(157.2 KiB, 2,178 DLs)

Despite large volume etc of share transactions, AO bound by Rule of Consistency to treat share gains as STCG

The assessee, engaged in the business of trading/investment in shares and securities offered STCG of Rs. 1.54 crores and LTCG of Rs. 2.91 crores. The assessee also traded in intra-day stocks without delivery and in derivatives, the gain or loss from which was offered as business income. While the LTCG was accepted, the AO & CIT (A) held that the STCG was assessable as business profits on the ground that (a) the purchases of Rs. 1098 lakhs and sale of Rs. 1241 lakhs during the year showed that the transactions were on a regular basis and on a substantially high scale, (b) The assessee had traded in as many as 85 scrips in 188 transactions and in as many as 1631852 shares during the year with frequency and regularity, (c) only in 21 scrips there have been some opening balances. The rest of the scrips had all been purchased and sold during the year, (d) the holding period in several shares has been merely a few days and in a few cases the purchase and sale had been on the same day and there is even one instance of forward sales, (e) there were no details regarding delivery of shares, (f) the assessee had not proved that the purchases were not out of borrowed funds and (g) there were no separate bank accounts. On appeal to the Tribunal, HELD allowing the appeal:

Though it is the case of the revenue that due to volume, magnitude, frequency, continuity, regularity, the ratio between purchase and sale clearly indicate that income on account of purchase and sale of shares should be treated as income from business and not as income from STCG, the AO has, from AY 2003-04 to 2008-09 (except for the impugned year 2006-07), consistently accepted the income as being STCG. In these circumstances, the Rule of consistency as propounded by the Bombay High Court in Gopal Purohit 228 CTR 582 (Bom) is squarely applicable and the income has to be treated as STCG.

(173.3 KiB, 2,494 DLs)

S. 50C applies to depreciable assets

The assessee sold an office building for Rs. 49.43 lakhs. As the WDV of the said building was also Rs. 49.43 lakhs, no STCG was offered to tax. The AO held that as the stamp duty valuation of the building was Rs. 76.49 lakhs, the consideration had to be taken at that figure u/s 50C. The AO also held that the entire block of assets had not ceased to exist. On appeal, the CIT (A) reversed the AO on the ground that the deeming provisions of s. 50 & s. 50C operate in distinct fields and s. 50C could not apply to depreciable assets. It was also held that the block of assets had ceased to exist. On appeal by the department, the matter was referred to the Special Bench. HELD by the Special Bench, allowing the appeal:

(i) There are two deeming fictions created in s. 50 and s. 50C for computing capital gains on building. While s. 50 modifies the “cost of acquisition” for purposes of s. 48, s. 50C modifies the term “full value of the consideration received or accruing as a result of transfer of the capital asset”. The two deeming fictions operate in different fields and there is no conflict between them. As s. 50C was inserted to prevent assessee’s indulging in under-valuation, there is no logic why it should not be applied to a depreciable building;

(ii) The assessee’s alternate argument that as the AO had held that the block of asset had not ceased to exist in the year and was in existence, s. 50 could not apply as held in Roger Pereira Communications 34 SOT 64 is not acceptable because the assessee itself had considered the entire block of buildings as having been sold/transferred during the year and the same was upheld by the CIT (A). The assessee was not aggrieved by the finding and could not file an appeal nor was it permitted to raise it as a Respondent under Rule 27 of the Tribunal rules to raise the issue (Hukumchand Mills 63 ITR 232 (SC) and Mahalakshmi Textile Mills 66 ITR 710 (SC) distinguished)

(173.8 KiB, 1,109 DLs)

Transfer Pricing: Low T/O companies are not comparable. Only operational profits to be considered for comparison

The assessee, a courier company, made payments to its parent company towards net work fees, reimbursement of expenses, purchase of marketing material etc. In evaluating the arms length price, the TPO took the view that (i) comparables whose turnover was less than 20% of the assessee’s turnover could not be considered even though they were accepted as comparable in the preceding year, (ii) Because other direct comparables were available, the segmental results of the courier activity of a company (TCI) engaged in diverse activities can be ignored and (iii) in comparing the results of the comparables, non-operating income had to be considered. This was upheld by the DRP. On appeal by the assessee to the Tribunal, HELD:

(i) The assessee’s argument that comparables with a turnover less than 20% of the assessee’s turnover should be considered is not acceptable because it is a universal fact that there are lot of differences between large businesses and small businesses operating in the same field. In the case of small business, economies of scale are not available and they are generally less profitable. The fact that such companies were considered comparable in an earlier year is not conclusive for want of facts of that year and also because there is no res judicata;

(ii) The argument that segmental results of a company engaged in diverse activities should be considered is also not acceptable because it is a common experience that in many such results certain expenditures, particularly relating to interest and head office, are generally not allocated. When direct comparables are available, there is no need to consider segmented results;

(iii) In principle, only the operating profit of the comparables should be considered. Items like interest income, rent, dividend, penalty collected, rent deposits returned back, foreign exchange fluctuations and profit on sale of assets do not form part of the operational income because these items have nothing to do with the main operations of the assessee. Insurance charges would depend on the nature of insurance charges. If the insurance charges were on account of loss of some parcel or courier against which courier has made a payment of compensation then such charges would constitute operational income.

