishti Securities P. Ltd. (Bom) p. 498

>> Employees of contractor not employees of assessee for claiming deductions u/ss 80HHC(2)(iv) and 80-I(2)(iv) : Venus Auto P. Ltd. v. CIT (All) p. 504

>> Provident fund and ESI contributions made before filing return allowable : CIT v. Aimil Ltd. (Delhi) p. 508

>> Sum received by assessee on retirement from firm of solicitors upon superannuation not a "benefit arising from profession" : Balkrishna Hiralal Wani v. ITO (Bom) p. 519

>> Reassessment invalid where Tribunal finding no material to believe agricultural land sold by assessee was a capita asset : CIT v. Batra Bhatta Co. (Delhi) p. 526

AUTHORITY FOR ADVANCE RULINGS

>> Team of architects and designers in Germany producing designs and drawings and delivering them to Government on internet : Receipt by non-resident amounts to "fees for technical services" : gmp International GmbH, In re p. 411

>> Discretion of AAR to admit second application of applicant on same points : Yongnam Engineering and Construction (Pte) Ltd., In re p. 442

STATUTES

From our Reporter at the Supreme Court :

>> Additional tax on undistributed profits : Whether assessee a company in which public are substantially interested p. 165

>> Appeal to High Court : Costs on Department for failure to file vakalatnama p. 165

>> Block assessment : Limitation from date of last panchnama p. 165

>> Business expenditure : Loss on fluctuation of foreign exchange rates p. 166

>> Business expenditure : Provision for estimated warranty expenses whether contingent liability p. 166

>> Business expenditure : Recovery of tax attachment and sale of property p. 166

>> Business expenditure : Service charges paid to mutual fund p. 166

>> Deduction of tax at source : Application for refund made in belated application p. 167

>> Deduction of tax at source : Whether employee bound to deduct tax at source on salary received by employee from another employer p. 167

>> Settlement of cases : Admission of writ petitions challenging validity of provisions and interim directions to Settlement Commission p. 167

>> Settlement of cases : Whether Settlement Commission had acted without jurisdiction in determining additional income p. 170


C. B. D. T. Circulars :

>> Circular No. 1 of 2010 : Clarification-Clarification regarding deduction in respect of contribution to pension scheme under section 80CCD of Income-tax Act p. 171

>> Circular No. 3 of 2010, dated 2nd March, 2010-Tax deduction at source on payment of interest on time deposits under section 194A of the Income-tax Act, 1961 by banks following Core-Branch Banking Solutions (CBS) software-Reg. p. p. 174

Rules :

>> I. T. (First Amendment) Rules, 2010 p. 137

Notifications :

>> Income-tax Act, 1961 : Notification under section 2(48) : Zero coupon bond p. 171

>> Income-tax Act, 1961 : Notification under section 10(15)(iv), item (h) : Exemption of interest payable on bonds issued by public sector companies p. 172

>> Income-tax Act, 1961 : Notifications under section 10(23C)(vi) : Institutions approved for purpose of section 10(23C)(vi) p. 173

>> Special Economic Zones Act, 2005 : Notification under section 1(3) : Commencement of sections 20, 21, 22 p. 175

>> Special Economic Zones Act, 2005 : Notification under section 11(1) : Rescission of previous notification p. 176

>> Special Economic Zones Act, 2005 : Notifications under section 21(2) : Notified offences p. 175

JOURNAL

>> Direct Tax proposals : An overview (S. Rajaratnam) p. 1

>> Charitable nature of educational institutions : View of Uttarakhand High Court (S. K. Tyagi) p. 8

NEWS-BRIEF

>> Accounting watch dog under tax-net likely

Accounting watchdog Institute of Chartered Accountants of India (ICAI), which regulates auditors, is currently facing the prospect of meeting an income-tax penalty of Rs. 16 crore, after the Income-tax Department withdrew tax exemptions on the institute.

ICAI's newly-elected president, confirmed the tax, but played down the issue saying that the institute is contesting the I-T Department's assessment. The move comes at a time when the Government is exploring the feasibility of having an independent regulator for auditors, a proposal that has been opposed by ICAI as it could significantly prune the current role of the institute.

Under section 10(23C) of the Income-tax Act of 1961, the ICAI, which was formed by an Act of Parliament, is exempted from paying income-tax as it had been established for the purpose of education and for advancement of projects of general public utility. A tax assessment panel is also understood to have said that the ICAI allegedly failed to get accounts signed by auditors and of allegedly providing loans to partners without guarantee and interest, said people connected with the development.

