Digest Of Important Case Laws – August 2014

S. 2(22)(e) : Deemed dividend-Advance received in connection with construction work was held not to be taxedas deemed  dividend.
Where the assessee, a builder and managing director of a company in which he was holding 63 per cent shares, received a construction contract from said company, in view of the fact that the assessee executed the contract in the normal cause of his business as a builder, the advance received in connection with construction work was held not to be taxable in the assessee’s hands as ‘deemed dividend’ under section 2(22)(e).
CIT .v. Madurai Chettiyar Karthikeyan (2014) 223 Taxman 350 (Mad.)(HC)

S. 2(22)(e) : Deemed dividend-Family settlement-Amount received in pursuant to family settlement from a company in which he had substantial interest-Not deemed dividend.
Tribunal held that if the family settlement had not taken place there was a peril for the dissolution of the family owned companies for the sake of partition. In order to prevent such a precarious situation the assets of the family owned companies had to be realigned. Thus there was a commercial exigency for the family owned companies to transfer some of its assets and liquid assets in order to avoid extinction. Thus, as the Transactions were between the family members and their wholly owned companies due to the family settlement the provisions of section 2(22)( e)of the Act were not applicable.(ITA No.1965(Mad/2011/2278 /Mad/ 2012 dt.17-07-2014) (AY. 2008-09)
SKM Shree Shivkumar .v. ACIT (2014) 65 SOT 232 / The Chamber’s Journal–October-P.27 (Chennai)(Trib.)

S. 2(15):Charitable purpose-Objects of general public utility-Ports Trust- Charitable as no profit motive.
Assessee trust was constituted under Major Ports Trusts Act,1963. Assessee filed an application seeking registration under section 12A contending that activities of port trust were for benefit of general public and were covered under definition of charitable purpose under section 2(15).Commissioner rejected assessee’s application holding that activities carried on by assessee were in nature of commercial activities and not for charitable purpose. Tribunal, however, granted registration to assessee trust. It was noted that assessee trust was constituted for administration, control and management of various port activities which was an activity of general public utility. Further, fact that there was no profit making was equally clear from provisions of Act of 1963 It was held that  in view of aforesaid, Tribunal was justified in granting registration to assessee trust.
CIT .v.Kandla Port Trust (2014) 364 ITR 164 / 107 DTR 349 /225 Taxman 145 (Guj)(HC)

S. 2(29A): Long-term capital asset- Cancellation of original site and allotment of new site –Period of holding to be considered from date of original site allotment-Entitled to exemption as long term capital gains. [S.48, 54EC, 54F]
The assessee sold a property for consideration of Rs. 1.13 crore. Out of the consideration, he invested an amount of Rs. 28 lakh and Rs. 22 lakh in REC Bonds and National Highway Authority Bonds. He also purchased an apartment and filed a return by offering the balance amount to tax under the head income from long-term capital gains, after claiming exemption under sections 54EC and 54F. The AO observed that the sale deed executed in favour of the assessee was on 27-2-2008 and he sold property on 29-5-2008, within four months from the date of purchase and, therefore, it was short-term capital gain. Therefore, he disallowed the exemption claimed and thereby raised  a demand on the assessee. The CIT (A) upheld the order of the AO. On appeal, the Tribunal observed that the assessee acquired a right to hold the property when the allotment was made for first time on 25-8-1988. Due to some disputes, he could not be conveyed a site without encumbrance and with a clear title. As the sale had taken place beyond the three-year period, capital gains accrued on such transfer constituted a long-term capital gain and therefore, the assessee was also entitled to exemption as claimed. On an appeal by revenue, the HC held that the original site was allotted to the assessee prior to 36 months after payment of full value, merely because the said allotment was cancelled, and a new site was allotted, in law, would make no difference, admittedly when the original consideration paid was treated as a consideration for the subsequent allotment. Capital gains arising on the sale of new property would be long-term, and assessee was entitled to the benefit of exemption under sections 54EC and 54F.
CIT v . A. Suresh Rao (2014) 223 Taxman 228 (Karn.)(HC)

