Digest Of Important Case Laws – March 2014

S.2(IA): Agricultural income-Agricultural land-Beyond municipal limit-Law laid down on when an isolated transaction can be regarded as an “adventure in the nature of trade” and the taxability of agricultural land situate beyond municipal limits. [S.2(14)(ii))(a), 10(1), 45]
The assessee purchased the land with standing crops thereon and it was shown in the records as land cultivated throughout the period of holding by the assessee. No efforts have been taken by the assessee to change the nature of land. Income from standing crops was offered for rate purpose as agricultural income. The transaction of purchase and sale of agricultural land is not part of a regular business activity of the assessee. It was an isolated transaction of purchase of agricultural land and sale thereof within a period of 13 months. Though the land is situated in the National Capital Region and there was a plan to develop the area of Alwer district as a global city, the fact remains that the master plan was finalised in the year 2010 and as per the master plan the area will be developed by the year 2013. If the assessee’s intention was to carry on an adventure in the nature of trade she has to wait at least till the master plan is finalised as otherwise she cannot expect substantial profit. On the contrary, the land was sold within a short span, seizing the opportunity of offer of better price which shows that the assessee intended to purchase the land as an investment only. Merely because a property was sold for a profit it cannot be assumed that it is an adventure in the nature of trade. Also, whether the land was sold out of free will or compulsion will not alter the character of the transaction. Every assessee would like to make profit on a transaction, given an opportunity. Taking a holistic view of the matter, the transaction was not an adventure in the nature of trade;
The land cannot be treated as capital asset since it is situated beyond eight kilometers from the municipal limits and it was purchased as agricultural land and sold accordingly without making any changes such as conversion in the land records, plotting of land, etc. The assessee earned agricultural income in the immediately preceding year on sale of standing crop and the same was offered as agricultural income and accepted by the AO for rate purposes. It is thus clear that it is a case of sale of agricultural land and the land being situated beyond eight kilometres from the municipal limit, it cannot be subjected to tax under the Income Tax Act either as business income or capital gains. The land situated outside the municipal limits stands excluded from the expression ‘capital asset’ from the inception and the sale proceeds have to be treated as revenue received from agricultural land. When two views are possible a view which is in favour of the assessee has to be taken. Consequently, the surplus arising on sale of the impugned agricultural land gives rise to agricultural income and not assessable to tax. (ITA No. 362/JU/2010, A.Y. 2007-08, dt. 13.05.2014.)
Supriya Kanwar (Smt.) .v. ITO(TM) (Jod.)(Trib.) www.itatonline.org

S.2(15): Charitable purpose – Construction of toilets-Carrying on an activity for consideration and not within ambit of definition of ‘charitable purpose’-Rejection of registration u/s. 12A was justified. [S. 12A, 12AA]
Assessee-society constructed dry latrines in villages under contract awarded by DUDA, i.e., District Urban Development Authority. It applied for registration under section 12A which was rejected by Commissioner. Tribunal held that since the  assessee had not constructed dry latrines (shushk shauchalya) as a part of a social service but it only executed contract awarded by DUDA, its case fell within ambit of carrying on an activity for consideration and not within ambit of definition of ‘charitable purpose’, therefore rejection of registration u/s. 12A was justified.
Bahara Shiksha Vikas Evam Sudhar Samiti .v. CIT(2014) 146 ITD 747 / (2013) 40 taxmann.com 2 (Delhi)(Trib.)

S.2(22)(e): Deemed dividend–Loan to shareholder–Not assessable in hands of person not a shareholder.
Since the assessee-company was neither a registered nor a beneficial holder of the shares in the company giving loan, the question of including the disputed amount as deemed dividend in terms of s. 2(22)(e) did not arise.
ACIT .v. Britto Amusement P. Ltd. (2014) 360 ITR 544 (Bom.)(HC)

S.2(29A): Long term capital asset-Capital gain- Period of holding- Letter of allotment- Period of holding of flat has to be reckoned from date of allotment letter for the purpose of computing capital gain. [S.45, 54F]
The Tribunal held that the assessee was allotted a flat in a building vide allotment letter dated 22-01-2005, by which the builders agreed to sell the flat to the assessee. After signing the said letter of allotment and paying the booking amount ,the assessee acquired the right in the flat. Thus, all the rights in the flat were duly acquired by the assessee on 22-1-2005, the period of holding is  to be computed with respect to the date of allotment that is 22-01-2005. Thus when the assessee sold the flat on 5-03-2009, the holding period of the right in flat with the assessee was right in flat with the assesse was more than 36 months, therefore, the assessee was right in claiming exemption under section 54F of the Act.ITA no 448/Ind/2013 dt.19-12-2013) (AY. 2009-10)   
ACIT .v. Sanjay Kumath (2014) The Chamber’s Journal –April P, 81 (Indore)(Trib.)
S.2(42A): Transfer-Letter of allotment-Period of holding-Booking rights-Capital asset of booking rights accrues to buyer only on signing of agreement and not on dare of allotment application. [S.2(14), 2(29A), 45]
The court held that for computing the period of holding of capital asset to be counted from the date of buyer’s agreement and not from the date of booking or date of allotment application. On the facts the allotment or confirmation letter states clearly that no right to provisional or final allotment accrues untill the agreement is signed between  the buyer and the builder. Thus , in such a case capital asset of booking rights accrues to buyer only on date of signing buyer’s agreement and not on date of allotment application or confirmation letter.
Gulshan Malik .v. CIT (2014) 223 Taxman 243 (Delhi)(HC)

