(155.4 KiB, 886 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.

(168.6 KiB, 677 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.

(260.0 KiB, 1,017 DLs)

Difference between “Finance Lease” & “Operating Lease” Explained

The assessee, a bank, purchased a boiler and gave it on lease to Indo-Gulf Fertilisers. The assessee claimed depreciation on the said boiler on the basis that it was the “owner” thereof. The AO & CIT (A) disallowed the claim for depreciation on the basis that the transaction was a “finance lease” which was akin to a loan given by the assessee and that the assessee was not the “owner“. On a reference to the Special Bench HELD:

(i) The distinction between a “Finance lease” and an “operating lease” is set out in the Guidance Note on Accounting for Leases and Accounting Standard (AS) 19. It is also set out in the judgement of the Supreme Court in Asea Brown Boveri vs. IFCI 154 TM 512 (SC) & Association of Leasing & Financial Services Companies v. UOI. In a finance lease, the lessee selects the equipment & the lessor provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. The lessee uses the asset for its entire economic life & all risks and rewards incidental to ownership are transferred to the lessee even though title may or may not be eventually transferred to the lessee. A finance lease is for a fixed period & non-cancellable. There is a fixed obligation on the lessee for payment of lease money & in case of premature termination, the lessor is entitled to recover his investment with expected interest. In substance, finance lease is a loan from the lessor to the lessee. In an operating lease, the lessor bears the risk of loss, the period is cancellable and lease rentals are not synchronized with the economic life of the asset. On facts, the assessee’s lease agreement had all the characteristics of a finance lease;

(ii) The assessee’s argument that even in the case of a finance lease, depreciation should be allowed to the lessor is not acceptable because all risks & rewards incidental to ownership are borne by the lessee and the lessor’s “ownership” is nominal & symbolic & serves no purpose other than as security for the recoupment of the investment with interest in the form of lease rentals. It is the lessee who is the actual and real owner of the asset (Podar Cement 226 ITR 625 (SC) & Mysore Minerals 239 ITR 775 (SC) applied), MCorp Global 309 ITR 434 (SC) distinguished)

(iii) On facts, the assessee had already advanced a loan to Indo-Gulf to purchase the boiler much prior to the entering into of the lease agreement. The lease agreement was entered into subsequently with the sole purpose of enabling the assessee to artificially fulfill the twin requirements of ownership and user of the asset so as to claim depreciation, to which it was not otherwise entitled as per law and thereby reduce its income in a mala fide manner. The agreement was consequently a “sham“. The assessee’s argument that the issue of depreciation is tax neutral because the tax rates on the lessor & lessee is the same is not correct because while the assessee had huge income, the lessee had a loss. The lease agreement was thus a “dubious way” to mitigate the assessee’s tax liability.

(241.2 KiB, 706 DLs)

No s. 195 TDS Liability On Payer If Payee Not Assessed

The assessee made a public issue of Global Depository Receipts (GDR) for which it engaged international lead managers like Jardine Fleming, Merrill Lynch etc and paid management and underwriting commission of Rs. 7.68 crores without deducting TDS. The AO & CIT (A) held that the said commission constituted “fees for technical services” and that the assessee ought to have deducted TDS u/s 195. The assessee was held to be in default u/s 201. Before the Tribunal, the assessee argued that as no action has been taken by the department against the payees and the time for taking such action had expired, no order u/s 195 & 201 could be passed. HELD by the Tribunal:

No order u/s 201(l) or (1A) holding the payer to be in default can be passed where the Revenue has not taken any action against the payee and the time limit for taking action against the payee u/s 147 has expired. On facts, the admitted position is that no assessment has been made in the hands of the payee in respect of the sums received from the assessee in respect of GDR issues. Similarly no proceedings have been taken against it till date for assessing such income. The time limit for issuing notice u/s 148 has also come to an end. As the time limit for taking action against the payee u/s 147 is not available, and there is no course left to the Revenue for making the assessment of the non-resident, exconsequenti, no lawful order can be passed against the assessee either u/s 201(1) or (1A) (Mahindra & Mahindra 313 ITR 263 (Mum) (SB) (AT) followed).

