INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 16-8-2010 Volume 326 : Part 1

INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 16-8-2010

Volume 326 : Part 1

 

 

SUPREME COURT JUDGMENTS

F Purchase of securities "cum-dividends" : Claim to set-off of loss permissible : CIT v. Walfort Share and Stock Brokers P. Ltd. p. 1

F Differential payments to cane-growers : Whether would constitute business expenditure : Whether reasonable or excessive : How decided : Deputy CIT v. Shri Satpuda Tapi Parisar SSK Ltd. p. 42

F Amount received under optional early retirement scheme exempt : Chandra Ranganathan v. CIT p. 49

HIGH COURT JUDGMENTS

F Tribunal finding fixed deposit represents undisclosed income of assessee : Finding of fact : Surinder Kumar v. ITO (P&H) p. 21

F Failure to file notification u/s 10(23C(vi) : No bar seeking exemption : CIT v. Mahasabha Gurukul Vidyapeeth Haryana (P&H) p. 25

F Assessee entitled to deduction u/s 80-IB where it deriving income from its own manufacturing and from job works done for others : CIT v. Impel Forge and Allied Industries Ltd. (P&H) p. 27

F Expenditure incurred in process of running of business to raise funds deductible : CIT v. Sukhjit Starch and Chemicals Ltd. (P&H) p. 29

F Penalty could not be imposed where transaction was bona fide and default technical : CIT v. Speedways Rubber P. Ltd. (P&H) p. 31

F Reassessment proceedings could not be kept pending till decision of Excise Tribunal : CIT v. Arora Alloys Ltd. (P &H) p. 34

F Duty draw back and DEPB not includible for computation of net profits for purposes of s. 80-IB : Jai Bharat Gum and Chemicals Ltd. v. Addl. CIT (P&H) p. 36

F Discovery that deduction u/s 80-IB allowed on duty draw back and DEPB entitlement : Reassessment to withdraw benefit valid :Jawand Sons v. CIT (Appeals) (P&H) p. 39

F Reassessment after four years not valid where no failure to disclose material facts : CIT v. Steel Tubes of India Ltd. (MP) p. 46

F Compensation in form of annual instalment is capital receipt :Anand Babu Agarwal v. ITO (All) p. 51

F Deduction u/s 80HHC : Gross interest and not net interest on fixed deposits in banks to be taken into account : CIT v. Asian Star Co. Ltd. (Bom) p. 56

F Reassessment proceedings void where no valid service of notice :Smt. S. Nachiar v. ITO (Mad) p. 77

F Rejection of application for waiver of interest solely for failure to pay interest : Matter remanded : Smt. Prakashkumari v. CIT (Bom) p. 82

F Recovery of tax : AO not considering submissions of assessee : Matter remanded : Dinesh T. Tailor v. TRO (Bom) p. 85

F Income would be business income if dominant purpose was commercial activity and it would be income from property if dominant object was to lease property : Matter remanded : Nutan Warehousing Co. P. Ltd. v. Deputy CIT (Bom) p. 94

F Assessee carrying on a business of real estate : Income assessable under "Profits of business" : CIT v. Rose Services Apartment India P. Ltd. (Delhi) p. 100

F Tribunal empowered to determine whether assessee entitled to claim a loss, if at all, under section or other : CIT v. Rose Services Apartment India P. Ltd. (Delhi) p. 100

F Tribunal finding provisions of s 41(1) not applicable : Proper : CIT v. Rose Services Apartment India P. Ltd. (Delhi) p. 100

F No liability for deduction of tax at source where assessee not paid any amount to procurement agencies on account of transportation, interest or storage charges : CIT (TDS) v. Asst. Manager (Accounts), FCI (P&H) p. 106

F No inference that assessee paid any amount of freight separately : Assessee not a defaulter u/s 194C : CIT v. Bhagwati Steels (P&H) p. 108

F Subsidy not received written off in books : Not a bad debt : CIT v. Khaitan Chemicals and Fertilisers Ltd. (Delhi) p. 114