S.2(47): Transfer-Possession of property before date of sale deed – Transfer could not be treated as taking place before date of sale deed-Denial of exemption under section 54F was held to be justified. [S. 45, 54F]
The word "transfer" under s. 2(47) includes a situation where a transaction has been made allowing possession of any immovable property in part performance of the contract. But that should be made good on material placed on record and through cogent evidence. Held, the claim of the assessee that there was transfer of possession to her under the agreement dated September 15, 2004, had not been made out on acceptable material facts before the three authorities. In view of the finding of fact, the order of the Tribunal could not be interfered with. Denial  of exemption under section 54F was held to be justified.(AY.2008-09)
Latha Ramachandra Inamdar (Ms) .v. DCIT (2014) 360 ITR 367 (Karn.)(HC)

S.2(47)(v): Transfer-Capital gains-Transfer under a development agreement takes place on handing over possession. Capital gains are chargeable to tax even if no consideration is received by assessee. [S.45,Transfer of Property Act, 1882, S. 53A]
S. 53A of the Transfer of Property Act, 1882, which is engrafted in the definition of “transfer” in s. 2(47) of the Income-tax Act does not contemplate any payment of consideration. Payment of consideration on the date of agreement of sale is not required. It may be deferred for a future date. The element of factual possession and agreement are contemplated as transfer within the meaning of the aforesaid section. When the transfer is complete, automatically, consideration mentioned in the agreement for sale has to be taken into consideration for the purpose of assessment of income for the assessment year when the agreement was entered into and possession was given. Here, factually it was found that both the aforesaid aspects took place in the previous year relevant to the assessment year 2003-04. Hence, the Tribunal has rightly held that the appellant is liable to pay tax on the capital gain for the assessment year.(ITA No. 245 of 2014, dt. 09/04/2014.)(AY.2003-04)
Potlanageswara Rao .v. DCIT (AP)(HC), www.itatonline.org

S.2(47)(v): Transfer-Possession-Development agreement-Despite handing over possession & receiving advance, development agreement is not a “transfer” for capital gains purposes if developer has not performed his part of the contract. [S.45 Transfer of Property Act , 1882, s. 53A]
A transaction is deemed to be a “transfer” u/s 2(47)(v) of the Act if the conditions of s. 53A of the Transfer of Property Act are satisfied. For s. 53A, ‘willingness to perform’ of the transferee is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of s. 53A of the TOP Act will come into play. On facts, a reading of the ‘Development Agreement-cum-General Power of Attorney’ indicates that what was handed over by the assessee to the developer is only ‘permissive possession’. The agreement specifically provides that the assessee has permitted the developer to develop the land and that the consideration receivable by the assessee from the developer is ‘38% of the residential part of the developed area’. That being so, it is only upon receipt of such consideration in the form of developed area by the assessee in terms of the development agreement, the capital gains becomes assessable in the hands of the assessee. Further, the facts show that even as on date, there was no developmental activity on the land. The process of construction has not been even initiated and no approval for the construction of the building is obtained. This is due to lapse on the part of the transferee. While the assessee has fulfilled its part of the obligation under the development agreement, the developer has not done anything to discharge the obligations cast on it under the develop agreement. Mere receipt of refundable deposit cannot be termed as receipt of consideration. Consequently, s. 53A does not apply. As a result, there is no “transfer” u/s 2(47)(v) of the Act.( ITA No. 157/Hyd/2011, dt. 04/04/2014.) (AY. 2006-2007) 
Binjusaria Properties Pvt. Ltd. .v. ACIT (Hyd.)(Trib.); vwww.itatonline.org

S.4:Charge of income–tax-Capital or revenue-Subsidy–Protection of capital investment of parent company.
Subsidy received by subsidiary of Government company from its holding company to protect capital investment of parent company is capital receipt. (AY.1985-86)
CIT .v. Handicrafts and Handlooms Export Corporation of India ltd. (2014) 360 ITR 130 (Delhi)(HC)

