Digest Of Important Case Laws: Jan – December 2015

S. 1 : Application of the Act-After extension of Income-tax Act, 1961 to State of Sikkim with effect from 1-4-1990, Sikkim State Income-tax Manual, 1948, stands repealed and assessments made there under for assessment years 1997-98 to 2005-06 were without authority of law, nonest and nullity.
The assessee university was established in the year 1995 by an enactment of the Sikkim State Government. On 7-7-2006, the AO passed an assessment order under the Sikkim State Income-tax Manual, 1948,for the assessment years 1997-98 to 2005-06. The assessee filed an appeal before the Special Commissioner for cancellation of the assessment order, claimed refund of the ad hoc payment with interest and also claimed exemption u/s.17 of the Sikkim State Income-tax Manual, 1948. The Special Commissioner upheld the order of AO.
On a Writ Petition by the assessee, the High Court observed that the Sikkim State Income-tax Manual, 1948, stood repealed after extension of the Income-tax Act, 1961, in the State of Sikkim with effect from 1-4-1990. It further observed that the assessee was claiming its rights as an assessee under the Income-tax Act, 1961. The High Court held that after extension of the Income-tax Act, 1961 to the State of Sikkim, the Sikkim State Income-tax Manual, 1948, stands repealed and the assessments made thereunder are without authority of law, non est and nullity.(W.P. (C ) No. 30 of  2013 dt. 18-11-2014) (AYs. 1997-1998 to 2005-2006).
Sikkim Manipal University v. State of Sikkim(2015)55 taxmann.com 270 / 113 DTR 23 (2015) (Sikkim) (HC)

S. 2(1A) : Agricultural income –Growing of mushroom-Within municipal limits- Income from growing ofsaid mushroom to be treated as non-agricultural income.[S.10(1)]
Assessee claimed growing of mushroom as agricultural income . AO denied the exemption. On appeal the Tribunal held that there was no land on which tilling operations etc., was carried out, and same was basic operation for carrying out agricultural activities, further, entire activity was carried on in residential area within municipal limits and mushrooms were grown under controlled conditions, since assessee had failed to explain basic agricultural operations carried out in mushroom production, income from growing of said mushroom to be treated as non-agricultural income. (ITA Nos. 377 & 389 (Chd.) of 2012 dt. 28 -10 – 2014) (AY. 2003 -04 & 200 4-05)
Chander Mohan .v. ITO (2014) 52 taxmann.com 203 / (2015) 67 SOT 28 (Chd.)(Trib.)

S. 2(15): Charitable purpose-If the definition of "charitable purpose" is construed literally, it is violative of the principles of equality & unconstitutional. Merely charging of fee does not destroy the character of a charitable institution.[S.10(23C)(iv), Constitution of India, Art 14]]
The DGIT (E) passed an order stating that though the assessee is engaged in “the advancement of any other object of general public utility” as per s. 2(15) of the Act, its object could not be regarded as “charitable purposes” due to the new proviso to s. 2(15) and that it was not eligible for exemption u/s 10(23C)(iv). It was held that as the assessee had huge surpluses in banks, it had given its space for rent during Trade Fairs and Exhibitions, it had received income by way of sale of tickets and income from food and beverage outlets in PragatiMaidan, etc, the assessee was rendering service to a large number of traders and industrialists in relation to trade, commerce and business and was, therefore, hit by the expanded list of activities contained in the proviso to Section 2(15). It was further observed that the service of allotting space and other amenities like water, electricity and security, etc. to the traders to conduct their exhibitions fell within the ambit of any activity of rendering any service in relation to trade, commerce or business. The assessee filed a writ petition claiming that the First Proviso to s. 2(15), as amended by the Finance Act, 2008, is arbitrary and unreasonable and violative of Article 14 of the Constitution of India. HELD by the High Court:
(i) It is apparent that merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. It is also important to note as to what is the dominant activity of the institution in question. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. It is clear from the facts of the present case that the driving force is not the desire to earn profits but, the object of promoting trade and commerce not for itself, but for the nation – both within India and outside India. Clearly, this is a charitable purpose, which has as its motive the advancement of an object of general public utility to which the exception carved out in the first proviso to Section 2(15) of the said Act would not apply;
(ii) If a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). It is well-settled that the courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down;
(iii) Section 2(15) is only a definition clause. The expression “charitable purpose” appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression “charitable purpose”, as defined in Section 2(15) of the said Act, is read in the context of Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation sought to be given to the expression “charitable purpose” by the revenue;
(iv)  The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable purpose’. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. (W.P.(C.) No of 1872/2013, Dt. 22.01.2015.)
India Trade Promotion Organization .v. DGIT(E)(2015) 371 ITR 333 / 229 Taxman 347 / 274 CTR 305 / 114 DTR 329 (Delhi)(HC)

