(1.4 MiB, 606 DLs)

Commission to CMD for personal guarantee may be treated as “ploy to divert funds”

The assessee claimed a deduction for the “guarantee commission” of Rs. 1.15 crores that it paid to its Chairman Shri. Vijay Mallya. The AO & CIT (A) disallowed the claim on the ground that the so-called guarantee was a mere signature on a document, not backed by specific assets and that as the commission payment exceeded Mr. Mallya’s net wealth of Rs. 70 lakhs, it was an “innovative method of diverting income from the company” and an “unwarranted benefit” to Vijay Mallya. However, the Tribunal allowed the claim. On appeal by the department, HELD reversing the Tribunal:

None of the bankers had obtained details of the assets & liabilities of Vijay Mallya in India or abroad. He stood guarantor in respect of total borrowings of Rs. 115 crores and received commission of Rs. 1.15 crores even though his net worth was hardly Rs. 70.47 lakhs. Also, as he was a NRI, the permission of the RBI ought to have been taken which was not done. The assessee paid the MD commission “on the pretext” of paying guarantee commission and it is a “clear case” of “a ploy to divert the income of the companies under his management”. The payment was characterized as commission to overcome the RBI’s directions, the provisions of s. 309 of the Companies Act and was not a lawful payment and could not be allowed as a deduction u/s 37(1).

(369.8 KiB, 429 DLs)

Though Expl. 10 to s. 43(1) does not apply to loan waiver, treatment in books of reducing amount waived from asset cost means that WDV has to be reduced

The assessee received a loan of Rs. 5,277 crores from the Steel Development Fund in earlier years. In AY 2000-01, a substantial part of the loan was waived. In its books of account, the assessee reduced the cost of the assets by the amount of loan waived and claimed depreciation on the reduced figure. However, the assessee claimed that for income-tax purposes, the waiver did not impact the WDV of the assets and that depreciation had to be allowed on the original figure. The AO, CIT (A) & Tribunal (included in file) decided the issue against the assessee by relying on Explanation 10 to s. 43(1) inserted by the F (No. 2) Act 1998 w.e.f. 1.4.1999. On further appeal to the Tribunal, HELD reframing the question:

Explanation 10 to s. 43(1) does not cover the case of waiver of the loan. It covers only the grant of a subsidy or reimbursement by whatever name called. Though the assessee’s case may not fall under Explanation 10, the waiver of the loan amounted to the meeting of a portion of the cost of the assets under the main provision of s. 43(1) because of the treatment given by the assessee in its books of account in reducing the cost/WDV of the assets by the amount of the loans waived. The real nature of a transaction can be understood by reference to the contemporaneous act of the parties, which throws considerable light on their true intention and their understanding of the transaction. The assessee understood the receipt of the loans as having been given towards meeting a part of the cost of the assets and the waiver cannot have a different effect on such intention. PJ Chemicals Ltd 210 ITR 830 (SC), which holds, (pre Explanation 10) that a subsidy given as an incentive for industrial growth cannot be reduced from the cost of the assets under s. 43(1), does not apply to the facts.

(78.0 KiB, 529 DLs)

If Prima Facie case is in favour Of the assessee, full demand should be stayed

The AO raised a demand u/s 201 on the ground that the assessee ought to have deducted TDS u/s 194-I instead of u/s 194C. The assessee filed a stay application before the CIT (A) who observed that the there was “enough strength in the plea of the assessee for stay of demand” but directed that 30% of the demand be paid. The assessee file a Writ Petition on the ground that as the CIT (A) had formed a prima facie opinion in favour of the assessee, he ought to have stayed the entire demand and not directed deposit of 30% thereof. HELD by the High Court:

While it is true that on merely establishing a prima facie case, interim order of protection should not be passed, if on a cursory glance it appears that the demand raised has no leg to stand, it would be undesirable to require the assessee to pay full or substantive part of the demand. As the CIT (A) had himself expressed opinion in the order that there is enough strength in the plea of the assessee for stay of the demand, there was no occasion to direct for deposit of 30 percent. The assessee is entitled to stay on furnishing adequate security (Dunlop India 154 ITR 172 (SC) & Pennar Industries followed)

(115.3 KiB, 352 DLs)

Low Tax Effect Circular is retrospective & dept Must Show “Cascading Effect”

The department filed an appeal in the year 2010 where the tax effect was Rs. Rs.6,69 lakhs. The issue raised was whether deduction of interest payment on funds introduced in the firm, (in the form of loan), could be allowed against remuneration received from the firm. In response to the point whether Instruction No.3 of 2011 dated 9.2.2011 issued by the CBDT which states that appeals should not be filed where the tax effect was less that Rs. 10 lakhs, the department argued that (i) as the appeal had been filed prior to the issuance of the circular, the circular did not apply and (ii) as the appeal had a “cascading effect” involved a “common principle”, the appeal could not be dismissed in view of the Supreme Court’s verdict in Surya Herbals. HELD dismissing the appeal:

In CIT vs. Polycott Corp 138 ITR 144 (Bom) & CIT vs. Vijaya V. Kavekar, it was held that Circular No.3 of 2011 has retrospective operation and applies even to pending cases. As regards Surya Herbals, the appeal does not involve any “cascading effect” as the department has not shown whether there are other appeals which raise the same point.

