Direct Tax recent Judgments and Updates

Cost Inflation Index for Financial Year 2014-15 notified – Capital Gain Section 48 [223 TAXMANN (st) 137]

The Central Government vide Notification No. 31/2014, notified the Cost of Inflation Index as “1024” for the Financial Year 2014-15.

DTAA – Agreement for Exchange of Information with respect to taxes of Foreign Countries – Principality of Liechtenstein [223 TAXMANN (st.) 138]

The Central Government vide Notification No. 30/2014 dated 06/06/2014, directs that the agreement between the Government of Republic of India and the Government of the Principality of Liechtenstein, for the exchange of information on the tax matters as set out in the agreement, shall have effect for all request made in respect of taxable period beginning on or after 1st April, 2013. The agreement between the Government of Republic of India and the Government of the Principality of Liechtenstein for the exchange of information of tax matters was signed at Berne, Switzerland on the 28th day of March, 2013.

Income Tax Form – ITRs – Amendment in rule 12 – Substitution of Forms ITR-3, ITR-4, ITR-5, ITR-6 & ITR-7 [223 Taxmann (st.) 13]

The CBDT vide Notification No. 28/2014 dated 30/05/2014 makes the Income Tax (Sixth Amendment) Rule 2014. It amends rule 12 of the Income Tax rules. It substitutes Form ITR-3, ITR-4, ITR-5, ITR-6 & ITR-7. It inserts the requirement of furnishing of report u/ss. 10AA, 44DA, 50B & 115VW of the Income-tax Act.

Constitution of Special Investigation Team (SIT) for purpose of bringing back unaccounted monies unlawfully kept in bank accounts abroad [223 TAXMANN (st.) 9]

The Central Government in the Ministry of Finance, Department of Revenue, in pursuance of the order dated 04/07/2011 of Hon’ble Supreme Court of India passed in Writ Petition No. 176 of 2009, videNotification F. No. 11/2/2009- AD.E.D., dated 29/05/2014, constitutes the Special Investigation Team under the Chairmanship of Hon’ble Mr. Justice M. B. Shah, former Judge of Supreme Court. The terms of references of the Special Investigation Team will be as per the order dated 04/07/2011.

The notified corporate body for the purpose of Section 36(1)(xii) of the Income-tax Act, 1961 [223 TAXMANN (st.) 1]

The Central Government vide Notification No. Tangas de Calvin Klein 25/2014 dated 29/04/2014 notifies, for the purpose of Section 36(1)(xii) of the Income-tax Act, 1961, the National Bank for Agriculture and Rural Development (PAN : AAACT4020G) established under section 3 of National Bank for Agriculture and Rural Development Act, 1981 for providing and regulating credit and other facilities for promotion of agriculture & rural development. This is subject to the following conditions, namely :

i. The expenditure, claimed as deductible under the Income-tax Act, 1961, is incurred for the objects and purposes authorized by the National Bank for Agriculture and Rural Development Act, 1981 (No. 61 of 1981), under section 38 of the said Act.
ii. Such expenditure is not in the nature of capital expenditure;
iii. Such expenditure is not eligible for deduction under any other provision of the Income-tax Act, 1961; and
iv. A separate account of the expenditure claimed under the said clause is maintained by the National Bank for Agriculture and Rural Development.

This notification is applicable w.e.f. A.Y. 2013-14 onwards, relevant to the F.Y. 2013-14 in which is application seeking notification u/s. 36(1)(xii) of the Act was filed.

Deduction u/s. 80-IA(4)(iii) of the Income-tax Act – Eligibility of deduction u/s. 80-IA for unexpired period [223 TAXMANN (st.) 1]

The CBDT vide Circular No. 10/2014 dated 06/05/2014, in the context of determining the eligibility criteria for availing deduction u/s. 80-IA (4) clarified that if an enterprise or undertaking develops an infrastructure facility, Industrial Park or Special Economic Zone, as the case may be, and transfers it to another enterprise or undertaking for operation and maintenance in accordance with the proviso to clause (i) or clause (iii) of sub-section (4) of section 80-IA of the Act and this transfer is not by way of amalgamation or demerger, the transferee shall be eligible for the deduction for the unexpired period. [For example, if the ‘transferor’ has availed of the deduction for development of an infrastructure facility for 6 years and thereafter transfers it to the ‘transferee’ for operation and maintenance; such transferee will be eligible for deduction for remaining 4 years.] It is further clarified that profit for the purposes of deduction in the case of transferee shall also be computed in accordance with sub-sections (5) to (10) section 80-IA of the Act.

The CBDT clarified in the context of proviso to clause (i) and clause (iii) of sub-section (4) of section 80-IA which deals with the situation where operation & maintenance of infrastructure facility or operation & maintenance of industrial park/SEZ respectively is transferred to another enterprise in the manner provided therein and the transferee undertaking can availed deduction for the unexpired period.