(90.8 KiB, 542 DLs)

S. 54EC investment time limit begins from date of receipt of consideration

The assessee entered into an agreement and handed over possession to the buyer which constituted a “transfer”. The consideration received from the buyer was invested by the assessee in s. 54EC Bonds beyond 6 months from the date of transfer though within 6 months from the date of receipt of the consideration. The Tribunal had to consider whether in view of the language of s. 54EC that the consideration had to be invested in the specified bonds within 6 months of the date of transfer, the relief could be allowed. HELD by the Tribunal:

In a case where the consideration for the transfer was received several months after the date of transfer, the period of 6 months for making deposit u/s 54EC should be reckoned from the date of actual receipt of the consideration. If the period is reckoned from the date of agreement and receipt of part payment at the first instance, it would lead to an impossible situation by asking assessee to invest money in specified asset before actual receipt of the same. Also, s. 54EC requires the “consideration” to be invested. If the consideration is not received, there is no question of investing it (S. Gopal Reddy 181 ITR 378 (AP), Janardhan Dass 299 ITR 210 (All) Darapaneni Chenna Krishnayya 291 ITR 98 (AP) (compulsory acquisition cases) followed).

(258.6 KiB, 681 DLs)

For s. 50B “Slump Sale”, liabilities reflected in “negative net worth” cannot be treated as “consideration” but the resultant “negative net worth” has to be added to the “consideration”

Pursuant to a scheme of arrangement u/s 391 & 394 of the Companies Act, the assessee transferred its “Power Transmission Business” to KEC International Ltd for a total consideration of Rs. 143 crores. The assessee claimed this transaction to be a “slump sale” u/s 50B. The “net worth of the undertaking” was computed at a negative figure of Rs.157.19 crores, being the excess of liabilities over assets. The assessee treated the net worth as Nil and offered the entire sale consideration of Rs. 143 crore as LTCG. The AO held that as the purchaser had taken over liabilities of Rs. 157.19 crores, the same had to be added to the consideration of Rs. 143 crores to arrive at the “full value of consideration” of Rs. 300 crores. The CIT (A), relying on Zuari Industries 105 ITD 569 (Mum) & Paper Base Co 19 SOT 163 (Del), held that the “net worth’ in s. 50B could not be a negative figure and if it was so because of the liabilities exceeding the assets, the net worth had to taken at Nil. The Special Bench had to consider two issues (i) whether the excess of liabilities over assets could be treated as “consideration” in the hands of the assessee & (ii) whether the resultant “negative net worth” could be treated as Nil or had to be added to the “consideration”? HELD by the Special Bench:

(i) On the issue as to the “full value of consideration“, the department’s argument that since the transferor’s liabilities have been taken over by the transferee, it would have to be treated as consideration received by the transferor is not acceptable. In the case of a slump sale, one lump sum value of the undertaking derived by adding all assets and reducing all the liabilities is arrived at. This is the “full value of the consideration”. If one adds the liabilities to this value, one is arriving at the consideration for the “assets” but not the consideration for the “undertaking“. Also, once the sale consideration has been approved by the High Court, it is unrealistic for the Revenue to contend that the consideration of Rs. 143 crore does not represent the full value of consideration of the undertaking. Accordingly, the “consideration” is Rs. 143 crores and not Rs. 300 crores as calculated by the AO (George Henderson 66 ITR 622 (SC), Gillanders Arbuthnot 87 ITR 407 (SC) & Attili N. Rao 252 ITR 880 (SC) distinguished);