(167.3 KiB, 844 DLs)

S. 14A does no apply to shares held as stock-in-trade. Disallowance on notional basis is invalid

The assessee availed of an interest-free loan of Rs.14 crores and paid brokerage of Rs.28 lakhs for purchasing shares. The shares were held as stock-in-trade and the assessee earned dividend of Rs. 46.67 lakhs thereon. The assessee claimed that no expenditure had been incurred to earn the dividend though the AO made a disallowance of Rs. 27.34 lakhs u/s 14A & Rule 8D. The Tribunal held that the brokerage on the loan, though incidental to the trading of shares, was indirectly incurred to earn dividend and had to be disallowed u/s 14A. On appeal by the assessee, HELD by the High Court allowing the appeal:

When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. The assessee had not retained shares with the intention of earning dividend. The dividend income was incidental to the business of sale of shares, which remained unsold by the assessee. It cannot be said that the expenditure incurred in acquiring the shares had to be apportioned to the extent of dividend income and that should be a disallowance u/s 14A.

(133.4 KiB, 452 DLs)

Power under S. 220(1) proviso to reduce period for payment of tax to be exercised after application of mind & recording reasons

The AO passed a s. 143(3) order on 9.3.2012 raising a demand of Rs. 36.56 crores and directed the assessee to pay the entire demand within 7 days even though the period specified in 220(1) is 30 days. The assessee filed a stay application u/s 220(6) on 12.3. 2012 which was rejected on the ground that it did not fall within the guidelines framed in the CBDT’s instruction No.1914. issued by the CBDT. The assessee approached the CIT pointing that there was no justification to demand payment within 7 days while s. 220(1) granted 30 days and that as there was already a provisional attachment, there was no determinant to the revenue. The CIT rejected the application and the AO attached the assessee’s mutual fund investments s. 226(3). The assessee filed a Writ Petition. HELD by the Court:

The Proviso to s. 220(1) which empowers the AO to demand payment within a period lesser than 30 days with the prior approval of the JCIT cannot be exercised casually and without due application of mind. The AO & JCIT must apply their mind on how it would be detrimental to the interests of the Revenue to allow the full period of 30 days and record reasons. The reasons & approval must be made available to the assessee if he seeks them. On facts, as there was already a provisional attachment u/s 281B attaching the assessee’s mutual funds to the extent of Rs.36.54 crores, there would have been no basis for forming the reason to believe that allowing the period of 30 days would be detrimental to the Revenue. Merely because the end of the financial year is approaching that cannot constitute a detriment to the Revenue. The detriment to the Revenue must be akin to a situation where the demand of the Revenue is liable to be defeated by an abuse of process by the assessee. There is absolutely no justification for the AO to demand payment in 7 days and his action is highhanded and contrary to law.

(136.1 KiB, 681 DLs)

S. 220(6): AO should not adopt “extra legal steps” of threatening or inducing the assessee for tax recovery

The assessee won Rs. 25 lakhs in “Kaun Banega Crorepati”. On receipt of the prize money by the assessee from Star Plus, the AO issued a notice u/s 208 directing her to pay advance-tax. Though the assessee claimed that the prize was not taxable, the AO deputed an Inspector and wrote a letter in which he threatened the assessee that 300% penalty would be levied and prosecution launched and that the assessee would have no defence. He also assured that upon receiving clarification from the CBDT, the advance-tax would be refunded with interest. Based on the threats of the AO, the assessee paid advance-tax of Rs. 7.55 lakhs. In the s. 143(3) order, the AO held that the prize money was taxable u/s 2(24) (ix) even though the amendment to tax TV game shows was inserted w.e.f. 1.04.2002. The CIT (A) accepted that s. 2(24)(ix) did not apply but held that the prize money was chargeable as “income from other sources”. The Tribunal upheld the AO’s stand that the winnings were taxable u/s 2(24)(ix). The High Court remanded the matter to the Tribunal for reconsideration pursuant to which the Tribunal allowed the assessee’s appeal and dismissed the department’s appeals. The department filed an MA before the Tribunal which was also dismissed and no further appeal was filed by the department. In giving effect to the Tribunal’s order, the AO treated the winnings as “income from other sources” despite the Tribunal decision that the assessee’s appeals were allowed. The assessee filed a Writ Petition to challenge the AO’s effect order. HELD:

The AO’s action of assessing the award as income shows utter disregard to the order of the Tribunal and lacks judicial propriety which is not expected from the AO who is subordinate to the Tribunal. The AO’s action of threatening the assessee with penalty and prosecution and deputing his inspector to collect the advance-tax is certainly not a healthy practice. In order to gain faith of the assessees and create confidence in the minds of the tax payers and for smooth administration of tax law, the Revenue authorities must act in a fair and legal manner. Every action of the State and its instrumentality should be fair, legitimate and above board and without any affection or aversion. The Government cannot be permitted to play dirty games with the citizens of this country to coerce them in making payments which the citizens were not legally obliged to make. If any money is due to the Government, the Government should take appropriate steps, but it should not take extra legal steps or adopt the course of maneuvering. Because of discontentment, it is necessary to provide guidelines for just exercise of the power of Revenue authorities. To prevent the abuse of power and to see that it does not become a new despotism, courts are gradually evolving the principles to be observed while exercising such power. New problems call for new solutions.

(139.9 KiB, 642 DLs)

S. 220(6): AO reminded that he is not mere “tax gatherer” & cautioned to follow guidelines for recovery of tax

The assessee, a public charitable trust, filed a ROI returning Nil income. The AO passed a s. 143(3) assessment order holding that the assessee was not eligible for s. 11 exemption on the ground that the receipt of donations by it amounted to a commercial activity and assessed its total income at Rs. 3.51 crores. The assessee filed an application for stay u/s 220(6). Without dealing with the stay application, the AO directed the assessee to pay the demand within 3 days and threatened coercive proceedings in the event of failure. The assessee filed an application before the DIT who directed it to pay 50% of the demand by March 2012 and the balance in installments. No reasons were given on why the stay application was not acceded to. The assessee filed a Writ Petition to challenge the direction: HELD by the High Court:

In the present case, as in several cases which have come up before this Court and particularly in the month of March, it is evident that the AO & DIT have both had scant regard to the parameters which have been laid down by this Court for disposal of stay applications in KEC International Ltd 251 ITR 158 & UTI Mutual Fund. No reasons are indicated. The orders do not contain a prima facie evaluation of the issues which would arise in appeal. In UTI Mutual Fund, this Court was constrained to issue a cautionary observation to the effect that AOs and Appellate Authorities, when they dispose of applications for stay, act as quasi judicial authorities and not merely as tax gatherers of the Revenue. While they have a duty of protecting the interests of the Revenue, they need to mitigate the hardship to the assessee and applications for stay must be considered objectively. The assessee does have serious issues to be urged before the CIT (A) and the AO & DIT ought to have granted a complete stay of demand u/s 220(6)

.

(430.9 KiB, 649 DLs)

S. 32(1)(ii): Business information, contracts, records etc are “intangible assets” & eligible for depreciation

The assessee, vide slump sale agreement, acquired a transmission and distribution business as a going concern for a lump sum consideration of Rs.44.7 crores. The net tangible assets were valued at Rs.28.11 crores and the balance Rs. 16.58 crores was allocated by the transferee towards acquisition of bundle of “business and commercial rights” being business information; business records; contracts; employees etc, compendiously termed as “goodwill”. The assessee claimed that the said “business and commercial rights” were an “intangible asset” and eligible for depreciation u/s 32(1)(ii). The assessee’s claim was rejected by the AO, CIT(A) & Tribunal on the ground that depreciation was not allowable on “goodwill”. On appeal by the assessee, HELD reversing the lower authorities:

S. 32(1)(ii) allows depreciation on “intangible assets” which are defined to mean “know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature”. Applying the principle of ejusdem generis, the expression “business or commercial rights of similar nature” need not answer the description of “knowhow, patents, trademarks, licenses or franchises” but must be of similar nature as the specified assets. The specified intangible assets are not of the same kind and are clearly distinct from one another. The nature of “business or commercial rights” cannot be restricted to only the aforesaid six categories of assets but can be of the same genus in which all the aforesaid six assets fall and form part of the tool of trade of an assessee facilitating smooth carrying on of the business. The intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee without any interruption. These intangible assets are comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. Accordingly, the intangible assets acquired under slump sale agreement were in the nature of “business or commercial rights of similar nature” and eligible for depreciation u/s 32(1)(ii) (Techno Shares 327 ITR 323 (SC) followed) (Q whether goodwill per se is eligible for depreciation u/s 32(1)(ii) left open).

(202.9 KiB, 455 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.