Income Tax Questions & Answers Series Consolidated

CASE NO.1

Unique Estates Development Co. Ltd Vs. DCIT

(Income Tax Appellate Tribunal, Mumbai)

ITA No. 4598/Mum/2019 | 22-03-2021

SUB: INCOME FROM UNSOLD FLATS SHALL BE TREATED AS BUSINESS INCOME OF THE DEVELOPER AND NO INCOME FROM HOUSE PROPERTY ON THE BASIS OF ANNUAL LETTING VALUE OR NOTIONAL VALUE OF RENT.

FACT OF THE CASE

1. The assessee company is engaged in the business of development of real estate, development of residential complex and malls.
2. The assessee has filed the return of income for Assessment Year 2016-17 on 17.10.2016 with total income of Rs. 215,99,70,220/- and the assessee company also filed the revised return of income on 01.12.2017 and 11.12.2017 with the total income of Rs. 214,75,70,217/-.
3. The return of income was processed u/s. 143(1) of the Act.
4. Subsequently, the case was selected for scrutiny and notice u/s. 143(2) & 142(1) of the Act were issued.
5. In compliance, the assessee-company complied with the notice and submitted the details.
6. On perusal of financial statements, the Assessing Officer (AO) found that the assessee has received dividend income and share of profit from partnership firm aggregating to Rs. 71,60,368/-and was claimed exempt u/s. 10 of the Act.
7. The A.O. is of the opinion that the assessee has not made disallowance u/s 14A r.w. rule 8D.
8. Hence the AO has calculated the disallowance under Rule 8D(2)(iii) of. Rs. 3,02,234/.
9. Further, the A.O. found that the assessee is a builder and developer of projects, but on perusal of the balance-sheet, the assessee has inventories of Rs. 33,36,51,425/- which includes finished goods of Rs.32,44,35,530/-. The AO has called for the submissions to furnish the breakup of inventory of finished goods.
10. The AO find that the stock of finished goods consists of flats of value of Rs. 32,44,35,530/- and required the assessee to explain why Annual Letting Value (ALV) of the unsold properties should not be computed. In response to the same, the assessee has filed the details referred at para-5.2 of the assessment order. The A.O. considered the submissions and proviso to section 23 of the Act and the judicial decisions and finally observed that the Annual Letting value (ALV) of the finished flats held by the assessee as closing stock has to be treated as Income from House Property after allowing the deductions.
11. The A.O. worked out ALV @ 7% on the investments of flats being Rs. 1,71,71,201/- and allowed deduction @30% of the ALV and made addition of ALV of unoccupied properties in three projects to the extent of Rs. 1,20,19,841/-. Similarly, the AO made a disallowance of Rs. 2,49,386/- by adopting rate@12% on interest free funds and assessed the total income of Rs. 2,16,01,41,680/- and passed the order u/s 143(3) of the Act dated 18.12.2018.

APPEAL BEFORE CIT(APPEAL)

12. Aggrieved by the order of AO, the assessee has filed the appeal before the CIT(A). The CIT(A) dealt on the disputed issue of addition of ALV of unsold flats, the submissions of the assessee and judicial decisions and observed at page 10 para-.5.9 of the order as under:

"5.9. In view of the discussion in the foregoing paragraphs, I hold that the AO has rightly assessed deemed income from the unsold units in the hands of the appellant as per the provisions of Sec.22 and 23 of the Act by adopting a rate of 7% of the investments made, 'in accordance with the decision of Radha Devi Dalmia (4 Taxman 183) (ALL HC). Accordingly, the addition of Rs. 1,20,19,841/- made by the AO after adopting the deemed rental income to be of Rs. 1,71,71,201/- is upheld and the ground of appeal taken by the appellant is rejected. Accordingly, this ground of appeal of the assessee is dismissed."

APPEAL BEFORE HON'BLE TRIBUNAL

13. The assessee has filed the appeal against the order of the Ld. Commissioner of Income Tax (Appeals)-52, Mumbai passed u/sec.143(3) and 250 of the Income Tax Act,1961. The assessee has raised the following grounds of appeal:

• On the facts and in the circumstances of the case as well as in law, learned CIT(A) erred in confirming the disallowance amounting to Rs.1,20,19,841/- considering the Annual Letting Value of unsold flats which is closing stock of the appellant, treated as "Income from House Property".
• On the facts and in the circumstances of the case as well as in law, learned CIT(A) erred in not following jurisdictional ITAT decisions which squarely apply to the facts of the appellant's case. The ITAT has decided same subject matter in its earlier decisions in the same assessee case.