F S 41(1)(a) not applicable where no record of remission or cessation of liability : S. I. Group India Ltd. v. Asst. CIT (Bom) p. 117

F Escaped income more than Rs. 50,000 : Reassessment not barred by limitation : Poonja Arcade v. Asst. CIT (Karn) p. 123

F Impossible to judge final report : Tribunal holding annual value of property cannot be assessed in hands of assessee u/s 22 : CIT v. Babukhan Builders (AP) p. 133

F Grant of interest-free loan by assessee-society to another society : Entitled to exemption : Director of Income-tax (Exemption) v. Acme Educational Society (Delhi) p. 146

F Reassessment not valid where no compliance u/s 147 :Travellers Choice v. ITO (Karn) p. 153

F Returns filed, assessment, revision and appeals in Bangalore and subsequent shifting of registered office of assessee to Punjab : Punjab and Haryana High Court has no jurisdiction to hear case : CIT v. Motorola India Ltd. (P&H) p. 156

F Order passed by Tribunal in Chennai and subsequent shifting of assessee's office to Punjab : Punjab and Haryana High Court has no jurisdiction : CIT v. H. F. C. L. Infotel Ltd. (P&H) p. 167

F Expenditure on transit accommodation not deductible u/s 37 :CIT v. IBM India Ltd. (Karn) p. 176

F Deduction for bad debt written off under clause (vii) of section 36(1) allowable only on excess over provision created and allowed under clause (viia) : CIT v. South Indian Bank Ltd. [FB] (Ker) p. 174

F Finding that funds invested by assessee and hire rent taxed in its hands : Assessee entitled to depreciation : CIT v. Varanasi Auto Sales P. Ltd. (All) p. 182

F Second hand medical equipment purchased for use as spare parts for existing equipment : Price paid was revenue expenditure : Dr. Aswath N. Rao v. Asst. CIT (Karn) p. 188

STATUTES

F Notifications :

Income-tax Act, 1961 : Notifications under section 10(15)(vii) : Exemption of interest payable on bonds issued by public sector companies p. 8

Income-tax Act, 1961 : Notifications under section 10(23C)(vi) : Institutions approved for the purpose of section 10(23C)(vi) p. 7

Income-tax Act, 1961 : Notifications under section 35(1)(ii)/(iia)(iii) : Scientific research associations notified by the Central Government for the purpose of section 35(1)((ii)/(iia)(iii) p. 1

Income-tax Act, 1961 : Notification under section 35(1)(ii)/(iii) : Corrigendum p. 7

NEWS-BRIEF

F Weighted deduction to educational institutions for scientific research raised

The Income-tax Act, 1961, before amendment by Finance Act, 2010, allowed a weighted deduction of 125 per cent. for any sum paid out of business income to a university, college or other institution in case the amount is used for scientific research. Similar weighted deduction of 125 per cent. was also allowed for any sum paid out of business income to a national laboratory or a university or Indian Institute of Technology for the purpose of an approved scientific research programme. The Finance Act, 2010 has increased the abovementioned weighted deduction from 125 per cent. to 175 per cent. with effect from April 1, 2010. Any sum paid to a hospital does not qualify for weighted deduction under the Income-tax Act, 1961.

The weighted deduction from business income is allowed for incentivising research and development in the country. Consequently, the weighted deduction is allowed with a condition that the donation received by the recipient organisation will be used for scientific research and development. As an orphanage is not engaged in any research and development, it cannot be included in the scheme specifically meant for encouraging research and development. However, donation to a hospital approved under section 80G of the Income-tax Act, 1961 qualifies for deduction at the rate of 50 per cent. of the donation. [Source : www.pib.nic.in dated August 3, 2010]

F Long-term infrastructure subscriptions, round-up deduction under Income-tax Act

The Finance Act, 2010 has inserted a new section 80CCF in the Income-tax Act, 1961, which provides that an amount up to the extent of Rs. 20,000 paid or deposited during the financial year 2010-11 as subscription to long-term infrastructure bonds shall be allowed as deduction in computing the income of an individual or a Hindu undivided family. The deduction will be over and above the existing overall limit of Rs. 1,00,000 available under sections 80C, 80CCC and 80CCD of the said Act on savings and other prescribed investments. This amendment takes effect from April 1, 2011 and is applicable for the subscriptions to eligible/notified infrastructure bonds made during the financial year 2010-11.