S.2(47):Transfer-Capital gains-Immovable property-Agreement to sell- Purchaser  has sold two shops-Liable to capital gain.[S.45]
Assessees were co-owners of a property .They entered into an agreement to sell said property on 7-9-1991.Assessees claimed that since by aforesaid agreement, they had not transferred possession, there was no transfer of capital asset within the meaning of section 2(47).Assessing Officer rejected assessees’ explanation holding that execution of agreement to sell resulted in transfer of property under section 2(47)(v).Tribunal found that assessees were full owners of property and by entering into agreement to sell, they had transferred their right of ownership in favour of purchasers. It was also undisputed that on basis of said agreement, purchasers further sold two shops and carried out development work on property in question. Tribunal thus confirmed order passed by Assessing Officer. It was held that impugned order of Tribunal did not require any interference.
Chandra Prakash Jain  .v.  ACIT(Inv.) Circle (2014)107 DTR 81 / 270 CTR 192 / 224 Taxman 290 (All)(HC)

S. 2(47):Transfer-Capital gains-Power attorney- A Power of Attorney which does not enable enjoyment of property does not result in a "transfer". CBDT Circular No.495 dated 22.9.1987 reads more into s. 2(47)(vi) than warranted-Not liable to capital gains. [S.45, Transfer of Property Act, 1882, S.53A,Registration Act, 1908]
The Court held that by a power of attorney (i) There is no transfer to or enabling enjoyment of property in favour of the assessee in any manner and therefore, sub-clause (vi) of Section 2(47) of the Income Tax Act does not get attracted. Clause 21 of the power of attorneyclearly reveals that no consideration was received from the power agent for appointing him as power of attorney. It also emphasised therein that the property right has not been handed over to the power agent. We are, therefore, unable to accept the plea of the Revenue that there was an element of transfer or enabling enjoyment in favour of the assessee.
We, therefore, now proceed to analyze the meaning behind circular No.495 dated 22.9.1987. The interpretation of the circular as put forward by the Revenue, we are not in agreement. The provisions of sub-clause (vi) of Section 2(47) of the Income Tax Act make it clear that the transaction, which has the effect of transferring or enabling the enjoyment of immovable property alone would come within the ambit of transfer. The circular reads something more into the provision. We are not inclined to accept such an interpretation. The circular also states that the legal ownership would continue with the transferor; but the property rights if transferred by way of power of attorney would come within the ambit of sub-clause (vi) of Section 2(47) of the Income Tax Act. Assuming we accept the intention behind the circular, then there should be an element of transfer or enabling enjoyment of property right as stated in paragraph 11.2 of the circular by the power of attorney holder.
(iii) We find no such recital in the power of attorney as extracted by the Tribunal and referred to by us. On the contrary, the terms of the power of attorney clearly show that property rights has not been transferred to the power of attorney holder and there is also no provision for enabling enjoyment. It is not the case of the Department that the power of attorney is sham. If they accept the power of attorney is valid, then the plea of capital gains at the hands of the assessee has no legs to stand.( TC ( Appeal ) No. 840 of 2014. dt. 3.11.2014.)
CIT.v. C. Sugumaran (Mad) ( HC );www.itatonline.org