S. 2(15) : Charitable purpose – Activities carried out by a Trust for providing employment to rural poor cannot be held as commercial activities. [S.11] – Activities of Trust is eligible for exemption.
The assessee-trust contemplates to organize milk societies for facilitating sale of milk; the underlying intention is to get good price for the milk sold by the villagers and also to encourage them to rear their own milch animals. The villagers can earn a decent livelihood by engaging themselves in rearing of milch animals and selling of milk without middlemen and exploitation, through the societies formed under the guidance of the assessee trust. This is the same case with other proposed activities like ginning, spinning, fruit processing etc., where labour of the village women-folk can be fruitfully deployed, to keep away exploitation. The Hon’ble Appellate Tribunal held that the economic activities in the above nature cannot be treated as activities in the nature of trade, commerce or business as contemplated in proviso to section 2(15). Therefore, we find that the Director of Income-tax (Exemptions) has characterized the activities of the assessee trust as commercial in nature without going into the circumstances in which the activities are contemplated to be carried on by the assessee trust. (ITA No. 2104 of 2013 dt.10-11-2014)
Thamizh Thai Seva Trust  v.  DIT (2015) 67 SOT 166 (URO)/53 taxmmann.com 215 (Chennai)(Trib.)

S. 2(15) : Charitable purpose -Advancement and development of trade, commerce and industry in India, income earned from incidental activities is eligible for exemption under section 11.[S.11, 12A]
Assessee Association was set up for the purpose of promotion and protection of Indian Business & Industry and was registered u/s 12A. the purpose for which the assessee association was established is a charitable purpose within the meaning of section 2(15). The assessee is carrying out activities which are incidental to the main object of the Association and which are conducted only for the purpose of securing the main object which is the advancement and development of trade and commerce and industry in India. The activities are not in the nature of business and there is no motive to earn profit. Thus, the incidental activities were well covered by the section 2(15) and were thus ‘charitable’ in nature. In such an eventuality, the application of the section 11(4A) which applies only to business activities stands absolutely negated. Thus the income of the assessee is exempt from tax under section 11..(ITA No 1284 & 1491 dt. 2-12-2014) (AY. 2008-09)
Indian Chamber of Commerce v. ITO(E) (2014) 52 taxmann.com 52 / (2015) 67 SOT 176(URO) / 167 TTJ 1  / 37 ITR 688 (Kol.)(Trib.)

S. 2(15) :  Charitable purpose-Receiving fees simplicitor is not reason enough to hold that the activity is not a charitable activity. The fundamental essence of the activity has to be seen
The assessee institution is set up by the Indian Army and it seeks to promote the well being of their personnel after their retirement from the service, as also of the widows and dependents of the brave army men who sacrifice their lives, and help them integrate in the civil society by taking up suitable employment. This is surely an activity of general public utility, and, therefore, covered by the definition of ‘charitable purposes’ under section 2(15). The true test for deciding whether an activity is business activity is (i) whether the said activity undertaken with a profit motive, or (ii) whether the said activity has continued on sound and recognized business principles, and pursued with reasonable continuity. Clearly, therefore, in a situation in which an activity is not undertaken with a profit motive or on sound and recognized business principles, such an activity cannot be considered to be a business activity. ( ITA no. 2996/Del/ 2011, dt. 22/01/2015)
Army Welfare Placement Organization .v. DIT(E) (Delhi)(Trib.); www.itatonline.org

S. 2(22)(e) : Deemed dividend- Not a shareholder-Not liable to tax.
Assessee was not liable to tax unless it was a shareholder. (ITA No. 96 of 2013 dt. 30-04-2014)(AY. 2007-08)
CIT v. Karnataka Turned Components (P.) Ltd. (2014) 49 taxmann.com 299 / (2015) 229 Taxman 465 (Karn.)(HC)

S. 2(22)(e) : Deemed dividend – Current account –Subsidiary company- In the course of business- Deeming provision is not attracted.
When both the Assessee Company and its subsidiary company maintain current accounts and the subsidiary company advances on behalf of Assessee company for the purchase of raw materials resulting into credit lying with the latter company and as these transactions were made during the course of business, the deeming provision u/s. 2(22)(e) is not attracted.( I.T.A. NO. 238  of 2003 dt. 15-10-2014)(AY. 1993-94)
CIT v. India Fruits Ltd. (2015) 274 CTR 67/ 228 Taxman 243 (Mag)/ 114 DTR 109 (AP) (HC) 

S. 2(22)(e) : Deemed dividend –No flow of fund or any benefit-Provision would not be applicable.
Assessee was director in company SEPL, and partner in firm ‘SE’. One ‘M’, who was employee of SEPL, was also proprietor of PSC. SEPL gave loan or advance to PSC on 24-10-2005. On that day itself PSC gave a loan of said amount to SE which gave back money to SEPL on that day itself. Tribunal concluded that section 2(22)(e) was not attracted inasmuch as transaction was a circuitous and money which initially belonged to SEPL was returned to same company on very same day through PSC and there was no flow of fund or any benefit from ‘SEPL’ to ‘SE’ or its partner, assesse. On facts finding of Tribunal could not be said to be perverse and section 2(22)(e) would not be applicable. (ITA No. 50 of 2012 dt. 17-06-2014) (AY. 2006-07)
CIT v. Pravin Bhimshi Chheda (2014) 48 taxmann.com 151 / (2015) 228 Taxman 340 (Mag.) (Bom.)(HC)

