(202.9 KiB, 946 DLs)

S. 80-IB(10): Multiple Housing Projects On 1 Acre Plot Permissible

The High Court had to consider the following questions on interpretation of s. 80-IB(10): (i) what is a “housing project” u/s 80-IB(10)?, (ii) whether if approval for construction of ‘E’ building was granted by the local authority subject to the conditions set out in the first approval granted on 12.5.1993 for construction of A and B building, construction of ‘E’ building is an “extension” of the earlier housing project for which approval was granted prior to 1.10.1998 and, therefore, benefit of s. 80IB (10) cannot be granted?, (iii) whether the housing project must be on a vacant plot of land which has minimum area of one acre and if there are multiple buildings and the proportionate area for each building is less than one acre, s. 80-IB(10) can be denied?, whether the merger of two flats into one so as to exceed the maximum size of 1000 sq feet violates the condition set out in s. 80IB (10)? HELD by the High Court:

(i) As the expression ‘housing project’ is not defined, it must have the common parlance meaning and means constructing a building or group of buildings consisting of several residential units. The approval granted to a building plan constitutes approval granted to a housing project. Construction of even one building with several residential units of the size not exceeding 1000 square feet would constitute a ‘housing project’ u/s 80IB (10);

(ii) ‘E’ building is an independent housing project and not an extension of the housing project already existing on the plot because when the earlier plans were approved, ‘E’ building was not even contemplated and came into existence much later. The fact that the approval was granted on the same terms as that granted to the other buildings does not make it an “extension”;

(iii) S. 80IB (10)(b) specifies the size of the plot of land but not the size of the housing project. While the plot must have a minimum area of one acre, it need not be a vacant plot. The object of s. 80IB (10) is to boost the stock of houses. There can be multiple housing projects on a plot of land having minimum area of one acre;

(iv) On facts, as there was no merger of flats and no application was made to the local authority seeking merger of two flats, there was no violation.

(155.4 KiB, 1,738 DLs)

S. 14A & Rule 8D Disallowance Cannot Exceed Total Expenditure

In AY 2008-09, the assessee earned tax-free dividend income. Its’ total expenditure as per the P&L A/c was Rs. 49 lakhs. The AO applied Rule 8D and made a disallowance u/s 14A of Rs. 2.37 crores which was reduced by the CIT (A) to Rs. 1.78 crores. Before the Tribunal, the assessee claimed that even assuming that the entire expenditure had been incurred to earn the dividend, the disallowance u/s 14A & Rule 8D could not exceed the expenditure incurred. HELD accepting the plea:

U/s 14A read with Rule 8D, disallowance can be made for the expenditure incurred for earning of exempt income. From the assessee’s P&L A/c, it is evident that the total expenditure incurred was Rs. 49 lakhs only which was claimed as a deduction. The disallowance u/s 14A & Rule 8D cannot exceed the expenditure actually claimed by the assessee. Accordingly, the action of the AO & CIT (A) in making disallowance in excess of total expenditure debited to P&L A/c is unjustified.

(277.5 KiB, 886 DLs)

In remand, s. 14A disallowance cannot exceed original disallowance

The AO made a disallowance u/s 14A of Rs. 45 Lakhs on the ground that the assessee had not been able to segregate expenses relating to earning of dividend income and that borrowed funds had been used to fund the investments. The CIT (A) reduced the quantum of disallowance & the department accepted that. In the assessee’s appeal, the Tribunal totally deleted the disallowance. On appeal by the department, HELD:

The AO should examine & compute the disallowance on the basis of what is laid down in Maxopp Investment Ltd 203 TM 364 (Del). However, the quantum of disallowance, if any, to be made by the AO will not exceed the disallowance which was made in the original assessment order as reduced by the CIT(Appeals).

