(273.9 KiB, 525 DLs)

AAR rulings are binding despite contrary rulings of AAR. Assessment order following binding precedent is not amenable to s. 263 revision

The assessee, a FII based in UK, applied for an advance ruling on whether the profits arising to it from purchase and sale of Indian securities was “business profits” and whether in the absence of a ‘permanent establishment’ in India, the said profits were chargeable to tax under the India-UK DTAA. The AAR issued a ruling dated 30.4.2001 holding that the profits were “business profits” and that they were not chargeable to tax in India in the absence of a PE. Subsequently, the AAR took the contrary view in Fidelity Northstar Fund 288 ITR 641 that as a FII was prevented by SEBI regulations from trading in shares, the profits arising to it was assessable as “capital gains” and not “business profits”. Based on the said ruling in Fidelity Northstar Fund, the DIT issued a notice u/s 263 in which the view was taken that the subsequent ruling of the AAR was a “change in law” and the ruling obtained by the assessee was no longer “binding” u/s 245S(2) and that the assessment orders passed on the basis of the ruling were “erroneous and prejudicial to the interests of the revenue”. The assessee filed a writ petition to challenge the said notice. HELD, upholding the challenge:

(i) S. 245S stipulates that an advance ruling is binding on the applicant, the CIT and the authorities subordinate to him in relation to which it was sought. S. 245S(2) postulates that the ruling shall cease to be binding if there is a change in law or facts on the basis of which the advance ruling has been pronounced. Once a ruling has been pronounced by the Authority, its’ binding effect can only be displaced in accordance with the procedure stipulated in law;

(ii) The CIT manifestly exceeded his jurisdiction in relying upon the ruling of the AAR in Fidelity Northstar Fund as a basis to hold that the ruling obtained by the assessee was not binding on the department. The CIT ignored the clear mandate of the statutory provision that a ruling was binding only on the Applicant and the Revenue in relation to the transaction for which it is sought. The ruling in Fidelity cannot possibly, as a matter of the plain intendment and meaning of s. 245S, displace the binding character of the advance ruling rendered between the assessee and the Revenue;

(iii) That apart, the CIT could not have found fault with the AO for having followed a binding ruling. Where the AO has followed a binding principle of law laid down in a precedent which has binding force and effect, his order cannot be termed “erroneous and prejudicial to the interests of the revenue” and it is not open to the CIT to exercise revisional jurisdiction u/s 263. Russell Properties 109 ITR 229 (Cal), Paul Brothers 216 ITR 548 (Bom) and Rajan Ramkrishna 127 ITR 1 (Guj) followed.

(275.9 KiB, 999 DLs)

S. 194J applies to payments made to non-professionals such as hospitals. CBDT Circular on TPA liability is valid except for view on penalty

The assessee, a Third Party Administrator (TPA), provided services such as hospitalization services, cashless access services and services in connection with the processing and settlement of claims and making payment to hospitals to holders of health insurance policies issued by insurance companies. All claims payable by the insurance company to the policyholder were paid through the TPA from a Claim Float Account (CFA) provided by the insurance company. In order to facilitate cashless hospitalization, the TPA entered into a memorandum of understanding with individual hospitals and medical aid providers. The AO took the view that in making payments to hospitals TPAs were required to deduct tax at source u/s 194J. The assessee filed a writ Petition to contend that s. 194J applied only to payments made to individuals carrying on the medical profession and not hospitals. HELD rejecting the claim:

(i) S. 194J requires tax to be deducted at source when payment of any sum is made to a “resident” by way of “fees for professional services”. The term “professional services” is defined in Explanation (a) to mean services rendered by a person inter alia in the course of carrying on medical profession. The term “resident” is not confined to a natural person. The argument that the medical profession can only be carried on by an individual and that consequently a hospital cannot be regarded as carrying on the medical profession and hence payments made by TPAs to a hospital cannot be treated as fees for professional services is not correct because in defining the expression “professional services” Parliament has not confined it to mean services rendered by an individual who carries on the medical profession. If Parliament intended to restrict the ambit of s. 194J only to fees received by an individual, it was open to Parliament to use words that would be indicative of that position. In fact, in defining the character of the person who is to make the payment, Parliament has excluded from the ambit of the expression “any person” an individual and a HUF. However, in defining the character of the payee, Parliament has used the wider expression “resident”. Further, the words “services rendered by a person in the course of carrying on” in the definition include services which are incidental to the carrying out of the medical profession;

