HC : Entering into JDA cannot make vacant land 'business asset'; Upholds wealth-tax levy

Andhra Pradesh and Telangana HC upholds taxation of vacant land purchased by assessee-individual during AY 2009-10 for wealth tax purpose, rejects assessee’s stand that entering into JDA with developer immediately after the land-purchase proved his intention of carrying on business and therefore land should be treated as ‘stock in trade’; Clarifies that mere execution of a development agreement would not by itself mean that the land-owner also intended to carry on business, also observes that purchase of property was an isolated transaction and assessee had not carried on any business either before or after; Notes that assessee had filed return in ITR-2 [prescribed form for individuals/ HUFs not having business income] which also lent support to Revenue’s contention that he intended to treat the subject land only as an investment, also notes that land was not disclosed as stock in trade in balance sheet; With respect to assessee being not subjected to capital gains tax u/s. 45 of the Income Tax Act, HC clarifies that “whether execution of a JDA had resulted in the transfer of the asset liable to tax as capital gains under..the Income Tax Act, is wholly extraneous to the present proceedings under the Wealth Tax Act.”;:HC 

ITAT : Rejects taxpayer’s LTCG exemption claim citing dubious trading in ‘penny stocks’

Bangalore ITAT rejects assessee-individual’s claim of ‘exempt’ long term capital gains (‘LTCG’) of Rs. 42 lakh arising on sale of ‘penny stocks’ during AY 2015-16, upholds AO’s stand that the LTCG booked by assessee were bogus and the gains were assessable as ‘business income’; Rejects assessee’s stand that the genuineness of LTCG claim cannot be doubted since the contract notes were placed on record and the payment were made through cheques identifying the company whose shares were transacted; Upon examining the financials of the company, ITAT observes that the financial worth of the company was very meager and not worth to be invested in, remarks that “With such financials, we are unable to understand how there can be manifold increase in the shares.”; Further observes that taking cognizance of BSE websites, money control website, investigation wing, SEBI reports, AO had noted that the price of these shares saw phenomenal rise and were constantly traded near the circuit limit (of 5%) so as to avail maximum price rise without hitting and triggering the circuit limit, and thereby avoid surveillance by the Stock Exchange Regulator; ITAT concludes that Revenue has brought sufficient material on record to demonstrate that unaccounted money was introduced in the books through LTCG by circuitous means.:ITAT 

ITAT : Sec. 194C TDS applicable on ‘advances’ made for carrying works, rejects ‘pass-through’ entity plea

Delhi ITAT holds assessee-society (formed for organizing South Asian Federation Winter Games, 2009) liable to deduct TDS u/s. 194C on amount tendered as ‘advance’ to various PSUs (Public Sector Undertakings) w.r.t. various works relating to construction of the infrastructure for winter games for AYs 2009-10 & 2010-11; Rejects assessee’s stand that it was merely a pass through entity that has been granted sum for organizing the winter games and it did not enter into any contract with the parties to whom payments were made; ITAT acknowledges that grants / sponsorship received by the assessee, are in turn, disbursed to various recipients (i.e. PSUs) who got the work done through contractors and deducted TDS on payments made to such contractors; However, ITAT remarks that “Though the contractor may be identified and engaged by the other organization, however, the implementation and utilization is the sole responsibility of the assessee. Otherwise, there is no other reason for the formation of the assessee society”; Observes that as required u/s. 194C, assessee is the person responsible for payments of sums to the PSUs, which infact was paid by the assessee; Clarifies that “Merely because the assessee is provided grant for onward distribution to these parties does not exclude the assessee from the liability for deduction of tax at source u/s 194C”; W.r.t. assessee’s alternative argument that all the recipients have already received the grant and if tax is recovered from the assessee it ought to be refundable in the hands of the recipients, ITAT directs the AO to verify as to whether due taxes have been paid by the recipients in terms of the proviso to Sec. 201(1); Lastly, ITAT deletes penalty levied u/s. 271C absent contemptuous conduct on assessee’s part for non-deduction of TDS; Separately in context of payments made to non-resident parties for equipment supply, ITAT rules that Sec. 195 TDS shall not apply as no income has accrued to those parties in India, in terms of Sections 5 & 9 of the Act and title of the goods has passed outside India.:ITAT 

HC : Holds PILCOM as agent of foreign Cricket Boards regarding 1996 World Cup receipts