S. 2(47):Transfer-Capital gains-Power of attorney-Possession was handed over- Execution of a Power of Attorney in favour of the builder constitutes part performance u/s 53A of Transfer of Property Act ,hence liable to capital gains. [S. 11,45,  Transfer of Property Act, 1953 , S.53A]
(i) On a reading of the above provision itself, it is clear that possession of the property has been handed over to the builder immediately on receipt of the first installment of the payment from the builder. As per clause (3), the total consideration is mentioned as Rs.8,83,50,400/- and Rs.3,00,00,000/- was to be paid as advance on the date of the agreement. The balance amounts were to be paid in instalments. These provisions categorically indicate the existence of an agreement by which the substantial portion of sale consideration is paid and possession of the property is handed over to the builder.
(ii) It is argued on behalf of the respondent that this is not a sale agreement at all. It is an agreement between owner of the land and the builder. It is argued that Clause (1) itself would show that if the project is not viable the property has to be returned back and the assessee will return all the money till then received. That apart, when a power of attorney is executed, the factum of sale arises only when the property is sold by the builder in favour of third parties. Only at that stage, that is when the sale deeds are executed, transfer as defined under Section 2(47) takes place.
(iii) On going through the materials on record and the documents made available, we do not think that the Tribunal has correctly appreciated the question on hand. When transfer is defined under the Income Tax Act and it includes a transaction involving possession to be handed over in part performance of a contract in the nature referred to in Section 53A of Transfer of Property Act, it amounts to transfer. Section 53A clearly explains the concept of part performance of a contract of sale of immovable property. If a buyer is put in possession of a property in part performance of the obligations under the agreement on the buyer paying a substantial portion of the sale consideration, the contract of sale is treated to be in part performance. Perusal of the agreement in the case clearly indicates such a contract of part performance. The assessee cannot take a contention that the builder is not the buyer. In fact, the terms and conditions of the agreement clearly indicates that the intention of the parties is to sell the property as such to the buyer, or their nominees and a power of attorney is given to enable the buyer to sell the undivided share of land in favour of purchasers of apartments to be constructed by the buyer of the land. The execution of the sale deed is deferred as at the time when the possession of the property is transferred to the builder, there is no purchaser for the property. In other words, the builder himself has crept into the shoes of the purchaser of the property and the registered instruments were created subsequently and the idea of keeping alive the agreement and execution of power of attorney in favour of the builder is only for the purpose of avoiding duplication of registered instruments and payment of stamp duty. In this case, the assessee itself executes the sale deed after several years on the request of the builder. Therefore, in principle, the actual transfer takes place between the assessee and the builder and it is thereafter the builder transfers possession to the purchaser of the apartments.
(iv) In the said circumstances, we are of the opinion, capital gains is to be computed at the time when the transfer takes place which has to be during the assessment year when a substantial portion of the amount was received by the assessee, that is when Rs.3.81 crores was received by the assessee during the assessment year 2004-05. Hence the said question is to be answered in favour of the department.( ITA No. 93 fo 2010. dt. 01.01.2014.) (AY.2004-05)
Cochin Stock Exchanges Ltd..v. CIT(Ker.)(HC);www.itatonline.org

S. 2(47)(v) : Transfer-Capital gains-Development rights-Mere execution of a development agreement does not result in a "transfer" if the approval of the municipal corporation   is delayed and the developer has not started work-Complete control over  the property was not given and only license was given. [S.45]
The assessee had received advance amounts much earlier to the execution of development agreement, probably on the strength of the MOU. The property was encumbered with tenancy rights of many persons and the release of tenancy right was completed only in January, 2005. Further, the approval from municipal corporation was also got delayed and the plans were revised subsequent to AY 2000-01. The surrounding circumstances show that the developer did not start the work of development in the year relevant to AY 2001-02. As per the terms of development agreement, the assessee has given only licence to enter into the property, meaning thereby the possession was not given in the year relevant to AY 2001-02. In view of the peculiar facts narrated above, the assessee has contended that the tax authorities are not correct in holding that the transfer of property took place in the year relevant to AY 2001-02. Held that the transfer of property did not take place on the date of execution of development agreement and accordingly the tax authorities are not justified in assessing the capital gain in AY 2001-02. The capital gain was rightly assessed in the assessment year 2004-05). (ITA No. 3096/Mum/2012, dt. 14.11.2014.) (AY. 2001-2002)
Dilip Annand Vazirani .v. ITO (Mum.)(Trib.);www.itatonline.org

S.4 : Income chargeable to tax- Notional income-Car parking space –Refundable deposit-Additions deleted by the Tribunal was confirmed.
The assessee entered into an agreement for the development of its property under which the developer was to construct for the assessee, 150,000 sq.ft of area of cost & 20% of the sale value subject to the minimum of Rs 200 sq.ft of the balance constructed area on the land. The High Court dismissed the appeal and held that in absence of any sale or transfer of car parking areas to the assessee by the developer, no chargeable income accrued to the assessee for being allowed to park the cars in open space against refundable security deposit. Further developer having provided free of cost air – conditioning facility to the assessee till property was transferred to theassessee, no notional income could be added in the hands of the assessee on that account. Further court also held that tax could be levied only on real income and not on hypothetical income. The order of Tribunal deleting the addition of Rs 35 lakhs was confirmed.(AY.2003-04)
CIT  .v. Spencess & Co. Ltd. (2014) 266 CTR  564(Mad.)(HC)