(168.6 KiB, 1,791 DLs)

In computing book profits u/s 115JA/JB, if actual expenditure to earn tax-free income not debited in P&L A/c, s. 14A cannot apply

For AY 2007-08, the assessee invested Rs. 10 crores in shares and units. The assessee claimed that it had incurred no expenditure to earn tax-free income though the AO & CIT (A) made a disallowance of Rs. 19.58 lakhs u/s 14A r.w. Rule 8D. Before the Tribunal, the assessee claimed that (i) Rule 8D could not apply to AY 2007-08 and (ii) No disallowance u/s 14A could be made for purposes of computing book profits u/s 115JB. HELD by the Tribunal:

Under the normal provisions of the Act, Rule 8D cannot apply till AY 2008-09 though the AO is at liberty to identify actual expenditure incurred to earn tax-free income & make disallowance. However, while computing book profit u/s 115JB, no actual expenditure was debited in the profit & loss account relating to the earning of exempt income. S. 14A cannot be imported into while computing the book profit u/s 115JB because clause (f) of Explanation to s. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s 115JB of the Act. In Goetze (India) Ltd. vs. CIT 32 SOT 101 (Del) it was held that sub-sec. (2) & (3) of s. 14A cannot be imported into clause (f) of the Explanation to s. 115JA. Accordingly, it is held that no addition to book profit can be made on account of alleged expenditure incurred to earn exempt income while computing income u/s 115JB.

(83.5 KiB, 1,797 DLs)

S. 220(6): Guidelines laid down on how stay applications should be dealt with

The assessee, a mutual fund, was a beneficiary of a trust named India Corporate Loan Securitisation Trust which was set up for securitising a loan of Rs.300 crores by issue of Pass Through Certificates (PTCs). The assessee had subscribed to the PTCs and its beneficial interest was proportionate to the PTCs subscribed. The Trust received interest of Rs.21.49 crores in respect of a loan and distributed the income to its beneficiaries in their respective shares. The AO passed an assessment order on the trust in the capacity of an AOP. Though a stay application was filed, the AO, without disposing of the stay application, demanded that 50% of the demand be paid. He also directed the assessee to pay Rs. 9.63 crores on the ground that it was a member of the AOP (Trust) and was jointly and severally liable in respect of the demand against the AOP. The assessee filed a stay application which was disposed of by the AO on 9.3.2012 (received by the assessee on 13.3.2012). On 12.3.2012, the AO attached the assessee’s bank account u/s 226(3). The assessee filed a Writ Petition pointing out that the action had been in pursuance of the CBDT Chairman’s letter dated 7.2.2012 promising postings commensurate with tax recovery. HELD by the High Court:

The Revenue has made an unfortunate and hasty attempt to make a recovery of the demand without enabling the assessee to take reasonable recourse to the remedies available in law. The assessee filed a stay application before the AO on 7.3.2012 and moved the CIT on 9.3.2012. Before service of the order rejecting the stay application, the assessee’s bank account was attached on 12.3.2012. Administrative directions for fulfilling recovery targets for the collection of revenue should not be at the expense of foreclosing remedies which are available to assessees for challenging the correctness of a demand. The sanctity of the rule of law must be preserved. The remedies which are legitimately open in law to an assessee to challenge a demand cannot be allowed to be foreclosed by a hasty recourse to coercive powers. AOs & appellate authorities perform quasi-judicial functions under the Act. Applications for stay require judicial consideration. Rejecting such applications without hearing the assessee, considering submissions and indicating at least brief reasons is impermissible. In KEC International 251 ITR 158 guidelines regard to the manner in which applications for stay should be disposed of have been laid down. Unfortunately these guidelines are now being breached by the Revenue. In Coca Cola India 285 ITR 419 the conduct of the Revenue was deprecated. In attaching bank accounts even before communicating the order passed The following guidelines should be borne in mind for effecting recovery:

 

1. No recovery of tax should be made pending

 

(a) Expiry of the time limit for filing an appeal;

 

(b) Disposal of a stay application, if any, moved by the assessee and for a reasonable period thereafter to enable the assessee to move a higher forum, if so advised. Coercive steps may, however, be adopted where the authority has reason to believe that the assessee may defeat the demand, in which case brief reasons may be indicated.