S. 2(15): Commercial activities by trusts having objects of general public utility only can result in denial of exemption

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”.
DIT (E) vs. Ahmedabad Management Association. Guj. High Court

S. 2(47)(v): 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

The assessee’s contention that no transfer takes place on the date of the agreement and handing over of possession if consideration is not received by the assessee is not acceptable because 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.

Potla Nageswara Rao vs. DCIT (Andhra Pradesh High Court)

SS. 2(47) & 47(iv): When market value available no need to refer for valuation

When the market value of the quoted shares was available, there is no need for the Tribunal to direct the authorities below to consider the valuation in terms of the income-tax proceedings.

New Ambadi Estate (P) Ltd. vs. Joint CIT, (2014) 267 CTR (Mad.) 533.

S. 4: Subsidy by Holding Company to its subsidiary is capital receipt

Subsidy granted by holding company to assessee subsidiary company with the purpose of securing and protecting the capital was a capital receipt in the hands of subsidiary company.

CIT vs. Handicrafts & Handlooms Export Corpn. of India Ltd. (2014) 268 CTR (Del.) 341.

S. 4: Grant by Government is capital receipt

Grant-in-aid received from Government for conducting research and not for carrying on day-to-day business constituted capital receipt.

CIT & ANR. vs. India Telephone Industries Ltd., (2014) 268 CTR (Kar.) 348.

SS. 4, 51 & 56(2)(vi) Forfeiture of advance against sale of property is capital receipt

On forfeiture of advance received against sale of property, Tribunal rightly held, that S.51 was applicable and no addition could be made by AO on the ground of sham transaction; contention that S. 56(2)(vi) was attracted could not be raised for the first time before the Court.

CIT vs. Meera Goyal (2014) 267 CTR (Del.) 225.

S. 10(23C)(iiiad) Mere existence of non-educational objects in deed cannot result in denial of exemption

When save and except educational activity the assessee did not carry on any other activity, merely because there exists object which is not related to educational activities, is not sufficient to deny the benefit of S. 10(23C)(iiiad).

Geetanjali Education Society vs. Assistant Director of Income Tax (Exemptions), (2014) 267 CTR (Kar.) 369.

SS. 11(1)(a) & 32(1)

(ii): Depreciation not allowed if asset allowed as application of income

Director of Income Tax (Exemption) vs. Charanjiv Charitable Trust, (2014) 267 CTR (Del.) 305

S. 14A disallowance cannot be made if the assessee has no tax-free income in the year

From the reading of s. 14A of the Act, it is clear that before making any disallowance the following conditions are to exist: a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), s. 14A of the Act cannot be invoked.

CIT vs. Lakhani Marketing (P&H High Court)

SS. 17(1)(iv),192,201(1) & 201(1A): No TDS where FBT paid on reimbursement of expenses

Conveyance maintenance and reimbursement expenses paid by assessee to its employees on monthly basis and on which fringe benefits tax had been paid by assessee, were not part of employees’ salary, hence assessee could not be treated in default for non-deduction of tax at source.

CIT vs. Oil & Natural Gas Corporation Ltd. (2014) 267 CTR (Guj.) 498.

SS. 17(2) & 192: No TDS on contribution to the superannuation fund

Lump sum contribution made by the applicant into a superannuation scheme established for the purpose of providing pension to the eligible employees of its Indian branch cannot be deemed to be perquisite in the hands of the concerned employees as they do not get a vested right at the time of contribution to the fund by the applicant and, therefore, no tax is required to be deducted under s.192 by the applicant from the contribution made to the superannuation fund.

Royal Bank of Scotland, N.V. , In Re Authority for Advance Rulings, (2014) 268 CTR (AAR) 406.


28 or S. 45: Gains arising from PMS transactions are capital gains & not business profits

The assessee offered LTCG & STCG on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The AO, CIT (A) & Tribunal held that as the transactions by the PMS manager were frequent and the holding period was short, the LTCG & STCG were assessable as business profits. On appeal by the assessee, HELD allowing the appeal that gain is taxable as capital gain.

Radials International vs. ACIT (Delhi High Court)

S. 37(1): Expenditure on director’s son studies abroad allowable

Expenditure on studies abroad of director’s son who had served the company for one year and had committed to work for further five years after obtaining MBA in a course connected with company’s line of business was allowable as business expenditure.

Kostub Investment Ltd. vs. CIT, (2014) 268 CTR (Del.) 54.

S. 37(1): Ad-hoc disallowance of expenditure not proper

Payments having been made by cheques and all the three sub-contractors having confirmed that they have received payments from the assessee-contractor for the work done by them on behalf of the latter, there was no justification for the AO to disallow 5 per cent of the total job work charges paid to the said sub-contractors.

CIT vs. Consulting Engineering Group Ltd. (2014) 267 CTR (Raj.) 447.

S. 37(1): Expenditure on repairs allowable as revenue expenditure

Expenditure on repairs and maintenance was revenue expenditure notwithstanding the fact that it had increased life of the existing assets beyond their original estimated economic life and profitability of the concern had substantially increased.

CIT vs. Vishal Paper Industries, (2014) 267 CTR (P&H) 295.

