Digest Of Important Case Laws – April 2014

S.2(15): Charitable purpose-Proviso to s. 2(15) which denies exemption to a charitable institution carrying on commercial activities does not apply to institutions carrying out relief to the poor, education or medical relief but applies only to those carrying out “advancement of any other object of general public utility”.
Though the assessee, carrying on activities in the field of education, was held eligible for exemption in earlier years, in AY 2009-10, the AO denied exemption on the ground that the case was hit by the Proviso to s. 2(15) inserted by the Finance Act, 2008 which provides that the ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of (a) any activity in the nature of trade, commerce or business; or (b) any activity of rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity. The AO’s stand was upheld by the CIT(A) though reversed by the Tribunal. On appeal by the department to the High Court HELD dismissing the appeal:

(i) On the issue as to whether the activities of the assessee are for “education” & “charitable” in nature, the sense in which the word ‘education’ has been used in s. 2(15) of the Act in the systematic instruction, schooling or training given to the young is preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. Though the word “education” is not used in a loose sense so as to include acquisition of all sorts of knowledge, it should also not be interpreted in a narrow or pedantic sense. It encompass systematic dissemination of knowledge and training in specialized subjects. The changing times and the ever widening horizons of knowledge may bring in changes in the methodology of teaching and a shift of the better in the institutional setup. Advancement of knowledge brings within its fold suitable methods of its dissemination and though the primary method of sitting in a classroom may remain ideal for most of the initial education, it may become necessary to have a different outlook for further education. It is not necessary to nail down the concept of education to a particular formula or to flow it only through a defined channel. Its progress lies in the acceptance of new ideas and development of appropriate means to reach them to recipients. On facts, activities such as Continuing Education Diploma and Certificate Programme; Management Development Programme; Public Talks and Seminars and Workshops and Conferences etc constitute “education” so as to qualify as a “charitable purpose” u/s 2(15);

(ii) The mere existence of profit will not disqualify an institution for exemption u/s 10(22) if the sole purpose of its existence is not profit making but is educational activities;

(iii) On the issue of the Proviso to s. 2(15), the same has been explained in Circular No.11/2008 dated 19/12/2008. From the said Circular it appears that the newly inserted proviso to s. 2(15) of the Act will apply to entities whose purpose is advancement of any other object of general public utility i.e. fourth limb of definition of ‘charitable purpose’ contained in s. 2(15) and hence such entities will not be eligible for exemption u/s 11 or u/s 10(23C) of the Act if they carry on commercial activities. The Proviso will not apply in respect of the first three limbs of s. 2(15) i.e. relief to the poor; education or medical relief. Thus, where the purpose of a trust or institution is relief of the poor; education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of the commercial activities.( Tax Appeal No. 707 of 2013m dt. 13/06/2014.)

DIT(E) .v. Ahmedabad Management association (Guj) (HC) www.itatonline.org

S. 2(15): Charitable purpose – Breeding of cattle – Incidental profit-Trust entitled to exemption. [S.11, 12]
The main objectives of the trust were to breed cattle and endeavour to improve the quality of the cows and oxen in view of the need for good oxen as India is prominently an agricultural country. All these were objects of general public utility and would squarely fall under section 2(15) of the Act. Profit making was neither the aim nor object of the trust. It was not the principal activity. Merely because while carrying out the activities for the purpose of achieving the object of the trust, certain incidental surpluses were generated, that would not render the activity in the nature of trade, commerce or business. The assessee was entitled to exemption under section 11.(AY.2009-10)
DIT (E) .v. Sabarmati Ashram Gaushala Trust (2014) 362 ITR 539 (Guj.)(HC)

S. 2(22)(e): Deemed dividend–Share application money  cannot be treated as loan or deposit-Not assessable as deemed dividend.
When the Tribunal gave a finding that the amount received by the assessee-company was share application money, the sum could not be treated as loan or deposit. Furthermore, share application money was retained for some months and shares were allotted in following year. Therefore, sec. 2(22)(e) was not applicable. (AY. 2008-2009)
CIT .v. Alpex Exports P. Ltd. (2014) 361 ITR 297 (Delhi)(HC)