 

2. The stay application, if any, moved by the assessee should be disposed of after hearing the assessee and bearing in mind the guidelines in KEC International;

 

3. If the Assessing Officer has taken a view contrary to what has been held in the preceding previous years without there being a material change in facts or law, that is a relevant consideration in deciding the application for stay;

 

4. When a bank account has been attached, before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law;

 

5. In exercising the powers of stay, the ITO should not act as a mere tax gatherer but as a quasi judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate hardship to the assessee. Though the AO has made an assessment, he must objectively decide the application for stay considering that an appeal lies against his order : the matter must be considered from all its facets, balancing the interest of the assessee with the protection of the Revenue.

(175.0 KiB, 1,206 DLs)

S. 220(6): AO must pass reasoned order to deal with stay applications

The AO passed an assessment order raising a demand of Rs.5.76 Crores. The assessee filed a stay application stating that the CIT (A) had heard the appeal and stay of demand be granted till the order on the appeal. The AO rejected the stay application and directed that the demand be paid without giving any reasons. The assessee approached the Addl CIT who noted that as the AO had already started recovery proceedings, there was no point before him to consider. The assessee’s bank accounts were attached u/s 226(3). The assessee filed a Writ Petition. HELD by the Court:

In several judgments of this Court, the parameters for the exercise of jurisdiction u/s 220(6) of the Act have been spelt out. In KEC International Ltd. v. B.R. Balakrishnan 251 ITR 158, the importance of reasoned orders being passed on the stay applications was emphasized. The AOs consistently refuse to follow the law laid down in the judgment of this Court. The AO & the appellate authorities are duty bound to act in accordance with binding precedent and there is no reason or justification to act in the manner in which the applications for stay have been disposed of in this case.

(176.3 KiB, 1,171 DLs)

AO & appellate authorities are not mere tax gatherers; have duty to be fair to the assessee

The assessee, a professional, offered income of Rs.19.41 crores. The AO passed an assessment order u/s 143(3) assessing the total income at Rs.22.43 crores and raised a demand of Rs.1.18 crores. The assessee filed a stay application before the CIT (A) who directed that a refund of Rs. 78 lakhs due for a subsequent year be adjusted and the balance of Rs.41 lakhs be paid. The CIT (A) held that considering “the financial status and affairs” of the assessee, the payment of the balance demand would not cause financial hardship. The assessee filed a Writ Petition to challenge the rejection of the stay application. HELD by the Court allowing the petition:

The power which is vested in the AO u/s 220(6) and on the CIT (A) to grant a stay of demand is a judicial power. It is necessary for both the AO as well as the appellate authorities constituted under the Income-tax Act to have due regard to the fact that their function is not merely to act as tax gatherers, but equally as quasi judicial authorities, they owe a duty of fairness to the assessee. This seems to be lost sight of in the manner in which the authority has acted in the present case. The parameters for the exercise of the jurisdiction to grant a stay of demand has been set out in several judgments of this Court, including in KEC International vs. B.R.Balakrishnan 251 ITR 158. The assessee’s submissions on merits require consideration. The CIT (A) ought to have devoted a more careful consideration to the issue as to whether a stay of demand was warranted. As out of a total demand of Rs.1.18 crores, Rs.78 lakhs has been adjusted, the balance has to be stayed.

(11.0 KiB, 1,402 DLs)

Review Petition dismissed

Pursuant to the judgement in Vodafone International Holdings B.V. vs. UOI holding that Vodafone was not liable to pay capital gains on the transfer of shares, the Union of India filed a review petition in the Supreme Court seeking a review of the aforesaid judgement. HELD by the Supreme Court dismissing the review petition:

We have carefully gone through the review petition filed by the Union of India on 17th February, 2012. We find no merit in the review petition. The review petition is, accordingly, dismissed.