S. 2(22)(e) : Deemed dividend –Security deposit-Business transaction- Firm was not a  shareholder-Deposit could not be treated as deemed dividend.
Assessee-firm entered into an agreement with its sister concern to supply its generator sets against a floating security deposit by said concern . In turn, sister concern would supply electricity to assessee at concessional rate. AO treated security deposit as deemed dividend in hands of assessee .Since deposit made by sister concern was a business transaction arising in normal course of business between two concerns and assesse. Firm was not a shareholder in said company, said deposit could not be treated as deemed dividend.(ITA No. 223 of 2011 dt. 26-09-2014) (AY. 2006-07)
CIT .v. Atul Engineering Udyog (2014) 51 taxmann.com 569 / (2015) 228 Taxman 295 (All.)(HC)

S. 2(22)(e) : Deemed dividend-Trade advance-Not a registered or beneficial shareholder- Not liable to be assessed as deemed dividend
Assessee company received a sum from another company and on same date, assessee paid certain amount to one ‘TR’ who was director of both companies. AO found that assessee showed received amount as trade advance and amount so paid to ‘TR’ was utilised by him for repayment of housing loan, accordingly AO held that ‘trade advance’ was nothing but loan received from company and he made addition under section 2(22)(c). On appeal Court held that the  assessee company was not a registered or beneficial shareholder, therefore assessee was not liable to pay tax.)(TCA No. 747 of 2014 dt. 10-11-2014)(AY. 2005-06)
CIT .v. Printwave Services (P.) Ltd. (2015) 373 ITR 665/53 taxmann.com 392 / 228 Taxman 378 (Mag.)(Mad.)(HC)

S. 2(22)(e) : Deemed dividend – Assessee holding more than 10% of equity capital of two private limited companies – Lending of money not part of business of companies nor substantial part of business – No organised course of activity involving dealings with anyone else except for assessee – Loan to assessee-Assessable as deemed dividend.
The Legislature has not used the expression "major part of the business" but has designedly used the expression "substantial part of the business of the company". The expression "business" contemplates an organised course of activity which is actually continued or contemplated to be continued with a profit motive and not for sport or pleasure. In each case, the true test is whether the lending of money constituted a substantial part of the business of the company. Within the purview of the exclusionary provision, the advance or loan must be, firstly, to a shareholder; secondly, the payment must be in the ordinary course of business; and, thirdly, the lending of money must constitute a substantial part of the business of the company. What constitutes a substantial part of business is a question of fact.
The assessee held more than 10% of the shareholding of two private limited companies. He received loans and advances from the two companies. Held, neither of the companies, admittedly, lent any money to any entity, save and except to the assessee. The lending of money was not a part of the business of the company, nor for that matter, could it constitute a substantial part of the business. There was no organised course of activity involving dealings with anyone else, save and except for the assessee. The assessee was, therefore, unable to establish that the exclusion was attracted.(ITA NO 252/14 dt 9-12-2014)(AY. 2007-2008)
Shashi Pal Agarwal .v. CIT (2015) 370 ITR 720/229 Taxman 307 (All.)(HC)

S. 2(22)(e):Deemed dividend-Not a shareholder- Provision  has to be construed strictly. If assessee is not a shareholder of lending co, S. 2(22)(e) does not apply even if funds are ultimately paid by Co in which assessee is a shareholder
The assessee received loan from one NS Fincon Pvt. Ltd. The Revenue seeks to tax this loan as deemed dividend. The case of the Revenue was that one Lafin Financial Services Pvt. Limited had advanced money to NS Fincon Pvt. Ltd. who in turn advanced money to the Assessee. The Assessee a 50% shareholder of Lafin Financial Services Pvt. Limited and in view thereof, loan advanced by NS Fincon Pvt. Ltd. to the Assessee is to be treated as a dividend in the hands of the Assessee. It is the admitted position that the Assesee is not a shareholder in NS Fincon Pvt. Ltd. The AO brought to tax the amount of loan received by the Asseseefrom NS Fincon Pvt. Ltd. as deemed dividend under Section 2 (22)(e) of the Act. This was deleted by the CIT(A) and the Tribunal. On appeal by the department to the High Court HELD dismissing the appeal:
The submission on behalf of the Revenue made before us is that one has to look at the substance of the transaction and that if one looks at the substance, then the Assessee would be chargeable to tax. This is not acceptable as fiscal status have to be interpreted strictly. Section 2 (22)(e) of the Act creates a fiction by bringing to tax an amount as dividend when the amount so received is otherwise then dividend. On a strict interpretation of Section 2(22)(e) of the Act, unless the Assessee is the shareholder of the company lending him money, no occasion to apply it can arise (AY. 2007-08) ( ITA No. 197 of 2013, 20.01.2015 )
CIT .v. Jignesh P. Shah(2015) 372 ITR 392/ 274 CTR 198 / 229 Taxman 302/ 114 DTR 249 (Bom.)(HC)

S. 2(28A) : Interest–Usage charges-Liable to deduct tax at source. [S.10(15), 40(a)(i),195]
Assessee company was manufacturing wooden furniture’s and trading of timber. It paid usance charges to non-resident on import purchases. TheAO  held that usance charges paid to the non-resident was the income arising to the non-resident reckoning within the meaning of provisions of section 5(2)(b), read with section 9(1)(v)(c)(b) and therefore, the assessee was liable to deduct TDS in accordance with the provisions of section 195. Accordingly, he disallowed same under section 40(a)(i).
On appeal, the CIT(A) held that the usance charges paid by the assessee were nothing but increased purchase price paid to the foreign sellers. Further, he held that TDS was not deductible on usance charges, as the same was not in the nature of interest and the recipient was a foreigner, whose income was not taxable in India at all.
On appeal by revenue  it was contended that in view of  Explanation (2) to section 10(15)(iv)(c) the usance charge in question was to be considered as deemed interest. Tribunal held that said charges would be considered as ‘interest’ and liable to TDS. (AY. 2007-08) (ITA No. 374 (Pnj.) of 2013)dt. 28 August, 2014)
ACIT .v. Bhavan Enterprises (2014) 52 taxmann.com 489 / (2015) 152 ITD 339 (Panaji)(Trib.)