S.2(47): Transfer-Capital gain-Profit on sale of property used for residence-If an agreement to sell is entered into within the prescribed period, there is a transfer of some rights in favour of the vendee. Fact that sale deed could not be executed within the time limit owing to supervening problem is not a bar for s. 54 exemption. [S.45,54]

Consequences of execution of the agreement to sell are very clear and they are to the effect that the appellants could not have sold the property to someone else. In practical life, there are events when a person, even after executing an agreement to sell an immoveable property in favour of one person, tries to sell the property to another. In our opinion, such an act would not be in accordance with law because once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and therefore, without hesitation we can say that some right, in respect of the said property, belonging to the appellants had been extinguished and some right had been created in favour of the vendee/transferee, when the agreement to sell had been executed. A right in respect of the capital asset, viz. the property in question had been transferred by the appellants in favour of the vendee/transferee on 27.12.2002. The sale deed could not be executed for the reason that the appellants had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated. As held in Oxford University Press vs. CIT [(2001) 3 SCC 359] a purposive interpretation of the provisions of the Act should be given while considering a claim for exemption from tax and one can very well interpret the provisions of Section 54 read with Section 2(47) of the Act, i.e. definition of “transfer”, which would enable the appellants to get the benefit under Section 54 of the Act.(AY.2005-06)

Sanjeev Lal ETC.ETC.v.CIT(2014)105 DTR 305(SC)

S.2(24):Income-Transfer of development right (TDR)-Compensation paid to members-Amount cannot be taxed in the hands of society.[S.2(14), 2(47)]
Assessee was a hosing society consisting of 51 members. It had certain property. Developer has paid certain amount to the society for granting consent to consume TDR purchased by developer from 3rd party. Developer has also paid certain amount  of compensation to individual members of society. AO held that compensation received by the society and members of the society also taxable in the hands of society. On appeal Tribunal held that amount of compensation paid by the developer to the members of the society cannot be taxed in the hands of society as individual members have offered the income to tax in their respective assessment. Society has received only Rs 2.51,000 for granting consent to consume TDR purchased  by the  developer from third party. The Society continued to be the owner of the land and no change in ownership of the  land had taken place.Mere grant of consent would not amount to transfer of land or any rights therein. Tribunal deleted the addition. The revenue has filed an appeal to High Court which was dismissed by Bombay High Court (ITA NO 2292 of 2011 dt. 27-12-2013.Revenue has filed SLP before Supreme Court, which was also dismissed.(AY.1997-98)(S.L.P(C) No. 34415 of 2015 dt 28-10-2013)
CIT .v.RajRatan Palace Co-operative Housing Society Ltd (2014) 362 ITR 1(St.)(SC)
Editorial: Refer Raj Ratan Co-operative Housing Society Ltd. (2011)46 SOT 217 (URO)(Mum.)(Trib.)

S. 4:Charge of Income-tax-Accrual-Excise credit- Credit of pro forma excise rebate.
Credit of pro forma excise rebate taken into account was illusory and no real income had accrued. The assessee had communicated its reasons why it resorted to such an illusory entry which included that the company had sustained losses and in order to impress the bankers and to please the shareholders the entry was passed into the profit and loss account. The Tribunal on the facts was satisfied with the explanation. This was a finding of fact which had not been challenged by the Revenue as perverse nor was the finding of the Tribunal demonstrated to be erroneous either in fact or in law. When the Tribunal was satisfied that the entry did not represent any real income or any real receipt of money, there was no question of its being taxable.
CIT .v. Kusum Products Ltd. (2014) 361 ITR 632 (Cal.)(HC)

S.6(1): Residence in India–Non-resident-Individual–Period of stay-Resident and receipts taxable.
Assessee, an Indian citizen, employed outside India returned to India in financial year 2010-11 after resigning employment. His total stay in India in preceding four years was more than 365 days and total stay in India for financial year 2010-11 was 119 days. Held, he is resident in FY 2010-11 and receipts taxable. (AY. 2011-12)
SmitaAnand (Mrs.) In re (2014) 362 ITR 38 (AAR)