S.4.Charge of income–tax-Capital or revenue-Non-compete fees–Capital receipt. [S.28va, 45]
Non-compete fees received prior to insertion of s. 28(va) is capital receipt.(AY. 2001-02)
CIT .v. Wintac Ltd. (2014) 360 ITR 614 (Karn.)(HC)

S.4:Charge of income–tax-Capital or revenue-Forfeiture–Termination of agreement-Revenue receipt.
Assessee had entered in to agreement for sale of property to lessee. Sale agreement provided for forfeiture of thirty lakh rupees. Amount forfeited upon termination of agreement for sale of property to lessee is revenue receipt.(AY. 2001-02)
CIT .v. Wintac Ltd. (2014) 360 ITR 614 (Karn.)(HC)

S.4:Charge of income-tax-Capital or revenue-Setting up new unit or expanding existing unit-Sugar incentive scheme-Capital receipt.
Amount received under sugar incentive scheme for setting up new unit or expanding existing unit was capital receipt.(AY. 1998-99)
CIT .v. Dhampur Sugar Mills Ltd (2014) 360 ITR 82 (All)(HC)

S.5: Scope of total income–Income-Accrual –Method of accounting-Mercantile system of accounting-Profit and loss account credited with a sum representing estimated amount of difference on outstanding bills. [S.145]
The assessee, an exporter, credited to its profit and loss account a sum of Rs. 5,37,909 representing the estimated difference on account of fluctuation in foreign exchange rates. According to the assessee, the amount did not represent any income received or accrued as on the date of the balance-sheet and, therefore, should be excluded in the determination of income.
Held, the assessee had credited its own accounts with Rs. 5,37,909 being the difference arising on account of foreign exchange rate fluctuation. The assessee may have received the amount much later. But the time of receipt was relevant only when the accounts were being maintained on the basis of the receipt system. The fact that foreign exchange was received much later was completely irrelevant having regard to the system of accounting followed. In fact the finding was that the payments were received much later and this was not a case where the payments were not received. There may be difficulties in actual realisation of amounts. But that could not detract from the accrual of income.
CIT .v. Mahavir Plantations Pvt. Ltd. (2014) 360 ITR 22 (Ker)(HC)

S.9(1)(i): Income deemed to accrue or arise in India-Business connection – Procurement fees-Deduction at source-Substantial question of law-Matter remanded back to High Court to decide the issue by taking in to consideration of section 26A. [S.9(1)(vii), 40(a)(ia), 260A]
The court observed that the High Court merely quoted the decision of the Tribunal in extensor in its judgment without deciding the substantial questions of law raised by the Revenue as to whether the Tribunal erred in holding that the procurement fees received by the assesse is taxable under section 9(1)(i) or 9(1)(vii) and deleting the disallowances under section 40(a) (i) . Apex Court set aside the matter to High Court and decide the questions of law keeping in to consideration of the provisions of section 260A.
DIT(IT) .v. Black & Veatch (I) (P) Ltd. (2014) 101 DTR 289 (SC)
Editorial: Judgment of Bombay High Court  in ITA no 927 of 2010 dt 17-01-2011  was set aside.

S.9(1)(vii): Income deemed to accrue or arise in India-Fees for technical services-DTAA-Deduction at source-Sales commission. [S.40(a)(i),) 195, art 12]
Assessee was engaged in business of import and export of electronic goods and components.AO held that as the assessee did not deduct TDS on payment of sales commission made to two foreign companies. According to the AO said payments were in nature of fee for technical service covered under section 9(1)(vii) and disallowed same under section 40(a)(i). CIT(A) held that as there was  no element of income involved in said payment or not and held that there being no element of income involved in said commission payment, assessee was not liable to deduct tax at source . On appeal by revenue the Tribunal held that since CIT(A) had decided a question which was not emerging out from assessment order and further relevant question whether recipients had permanent establishment or not matter remanded for fresh adjudication to the AO. (AY. 2007-08)
ACIT .v. Sahasra Electronics (P.) Ltd. (2014) 146 ITD 565 / 41 taxmann.com 384 (Delhi)(Trib.)

S.9(1)(vii): Income deemed to accrue or arise in India- Fees for technical services-Sales promotion services-Not taxable-DTAA-India –Sri Lanka. [Art.14]
The applicant appointed an individual resident of Sri Lanka as resident executive for promotion of sale in Sri Lanka of books published by the applicant. The applicant has paid certain remuneration to the resident executive by remitting it to her bank account in Sri Lanka . The applicant approached AAR for its ruling on the taxability of such remuneration. AAR held that payments for sales promotion services rendered by a Sri Lanka resident were not FTS under the Act and were also not taxable in terms of Article 14. (Dt 30-04-2014)
Oxford University Press In re (2014) 45 taxmann.com 282 (AAR)