S. 2(29A) : Long-term capital asset–Capital gains-Agreement with builder purchase of undivided share and construction-Date of allotment of undivided share in land was to be adopted as date of acquisition for computing capital gain instead of date of sale deed. [S. 2(42A) 45]
The assessee had entered into an agreement dated 22-2-2005 for purchase of undivided share of land as well as for construction of home by a project promoted by VHPL. Thereafter, the assessee sold the entire unit by a sale deed dated 10-4-2008 and claimed the difference between the cost of acquisition and sale consideration as long term capital gains.AO  took a view that the undivided share of land was registered on 4-8-2005 and since the property was purchased in the month of August, 2005 and sold in April, 2008, the capital gains arising from sale would be assessed as short term capital gains only and accordingly, denied benefit of section 2(29A) made addition. Appeal claim  of assessee was allowed. On appeal by revenue the Court held that on the basis of the admitted facts, the Tribunal placed reliance on Mrs. Madhu Kaul v. CIT [2014] 363 ITR 54 (P& H)(HC) where an identical issue arose as to whether the date of capital gains should be reckoned from the date of allotment or it should be reckoned from the date of actual sale, which is subsequent to the date of allotment. In effect, the High Court held that the allottee gets the title to the property on issuance of allotment letter and the payment in instalments is only a consequential act upon which delivery of possession to the property flows. Circular No. 471 dated 15-10-1986 speaks about the right of an allottee over a property that has been allotted. The other issues like payment of balance installments, delivery of possession, which takes place after the allotment only, relates back to the original allotment, in the present case, agreement. Therefore, the principle on which long term capital gains should be determined has been clearly indicated in the circular. Appeal of revenue was dismissed.  (T. C. (A) No. 976 of 2014 dt. 25-11-2014) (AY.2009-10)
CIT .v. S.R. Jeyashankar (2015) 373 ITR 120/ 53 taxmann.com 107 / 228 Taxman 289 (Mad.)(HC)

S. 2(42B) : Short term capital gain-Capital asset-Right in the agreement –Transferred within 36 months-Assessable as short term capital gains .[S. 2(14),2(29B, 45] 
Right in the agreement was transferred within 36 months hence the gain is assessable as short term capital gains. (ITA No.4625/Mum/2014, dt. 19.10.2014) ( AY. 2005-2006)
Prakash Shantilal Parekh .v. ITO (2015) 37 ITR 119 (Mum.)(Trib.)

S. 2(47) : Transfer-Capital asset- Capital gains- Accrual-Stock in trade-Land ceases to be a capital asset on date of application for conversion into N. A. land. Pursuant to amendment to s. 53A of Transfer of Property Act-Non-registered development agreement does not result in transfer u/s 2(47)(v) – Law in ChaturbhujDwarkadasKapadia 260 ITR 461 (Bom.) does not apply after amendment to s. 53A; [S.(2(14) 2(47)( v),(vi), 45, 48, Transfer of Property Act, 1882, S.53A]
(i) The land ceased to be a capital asset from the date when assessee filed application before the Bangalore Development Authority for conversion of land from ‘agriculture’ to non-agriculture. The intent of the assessee to hold the land as ‘stock in trade’ is further established by the fact that in the records of Revenue Department land was registered as ‘N.A. Land’ without which no residential project could be carried thereon. The approval of plans to construct residential villas by BDA further proves the intention of the appellants to treat the land as commercial asset. Thus various steps taken by the assessee are very much part of business activities involved in real estate development.
(ii) Amendment made in section 53A in 2001 is also relevant wherein an additional condition for registration of the written agreement was introduced as a result of which if the agreement between transferor and transferee is not registered, the transferor can dispossess the transferee from the property. Simultaneously, a consequential amendment was also been made in The Registration Act, 1908 to provide that unless the documents containing contracts to transfer any immoveable property for the purpose of section 53A of the TOPA is registered, it shall not have effect for the purposes of section 53A of the TOPA. A perusal of the Section reveals that registration of document is a sine qua non for applicability of section 53A of TOPA which entitles the transferee to remain in possession of the property.
(iii) In the instant case, Development Agreement was executed on stamp paper of Rs. 100/- and the same was not registered, hence, provisions of section 2(47)(v) of the Act are not applicable since the conditions stipulated in section 53A of TOPA are fulfilled.
(iv) With respect to the decision of the Bombay High Court in the case of ChaturbhujDwarkadasKapadiav.CIT (2003) 260 ITR 491(Bom)(HC), we found that the said decision is not applicable because the said decision was in the context of transfer of capital asset. Although the said decision was rendered in February 2003 the assessment year under its consideration was A.Y.1996-97. Further for the purpose of assessment of capital gains in the said case, all the conditions specified in Section 53A of the TOPA were satisfied. Hence, the judgment was delivered qua the law prevailing in the year of the transaction. Accordingly, the Hon’ble Bombay High Court has discussed all the conditions required to be complied under Section 53A of the TOPA, other than the condition of registration, since the law provided only five conditions at the time. Thus the case of ChaturbhujDwarkadasKapadia (supra) is of no help to Revenue to bring the transaction within the purview of section 53A of TOPA. As provisions of section 53A was amended in 2001 by which additional condition of registration of the written agreement was introduced and since in the instant case the agreement was not registered, the decision rendered by Hon’ble Bombay High Court in the case of ChaturbhujDwarkadasKapadia(2003)260 ITR 491 with respect to relevant provisions of section 53A applicable in A.Y. 1996-97 will not be applicable to the facts of instant case. We can therefore safely conclude that the conditions stipulated in section 53A of TOPA are not satisfied n the case of assessee as discussed above, there is no transfer as per the provisions of section 2(47) of the Act.( ITA no. 1588/Mum/2013, dt. 25.02.2015) ( AY. 2008-09)
Fardeen Khan .v. ACIT(2015) 117 DTR 130/169 TTJ 398
(Mum.)(Trib.),www.itatonline.org