S. 9(1)(vi):Income deemed to accrue or arise in India–Royalty-Use of equipment or use of process-Brand width services or Telecom services- Taxable as Royalty0-DTAA-India-Singapore. [Art. 12(3)(b), (4)]
Payment received by assessee for providing international private leased circuitamounts to use of equipment or use of process and was taxable as royalty. (AYs. 2002-2003, 2003-2004, 2007-2008, 2008-2009)
Verizon Communications Singapore Pte Ltd. .v. ITO (IT) (2014) 361 ITR 575 (Mad.)(HC)

S.9(1)(vi):Income deemed to accrue or arise in India–Deduction of tax at source-Production and distribution of television programmes–Shooting of film outside India-Services specially characterized as work under section 194C  would not be taxable without a permanent establishment in India-Not liable to deduct tax at source  under S. 195.[S. 194C,195]
The applicant was a resident company engaged in the business of producing and distributing television programs. For shooting a program outside India, the applicant engaged U, company incorporated in, and a tax resident of, Brazil, for providing line production services and for providing a line producer, local crew for providing stunt services, transport necessary for stunts for production of the show in Brazil. Under the agreement, U was responsible for arranging for crew and support personnel as may be requisitioned; props and other set production materials; safety, security and transportation; and filming and other equipment as may be requisitioned. The anchor and the participants of the show were engaged and paid separately by the broadcaster and were not the responsibility of U. Held, the services were specifically characterised as work for the purpose of s. 194C by the Explanation to that section. Therefore, the payments made by the applicant to the non-resident company specifically fell under the definition of work u/s 194C of the Act and would not be taxable without a permanent establishment in India. Consequently, the payment would not suffer withholding of tax u/s 195 of the Act.(AAR  Nos. 1081 /1082  of 2011 dt 19-02-2014)
Endemol India P. Ltd. In re (No.4) (2014) 361 ITR 658 (AAR)

S. 9(1)(vii): Income deemed to accrue or arise in India-Fees for technical services–DTAA-India-Germany-Japan-USA-Netherland-Italy-Australia-China-France. [S.195,Art. 7]
Payments received or receivable by non-resident in connection with provision of services of technical and professional personnel to an Indian group company is taxable in India in view of Explanation 2 to sec. 9(1).
The incomes received by the applicants from the Indian company were taxable as business profits under article 7 of the Double Taxation Avoidance Agreement between India and the respective countries (except the applicant in the Cayman Islands with which there was no Agreement, and the applicant in Italy), whose income was to be taxed in accordance with the provisions of the Act. Applicants were subject to withholding  of tax under section 195.
Booz and Company (Australia) P. Ltd. In re (2014) 362 ITR 134 (AAR)

S. 10(14):Exempt income–Conveyance expenses-No relevance or bearing on actual expenditure-Taxable as salary-Tax is deductible at source.[S.15,17, 195, 201]
The conveyance allowance paid to defray expenses connected with journeys from residence to office and back could not be treated as an allowance paid for defraying expenses wholly, necessarily and exclusively in the performance of the duty. Held, that the conveyance allowance paid by the assessee without any relevance or bearing on the actual expenditure incurred by the employees, could not come within the purview of s. 10(14) and for that matter since the standard deduction granted u/s 16(1) was meant to take care of the expenses of an employee, incidental to his employment, including the journeys from residence to office and back, the conveyance allowance was clearly taxable under the head "Salary" and the assessee could not have excluded the conveyance allowance paid, while computing the tax deductible at source, from the salaries paid by it to its employees. (AY. 1995-96)
SriramRefregeration Industries.v. ITO (2014) 361 ITR 119 (AP)(HC)

S.10(23C): Exempt income–Educational institution-Property purchased in name of director of educational institution but transferred subsequently to educational institution-Entitled to exemption.[S. 11]
Property was purchased in the name of director of educational institution but was transferred subsequently to the educational institution. Held, there was no violation of provisions of s. 10(23C)(vi) or s. 11, and Assesseewas entitled to exemption.(AY.2004-05)
CIT .v. Sunbeam English School (2014) 361 ITR 325 (All.)(HC)