Sec. 40A(2): Substantial increase in Salary to managing director allowable

Receipts of the assessee-company having increased from ` 7.73 crores in the preceding year to ` 9.92 crores during the relevant year mainly due to the competence of its chairman-cum-managing director, the increased salary of ` 24 lakh paid to him in the relevant year as against ` 12 lakh paid in earlier year cannot be said to be excessive or unreasonable and the Revenue having not made out a case that the increased salary was not as per the fair market value as provided under s. 40A(2)(a), disallowance under s. 40A(2) was rightly deleted by Tribunal.

CIT vs. Consulting Engineering Group Ltd. (2014) 267 CTR (Raj.) 447.

S. 40A(3), Income tax Rules 1962, r.6DD(j): Cash payment in peculiar situation allowed

Assessee was compelled to make cash payments on account of peculiar situation on insistence upon by the principal, and genuineness and identity of the payee not being in dispute, disallowance under s. 40A(3) was not sustainable.

Anupam Tele Services vs. Income Tax Officer, (2014) 268 CTR (Guj.) 121.

SS. 43(5) & 74: Speculative loss cannot be set off against long term capital gain

Assessee having neither made any payment for the purchase of the shares in question nor taken actual delivery of the shares at any point of time, the transactions of purchase and sale of said shares cannot be accepted as genuine and hence at the most it is speculative transaction as per s. 43(5); consequently the short-term capital loss on the sale of shares cannot be set off against the long-term capital gains.

Commercial Motors Ltd. vs. DCIT, (2013) 268 CTR (All) 219.

S. 50C– Reference to Valuation Officer

S. 50C: If the stamp duty valuation is higher than the consideration received, the AO must refer the valuation to the DVO even if there is no request by the assessee.

Sunila Kumar Agarwal vs. CIT Calcutta High Court

S. 68: Unexplained cash credit

Once the amount was advanced by the creditors by account payee cheque from their respective bank accounts and the said creditors were being assessed to income-tax, then capacity of the creditors and genuineness of the transactions stood proved and in the absence of any evidence to prove that money actually belonged to the assessee himself, addition under S. 68 was not sustainable.

CIT vs. Jai Kumar Bakliwal, (2014) 267 CTR (Raj.) 396.

S. 73: Speculation loss on transactions in derivatives can be set off against the gains of delivery shares

Under the Explanation to s. 73 where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Therefore, the entire transaction carried out by the assessee was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares.

CIT vs. Baljeet Securities Pvt. Ltd. (Calcutta High Court)

S. 80HHC: Exchange rate difference allowable as deduction

Amount representing the exchange rate difference relating to the export of earlier period is eligible for deduction under s. 80HHC; it cannot be deducted from the export turnover and 90 per cent thereof cannot be excluded from the business profit for the purpose of computation of deduction under s.80HHC.

CIT vs. Priyanka Gems & Ors. (2014) 267 CTR (Guj.) 480.

S. 80-IB: Depreciation allowed after legal title conveyed

Assessee having purchased and using the building, plant and machinery since 30th Aug., 2000, though legal title was conveyed by KIADB initially in 2003 by executing lease deed and then in 2009 by executing sale deed in favour of the assessee, the Tribunal has rightly allowed the depreciation.

CIT & ANR. Boxer Calvin Klein Al Mayor vs. WEP Peripherals Ltd., (2014) 268 CTR (Kar.) 88.

S. 147: Reopening of assessment based on internal audit opinion

Very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject-matter of consideration by the AO during the original assessment proceedings; internal audit report is an opinion/inference on facts i.e. the accounts and therefore, would not be tangible material to reopen an assessment; reopening was not therefore sustainable.

Aroni Commercials Ltd. vs. CIT & Anr., (2014) 267 CTR (Bom.) 228.

S. 226(3) & Sch, II, R. 10: PPF account cannot be attached

In view of the provisions of s. 9 of the PPF Act, 1968, read with R.10 of Sch. II to the IT Act and cl. (Ka) of proviso to s. 60(1) of CPC, any amount lying in the PPF account of a subscriber is immune from attachment and sale for recovery of income-tax dues; action of the respondent in first attaching the PPF account of the assessee under S. 226(3) and thereafter withdrawing the impugned amount from the said account is quashed.

Dineshchandra Bhailalbhai Gandhi vs. CIT, (2014) 267 CTR (Guj.) 243.

S. 147: Fresh claim cannot be entertained in reassessment

A fresh claim at the instance of assessee cannot be entertained in reassessment proceeding.

Satyamangalam Agricultural Producer’s Co-operative Marketing Society Ltd. vs. CIT, (2014) 267 CTR (Mad.) 249.

S. 147: Reopening of assessment based on opinion of DVO

Opinion of the DVO is per se not information for the purpose of reopening of an assessment; the AO has to apply his mind to the report of the DVO and only if on application of mind, he forms a belief that there is escapement of income, he can seek to reopen the assessment under s.147.

Mahashay Chunnilal Charitable Trust vs.

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