S. 2(47)(v) : Transfer –Development right-Possession of land was given-Capital gains-Held to be transfer.[S. 45]
Assessee entered into development agreement with builder and developer for transfer of development rights in respect of land. Developer took possession of that land and started development work. Said transaction was to be treated as transfer of right in property covered under section 2(47)(v) .(ITA No. 336 of 2012 dt. 10-07-2014)
Bertha T. Almeida v. ITO (2015) 53 taxmann.com 522 / 229 Taxman 159 (Bom.)(HC)

S. 2(47(v) : Transfer-Capital gains-Development agreement-Consideration of 50% constructed area-Liable to capital gain tax.[S.45] 
The assessee along with his brother were the owner and in possession of land. They entered into a joint development agreement with ‘APL’. The assessee and his brother had given an irrevocable license to the developer to enter and develop the property. They have also executed a power of attorney in favour of the developer to enable the developer to gets sanction site plans, license and other approvals for the development of entire scheduled property. The developer was authorized to avail loans and financial facilities from the financial institutions.
The AO  was of the view that the assessees had surrendered their rights to the extent of 50 per cent in the land in lieu of 50 per cent constructed area, whose cost was to be borne by the builder. Thus, in the opinion of the AO, transfer of the land has taken place within the meaning of section 2(47)(v) and the assessees were assessable for long term capital gain. The CIT (A) on an analysis of the agreement had held that no transfer of the asset in the case of the assessee as on the date of entering into joint development and executing the power of attorney taken place. Therefore, capital gain was not assessable. On appeal by revenue the Tribunal  up held the order of AO. (ITA No. 676(Bang) of 2011 1-12-2014) (AY. 2007-08)
ITO .v. N.S. Nagaraj (2014) 52 taxmann.com 511 / (2015) 152 ITD 262 / 118 DTR 163 (Bang.)(Trib.)

S. 4 : Charge of income-tax–Overhead  expenses in construction of community centre-Minutes misread-Charges not received-Addition was deleted.
Assessee had undertaken construction of project awarded to them by Government . Assessing Officer relied upon minutes of meeting to hold that assessee was entitled to overhead charges of 1.5 per cent not only in respect of cost of construction of community centre but also on cost of construction of residential flats and made addition. However, it was found that assessee never received 1.5 per cent as overhead expenses for construction of residential quarters and said minutes had been misread, therefore stand of assessee that notes of meeting related to development of community centre complex and not to residential quarters was correct. Additions confirmed by the Tribunal was deleted. (ITA No. 339 of 2014 dt. 27-10-2014)(AY. 2002-03)
Housing & Urban Development Corporation Ltd. .v. Addl. CIT (2015) 54 taxmann.com 16 / 229 Taxman 157 (Delhi)(HC)

S. 4 : Charge of income-tax-Preoperative expenses-Amortisation of preliminary expenses –Income from other sources-Interest income was to be adjusted against pre-operative cost of plant and machinery cost of plant and machinery.[S.35D,56]
Assessee set up an industrial undertaking at NEPZ to manufacture Halogen lamp. Production was not yet started. Assessee invested share application money received by it in FDRs for a short period for purpose of providing security for obtaining letter of credit to import machineries. Since said deposit was made under compulsion for having letter of credit, interest income was to be adjusted against pre-operative cost of plant and machinery cost of plant and machinery .(ITA No. 2 of 2013 dt. 25-07-2014) (AY. 1992-93)
Phoenix Lamps India Ltd. .v. CIT (2014) 50 taxmann.com 320 / (2015) 228 Taxman 306 (Mag.) (All.)(HC)