Consequent to this amendment, "long-term infrastructure bonds" have been notified vide Department of Revenue, Central Board of Direct Taxes, Notification No. 48/2010 [S. O. 1639(E), dated July 9, 2010], specifying the details such as the tenure, interest rate, agencies which can issue the bonds, etc. [Source : www.pib.nic.indated August 3, 2010]

F Access to Swiss accounts boosted by talks to revise treaty

The Government has concluded the renegotiation for widening the ambit of its tax treaty with Switzerland to access information on Swiss bank accounts, a big step towards tracing Indian money stashed away overseas.

The tax treaty has been amended on the lines of the OECD Model Tax Convention, which means it will not provide for roving enquiries, or fishing expeditions as they are commonly called.

The revised agreement is expected to be taken up by the Cabinet shortly, a senior official with the Central Board of Direct Taxes said.

The new treaty will be notified by India immediately after it is signed, but the Swiss authorities will be able to put the agreement into effect only after it is ratified by their Parliament.

India's income-tax authorities will be able to access information on Swiss bank accounts of Indians more easily, but only in specific cases where they have a prima facie evidence of wrongdoing.

The Enforcement Directorate has already issued show cause notices to some Indian citizens for maintaining banks accounts in Switzerland and the Government has initiated steps to elicit requisite information from Swiss authorities.

"The renegotiation of the Double Taxation Avoidance Agreement (DTAA) between India and Swiss Confederation has been concluded. The matter is being actively pursued for early entry into force of the amended DTAA", the Finance Minister said in reply to a query in Lok Sabha.

The Government had approached Switzerland in April 2009 to renegotiate the DTAA to get access to information on bank accounts.

Switzerland has also amended tax treaties with the US, France and Italy.

The issue of tainted money stashed away in Swiss bank accounts had taken centre stage during general elections in India last year and has again come to limelight after the US entered into a deal with leading Swiss bank UBS on information exchange on tax evaders.

India is pursuing the issue of exchange of information with other countries as well and would seek amendment in tax treaties with them. The move is in line with a decision taken at the G-20, which took up the issue of tax havens. [Source :www.economictimes.com dated July 31, 2010]

F Tax sops for SEZs more than meets the eye

Section 80-IA(4)(iii) of the Income-tax Act, 1961 provides for a tax holiday for 10 out of 15 years in respect of profits of any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone. The tax benefit is available to such industrial parks subject to the condition that it is notified by the Central Government in accordance with the Scheme framed and notified in this behalf for the period beginning on April 1, 1997 and ending March 31, 2006. The terminal date for availability of this tax incentive was extended up to March 31, 2011 by the Finance (No. 2) Act, 2009. As a consequence, the Industrial Park Scheme, 2008 has been notified by the Ministry of Finance in exercise of the powers conferred by the aforesaid section vide Notification No. S.O. 51(E), dated January 8, 2008.

The Government of Uttarakhand has requested for extension of the industrial package for the State up to 2020. The incentives under Industrial Package for Uttarakhand are admissible till January 6, 2013. Only, the excise duty exemption benefits for the industrial units set up after March 31, 2010 have lapsed. [Source : www.pib.nic.indated August 2, 2010]

 

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Judgments 14A

CIT vs. Leena Ramachandran (Kerala High Court)

S. 14A applies where shares are held as investment and the only benefit derived is dividend. S. 36(1)(iii) deduction allowable if shares held as stock-in-trade

 

The assessee borrowed funds to acquire controlling interest shares in a company with which she claimed to have business dealings. The interest on the borrowings was claimed as a deduction u/s 36(1)(iii). The AO rejected the claim on the ground that the only benefit derived from the investment in shares was dividend and that the interest had to be disallowed u/s 14A. This was confirmed by the CIT (A). The Tribunal held that the deduction of interest was allowable u/s 36(1)(iii) in principle though a portion of the interest paid had to be regarded as attributable to the dividend and was disallowable u/s 14A. On appeal by the Revenue, HELD reversing the order of the Tribunal:

 

(i) The only benefit derived by the assessee from the investment in shares was the dividend income and no other benefit was derived from the company for the business carried on by it. As dividend is exempt u/s 10(33), the disallowance u/s 14A would apply. The Tribunal was not correct in estimating the s. 14A disallowance to a lesser figure than the interest paid on the borrowing when the whole of the borrowed funds were utilized by the assessee for purchase of shares;

 

(ii) Deduction of interest u/s 36(1)(iii) on borrowed funds utilized for the acquisition of shares is admissible only if shares are held as stock in trade and the assessee is engaged in trading in shares. So far as acquisition of shares in the form of investment is concerned and where the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s 14A is squarely attracted.

 

Note: In CIT vs. Hero Cycles 323 ITR 518 (P&H) it was held that held that in the absence of an actual nexus between tax-free income and expenditure, s. 14A disallowance could not be made.


Regards,

Land mark judgment : PE , wrt Article 5(1) & 5(2) of DTAA

This is a landmark decision which has extensively dealt with and analysed the relationship between Articles 5(1) and 5(2) of a Tax Treaty. This decision would not only have an impact on foreign law firms rendering services in relation to Indian projects, but the findings related to territorial nexus can be applied by the Revenue in bring to tax several composite service arrangements that involve services being rendered from India and outside India. It seems likely that the taxpayer will appeal the decision and hence, the findings of the Higher Courts will be eagerly watched.

Tribunal holds that services rendered by a law firm results in a Service PE

The Mumbai Bench of the Income-tax Appellate Tribunal ("Tribunal") has delivered a significant ruling in the case of Linklaters LLP holding that the rendering of professional services by a foreign law firm results in a Service Permanent Establishment ("Service PE") for the firm and the profits relating to such services, whether rendered in India or not, are chargeable to tax in India.

Facts of the case

Linklaters LLP ("the taxpayer") is a UK based law firm. During the relevant year, the taxpayer rendered professional services to some of its clients whose operations extended to India. For rendering such services, lawyers from the firm were sent to India and the aggregate period of stay of the lawyers in India exceeded 90 days. Services to the clients were rendered by the lawyers in India and also from outside India. The taxpayer filed a return of income in India and claimed that its income arising from work done in India was not chargeable to tax in India on the basis that Article 15 of the Tax Treaty between India and the UK ("Tax Treaty") dealing with Independent Personal Services does not apply to a firm, and that it does not have a fixed place of business in India.

Question before the Tribunal

Whether the professional services rendered by the taxpayer would constitute a Service PE in India under Article 5(2)(k) of the Tax Treaty and if so, whether income pertaining to services rendered from outside India should also be attributable to the PE in India?

Taxpayer's contentions

• EBG's first sectoral round table meeting on Environment/Energy, August 27, New Delhi, India

• Private Equity International India Forum, October 5-6, 2010, Mumbai, India

• BMR rated Great Place to Work 2010; Great Place to Work Institute • BMR ranked Tier 1 Tax Planning and Tax Transactional Firm in India, International Tax Review's online poll 2010

• BMR Advisors ranked second most active transaction advisor (Private Equity) in 2009, Venture Intelligence League Table

• BMR is Transfer Pricing Firm of the Year and wins India Case of the Year award, International Tax

Review Asia Awards, 2009

• Sriram Seshadri

• Sri Krupa V

• It relied on the decision of the Bombay High Court in the case of Clifford Chance and argued that only income from services rendered in India should be charged to tax under the Income-tax Act, 1961 ("the Act") and income related to services rendered from outside India should not be charged to tax in India. The retrospective amendment to section 9 of the Act by the Finance Act, 2010 relates to the taxability of fees for technical services and not professional services.

• The taxpayer was assessable as a partnership firm in UK even though the tax is computed with reference to the tax liability of the partners. It cannot be held that the taxpayer was not 'liable to tax' and consequently, the benefit of the tax treaty cannot be denied.