(141.2 KiB, 1,435 DLs)

S. 14A disallowance of interest on borrowings on ground that assessee ought to have repaid borrowings instead of investing in tax-free investments invalid

The assessee earned tax-free dividends of Rs. 21.73 crores from shares & units and claimed that the investment in the shares & units having been made out of own funds, no part of the interest on the borrowed funds could be disallowed u/s 14A. The AO, relying on Abhishek Industries 286 ITR 1 (P&H) held that the assessee ought to have utilized the own funds for repaying the borrowing instead of investing in shares and that it was a case of indirect diversion of borrowed funds into the shares and units to earn tax-free income. Interest of Rs. 9.91 crores was disallowed on a pro-rata basis. This was upheld by the CIT (A). On appeal by the assessee, HELD:

(i) The facts showed that the borrowed funds were utilized for business purposes and the investment in shares & units was made out of own funds. As per the fund flow statement for the year, Rs. 46 crores were generated from operations while the net investment made in the year was only Rs. 40.60 crores. While the aggregate investment was Rs. 316.46 crores, the own funds in the form of capital & reserves were Rs. 335.36;

(ii) The AO’s argument that the assessee could have utilized its surplus funds for repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 (P&H) where Abhishek Industries was distinguished and it was held disallowance u/s 14A of interest on borrowed funds was not permissible if the investment in shares was made out of own funds.

(39.9 KiB, 1,780 DLs)

Failure to voluntarily apply s. 50C does not attract penalty u/s 271(1)(c)

The assessee sold a flat for Rs. 63 lakhs and offered capital gains on that basis while its stamp duty valuation was Rs. 72 lakhs. The difference of Rs. 9 lakhs was assessed by the AO u/s 50C which the assessee accepted. The AO levied penalty u/s 271(1)(c) which was confirmed by the CIT (A). On appeal to the Tribunal, HELD allowing the appeal:

The AO had not questioned the actual consideration received by the assessee but the addition was made purely on the basis of the deeming provisions of s. 50C. The AO had not doubted the agreement or given any finding that the actual sale consideration was more than the sale consideration stated in the sale agreement. The fact that the assessee agreed to the addition is not conclusive proof that the sale consideration as per agreement was incorrect and wrong. Accordingly, there was no concealment of income or furnishing inaccurate particulars of income.

(66.5 KiB, 1,686 DLs)

Despite concealment, no s. 271(1)(c) penalty if s. 115JB book profits assessed

Pursuant to a search u/s 132 and the detection of incriminating documents, the assessee offered additional income. The AO computed the income under the normal provisions and levied penalty u/s 271(1)(c) for concealment of income. However, as the book profits computed u/s 115JB was higher, the assessee was assessed u/s 115JB. The assessee’s appeal against the levy of penalty u/s 271(1)(c) was rejected by the CIT (A). However, on appeal to the Tribunal, HELD:

The concealment of income had its repercussions only when the assessment was done under the normal procedure. If the assessment as per the normal procedure was not acted upon and it was the deemed income assessed u/s 115JB which became the basis of assessment, the concealment had no role to play and was totally irrelevant. The concealment did not lead to tax evasion at all

(144.4 KiB, 1,332 DLs)

Granting permission for development not “transfer” & consideration not assessable in society’s hands

The assessee, a co-operative housing society, was the owner of a plot of land on which a building was constructed. The assessee entered into a development agreement pursuant to which it gave the developer the right to demolish the structure and construct a new building. In consideration, the developer paid Rs. 2.51 Lakhs to the assessee and Rs. 3.02 crores to the individual members of the society. The AO held that as the assessee was the owner, it was entitled to the entire consideration of Rs. 3.02 crores (though paid to the members) and was assessable u/s 2(24). This was confirmed by the CIT(A) on the ground that the grant of development rights was a “transfer” and the consideration was assessable as “capital gains”. On appeal by the assessee, HELD allowing the appeal:

The assessee-society had merely given permission to the developer to construct on the society’s land. No part of the land was ever transferred by the society. The Society continued to be the owner of the land and no change in ownership of land had taken place. Mere grant of consent will not amount to transfer of land/or any rights therein. The amount of Rs. 3.02 crores received by the members (on which some of them had paid tax) was not assessable in the assessee’s hands either u/s 2(24) or as capital gains