S. 4 : Charge of income-tax-Protective assessment-Substantive basis-Double taxation-Additions cannot be made in the hands of partners. [S. 143(3)]
Where additions were already made on substantive basis in case of partnership firm or other partners and said additions had been finally sustained by Tribunal, then same addition could not be made on protective basis in hands of assessee being partner of firm .(D. B. IRA No. 34 of 1994 dt. 17-09-2014) (AY. 1986-87)
CIT .v. Sobhrajmal (2014) 51 taxmann.com 506 / (2015) 228 Taxman 308 (Raj.)(HC)

S. 4 : Charge of income-tax–Deduction of tax at source-Compensation awarded under Motor Vehicles Act is awarded in lieu of death of a person or bodily injury suffered in a vehicular accident and it could not be taxed as income-Circular of Board of Board to deduct tax at source was quashed. [S. 2(31), 2(42), 194A, Motor Vehicles Act, 1988]
The Registrar of the High Court had put up a note that Bank Authorities were making tax deductions on interest accrued on the term deposits, i.e., fixed deposits made by the Registry in terms of the orders passed by the Court in Motor Accident Claims cases.
The matter was referred to the Finance/Purchase Committee for examination. The Committee was of the view that since the dispute involved was intricate and public interest was involved, it was recommended that the matter required consideration on judicial side.
The recommendation of the Committee was treated as Public interest Litigation and suo motu proceedings were drawn.
The department filed the reply and pleaded that in terms of Circular No. 8/2011, dated 14-10-2011, issued by the income-tax authorities, income-tax was to be deducted on the interest periodically accruing on the deposits made on the court orders to protect the interest of the litigants.
The Court held that the circular, dated 14-10-2011, issued by the income-tax authorities, is not in tune with the mandate of sections 2(42) and 2(31), read with section 6. The said circular also is not in accordance with the mandate of section 194A hence the Compensation awarded under Motor Vehicles Act is awarded in lieu of death of a person or bodily injury suffered in a vehicular accident and it could not be taxed as income. Circular No. 8/2011, dated 14-10-2011, issued by Income-tax Authorities, whereby deduction of income-tax has been ordered on award amount and interest accrued on deposits made under orders of Court in Motor Accident Claims cases run contrary to mandate of granting compensation, thus, was quashed.In case any such deduction has been made by department, they are directed to refund the same, with interest at the rate of 12% from the date of deduction till payment. (CWPIL No. 9 of 2014 dt. 15-10-2014)
Court on its own motion v. H.P. State Cooperative Bank Ltd. (2014) 52 taxmann.com 151 / (2015) 228 Taxman 151/ 117 DTR 231/ 276 CTR 264 (HP)(HC)

S. 4 : Charge of income-tax –Income which was taxed in the hands of HUF,  cannot be taxed again as a member of HUF in his individual capacity.[VDIS,1997, S.64, 65]
Once a particular amount was taxed in hands of HUF in terms of declaration made under Voluntary Disclosure of Income Scheme, 1997, said amount could not be taxed again in hands of assessee as a member of HUF in his individual capacity.(ITA No. 519 of 2008 dt. 08-07-2014) (AY. 1988-89 to 1997-98)
CIT v. Kundanmal Babulal Jain (2014) 52 taxmann.com 303 / (2015) 228 Taxman 165 (Mag.)(Kar.)(HC)

S. 4 : Charge of income-tax -Principle of real income – Excess billing discovered and rectified- Rectification by making appropriate entries in account books. [S.5,36(2),145]
The excess surcharge which was not lawfully recoverable had to be set right, for which permission of the Reserve Bank of India was required in a procedure prescribed. The assessee had noticed the error and rectified the mistake in the balance-sheet before the return was filed. It offered to tax the actual income and deleted the income, which was relatable to the erroneous claim under surcharge. Hence, the Tribunal was justified in holding that there was no question of tax on a hypothetical income.
(TC(A) No. 512/14  dt.27-10-2014)(AY.2005-2006)
CIT v. Tyco Sanmar Ltd. (2015) 370 ITR 173/55 taxmann.com 449 (Mad.) (HC)

S.4:Charge of income-tax-Joint venture-Even if contract is awarded to the Joint Venture, the income is assessable only in the hands of the person which has executed the work.[S. 2(31), 143(3),153A]
The High Court had to consider whether the entire income earned by the joint venture company is liable to be taxed in the hand of one of the members of the assessee company without appreciating the fact that the contract was awarded to the assessee company and not to the individual member of the assessee company. It also had to consider the impact of C.H. Acthaiya 218 ITR 239 (SC) and MurugesaNaicker Mansion 244 ITR 461 (SC) wherein it was held that AO is not precluded from taxing the right person merely on the ground that a wrong person is taxable. HELD by the High Court dismissing the appeal:
The ITAT has as a matter of fact found that the assessee/ joint venture did not execute the contract work and the said work was done by one of its constituents namely SMS Infrastructure Limited. It is also found that the receipts for the said project work are reflected in the books of account of SMS Infrastructure Limited and in return, said SMS Infrastructure Limited has disclosed that income. The said return was accepted by the Assessing Officer in the assessment made under Section 153A read with Section 143 (3) of the Income Tax Act, 1961. It found that, therefore, some income could not have been taxed again in the hands of joint venture/assessee.( ITA no. 44 of 2013, dt.02.03.2015.)
CIT v. SMSL- UANRCL (JV)(2015) 116 DTR 430 / 277 CTR 47 (Bom.)(HC),
www.itatonline.org