(119.3 KiB, 1,133 DLs)

S. 47(iv) relief not available if holding co and nominees hold 100% of subsidiary

The applicant, a German company, held 99.99% of the shareholding of an Indian company. The rest of the shares were held by other companies as nominees of the applicant. The Indian company proposed a buy back of shares u/s 77A of the Companies Act which would have resulted in transfer of shares of the Indian company from the applicant to the Indian company at a price to be determined. The applicant claimed that as it and its nominees held 100% of the shares of the Indian company, the exemption conferred by s. 47(iv) on transfers between holding company and 100% subsidiary applied and s. 46A would not apply. HELD by the AAR:

(i) S. 47(iv) exempts a transfer of a capital asset by a company to its subsidiary if “the parent company or its nominees hold the whole of the share capital of the subsidiary company”. The word used is “or” and not “and”. The assessee held only 99.99% of the shareholding. The shares held by the nominees cannot be considered as held by the assessee. If, under Indian law (s. 49 (3) of the Companies Act), a company cannot by itself hold 100% of the shares in a subsidiary, it would only mean that Parliament did not intend to confer the benefit of s. 47(iv) on such a parent company. Though this approach confines the relief to a particular species of parent companies, it does not mean that the provision is unworkable. If the nominees are treated as holding the shares benami for the parent company, it would offend the Benami Transactions (Prohibition) Act, 1988 and also violate s. 49(3) of the Companies Act. The nominees can also not be regarded as a trustee in view of s. 153 of the Companies Act. The result is that the applicant does not hold 100% of the share capital of the subsidiary and so s. 47(iv) is not attracted;

(ii) S. 46A, which provides that in the case of a buyback, the difference between the consideration and the cost of acquisition shall be deemed to be capital gains is a special provision and prevails s. 45. S. 47 overrides s. 45 but not s. 46A. There is no reason to enquire whether s. 46A is a charging section or not. The result is that even if the exemption in s. 47(iv) is held applicable, it does not override s. 46A and the applicant is subject to capital gains.

(232.3 KiB, 664 DLs)

S. 80-I: Despite “Dependence” on Old Unit, Unit Can Be “New Industrial Undertaking”

The assessee had a plant to produce caustic soda. It increased capacity from 37425 MT to 70425 MT by installing “12 new cells” and incurred expenditure of Rs.7.5 crore towards new machinery and plant added to the existing plant. The assessee claimed that a “new industrial undertaking” had come into being which was eligible for relief u/s 80-I. The AO, CIT (A) & Tribunal disallowed the claim on the ground that it was a case of substantial expansion and not a “new industrial undertaking” on the ground that though new plant and machinery by investing substantial funds had been installed, the undertaking was not an “integral unit by itself” but was dependent on the old undertaking for its functioning. On appeal by the assessee to the High Court, HELD reversing the lower authorities:

The principal object of s. 80-I is to encourage setting up of new industrial undertakings by offering tax incentives. A reasonable and purposive construction should be adopted. There is no logic in the argument of the department that the true test would be as to whether a new industrial undertaking can function independently of the existing industrial undertaking. If this argument is accepted, it will amount to adding a new clause in s. 80-I of the Act. The fact that the new unit is not capable of independently producing the goods without taking the assistance of the existing plant and machinery of the old unit is no ground to reject the claim u/s 80-I. The test laid down in Textile Machinery Corporation 107 ITR 195 (SC), namely that the new unit should have a “separate and distinct identity” is not violated only because the new undertaking is to a certain extent dependent on the existing unit. It all depends on the nature of the technology and the mechanism of production. One cannot ignore the fact that new machinery and new plant have been installed at an investment of Rs.7 crore and the fact that production has gone from 34000 MT to 75000 MT (Associated Cement Company 118 ITR 406 & other judgements distinguished /explained)