(352.9 KiB, 1,019 DLs)

Despite view taken in s. 195(2)/197 order, s. 147 reopening valid

The assessee was awarded contracts for on-shore supply, on-shore services and off-shore supply by Power Grid Corporation of India Ltd (PGCIL). PGCIL filed an application u/s 195(2) and obtained an order from the AO that tax had to be deducted at 10% on certain payments and at Nil rate on other payments. The assessee obtained s. 197 certificates to the same effect. Subsequently, the AO revised the s. 197 order and directed that tax be deducted at a higher rate even in respect of payments received in earlier assessment years for which Nil rate had been prescribed. This was challenged by the assessee and it was held by the High Court that the revision in TDS rates would apply prospectively. Subsequently, the AO issued a s. 148 notice alleging that income had escaped assessment. This was challenged by the assessee on the ground that as the s. 195/197 orders had been passed after full application of mind, the reopening was based on a “change of opinion”. HELD dismissing the Petition:

(i) It is well settled that orders passed u/s 195(2) and 197 are provisional and tentative. These orders do not bind the AO in regular assessment proceedings. and do not preempt the Department from passing appropriate orders of assessment. The fact that a determination u/s 195 & 197 is an “order” subject to challenge u/s 264 does not make any difference (Dodsal 260 ITR 507 (Bom) & Elbee Services 247 ITR 109 (Bom) followed);

(ii) Under Explanation 2 (a) to s. 147, a case where no return is filed is deemed to be a case where income has escaped assessment. On a conjoint reading of s. 195 and 197, if any opinion is expressed at the time of grant of certificate it is tentative or provisional or interim in nature and does not debar the AO from initiating proceeding u/s 147 on the ground that there has been a change of opinion.

(70.8 KiB, 1,053 DLs)

Employee not liable to pay s. 234B interest for failure to pay advance tax on salary

The assessee, a foreign company, entered into a contract with ONGC pursuant to which it supplied technicians. The AO treated the assessee as an agent of the technician – employees and assessed their income under the head “salaries”. Interest u/s 234B was levied on the ground that the employees had not paid advance tax. The CIT (A) & Tribunal upheld the claim of the assessee that the employees were not liable to pay advance tax as the tax was “deductible” at source u/s 192. On appeal by the department, the issue was referred to a Full Bench. HELD by the Full Bench:

U/s 208, an employee is not liable to pay advance tax on salary because u/s 192 there is an obligation on the employer to deduct tax at source. The employee cannot foresee that the tax deductible under a statutory duty imposed upon the employer would not be so deducted. The employee proceeds on the assumption that the deduction of tax at source has statutorily been made or would be made and a certificate to that effect would be issued to him. If the employer fails to deduct tax at source, the employee becomes liable to pay the tax directly. However, the liability to pay interest remains upon the person responsible to deduct tax at source. The department is entitled to proceed against the employer u/s 201(1A). (Sedco Forex 264 ITR 320 (Utt) & other judgements followed).

(38.7 KiB, 987 DLs)

Refund of Excise Duty under subsidy scheme is a capital receipt & not taxable

The assessee, pursuant to the New Industrial Policy announced for the State of J&K, received excise refund and interest subsidy, etc which it claimed to be a capital receipt. In the alternative, it was claimed that the same was eligible for deduction u/s 80-IB. The AO, CIT (A) and Tribunal rejected the claim and held the receipts to be revenue on the ground that the subsidy (i) was for established industry and not to set up a new one, (ii) it was available after commercial production, (iii) it was recurring in nature, (iv) it was not for purchasing capital assets and (v) it was for running the business profitably. On appeal by the assessee, HELD reversing the lower authorities:

(i) The ratio of Sahney Steel 228 ITR 253 (SC), Ponni Sugars 306 ITA 392 (SC) and Mepco Industries 319 ITR 208 (SC) is that to determine whether incentives & subsidies are revenue or capital receipts, the purpose underlying the incentives is the determinative test. If the object of the subsidy scheme is to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the subsidy scheme is to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. It is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given is irrelevant;

(ii) On facts, the object of the subsidy scheme was (a) to accelerate industrial development in J&K and (b) generate employment in J&K. Such incentives, designed to achieve a public purpose, cannot, by any stretch of reasoning, be construed as production or operational incentives for the benefit of assesses alone. It cannot be construed as mere production and trade Incentives;

(iii) The fact that the incentives were available only after commencement of commercial production cannot be viewed in isolation. The other factors which weighed with the Tribunal are also not decisive to determine the character of the incentive subsidies in view of the stated objects of the subsidy scheme;

(iv) Question whether the subsidy receipts are eligible u/s 80-IB not decided.