ITAT DECISION

1. In the case of titled as M/s. C.R. Developments P. Ltd. Vs. JCIT. The relevant para in 5 is hereby reproduced as under.: -

"5. We have considered rival contentions and perused the record. The issue under consideration has been restored by the CIT(A) to the file of AO to compute the annual value. Recently the Hon'ble Supreme Court in the case of M/s Chennai Properties & Investments Ltd. Vs. CIT, reported in (2015) 42 SCD 651, vide judgment dated 9-4-2015 has held that where assessee company engaged in the activity of letting out properties and the rental income received was shown as business income, the action of AO treating the rental income as income from house property in place of income from business shown by the assessee was held to be not justified.

The Hon'ble Supreme Court held that since the assessee company's main object, is to acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as income from business.

On the very same analogy in the instant case, assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year was shown as stock-intrade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold was its stock in trade and income arising on its sale is liable to be taxed as business income. Accordingly, we do not find any justification in the order of AO for estimating rental income from these vacant flats u/s.23 which is assessee's stock in trade as at the end of the year. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23 of the I.T. Act."

2. In the factual position of the present case is quite similar to the facts of the case mentioned above. In view of the law relied upon the law representative of the assessee i.e., M/s. Runwal Constructions Vs. ACIT and M/s. C.R. Developments P. Ltd. Vs. JCIT (supra), we are of the view that the finding of the CIT(A) on this issue is wrong against law and facts whereas the case of the assessee has duly been covered by the law mentioned above, therefore, by honouring the orders mentioned above. We deleted the addition raised by assessee on account of notional income of vacant flats. Accordingly, this issue is decided in favour of the assessee against the revenue."

3. The facts and the issue involved in the present case are similar to the facts of the case and the issue involved in the case of Ferani Hotels Pvt. Ltd. (supra). In the said case, the coordinate Bench has deleted the addition confirmed by the CIT (A) on account of notional rent determined by the AO by holding that the ALV of the unsold unit of assessee project is assessable under the head ‘income from house property'. Since, the findings of the Ld.CIT (A) is not in accordance with the decision of the coordinate Bench rendered in the case of Ferani Hotels Pvt. Ltd. (supra), we respectfully following the decision of the coordinate Bench set aside the order of the Ld. CIT (A) and allow the appeal of the assessee and direct the AO to delete the addition made under the head ‘income from house property'.

4. On perusal of the said order, we find that the issue is squarely covered in favour of the assessee and, hence, the order of the CIT(A) upholding the addition made by AO estimating the ALV in respect of unsold flats cannot be sustained. The decision relied upon by the learned DR in the case of CIT vs. Gundecha Builders (supra), is distinguishable on facts as in that case the unsold portion of the property constructed by the builder was given on rent and rental income was treated as business income. Whereas, in the present case, the assessee has not let out any flats and all were lying unsold as stock in trade. Accordingly, we are inclined to set aside the order of the CIT(A) and direct the AO to delete the addition on account of estimation of ALV in respect of unsold flats for A.Y. 2013-14.

We fallow the judicial precedence and apply the ratio of the decision to the facts of the present case. Accordingly, we set-aside the order of CIT(A) and direct the AO to delete the addition and allow the grounds of appeal of the assessee.

CONCLUSION

From above decisions, it is clear that income from unsold flats/shops/units of a developer or builder, shown as stock-in trade in books of account of the builder/developer should be assessed as income from Business and Professional and should not be considered as income from house property. In case of vacant flats/ shops /units, AO could not assess the same on the basis of their Annual Letting Value as income from house property.

CASE 2

QUESTION: A Public Trust is to be created for Charitable Purposes in April,2021. The trust intends to claim benefits of Sections 11 and Section 12 from AY 2022-23. In this regard, what is the time limit for making an application for registration, time limit for granting approval by the Principal Commissioner or Commissioner and the period for which approval is valid?

ANSWER: In order to avail exemptions under Sections 11, the newly set up has to obtain registration U/s. 12AB read with Section 12A (1) (ac)(i), as follows;

PLEASE NOTE THAT: the Public Trust can apply for Final Registration by filing relevant form in the online mode at least six months prior to expiry of period of Provisional Registration or within six months of commencement of activities of Public Trust, whichever is earlier.

KEY AMENDMENTS IN SECTION 11 TO 12AB

Section 12AA - Procedure for Registration

• With effect from the 01/04/2021 following sub-section shall be inserted after sub-section (4), namely:
• "(5) Nothing contained in this section shall apply on or after the 01/04/2021".

Section 12AB

After section 12AA of the Income-tax Act, the Section 12AB shall be inserted with effect from the 01/04/2021. That is Procedure for Fresh Registration.

Amendments in Section 12A

Condition for Applicability of Section 11 & 12 - effective from 01/04/2021.