(ii) Though a hospital by itself, being an artificial entity, is not a “medical professional”, yet it provides medical services by engaging the services of doctors and qualified medical professionals. These are services rendered in the course of the carrying on of the medical profession. The fact that the services are institutionalized at a hospital which provides medical services makes no difference to the applicability of s. 194J;

(iii) No exception can be taken to the view expressed by the CBDT in Circular No. 8/2009 dated 24.11.2009 that payments made by TPAs to hospitals fall within the purview of s. 194J. However, the determination made by the CBDT that a failure to deduct tax on payments made by TPAs to hospitals u/s 194J will necessarily attract a penalty u/s 271C interferes with the quasi judicial discretion of the AO and appellate authorities, forecloses the defense of “reasonable cause” u/s 273B and is in violation of the restraints imposed by s. 119 (1). To that extent the circular is set aside. Also clarified that in making assessments and passing appellate orders the AO and CIT (A) shall do so independently and not regard the exercise of their quasi judicial powers as being foreclosed by the issuance of the circular.

(122.7 KiB, 899 DLs)

S. 197 TDS: High Court censures Dept for cavalier approach

The assessee, a consortium, was awarded a contract by MMRDA for the monorail project. The assessee filed an application u/s 197 for a certificate that MMRDA be directed to deduct tax at 0.11% on the ground that the percentage of total tax liability to revenue was estimated to be 0.11%. The AO rejected the application on the ground that Rule 28AA required figures for three previous years which were unavailable and no eTDS returns were filed by the assessee. A revision application filed u/s 264 was rejected by the CIT on the ground that (i) an order rejecting a s. 197 application is not an “order” for purposes of s. 264 and (ii) by not giving the benefit of a lower rate for withholding u/s 197, no hardship or prejudice is caused to the assessee as the assessee would get a refund of the excess tax paid, if any, with interest. On a Writ Petition filed by the assessee, HELD, censuring the department:

(i) It is far fetched to accept the view that the rejection of a s. 197 application lies in the absolute discretion of the AO or that the AO is not bound to indicate reasons for the rejection of the application. The AO cannot be heard to urge that though an assessee fulfills all the requirements which are stipulated in Rule 28AA/29B, he possesses an unguided discretion to reject the application. In rejecting an application, he is bound to furnish reasons which demonstrate application of mind to the germane. Hence, It is impossible to accept the view that the rejection of an application u/s 197 does not result in an order. The expression “order” for purposes of s. 264 has a wide connotation and includes a determination by the AO on an application u/s 197;

(ii) The manner in which the application has been dealt with by the AO and the CIT leaves much to be desired. The approach of the CIT that no prejudice is caused to the assessee as the excess TDS would be refunded is specious because if the conditions for grant of a certificate u/s 197 are fulfilled, it was impermissible for the AO to reject the application merely on a whim and on caprice and for the CIT to hold that no prejudice is caused to the assessee since the TDS would be refunded later with interest. “We are constrained to observe that the application filed by the assessee has been rejected in a rather cavalier manner and without application of mind to circumstances which are germane to the statute“.

(255.1 KiB, 516 DLs)

EEFC A/c foreign exchange fluctuation and interest not eligible u/s 80HHC

The assessee, an exporter, claimed deduction u/s 80HHC on account of foreign exchange fluctuation and interest in the EEFC account on the ground that it was part of business income and arose from exports. The AO & CIT (A) rejected the claim though the Tribunal allowed it. On appeal by the Revenue, HELD reversing the Tribunal:

(i) S. 80HHC allows a deduction in respect of the profits “derived” from exports. The term ‘derived’ is of a narrower connotation than the term ‘attributable to’ and postulates the existence of a direct and proximate nexus with the export activity. Pandian Chemicals 262 ITR 278 (SC) and Ravindranathan Nair 295 ITR 228 (SC) followed;

(ii) An exporter is not obliged to maintain the export proceeds in the EEFC Account but, this is a facility made available by the RBI. The transaction of export is complete in all respects upon repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC Account. The exchange fluctuation arises after the export transaction is complete and payment has been received by the exporter. It does not bear a proximate and direct nexus with the export transaction so as to be “derived” from exports for s. 80HHC. Interest on EEFC deposits is not “business income” but is “income from other sources” and not eligible for deduction u/s 80HHC.