ICAI's President said since the matter is sub-judice, he cannot comment on the topic. The Director exemptions at the I-T Department, also declined to comment on the issue. The need for an independent regulator for auditors has been doing the rounds in the Government, especially in the Ministry of Corporate Affairs. [Source : www.economictimes.com dated February 16, 2010]

>> Pay tax only when interest credited to fixed deposit account

No income-tax at source will be deducted if banks have only made a provision for interest on fixed deposits and not actually paid it to the depositor, the Finance Ministry has clarified.

Until now, tax was supposed to be deducted by banks even if only provisioning was made for interest payment.

The Indian Banks' Association in a representation to the Income-tax Department had said that for banks using the CBS software, interest payable on fixed deposits is calculated generally on a daily or a monthly basis but is parked in the provisioning account for monitoring only.

The interest is actually credited to the depositor's account either at the end of the financial year or at periodic intervals or on maturity of the deposits.

According to a Finance Ministry official, CBDT clarified that since no credit is given to the depositors while calculating interest on fixed deposits on daily or monthly basis in the CBS software used by banks, tax need not be deducted at source on such provisioning of interest.

"In such cases, tax shall be deducted at source on accrual of interest," the board clarified, according to a source. Income-tax is charged at the rate of 10 per cent. on interest income of more than Rs. 10,000 in a year. [Source : www.economictimes.com dated March 7, 2010]

>> FICCI disappointed at MAT rate hike

Apex industry chamber FICCI decried a 3 per cent. hike in the Minimum Alternate Tax in Budget 2011, saying it over weighed the concessions in the corporate tax and the Government should look at reducing the peak rate to 25.6 per cent. from over 30 per cent. now.

" . . . as the rates come down, the revenue growth is much sharper . . the world around, the figure is 25.6 per cent. India should start considering to look at the same tax rate over a period of time . . . It would be more in line with international standards," FICCI President said.

On the hike in MAT rates, he said, "They (the government) have reduced the surcharge (on corporate tax) but increased MAT. It is a disappointment for the industry".

The Budget proposals announced last month, raised MAT to 18 per cent. from 15 per cent., and cut surcharge on corporate tax to 7.5 per cent. from 10 per cent.

He said the reduction was "not at all" beneficial as the Government had reduced surcharge, but hiked the MAT rate.

Pointing to several other areas that needed push for better economic growth, the new FICCI President said the Budget could have hiked the FDI limit in the insurance sector to 49 per cent. from 26 per cent. at present and opened up the multi-brand retail sector.

He added that the Government could have also extended more tax benefits for investments in sectors like agriculture, food processing and cold chains, for a more liberalised regime and better growth in 2010-11. [Source : www.economictimes.com dated March 7, 2010]

>> Services rendered from outside India to be taxed

Services rendered from outside India for use within the country will now come under the tax net, following the recent amendment to the Income-tax Act.

The amendment in section 9 of Income-tax Act, proposed in the Budget, will now bring all services, including fees on technical service or royalty that are typically charged as consultation fees, under the tax net. This would also be irrespective of whether the service provider has business connection in India, or residence or place of business. The Government wanted to make it clear that it would levy tax on the payment to a non-resident, if the service is utilised in India, irrespective of whether the service is rendered in India or not.

According to people familiar with legal developments, if a non-resident architect is paid for consultation on a building situated in India, it means that his services have been utilised in India. Prior to the amendment, the architect's consultation fees would have been taxed had he been based in India. The Government will now tax the non-resident architect, even if he does not come to India and renders the service from outside India.

A chartered accountant firm, said: "The amendment has serious implications. It will certainly lead to litigations. Moreover, the amendment is not clear as regards its applicability on income by way of interest and royalty earned by a non-resident outside India." [Source : www.economictimes.com dated March 3, 2010]

>> Direct Tax Code Bill to be presented as monsoon bonanza

Government will introduce the bill for a Direct Taxes Code in the monsoon session of Parliament, the Revenue Secretary said. Having altered the income-tax slabs in the Budget, the Finance Ministry said the next round of widening of the tax slabs is possible when the direct taxes code comes into effect, likely from 2011-12.

The Finance Ministry has already come out with the Draft Direct Taxes Code, but since there are a number of grievances on it, it will come out with a revised draft in the first quarter of next fiscal so that a bill to this effect can be tabled in the Monsoon session of Parliament.

"The period is going to be between April and June. That is when we have time for this process, if we were to get the legislative process commencing from around July during the Monsoon session," the Revenue Secretary said.