(ii) On the issue as to the “net worth” of the undertaking, the assessee’s argument that if the net worth is negative (excess of liabilities over assets), it should be taken at Nil is not acceptable. Though, in ordinary parlance, the terms “cost” & “net worth” may not have a negative value, in the context of s. 50B, if the liabilities exceed the assets, there would be a negative net worth. The said negative net worth has to be “deducted from” (i.e. “added to“) the full value of consideration. Consequently, the chargeable capital gain is Rs. 300 crores (Rs. 143 crores + Rs. 157 crores) (Zuari Industries 105 ITD 569 (Mum) & Paper Base Co 19 SOT 163 (Del) reversed)

(74.6 KiB, 994 DLs)

S. 54EC limit of Rs. 50L applies to the transaction & not financial year

In AY 2008-08, the assessee sold property for Rs. 2.47 crores and disclosed capital gain of Rs. 1.14 crores. To overcome the restriction in the Proviso to s. 54EC that the investment made in the specified asset “during any financial year” should not exceed Rs. 50 lakhs, the assessee, within the prescribed period of 6 months, invested Rs. 50 lakhs on 31.03.2008 (FY 2007-08) & 10.06.2008 (FY 2008-09) and claimed a deduction of Rs. 1 crore. The AO rejected the claim though the CIT (A) allowed it. On appeal by the department, HELD reversing the CIT (A):

The object of the proviso to s. 54EC is to provide a ceiling of Rs. 50 lakhs on investment by an assessee in the long term specified assets. If the assessee’s interpretation is accepted then, because the transfer of assets has taken place from 1st Oct to 31st March, the assessee is able to invest Rs. 50 lakhs in the financial year in which the transfer took place and Rs. 50 lakhs in the subsequent financial year. However, assessees who have made a transfer of assets from 1st April to 30th Sept will not be entitled to do so. Accordingly, the investment has to be linked to the financial year in which transfer has taken place and the claim for deduction cannot exceed Rs. 50 lakhs.

(122.9 KiB, 424 DLs)

TDS: Extended time limit in s. 201(3) Proviso does not save proceedings initiated before 1.4.2010 even if order passed after that date

Pursuant to a search conducted on 11.09.2007, the AO passed an order dated 27.4.2010 u/s 201(1) / 201(1A) for FYs 2002-03, 2003-04 and 2004-05 in respect of TDS on salary & perquisites of expatriate employees. The assessee relied on NHK Japan Broadcasting Corp 172 TM 230 & Hutchison Essar Telecom Ltd 323 ITR 230 (Del) & argued that as the order was passed after 4 years from the end of the FY, it was barred by limitation. The AO relied on the Proviso to s. 201(3) inserted by the FA 2009 w.e.f. 1.4.2010 which provides that an order for a financial year commencing on or before 1.4.2007 may be passed at any time on or before 31.3.2011. The CIT (A) allowed the appeal on the ground that one had to see the law as of the date of initiation of proceedings and held that the order was beyond limitation. On appeal by the department, HELD dismissing the appeal:

S. 201(3) inserted by the FA 2009 w.e.f. 1.4.2010 imposes a time limit for the passing of s. 201 orders. The Proviso to s. 201(3) provides that an order for a financial year commencing on or before 1.4.2007 may be passed at any time on or before 31.3.2011. In the present case, the proceedings were initiated after the search on 16.11.2009. On this date, the amended provisions of s. 201 (3) had not come into force. Accordingly, the law prevailing as on that date as per NHK & Hutchison applied where it was held that an order u/s 201 could not be passed after the expiry of 4 years from the end of the FY. The s. 201 order was consequently beyond limitation. (H.M.T. Ltd. (P&H) & Bhura Exports 202 TM 88 (Cal) not followed)

(551.1 KiB, 602 DLs)

S. 50C does not apply to transfer of tenancy/ leasehold rights

The assessee held lease hold rights for 99 years in a house property. By a tripartite agreement, the owner sold his rights in the property while the assessee assigned his leasehold rights. The assessee received Rs. 3.19 crores. The AO held that as the stamp duty valuation of the said property was higher than the agreed consideration, s. 50C applied and the assessee was assessable on the basis of the stamp duty valuation. This was reversed by the CIT (A) on the ground that s. 50C did not apply to leasehold rights. On appeal by the department to the Tribunal, HELD dismissing the appeal:

There is a distinction between a receipt for transfer of ownership rights in property and a receipt for transfer of tenancy rights in respect of a property because though both are assessable as capital gains, in the case of tenancy rights, the “cost of acquisition” is deemed to be Nil u/s 55(2)(a) unless if it is purchased for a cost. The fact that the assessee assigned his rights, together with the owner, pursuant to the tripartite agreement did not mean that the assessee’s had ownership rights in the property. S. 50 C applies “where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government …… for the purpose of payment of stamp duty in respect of such transfer”. The sine qua non for application of s. 50 C is that the transfer must be of a “capital asset, being land or building or both”. A “leasehold right in land or building” cannot be equated with the “land or building”. Accordingly, s. 50C has no application to the assignment of leasehold/ tenancy rights

.

(36.1 KiB, 581 DLs)

Concern expressed at “mutual acrimony” between Members of Chandigarh Bench

The Applicant, an Accountant Member of the Tribunal, was transferred from Chandigarh to Rajkot. He challenged the transfer on the ground that it was punitive and had arisen because of a complaint against him by a Judicial Member. It was alleged that the Sr. VP, who decided the complaint, had indicted him without a hearing and that the said VP was part of the Collegium which had recommended the transfer. In turn, the Judicial Member alleged that she had been subjected to harassment by the Applicant and other Members of the Chandigarh Bench. She claimed that she had heard a bunch of appeals with the Applicant and that though she had drafted the judgement, the Applicant did not sign it till he sat on another Bench and decided another bunch of appeals by taking a contrary view to the view taken by her. She claimed that the Applicant had “purposely” kept the draft judgement in abeyance in order to be able to take a different view in another Bench while the Applicant alleged that there was something “extra judicial in her mind“. HELD by the CAT, dismissing the application:

(i) The documentation indicates an unsavoury and uneasy situation prevalent at the Chandigarh Bench of the ITAT and the litigating parties are found to be engaged in an unenviable endeavour to wash the proverbial dirty linen in public. The prevalence of the factual scenario, indicating almost complete want of trust and faith inter-se, ought to be foreign to each segment of dispensation of justice which (system), for optimum and unbiased delivery requires an ambience based upon balanced and conscientious approach. For reasons of propriety, we are not noticing any part of the mutual acrimony as between the personnel who are a part of the dispensation at the local Bench of ITAT. We express our deep sense of exasperation at the prevalent scenario and hope and trust that the sentiments expressed by the President of the ITAT in the course of his letter dated 4.1.2012 for ensuring bonhomie at the local Bench of the ITAT, would be pursued to its logical conclusion;

(ii) Transfer is an incident of public service. It is well settled that Courts/ Tribunals ought to refrain from interfering in transfer matters unless there is an element of perversity or extreme arbitrariness/ bias in the grant of the relevant order. The transfer order was passed on the recommendation of the collegium and though the Applicant found fault with the association of the VP who dealt with the complaint, no bias on part of the President or the other VP was alleged. Further, the claim that as the transfer was pursuant to a complaint, the competent authority ought to have granted a hearing is not acceptable. An employer is free to effect transfer on the basis of a complaint or adverse report without hearing the employee. The giving of a hearing may actually be counter-productive in such matters. Also, the Applicant was not free from blame because, having heard the bunch of appeals with the JM and having allotted the matters to her for dictation, it was not appropriate for him to retain the draft judgement till he sat on another Bench and took a view contrary to the one taken by the JM. If he was not agreeable with the view of the JM, he ought to have written an order of dissent. (Desire expressed that the competent authority may consider the feasibility of doing something to establish appropriate ambience at the Chandigarh Bench of the ITAT).