Calcutta HC reverses ITAT order and rules in favour of Revenue for AY 1996-97, holds PILCOM as agent of Non-Resident Cricket Boards in relation to 1996 World Cup receipts; Pursuant to ICC choosing Pakistan, India and Sri Lanka to co-host the World Cup 1996, a joint management committee of these three countries (PILCOM)] was formed which paid guarantee money to cricket associations of various countries and other sums from bank account in London; While the AO had made an assessment of income u/s. 147 for all the cricket boards through PILCOM, ITAT had quashed the same and had held that PILCOM could not be held liable as agent u/s. 163 as the income had accrued in India and it could not be said to be deemed to have accrued in India; Referring to Sec. 5 (scope of total income), Sec. 9 (income deemed to accrue/ arise in India) and Sec. 163 (relating to non-resident agent), HC holds that ITAT completely misinterpreted the law, remarks that “It goes without saying that the representative assessee not only represents an income which has directly arisen or accrued in India but also that which has indirectly arisen or accrued in this country, through a business connection.”; Noting that the short title to Sec. 9 describes the income as deemed to accrue or arise in India, HC clarifies that “Use of this title does not absolve the representative assessee of the duty to account for any income which has directly or deemed to have arisen to the non-resident in this country.”  :HC 

No penalty on alleged ‘kickbacks’ under Volcker report; Sec. 263 revision upheld for hawala purchases

ITAT: No penalty on alleged ‘kickbacks’ under Volcker report; Highlights non-bindingness of UN resolution

Not a taxable capital receipt.

Bhojison Infrastructure Pvt. Ltd vs. ITO (ITAT Ahmedabad)

S. 2(14)/ 28(va): The "right to sue" which arises on breach of a development agreement is a "personal right" and not a "capital asset" which can be transferred. Consequently, the damages received for relinquishment of the "right to sue" is a non-taxable capital receipt (all judgements considered)

A development agreement was executed which enabled the assessee to utilize the land for construction and for sharing of profits. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner) perceived threat of filing suit by developer and consequently paid damages/ compensation to shun the possible legal battle. The intrinsic point with respect to accrual of ‘right to sue’ has to be seen in the light of overriding circumstances as to how the parties have perceived the presence of looming legal battle from their point of view. I t is an admitted position that the defaulting party has made the assessee a confirming party in the sale by virtue of such development agreement and a compensation was paid to avoid litigation. This amply shows the existence of ‘right to sue’ in the perception of the defaulting party.

Imp Verdicts

PCIT vs. Radan Multimedia Ltd (Bombay High Court)

There is no discipline in the manner the Dept conducts matters. The Dept should not take legal matters casually and lightly. There should be a dedicated legal team in the department. Lack of preparation is affecting the performance of the advocates. They do not have full records & do not have the assistance of officials who can give instructions. The CsIT should devote more time to their work rather than attending some administrative meetings and thereafter boasting about revenue collection in Mumbai

If Appeals are filed routinely merely because the Revenue thinks that there are huge stakes involved, then, it is expected that the Revenue officials come fully prepared to Court, give instructions and before the matters are actually argued before us, they hold meeting and conference with the Revenue advocates. Very often, lack of preparation is affecting the performance of the advocates. One of the reasons why the advocates are not in a position to render complete assistance to the Court is because they themselves do not have full records. They do not have the assistance of the official, who can give them instructions. Arguing matter before a Court requires presence of mind. At times, one has to think on toes. More so, when the scales are not evenly balanced. The assessees and their counsel are fully equipped, but the Revenue does not have such degree of competence nor are they efficient enough

FAQs on Tax Audit under Section 44AB

Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity. As per these provisions, tax audit shall be conducted by a Practicing Chartered Accountant who ensures that the taxpayers has maintained proper books of account and complied with the provisions of the Income-tax Act. Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CD. The Form no. 3CD has been revised by the government on July 20, 2018. The new form 3CD is applicable with effect from August 20, 2018 and various new clauses have been inserted therein. In this article, we have attempted to resolve some Frequently Asked Questions (FAQs) about the tax audit.   