• The basic conditions of Article 5(1) have to be satisfied to result in a PE and Article 5(2) merely provides an illustrative list which is to be read with Article 5(1) of the Tax Treaty. Since there was no continuity of activities in India, the partners and staff members of the taxpayer visited India only as and when required and the activities were sporadic or isolated, it cannot result in a PE for the taxpayer in India.

• The Article dealing with Independent Personal Services in a Tax Treaty should apply in respect of the income arising from services of a law firm. Since Article 15 of the Tax Treaty does not apply to a firm, but only to individuals, the income should be considered as not chargeable to tax in India. In such a case, the income should not even be considered under Article 7 of the Tax Treaty.

• Article 5 of the Tax Treaty refers to commercial and industrial establishments and it cannot cover the rendition of professional services. Further, the services provided by the taxpayer cannot be held as 'furnishing of services' as the taxpayer is an international professional enterprise rendering services directly to its clients. The term 'furnishing of services' does not cover 'rendering of services' by lawyers.

• As per Article 7(2) of the Tax Treaty, the PE must be assessed to tax on the basis of value of services rendered by the PE at the market value of such services in India and not on the basis of the price charged by the taxpayer to its clients. If appropriate adjustments are not carried out, the language of Article 7(2) of the Tax Treaty would become redundant. Revenue's contentions

• The entire fees for services rendered by the taxpayer in India and abroad are chargeable to tax in India as the services have been utilized in India.

• Since a partnership firm was not 'liable to tax' in UK, the partnership firm cannot avail the benefit of the Tax Treaty between India and UK. The expression 'liable to tax' covers only such entities which are subject to tax in respect of their income.

• Article 5(1) and Article 5(2) are not to be read together and Article 5(1) does not restrict the application of Article 5(2) of the Tax Treaty. Article 5(2) would become redundant if it is concluded that it conditions of Article 5(1) of the Tax Treaty should also be satisfied. Once the duration test is satisfied, the permanence test envisaged under Article 5(1) of the Tax Treaty need not be satisfied.

• As per Article 7(2) of the Tax Treaty, income and expenditure of an enterprise as a whole are to be allocated to the PE to the extent they are relatable to the PE. Article 7(2) of the Tax Treaty does not envisage revenue billings relatable to the PE to be substituted by the market value of such services.

Tribunal Ruling

• The Bombay High Court decision in the case of Clifford Chance was not good law due to the retrospective amendment to section 9 of the Act by Finance Act, 2010. It was no longer necessary that the services must be rendered in the India for taxing the income arising from such services in India.

• The Tax Treaty benefits cannot be denied to the taxpayer, since the profits of the partnership firm is taxable, though not in its own hands, but in the hands of the partners. As long as entire income of the partnership firm is taxed in the Country of residence, Tax Treaty benefits cannot be denied.

• The terms 'rendering of services' and 'furnishing of services' are used interchangeably and are not relevant for the purpose of deciding the existence of PE.

• Article 5(2) of the Tax Treaty has to be applied on a standalone basis. Clauses (a) to (i) of Article 5(2) are illustrative of the basic rule of a PE, whereas clauses (j) and (k) are extensions of the basic rule. Items falling under these clauses would not constitute a PE under the basic rule, but should be treated as a PE on account of the deeming fiction provided in such clauses.

• The Commentary on the OECD Model Convention ("MC") shows that income derived from professional services or other activities of independent character have to be dealt with under Article 7 of the Tax Treaty as business profits. Accordingly, even professional services are covered by Article 5(2)(k) of the Tax Treaty.

• The Commentary on UN MC provides that professional services rendered by an individual are governed by Article 15 while such services rendered by an enterprise are governed by Article 5(2)(k) read with Article 7 of the Tax Treaty.

• Article 7(1) of the Tax Treaty provides for the taxability of profits 'directly or indirectly attributable' to the PE which incorporates 'force of attraction' rule and income from services similar to those rendered to an Indian project should also be taxed in India irrespective of whether such services are rendered through the PE or directly by the taxpayer.

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