S.4:Charge of Income-tax-Information received by the AO that the assessee is a beneficiary in a "discretionary" trust set up in Liechtenstein can form the basis of assessment of undisclosed income in the assessee’s hands. Argument that the trust is "discretionary" and that the amount has not "accrued" to him or that the documents are "not corroborated" is not acceptable.[S.164]
The assessment was reopened because a tax-evasion petition (TEP) has been received from CBDT that the assessee is a beneficiary of Ambrunova Trust and Merlyn Management SA. In the return of income the assessee neither offered any income with reference to the trust nor disclosed any details to the effect that the appellant was a beneficiary of the said trust. The AO, from the, summary of the trust account in LTG Bank found credit balance of US $ 24,06,604 (Rs.11,60,99,390) was credited to the said account. As the same was not reflected in the return of income thus, the AO correctly presumed that income has escaped assessment.
As regards the addition of Rs.2,34,64,398 on account of alleged undisclosed income, the argument of the assessee that the alleged trust was a discretionary trust and neither the amount was accrued/credited nor the name of the assessee appeared as beneficiary of Ambrunova Trust is not acceptable because the ld. Special Counsel brought to our notice certain documents evidencing that the names of all the assessees were appearing as beneficiaries of the said trust. Liechtenstein joined India as important partner in fighting overseas tax abuse and black money and shed its secrecy cloak and joined the league of a host of other countries for automatic exchange of information and mutual assistance in tax matters. Thus, became 62nd signatory to a worldwide convention, accepted by almost by all economic super powers and formulated by Paris based Organization for Economic Co-operation and Development (OECD), an international policy advisory body which formulates global tax standard to fight tax evasion and concealment of illicit funds. Switzerland joined the same convention in October, 2013. The ld. Spl. Counsel showed the bench a confidential list containing the names of the present assessee as trustee/beneficiaries of the trust. It was requested that since the investigation is in progress, therefore, at this stage it will hamper the investigation if the document is made public as the same list is containing the names of other beneficiaries also. On going through the bank summary in respect of Ambrunova’s trust account in LTG Bank Liechtenstein, we find that there is a credit balance of USD 24,06,605 (equivalent to Rs.11,60,99,390/-).
The contention of the assessee that such documents were not provided to him is also incorrect. The assertion that the information was unvouched and not corroborated with any evidence is also not accepted because the said documents were received officially by the Government pursuant to an investigation made by permanent subcommittee on investigation of United States Senate. Liechtenstein jurisdiction qualifies as an off shore financial center due to a very modest tax regime, high standard of secrecy laws and further foreign investors had the opportunity to establish companies or trust with “HOST trust reg.” in the principality of Liechtenstein to enjoy the advantages of off-shore financial center. As per the report Indian Investigating Agencies came across a number of cases where individual or entities from India were detected using banking channels of Liechtenstein to hide their illegal income or stash funds and it was only possible when India became signatory to a world-wide convention formulated by OECD an international policy advisory body which formulated global tax standards to fight tax evasion and concealment of illicit funds. It also provided option to undertake automatic exchange of information. It is a common knowledge that discretionary trusts are created for the benefit of particular persons and those persons need not necessarily control the affairs of the trust. Still the fact remains that they are the sole beneficiaries of the trust. Thus totality of facts clearly indicate that the deposit made in the bank account of the trust represents unaccounted income of the assessee, as the same was not disclosed by the these assessees in their respective returns in India, consequently, the addition was rightly made by the AO and confirmed by the CIT(A). ( ITA No. 3544/Mum/2011, dt.31.10.2014. ) (AY. 2002-03), 
Mohan Manoj Dhupelia .v. DCIT (Mum.)(Trib.);www.itatonline.org
Ambrish Mannoj Dhupalia .v. DCIT (Mum.)(Trib.);www.itatonline.org
Bhavya Mannoj Dhupalia(Ms.) .v. DCIT (Mum.)(Trib.);www.itatonline.org