ITAT : Allows provision for ‘retrospective’ price reduction on set top boxes

Delhi ITAT grants deduction for provision in respect of price reduction on set top boxes for subject AY 2007-08, notes that price reduction was crystallized after March 31st of relevant year but before the finalization of financial statements; During relevant AY, assessee company had sold set top boxes to Tata Sky Ltd. at the price agreed as per the MOU dated January, 2006, however, owing to reduction in duties announced by Union Budget w.e.f. March 1, 2007, there was a retrospective reduction in the price as agreed between the parties vide letter dated August, 2007; Rejects Revenue’s stand that post facto adjustment to sales receipt cannot be accepted since price reduction was crystallized after the closure of the relevant year; ITAT observes that the provision for price reduction pertained to the set top boxes sold during relevant year, notes that though the exact price reduction happened post 31st March, 2007, it was in principle agreed before March 31st (i.e. at the time of Union budget); Further in view of AS-4 and mercantile system of accounting followed by assessee, ITAT holds that costs directly associated with the revenue recognized during the relevant period, irrespective of whether the money paid or not, have to be considered, lastly clarifies that if the deduction is not allowed in subject AY, the same has to be allowed in subsequent AY:ITAT 

HC : Calculates compounding fee @100% of 'tax' evaded, not on income addition

Gujarat HC rules that compounding fees should be levied @ 100% of ‘tax’ sought to be evaded and not @ 100% of ‘income addition’ with respect to prosecution initiated on assessee co. u/s 276C; Notes that para 12 of CBDT’s latest guidelines of December, 2014 on compounding of offences prescribes compounding fees for offense u/s 276C(1) at 100% of the ‘amount sought to be evaded’; Since this para does not contain any specification of ‘the amount sought to be evaded’, HC remarks that “we may fall back on the statutory provisions in relation to which, this compounding fee is prescribed.”; Notes that Sec. 276C links the severity of punishment on the amount sought to be evaded and thus, in turn has relation to the attempt at evasion of tax, penalty or interest; Accordingly, HC concludes that “when the CBDT circular refers to the amount sought to be evaded, it must be seen and understood in light of the provisions contained in section 276C(1) and in turn must be seen as amount sought to be evaded.…”:HC 

When validly revised return, filed pursuant to notice u/s 153A, is accepted, defects found in original return cannot be considered for purpose of penalty: ITAT

THE ISSUE IS - Whether when validly revised return of the assessee, filed pursuant to notice u/s 153A, is accepted by the AO and income is assessed, the defects of original return can still be considered for the purpose of penalty u/s 271(1)(c). NO IS THE ANSWER.

Facts of the case

THE assessee-company, filed the return for the relevant AY by declaring a loss of around Rs.1.13 cr. However, a search was conducted on the assessee and thereafter, the assessee again filed a return by declaring loss of around Rs 27.62 lakhs and thereafter, again revised the same declaring NIL income. Accordingly, the assessment was completed on the NIL income. However, the AO was of the opinion that the conduct of the assessee in initially declaring a huge loss, which was reduced substantially pursuant to the notice u/s 153A and subsequent revision declaring nil income amounts to concealment of income by filing inaccurate particulars. Therefore, He initiated proceedings u/s 271(1)(c) and imposed a penalty of around Rs.35.14 lakhs being the 100% of the tax sought to be evaded. On assessee's appeal, the CIT(A) upheld the decision.

On appeal, the Tribunal held that,

++ there is no dispute that pursuant to the notice issued u/s 153A, the assessee filed the return of income on 14.7.2014 which was revised on 24.2.2015 declaring nil income and the assessment was also completed on 24.3.2015 at nil income only. On the question of whether or not the assessee set up any business during the year and the loss claimed cannot be allowed, in the revised return the assessee withdrew such a claim and declared the income at nil. No doubt the question of whether or not the assessee set up any business during the year and whether no business could be turned out even after the business was set up is a disputed question of fact, and is a debatable issue. However, the AO felt that the claim of loss on the premise that the business was set up amounts to concealment of income by filing inaccurate particulars. From the assessment order it is not clear as to whether it was concealment of income or furnishing of inaccurate particulars;

++ as the facts indicate the entire dispute relates to the question whether the business is set up or not. Whether the assessee did any business or not is not relevant if the business is set up during the year under consideration. This is a debatable issue and was not finally decided by the AO because the assessee withdrew their claim by revising the return of income. As is held in the case of Neeraj Jindal and other cases relied upon by the assessee, the return of income filed pursuant to the notice u/s 153A takes the place of the return filed u/s 139(1) which was validly revised by the assessee even before any defect was pointed out by the AO. In such circumstances, in view of the decision in the case of CIT vs Reliance Petro Products P. Ltd., no penalty could be levied;

++ when the revised return is accepted and the income is assessed as per the revised income, there is no scope for penalty. In the case of Kirit Dahyabhai Patel vs ACIT, the High Court held that in view of specific provision of Section 153A, the return of income filed in response to notice u/s 153A is to be considered as return filed u/s 139, as the AO has made assessment on the said return and, therefore, the return has to be considered for the purpose of penalty u/s 271(1)(c) of the Act and the penalty is to be levied on the income assessed over and above the income returned u/s 153A, if any. Admittedly, in this matter both the returned income and the assessed income are nil. On this ground also, we cannot sustain the penalty order.