S. 10(23C): Exempt income-Maternity hospital–Medical attention-Entitled to exemption-Matter remanded to AO.
The expression "medical attention" cannot be read to be confined to medical treatment of persons suffering from an illness or a mental disability alone. If that were the intent of the Legislature, the sub-clause would have been framed differently stipulating that the subsequent provisions for the reception and treatment of persons during convalescence, rehabilitation or in regard to providing medical attention would be of those suffering from an illness or mental disability. Prevalence of mental disability is not governing requirement of entirety of sub-clause (iiiae).Assessee being a maternity hospital was entitled to exemption. (AY. 2009-10)
Nehru PrasutikaAspatalSamiti.v. CIT (2014) 361 ITR 68 (All.)(HC)
Editorial: Order of Tribunal in CIT v. Nehru PrasutikaAspatalSamiti (2013) 26 ITR 376 (Agra)(Trib.) is reversed.

S. 10(23C): Exempt income-Educational institution–Conducting examinations-Matter remanded.
One of the activities undertaken by the assessee was to conduct examinations and several candidates participated in the examinations. The results secured helped colleges select students for further studies. Course material, syllabus, contents of papers, question papers, etc., were part and parcel of the education system. Therefore, the assessee could not be denied the character of "other education institution" because it conducted examination or tests. In depth and proper verification or examination was required to be made before it was held or observed that the activities of the assessee were not genuinely charitable or were not being undertaken in accordance with the provisions of section 10(23C)(vi). This necessarily entailed and required the assessee’s co-operation and furnishing of full details. General observations should not and cannot become the basis of invoking the thirteenth proviso to section 10(23C)(vi).No finding that assesse was carrying on activities which were not solely educational-Matter remanded.(AYs. 2005-2006, 2006-2007, 2007-2008)
All India Management Association .v. DGIT (E) (2014) 362 ITR 451 (Delhi)(HC)

S.10(23C): Exempt income-Educational institution–Not conducting classes but affiliating schools, prescribing syllabus and conducting examination is eligible exemption.
It is not mandatory to hold classes for an institution to qualify and to be treated as an educational institution. If the activity undertaken and engaged is educational, it is sufficient. Held, that the assessee did not conduct classes nor was it directly engaged in teaching students. The assessee affiliated schools, prescribed syllabus and conducted examination for students. The assessee was authorised and permitted to conduct the examinations and the results enabled students to get admission at the graduate level. It was not disputed that the exams conducted by the assessee were recognised. The assessee was an educational institution within the meaning of section. 10(23C)(vi). (AYs. 2008-2009, 2009-2010, 2010-2011)
Council for the Indian School Certificate Examinations .v. DGIT(E) (2014) 362 ITR 436 (Delhi)(HC)

S. 10A: Free trade zone–Set off of losses–Export processing zone unit-Brought forward losses of non export processing zone unit is not to be deduced or reduced from profit /income of export processing unit.[S.10B, 80A]
Brought forward losses of non-export processing zone unit cannot be deducted or reduced from profit/income of export processing zone unit. (AYs.2002-2003, 2003-2004)
CIT .v. TEI Technologies Pvt. Ltd. (2014) 361 ITR 36 (Delhi)(HC)

S. 10A: Free trade zone–Manufacture–Making of jewellery-Entitled to exemption.
Process of making jewellery amounts to manufacture and assessee is entitled to exemption under section 10A. (AYs.2003-2004, 2005-2006)
CIT .v. Jayshree Gems and Jewellery (2014) 362 ITR 272 (Delhi)(HC)

S. 10B: Hundred per cent export–Manufacturing-Food items- Outsourcing-Only some follow up action was done by assessee-Not entitled to exemption.
A part of manufacturing activity of the assessee was outsourced. Raw material for preparation of snack items was not procured and supplied by assessee. Only some follow up action taken by assessee for packing and storing snacks was done by the assessee. Held, this did not amount to manufacture or producing an article or thing. Hence, assesseewas not entitled to exemption.(AY.2008-09)
Deepkiran Foods P. Ltd. .v. ACIT (2014) 361 ITR 437 (Guj.)(HC)