In a Rs. 21,000-crore bonanza, the Budget has widened the income-tax slabs for all. While there would be no tax for income up to Rs. 1.6 lakh, a tax of 10 per cent. would be levied for income up to Rs. 5 lakh, 20 per cent. for up to Rs. 8 lakh and 30 per cent. beyond that level. [Source : www.economictimes.com dated March 5, 2010]

Roll-over charges for foreign currency contracts have to be capitalized u/s 43A

Roll-over charges for foreign currency contracts have to be capitalized u/s 43A

The assessee procured a foreign currency loan for expansion of its existing business. To ensure availability of foreign currency, the assessee booked forward contracts with a bank. The contract was for the entire amount and delivery of foreign currency was obtained from the bank for the installment due from time to time. The balance value of the contract was rolled over for a further period up to the date of the next installment. The assessee paid “roll over premium charges” for the same. The AO disallowed the said charges on the ground that as it were incurred for purchase of plant & machinery, it was capital expenditure. The CIT (A) reversed the AO on the ground that the charges were expenditure for raising a loan and was consequently revenue in nature. The Tribunal reversed the CIT (A) on the ground that u/s 43A the expenditure had to be capitalized. The High Court reversed the Tribunal on the ground that the charges were in the nature of interest or commitment charges and allowable u/s 36(1) (iii). On appeal

(a) Exchange differences are required to be capitalized if the liabilities are incurred for acquiring fixed assets like plant and machinery. It is the purpose for which the loan is raised that is of prime significance. Whether the purpose of the loan is to finance the fixed asset or working capital is the question which one needs to answer;

(b) The cost for carrying forward the contracted foreign currency not immediately required for repayment is called the roll over charge(s). The argument that s. 43A applies only to cases where there is a fluctuation in the rate of exchange and that since roll over charges are paid to avoid increase or reduction in liability on account of such fluctuation, s. 43A does not apply has no merit because s. 43A applies to the entire liability remaining outstanding at the year end and is not restricted merely to the installments actually paid during the year. Therefore the year-end liability of the assessee has to be looked into. Further, it cannot be said that roll over charge has nothing to do with the fluctuation in the rate of exchange. Roll over charges represent the difference arising on account of change in foreign exchange rates. Roll over charges paid/ received in respect of liabilities relating to the acquisition of fixed assets should be debited/ credited to the asset in respect of which liability was incurred. However, roll over charges not relating to fixed assets should be charged to the Profit & Loss Account.

Note: This matter best exemplifies the uncertainties of litigation. The AO was reversed by the CIT (A). The CIT (A) was reversed by the ITAT. The ITAT was reversed by the High Court and finally the High Court was reversed by the Supreme Court. As a great jurist lamented “Those who enter this labyrinth find exit by different paths“.

Budget plugs tax loophole

Mechanism for non-resident service providers made stricter.

Budget 2010 has shut the window for non-resident service providers like technical or financial consultants, or certain other foreign service providers, to save taxes for rendering services to Indian businesses.

This relates to the amendment of the source rule in Section 9 (clause v, vi, vii) of the Income Tax Act on the income from interest, royalty and fees for technical services rendered by non-resident service providers, in India or abroad, for Indian businesses.

The finance bill has clarified such services rendered by a non-resident will attract the withholding tax of 10.56 per cent, irrespective of whether the services were rendered in India or abroad, if it was paid by or availed for a business in India.

The amendment comes into effect retrospectively, from June 1, 1976, and overrules a Supreme Court judgment in 2007, which said non-residents have to pay a tax only if they physically rendered the service in India, and not otherwise.

What the new rule says is that irrespective of where the service was rendered, the service provider will be liable to pay tax in India if its services were paid or availed by an Indian entity or were used to carry out business in India or earning an income in India.

In 1976, the government had mandated that all such income for services rendered by non-residents will be liable to be taxed in India, irrespective of whether these services were rendered in India or abroad, if the services were paid or availed by an Indian firm.

However, the Supreme Court, in a case of Ishikawajima-Harima Heavy Industries Vs Directorate of International Tax, held that for such services to be taxed, it must be rendered in India, as well as utilised in India. What it meant was that if the service was being rendered out of say, New York, it couldn't be taxed in India.

"People were trying to use the window (created by the apex court judgment) to avoid the tax. The clarification effectively closes this window," said Anurag Jain, partner (direct tax), BMR Advisors. A non-resident using the services of a non-resident will have to deduct a tax, if the same is paid for by a business in India, or is meant for earning income here.

"The problem with amendments like this is that many of these are with retrospective effect and overrule court rulings. The taxpayers become liable to pay tax with retrospective effect, which creates uncertainty (in business circles)," said Sunil Badala, partner, B S R & Co.

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