Income earned from operation and maintenance of SEZ is eligible for deduction u/s 80IAB: ITAT

THE ISSUE IS - Whether income earned from operation and maintenance of SEZ is eligible for deduction u/s 80IAB of Act. YES IS THE VERDICT.

Facts of the case

The assessee company, was developer of Special Economic Zone and had filed return for relevant AY, claiming deduction u/s 80IAB of Act, which included profit on business of operation and maintenance of (SEZ) amounting to Rs. 1,94,12,129/-. During assessment, the AO held that income derived from "operation and maintenance" activity of (SEZ) was not eligible for deduction u/s 80IAB of the Act. The AO accordingly denied deduction claimed amounting to Rs. 1,94,12,129/- attributable to operation and maintenance activities. On appeal, CIT(A) reverse the action of the AO. Aggrieved, the Revenue filed appeal before the Tribunal.

Tribunal held that,

++ the Co-ordinate bench of Tribunal in Revenue's appeal relevant assessment year 2010-11 has dismissed the appeal of the Revenue and thus allowed the deduction claimed on operation and maintenance activity. While doing so Coordinate bench in turn relied upon the decision of the Co-ordinate bench of Tribunal in assessee's own case relevant AY 2009-10. In parity with the view taken by the Co-ordinate bench in assessee's own case in the preceding assessment years, it was decided not to interfere with the order of the CIT(A). In the result, appeal of the Revenue is dismissed.

ITAT : Penalty for Trust’s belated return filing, mandatory pre-2012; 'Reasonable cause’ defense inapplicable

Bangalore ITAT upholds penalty levy u/s 272A(2)(e) on assessee-Trust for AY 2009-10, for filing of return of income u/s 139(4A) with the delay of 541 days; Rejects assessee’s stand that penalty should be deleted as the failure to file return was under the bonafide belief and advice received from former deceased Accounts-in-charge Manager of assessee Trust; ITAT remarks that for subject AY, levy of penalty was mandatory even if reasonable cause was established, observes that Parliament had inserted reference of Sec. 272A in the provisions of Sec. 273-B only vide Finance Act, 2012 w.e.f. April 1, 2012; States that “The Act does not confer any discretion on the AO not to levy penalty in case reasonable cause is shown to exist”; Relies on SC ruling for Aditanar Educational Institution to hold that the assessee claiming exemption u/s 11 should mandatorily file return of income as per Sec. 139(4A).:ITAT 

Key takeaways of ICAI Technical Guidance on amended Tax Audit Report

ICAI’s implementation guide on Tax Audit Report covers amendment to Tax Audit Report (Form 3CD) which are effective from August 20, 2018 and thus, does not discuss GAAR and GST reporting (under clause 44); Clarifying on reporting relating to secondary adjustments, Guidance states that in cases where amount of imputed interest income on the excess money not repatriated to India relates to more than one year, “Prima-facie, it appears that reporting of such interest is not required to be reported under clause 30A(b)(v) since Clause 30A requires reporting only in relation to primary adjustment made during the relevant previous year”; However, ICAI Guidance also stresses that “it may be advisable for the taxpayer to furnish and tax auditor to verify and report the information pertaining to such primary adjustments in respect of interest income which is chargeable u/s. 92CE(2)” as the return filing utility may synchronize the parameters of imputed interest u/s 92CE(2) as offered in the return of income with the parameters stated in the Tax Audit Report; With respect to reporting of interest limitation u/s 94B, ICAI Guidance clarifies that “The computation of “excess interest” as per section 94B(2) should be within the boundaries of interest referred to in s.94B(1), which is NR AE interest”; Regarding disclosure of CbCR information, the Guidance clarifies that “the tax auditor is not required to comment upon correctness or completeness of the report filed under section 286(2)”; Further, apart from highlighting the widened scope of reporting requirements in respect to TDS/TCS returns, the Guidance clarifies on applicability of Sec. 269ST reporting (for cash transactions exceeding Rs. 2 lakh threshold) to Govt. companies and to capital and revenue payment / receipts;  Regarding reporting of deemed dividend u/s. 2(22)(e), the Guidance suggests that the tax auditor may arrive at the accumulated profits by appropriating the profit for the year on time basis, where he may not have access to the records of a closely held company making payment during relevant financial year. 