(254.5 KiB, 611 DLs)

Benefit of lower tax rate under Proviso to s. 112 available to bonus shares despite no indexation

The proviso to s. 112(1) provides that “where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities … exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48 (i.e. indexation), then, such excess shall be ignored for the purpose of computing the tax payable by the assessee“. The assessee sold bonus shares of Infosys for Rs. 6.13 crores. As there was no cost of acquisition of bonus shares and no indexation, the long-term capital gains were computed at Rs. 6.13 crores. The assessee sold other shares and computed a long-term capital loss of Rs. 2.68 crores after indexation, which was claimed as a set off against the LTCG of Rs. 6.13 crores. On the balance of Rs. 3.45 crores (comprising of gains on the bonus shares), the assessee paid tax at 10% as per the Proviso to s. 112. The AO took the view that as the assessee was not eligible to claim indexation benefits in respect of the bonus shares, it was not entitled to the option given by the Proviso to s. 112 and tax was payable on the entire gains at the rate of 20%. The AO’s stand was upheld by the CIT (A) though reversed by the Tribunal. On appeal by the revenue, HELD dismissing the appeal:

(i) U/s 45 (1), the capital gains on the transfer of each capital asset have to be computed separately. Under the second proviso to s. 48, the gains have to be computed by deducting the “indexed cost of acquisition” from the consideration. U/s 70, the assessee is entitled to set off the loss sustained on the sale of shares from the capital gains realized from the sale of the bonus shares of Infosys resulting in the net capital gain of Rs.3.45 crores. U/s 112, the said long term capital gains are chargeable to tax at the rate of 20% subject to the Proviso;

(ii) In the case of bonus shares, the question of indexation does not arise because the cost of acquisition is taken to be nil. What the proviso to s. 112 essentially requires is that where the tax payable in respect of a listed security (being LTCG) exceeds 10% of the capital gains before indexation, such excess beyond 10% is liable to be ignored. The proviso to s. 112 requires a comparison to be made between the tax payable at 20% after indexation with the tax payable at 10% before indexation. If the shares were acquired at a cost, it becomes necessary for purposes of the proviso to s. 112(1) to compute capital gains before giving effect to indexation. However, that does not arise in respect of bonus shares. There is nothing in the s. 112 to suggest that the assessee would be entitled to a set off of the loss u/s 70 but without the benefit of indexation;

(iii) Circular Nos. 721 and 779 dated 13.9.1995 and 14.9.1999 respectively are significant because they reflect the Revenue’s understanding that (i) the benefit of a set off would be available while computing the income arising from the transfer of a long term capital asset, which is part of the total income of an assessee and (ii) The benefit of the cost inflation index or indexation would continue to be available subject to the condition that where the tax on long term capital gains without adjustment for indexation exceeds 10%, such excess shall be ignored.

(103.2 KiB, 505 DLs)

Assessment order is not effaced in respect of items that are not subject of reassessment. Time limit for s. 263 begins from date of original order for such items

An assessment order u/s 143(3) was passed on 27.12.2006. A reassessment order u/s 147 was passed on 27.12.2007. A show-cause notice u/s 263 was issued by the CIT on 30.4.2009 in respect of issues that were not the subject matter of the reassessment order. The s. 263 notice was time-barred if reckoned from the date of the assessment order but was within time if reckoned from the reassessment order. The revenue urged that the time limit should be reckoned from the date of the reassessment order on the basis of ITO vs. K.L. Srihari (HUF) 250 ITR 193 (SC) where it was held that the reassessment order “made a fresh assessment of the entire income of the assessee” and “the original order stood effaced by the reassessment order“. HELD rejecting the plea of the department:

(i) In CIT vs. Alagendran Finance 293 ITR. 1 (SC) it was held that the doctrine of merger does not apply where the subject matter of reassessment and original assessment is not one and the same. Where the assessment is reopened on a specific ground and the reassessment is confined to that ground, the original assessment continues to hold the field except for those grounds on which a reassessment has been made. Consequently, an appeal on the grounds on which the original assessment was passed and which does not form the subject of reassessment continues to subsist and does not abate. The order of assessment is not subsumed in the order of reassessment in respect of those items which do not form part of the order of reassessment;

(ii) Consequently, the time limit for exercise of power u/s s. 263 with reference to issues which do not form the subject of the reassessment order commences from the date of the original order and not the reassessment order;

(iii) The principle laid down in K. L. Srihari applies to a case where the subject matter of the original assessment as well as of the reassessment was the same and not to a case like Alagendran Finance where the subject matter of the original assessment and the reassessment were not the same;

(iv) The fact that under Explanation 3 to s. 147 inserted by the Finance (No.2) Act 2009 with retrospective effect from 1.4.1989 the AO can reassess even in respect of items that are not the subject-matter of the recorded reasons makes no difference to this principle of law.