Shri Satendra Koushik v ITO (ITA No. 392/JP/2019 dated 23.04.2019) Background: Tax payer purchased Land vide a registered purchase deed for consideration of Rs. 15 lakhs. The land was reflected as Stock-in-trade by the tax payer The stamp duty value of the said land was Rs. 49,23,542. During the course of assessment proceedings, the AO treated difference of Rs. 34,23,542/- i.e. between stamp duty value and purchase price as deemed income of the assessee u/s. 56(2)(vii)(b)(ii). CIT(A) upheld AO’s order. Tax Payer’s contentions: Tax payer is engaged in real estate business and regularly deals in sale and purchase of lands and buildings and hence provisions of section 56(2)(vii)(b)(ii) are itself not applicable. As per the Explanation (d) of section 56(2)(vii), the term ‘property’ is defined to mean only capital asset which inter-alia includes immovable property being land or building or both. HELD: The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extent the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. Therefore, the definition of property has been amended to provide that section 56(2)(vii) will have application to the ‘property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.
Miscellaneous
Priapus Developers (P.) Ltd v ACIT [2019] 104 taxmann.com 298 (Delhi – Trib.) Background: Two subsidiary companies of the assessee were amalgamated with the assessee company. Delhi High Court had sanctioned the scheme of Amalgamation. As per the Scheme of Amalgamation the accounting principles and ‘purchase method’ as prescribed in ‘AS-14 was adopted. Further, as per the Scheme, all the assets and liabilities of the amalgamating companies were to be transferred at their respective fair values. The scheme also provided for transferring any excess (difference between fair value and book value of the assets) to capital reserve. Equity shares of a listed company – IFHL held by the subsidiary company were revalued and recorded in the books of the assessee company at fair value. The difference between book value of the shares so acquired and the FMV at which it was recorded in the books of the assessee being the amalgamated entity was credited to capital reserves. In the subsequent year, the shares were sold at a loss and STT was paid thereon. In the year of amalgamation, the transfer of assets were claimed as exempt by virtue of section 47(vi). No adjustment was made in relation to the revaluation / excess value of the shares credited to capital reserves in the MAT computation u/s 115JB in the year of amalgamation. The sale of shares at a loss in the subsequent year was disallowed by the assessee itself u/s 10(38). However, the loss on sale recorded in the P&L A/c was not separately disallowed in the MAT computation u/s 115JB. The AO observed that reserve created on account of revaluation of shares was not credited to P&L A/c and held that in terms of clause (v) to Explanation 1 of section 115JB, such revaluation of shares has to be taken into account while computing the book profit. In the first level of appellate proceedings, the CIT(A) upheld the order of AO. Revenue’s Arguments: Amalgamation has been used by the assessee as a tool for tax evasion. As per AS-13 for accounting for investments, investments are to be carried at cost and not fair market value. Further AS-13 also clarifies that difference between carrying amount and disposal proceeds net of expenses, has to be recognised in the P/L A/c. Thus, the assessee has not even followed the accounting treatment required to be followed as per AS-13. The adoption of fair market value of the Investments is nothing but revaluation. Merely, the credit of increase in value to “capital reserve” would not alter the true character and substance of the event. HELD: The scheme has been duly approved by Delhi High Court. High Court had issued notices to the Income Tax Department / Assessing Officer to provide any objections to the said Scheme, if any. The Assessing Officer/ Department nowhere had objected to said Scheme at any point of time. Thus, Scheme of Amalgamation sanction by High court had become final. Reliance was placed on the Supreme Court in the case of […]
No adjustment of revaluation u/s 115JB upon amalgamation when the same is credited to capital ...
JSW Steel Limited v ACIT (ITA No.923/Bang/2009 dated 13.01.2017) (Mumbai ITAT) BACKGROUND: – Assessee had availed term loans from various Indian and foreign financial institutions and banks for setting up of integrated steel plants. The assessee had utilized the above loans to pay the purchase price of the imported plant and machinery for setting up of the Steel plants. The loans were repayable over various maturity dates up to 2010. – After setting up the steel plants, the assessee had incurred huge loss due to economic recession in general and steel industry in particular and was under severe financial crisis. Accordingly, the assessee entered into a financial restructuring package. – After negotiations with the foreign lenders, the assessee entered into agreements to settle the dues, pursuant to which the principal and interest payable were reworked and part of the principal and interest amounts were waived. – Accordingly, the entire sum of was credited to the Profit and Loss account as an exceptional item on account of waiver of the principal and interest payable thereon with a specific note in ‘Notes to Account’ that the exceptional item represents waiver of dues on settlement. – During the course of assessment proceedings, the assessee contended that since the waiver of principal amount of borrowing was utilized on capital account, therefore, it is a capital receipt not taxable while computing the income of the assessee and hence the amount waived has not been offered to tax as per section 41(1). – Further, the assessee by way of a note in the computation gave a caveat that the amount of Rs.314.14 crores which represents capital receipt is not in the nature of profit and gains of business and therefore, is not includable in the book profit under section 115JB. – The Assessing Officer, however, while computing the book profit in the assessment order considered the figure as given in the profit & loss account and did not agree to reduce the aforesaid waiver of dues.
Capital Receipt / Waiver of loan [not chargeable to tax u/s 41(1)] to be excluded ...