IMP CASE LAWS

Prabhat Agarwal vs. DCIT (Delhi High Court)

S. 147/ 148: The revenue played a subterfuge in trying to cover up its omission and in ante dating the record. The court hereby directs the Chief Commissioner to cause an inquiry to be conducted as to the involvement of the officials or employee in the manipulation of the record, and take strict disciplinary action, according to the concerned rules and regulations. This inquiry should be in regard to the conduct of the concerned AO posted at the time, who issued the notice under Section 147/148 as well as the officers who filed the affidavits in these proceedings 

ITAT : No TDS on 'scientific services' of Non-resident individuals; Article 14 to prevail over Article 12

Delhi ITAT holds that payment made by assessee company to individuals (resident of Germany and Switzerland)  for AY 2008-09 and 2009-10 cannot be taxed as 'fees for technical services' under Article 12 of India Germany and India Switzerland DTAA, TDS u/s 195 inapplicable; Perusing the evidence in the form of copies of trials conducted by NR, email exchanges and working protocol, ITAT holds that services rendered were 'independent scientific services' falling under Article 14 - 'independent personal services', but same cannot be brought to tax in India absent a fixed base in India or non-resident recipients staying in India for 120 days or more; Rejects Revenue's contention that services would fall under Article 12, holds that Article 14 being a more specific provision applicable to professional services provided by individuals, it would prevail over general provisions under Article 12 which applies to all types of taxpayers; Also rejects Revenue's reliance on earlier year ruling in assessee's own case where applicability of Article 14 was rejected as assessee failed to prove that services were independent scientific services, notes that in the year under consideration, assessee had provided enough evidence to prove the nature of services provided by non-resident individuals:ITAT

STT applicable on delivery-based derivative settlements, CBDT to inform HC

CBDT issues note to Income tax Department Mumbai, directs Dept. to file affidavit before Bombay HC that STT shall be applicable to delivery based derivative transactions; CBDT takes a view that transaction of derivative contract being settled by physical delivery of shares is not any different from transaction in equity shares where contract is settled by actual delivery or transfer of shares ;  Therefore, CBDT instructs Dept. to clarify to HC that the rates of STT as applicable to delivery based equity transactions shall also be applicable to such derivative transaction; States that legal mandate of STT is  wide enough to cover these transactions

CBDT further extends return filing due date to September 15th for assessees in Kerala

CBDT further extends return filing due date to September 15th for all assessees in the State of Kerala due to severe floods. 

CBDT: Mandates ‘E-Proceeding’ for ‘all’ assessments during 2018-19, carves-out 7 exceptions

CBDT mandates conducting assessments electronically through the ‘E-Proceedings’ facility in all cases requiring framing of assessment u/s. 143(3) during the year 2018-19; However, carves-out 7 exceptions, where ‘E-Proceeding’ shall not be mandatory; Also lists down 4 situations where personal hearing/ attendance may take place, despite assessment proceedings being carried out through the ‘E-Proceedi

ITAT : Grants vacancy allowance; Saif Ali Khan's ‘construction defect’ plea not spurious

Mumbai ITAT grants vacancy allowance u/s 23(1)(c)  to Saif Ali Khan Pataudi (‘assessee’)  in respect of his Bandra flats that could not be let out during AY 2012-13;  Notes that assessee had offered Rs.11.83 lakh  as taxable rent, however, Revenue had substituted a sum of Rs. 50 lakh as reasonable rent for the property, accepts assessee’s plea that due to inherent defects/unauthorised construction, the flat could not be let out; Holds that assessee’s plea “cannot be said to be spurious, vexatious, mere bluster or frivolous.”, furthermore, noting that assessee had to incur Rs. 50 lakhs in order to make necessary alterations to remove defects, ITAT remarks that “This oxygenates the assessee's claim that the premises required alteration in order to properly let out.” ; Referring to Sec. 23(1)(c), ITAT opines that “in case the property or part thereof was vacant during the period, the proportion deduction should be allowed from the sum on which the property might reasonably be let out from year to year.”; In light of aforesaid facts, ITAT holds that assessee deserves vacancy allowance, relies on co-ordinate bench ruling in Premsudha Exports (P) Ltd.:ITAT