S.4:Charge of income-tax-Subsidy-Capital or revenue-Subsidy-Entertainment tax subsidy is a capital receipt even though the source is the public who visit the cinema hall after it becomes operational.[U.P.Entertainment and Betting Tax Act, 1979]
(i) The UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. A subsidy of such nature cannot possibly be granted by the Government directly. Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational. Since the source of the subsidy is the public at large which is to be attracted as viewers to the cinema halls, the funds to support such an incentive cannot be generated until and unless the cinema halls become functional.
(ii) The State Government had offered 100% tax exemptions for the first three years reduced to 75% in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Given the uncertainties of a business of this nature, it is also possible that a multiplex owner may not be able to muster enough viewership to recover all his investments in the five year period. 34. Seen in the above light, we are of the considered view that it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade.  ( ITA No. 586/ 587/2013& 161& 204/ 2014 dt. 30/01/2015 ) (AY. 2006-07 to 2009-10)
CIT .v. Bougainvillea Multiplex entertainment (2015) 373 ITR 14/229 Taxman 471 / 116 DTR 129 (Delhi)(HC); www.itatonline.org

S. 4 : Charge of income-tax-Capital or revenue-Business income-Receipt on sale of carbon credit-Capital in nature.[S.28(i)]
Tribunal held that the receipt on sale of carbon credits was capital in nature. (ITA NO 147/Mds/14, dt. 30-1-2015) ( AY. 2010-2011)
ACIT v.  INTEX (2015) 38 ITR 496 (Chennai)(Trib)

S. 4 : Charge of income-tax-Accrual-Grants from Government-To meet the expenses –Not chargeable to tax-Amount not adjusted  is to be chargeable to tax.[S.12A] 
The assessee was a Government of India agency under the Ministry of Shipping, Road Transport and Highways and was granted registration under section 12A of the Act. The assessee claimed that income from internal resources were grant from the Government and therefore could not be chargeable to tax. The AO charged the income from internal resources to tax. The CIT(A)(A) confirmed this. On appeal:
 
Held, that,grants to meet the expenses  is not chargeable to tax. Amount not adjusted  is to be chargeable to tax. (ITA Nos. 1994 to 2001/Del/2013, dt. 21.11.2014 ) ( AY. 1988-1989, to  1996-1997 )
Inland Waterways Authority of India .v. Add. CIT (2015) 37 ITR 332 (Delhi)(Trib.)

S. 4 :Charge of income -tax- Diversion of income-Income by over-riding title-Application of income- Contribution of 1% of net profit to the Cooperative Education Fund maintained by National Cooperative Union is an application of income. [S. 61, 62]
On facts, it is only after the net profit reaches the co-operative society that the question of its disposal in terms of the provisions arise of the Act of 1965 and not earlier thereto, net profit is to be apportioned by transferring part of it as may be prescribed by Rules to the reserve fund or to other funds. Part of the profits has to be carried to the co-operative deduction fund constituted under the Rules and the balance is available for utilisation for payment of dividends to the members, bonus to the members and contribution to such other special funds as may be specified in the Rules as per Sec.63(2). As already stated earlier, assessee is not charging the amount of 1% on the profits of the year, in the year of accrual but is claiming the amount paid during the year on the profits of earlier year. This certainly indicates that the amounts have been received by assessee and utilized by assessee, then only amount was remitted to the said National Union under the Act. This indicates, there is no diversion at source but is only appropriation of profits as per principles laid down. It is also an admitted fact that there is no charge in the year in which assessee incurs losses. It is only when there are profits the amount has to be paid. This also distinguishes the issue that it is only an appropriation of profits earned but not diversion of income. If it is to be considered as diversion at source by overriding title, whether assessee incurs profits or loss, the said amount has to be paid. This is not the case here. The amount at 1% is payable only when assessee has profits in any year. This supports the view that this is not a diversion at source but an appropriation of amounts.
Following the principles laid down in CIT vs. Jodhpur Cooperative Marketing Society 275 ITR 372 (Raj), we are of the opinion that the amount contributed by assessee to the National Cooperative Union, New Delhi is appropriation from the net profits. There is a right to receive the income independent of accrual and receipt of income by the assessee before third party could lay claim to any part of it. Since income reached assessee before it reached to a third party, there is no diversion. As already stated, there is no payment in the year of losses. Therefore, payment under section 63(1)(b) is only an appropriation of profit. Moreover, this amount paid during the year is also not out of the profits of this year but profits of earlier year. Therefore, on that count also amount cannot be allowed as deduction during the year. ( ITA no. 1580/Hyd/2013, dt. 31.12.2014) ( AY. 2010-11)
A. P.  Mahesh Co-op Urban Bank Ltd. .v. DCIT (Hyd.) (Trib.) www.itatonline.org

S. 4 : Charge of income-tax – Advance against depreciation by way of tariff charges-Liability not includible in computation of taxable income.[S.145]
Assessee, a public sector company, engaged in selling electricity to State Electricity Boards, received Advance Against Depreciation (AAD) by way of tariff charge which was to be adjusted against future depreciation so as to reduce tariff in future years, amount so received was to be regarded as liability and, thus, not includible in computation of taxable  income .(ITA Nos. 3013 to 3015 (Delhi) of 2010 dt. 30-09-2014) (AY. 2000-01, 2001-02 & 2003-04)
ACIT .v. NHPC Ltd. (2014) 50 taxmann.com 221 / (2015) 67 SOT 130 (Delhi)(Trib.)