CIT v Yash International Inc. (ITA No. 4002 of 2013) dated 28.10.13 – HIGH COURT OF HIMACHAL PRADESH Background: The assessee firm formed a unit under the name and style of M/s Yash International having same partners as in the case of its erstwhile firm M/s Yash Electricals, Baddi. The assessee claimed deduction under section 80IC in respect of undertaking established in HP. The AO denied the deduction to the assessee on the ground that the assessee firm was formed splitting up / reconstruction of erstwhile firm. CIT(A) and ITAT allowed the benefit u/s 80IC to the assessee. Tax Authority’s arguments: The assessee and the erstwhile firm have same partners. Only the wife was introduced as new partner of erstwhile firm who did not contribute any capital except sharing of profit at the end of the year. The workers of M/s Yash Electricals were also shifted to the new unit. Control and management of the existing and new unit remained the same.
80IC allowable even if undertaking formed with same partners of erstwhile firm & having common ...
CIT v BABCOCK POWER (OVERSEAS PROJECTS) LTD. ITA 178/2002 dated 05.09.2014 – DELHI HIGH COURT Background: The assessee – M/s.Babcock Power (Overseas Projects) Ltd., a non-resident company incorporated in United Kingdom, during the Assessment Years 1987-88 to 1989-90 had a project office in India and was engaged in execution of a contract of setting up a coal based thermal plant. The assessee to fulfil their contractual obligations, had engaged their foreign technicians who were deputed to work at the Indian project office. These employees were on pay roll of UK office of the respondent assessee and salaries were paid in foreign currency in their bank accounts abroad. These contracts of employment were duly approved by the Ministry of Mines for the purposes of Section 10(6) of the Act. Assessee did not deduct Tax at Source on the salary paid on the ground that tax was not required to be deducted. The Assessing Officer disagreed and also directed interest under Section 201(A) of the Act be charged. A question arose, whether the assessee was liable to deduct tax at source under Section 192 of the Act on the salaries paid to the foreign technicians. Tribunal, by the impugned order, has rejected the contention of the assessee that they were not liable to deduct tax at source. Tribunal further upheld levy of interest and observed that interest was payable under Sections 201(1) and 201(1A). Interest has been referred to as the legitimate amount of tax due for delayed payment. However, the Tribunal did not accept and agree with levy of interest for the period commencing from 1st April following the Financial Year till the date of the order of levy of interest under Section 201(1A) observing that this was erroneous and cannot be sustained. This finding/direction is questioned.
Interest u/s 201(1A) to be levied from dt of on which tax was deductible till ...
CCIT v Sarva Equity (P.) Ltd [IT APPEAL NOS. 322 TO 324 OF 2014 dtd 08.01.2014] – Karnataka HC Background: Assessee and Ittina Properties Private Limited are sister concerns. The assessee had taken an unsecured loan from Ittina of Rs.9,56,48,107. The AO treated the loan as a deemed dividend under Section 2(22)(e). The Directors and shareholders of both the companies, are members of one and the same family and they have substantial holding in M/s. Ittina and assessee company. The Appellate Authority reversed the order passed by the Assessing Officer holding that the respondent-assessee is not a shareholder of M/s. Ittina Properties Private Limited and in view thereof, not liable to pay taxes under Section 2(22)(e) of the Act. The order of the appellate authority has been confirmed by the Tribunal.
Indirect shareholding is not covered under the fiction of deemed dividend u/s 2(22)(e) – Karnataka ...
CBDT Circular No. 1 of 2014 Rajasthan High Court in the case of CIT(TDS) vs. Rajashthan Urban Infrastructure held that the words “any sum paid” used in Section 194J of the Income Tax Act, relate to “fees for professional services or fees for technical services”. In terms of the agreement, the amount of Service Tax was to be paid separately and was not included in the fees. Accordingly, it was decided that if Service tax is payable in addition to professional/ technical fees under the contract, the withholding tax will be restricted to the professional fees. The CBDT vide CBDT Circular No. 1 of 2014 dated 13.01.2014 has decided in exercise of powers u/s 119 that wherever the terms of the agreement/ contract between the payer and the payee, the service tax component comprised in the amount is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component. The aforesaid circular should apply to all kinds of payments made to residents.
No TDS on service tax component – CBDT Circular
The CBDT has issued Circular (No: 10/DV/2013) dated 16/12/2013 providing ‘Departmental View‘ on the controversial issue surrounding section 40(a)(ia) of the Income-tax Act, 1961. In case of Merilyn Shipping & Transports v Addln CIT /[2012] 136 ITD 23 (VISAKHAPATNAM), it was held that: “The word ‘payable’ used in section 40(a)( ia) is to be assigned strict interpretation, in view of the object of Legislation, which is intended from the replacement of the words in the proposed and enacted provision from the words ‘amount credited or paid’ to ‘payable’. Hence, it has to be concluded that provisions of section 40(a )(ia) are applicable only to the amounts of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow expenditure which has been actually paid during the previous year, without deduction of TDS.”
S. 40(a)(ia) – CBDT issues circular providing “Departmental View” contradicting Merylin Shipping ruling
CIT v I.T.C. Ltd [IT APPEAL NO. 44 OF 2002 dated 4.09.13] – Allahabad High Court Background: Assessee was deducting tax on the estimated income of the employees including the travelling allowance upto January, 1993. For a period of two months, the assessee stopped deducting the amount on the ground that he held discussions with the Income Tax Officer. Assessee was treated as assessee in default u/s 201(1A) and was made liable to pay the interest on the amount of income tax, which was not deducted by the assessee from the conveyance allowance given to its employees under Section 192 (1) of Income Tax Act.