S. 5 : Scope of total income -Accrual of income-Mercantile system of accounting-Civil construction-Sums retained for payment after expiry of defect-free period-Right to receive amount contingent upon there being no defects-Accrual only on receipt of amount after defect-free period.[S.145]
The assessee, a civil contractor, was awarded a contract by the Hyderabad Municipal Water Supply and Sewerage Board. The contract provided for deduction of 7.5 per cent. from each bill. Out of this, 5 per cent.would be payable on successful completion of the work and the balance 2.5 per cent. after the expiry of the defect-free period. The assessee, for the assessment year 1996-97, did not include the amount representing 2.5 per cent. of the bills. According to the assessee, such amount could be shown as income, only on its being received. The Assessing Officer held that since the assessee was following the mercantile system of accounting, the amount of 2.5 per cent. of bills could be said to have accrued to it, along with the amount paid under the bills and was liable to be treated as income for that year. The Commissioner (Appeals) confirmed this. The Tribunal held in favour of the assessee. On appeal :
Held, dismissing the appeal, that the right to receive that amount was contingent upon there not being any defects in the work, during the stipulated period. It was then, and only then, that the amount could be said to have accrued to the assessee.(ITTA NO 135/04 dt.16-12-2014) (AY. 1996-1997)
CIT v. Shanker Constructions (2015) 371 ITR 320 (T & AP) (HC)

S. 5 : Scope of total income-Accrual of income outside and in India-Stock option-Not-ordinary resident- Only that portion of stock awards and stock option transfer proceeds which are attributable to services rendered in India can form part of total income of the relevant assessment year of the assessee who is not-ordinarily resident-DTAA-India-USA  [S.9(1)(ii), 147, 148, Art 16]
Assessee is an individual employed with M/s. Microsoft India (R & D) Hyderabad. The Assessing Officer reopened the assessment under section 147 by issuing notice under section 148. In response to the notice the assessee filed a letter requesting to treat the return filed originally as a return in response to notice under section 148. The Assessing Officer made the addition of the amount of Rs. 1,49,80,713/- being the stock award / SOTP. The CIT(A) confirmed the addition made by the Assessing Officer.
The Tribunal remitted the matter to the Assessing Officer for taking a fresh decision and held that only that portion of stock awards and stock option transfer proceeds which are attributable to services rendered in India can form part of total income of the relevant assessment year of the assessee who is not-ordinarily resident. (ITA No. 220/Hyd./2014 dt. 21-1-15) (AY. 2007-08)
Anil Bhansali v. ITO (2015) 168 TTJ 412/115 DTR 132 /53  taxmann.com 367 (Hyd.)(Trib.)

S. 5 : Scope of total income –Accrual  of income- Agreement was signed  in the relevant assessment year hence , income cannot be assessed for the relevant assessment year.[S.145] 
The assessee was a state government undertaking, engaged in the business of power generation. It supplies power inter alia to DISCOMs, which again were undertakings of the State Government. During the year under consideration, huge amount due to the assessee by the DISCOMs running into thousand of crores was outstanding. According to the AO  the assessee had right to claim interest on such dues and accordingly interest receivable worked out at Rs. 233.75 crores was added by him to the total income of the assessee.On appeal, the CIT(A)  found merit in the submissions made by the assessee on this issue and deleted the addition made by the AO.  On appeal by revenue the  Tribunal held  that said agreement was effective from date of signing of agreement i.e. 22-12-2009, and not in relevant assessment year, therefore, assessee was not entitled to claim any interest on said delayed payments for year under consideration and such interest income could not be said to have accrued to assessee in relevant year . (ITA No. 600 (Hyd.) of 2014 dt. 17-09-2014) (AY. 2009-10)
Dy.CIT .v. Andhra Pradesh Power Generation Corporation Ltd. (2014) 52 taxmann.com 300 / (2015) 67 SOT 183 (Hyd.)(Trib.)

S. 9(1) : Income deemed to accrue or arise in India – Business connection-Royalty-Deduction at source. [S. 9(1)(vi),40(a)(i), 195]
Assessee company entered into an agreement with ‘F’, a foreign firm, to provide investment advice for investments to be carried outside India.  AO  held  that payment made by assessee to ‘F’ were in nature of royalty. Tribunal held that in assessee’s own case for earlier assessment year, it was held that said payment could not be treated as royalty as it did not include any information provided in course of advisory services and further, since services were rendered abroad, no part of income had accrued or arise in India and no tax would be deducted. Following said decision, assessee would not be liable to deduct tax on said payment made. (ITA Nos. 1154 & 1241 (Mds.) of 2014 dt. 22-08-2014)(AY. 2009-10 & 2010-11)
ACIT .v. Sundaram Asset Management Co. Ltd. (2014) 52 taxmann.com 466 / (2015) 67 SOT 67 (URO)(Chennai)(Trib.)