• After clause (ab), a new clause (ac) has been inserted
• In subsection (2) certain Provisions have been substituted

Amendments in Section 11

SECTION 11(7)

• Where a trust or an institution has been granted registration u/s 12AA(1)(b) or u/s 12AB or u/s 12A and the said registration is in force for any previous year, then, nothing contained in section 10 [other than Section 10(23C) (1) and 10(46) thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year.
• Provided that such registration shall become inoperative from the date on which the trust or institution is approved u/s 10(23C) or notified u/s 10(46) or the date on which this proviso has come into force, whichever is later:
• Provided further that the trust or institution, whose registration has become inoperative under the 1st proviso, may apply to get its registration operative u/s 12AA or u/s 12AB, subject to the condition that on doing so, the approval u/s 10(23C) (1) or 10(46), shall cease to have any effect from the date on which the said registration becomes operative and thereafter, it shall not be entitled to exemption under the respective clauses.".

KEY AMENDMENTS IN SECTION 12A

In Sub-Section (1) after clause (ab) a new clause (ac) shall be inserted w.e.f. 01/04/2021, which states: -

• Notwithstanding anything contained in clauses (a) to (ab);
• the person in receipt of the income has made an application in the prescribed form and manner;
• to the Principal Commissioner or Commissioner, for registration of the trust or institution.

RULE - 17A - APPLICATION FOR REGISTRATION

Rule 17 A (1)  

An application u/s 12A (1) (ac) for registration of a charitable or religious trust or institution shall be made in: -

1. Form 10A - in case of application under sub-clause (i) (Already registered u/s 12A or U/s 12AA) or under sub-clause (vi) (In any other case (residual category)) of section 12A(1)(ac).
2. Form 10AB - in case of application under sub-clause (ii) or (iii) or (iv) or of section 12A(1)(ac).

Rule 17 (2)  

The application under sub-rule (1) shall be accompanied by the following documents, as required by Form Nos.10A or 10AB, as the case may be, namely:-

1. Where the applicant is created, or established, under an instrument, self- certified copy of such instrument creating or establishing the applicant;
2. where the applicant is created, or established, otherwise than under an instrument, self-certified copy of the document evidencing the creation or establishment of the applicant;
3. Self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be;
4. Self-certified copy of registration under Foreign Contribution (Regulation) Act, 2010(42 of 2010), if the applicant is registered under such Act;
5. Self-certified copy of existing order granting registration under section 12A or section 12AA or section 12AB, as the case may be;
6. Self-certified copy of order of rejection of application for grant of registration under section 12A or section 12AA or section 12AB, as the case may be, if any;
7. Where the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of the applicant relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up;
8. where a business undertaking is held by the applicant as per the section 11(4) and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business undertaking relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and self-certified copy of the report of audit as per the provisions of section 44AB for such period;
9. Where the income of the applicant includes profits and gains of business as per Section 11(4A) and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and self-certified copy of the report of audit as per the provisions of section 44AB for such period;
10. Self-certified copy of the documents evidencing adoption or modification of the objects;
11. Note on the activities of the applicant.

Rule 17 (3) 

Form Nos. 10A or 10AB, as the case may be, shall be furnished electronically, -

1. Under digital signature, if the return of income is required to be furnished under digital signature;
2. Through electronic verification code in a case not covered under clause (i).

Rule 17 (4)

Form Nos. 10A or 10AB, as the case may be, shall be verified by the person who is authorised to verify the return of income under section 140, as applicable to the applicant.

Rule 17 (5)

On receipt of an application in Form No. 10A, the Principal Commissioner or Commissioner, shall pass an order in writing granting registration under clause (a), or clause (c), of section 12AB(1) read with sub- section (3) of the said section in FormNo.10AC and issue a sixteen digit alphanumeric Unique Registration Number (URN) to the applicants making application as per clause (i) of the sub-rule (1).

Rule 17 (6)

If, at any point of time, it is noticed that Form No. 10A has not been duly filled in by :-

1. Not providing, fully or partly, or
2. By providing false or incorrect information or
3. Documents required to be provided under sub-rules (1) or (2) or
4. By not complying with the requirements of sub-rules (3) or (4),
5. The Principal Commissioner or Commissioner, after giving an opportunity of being heard, may cancel the registration in Form No. 10AC and Unique Registration Number(URN), issued under sub-rule (5), and such registration or such Unique Registration Number (URN) shall be deemed to have never been granted or issued.

Rule 17 (7)  

In case of an application made under (ac) of sub-section (1) of section 12A(1)(ac)(vi) [In any other case (residual category)] during previous year beginning on 1st day of April, 2021, the provisional registration shall be effective from the assessment year beginning on 1st day of April, 2022.

Rule 17 (8)

1. In case of an application made in Form No. 10AB under clause (ii) of the sub-rule (1),
2. The order of registration or rejection or cancellation of registration under section 12AB(1)(b)(ii) shall be in Form No.10AD and
3. In case if the registration is granted, sixteen digit alphanumeric number Unique Registration Number (URN) shall be issued by the Principal Commissioner or Commissioner.

Rule 17 (9)

The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall:

1. Lay down the form, data structure, standards and procedure of ,-

• Furnishing and verification of Form Nos. 10A or 10AB ,as the case may be;
• Passing the order under clause (a), sub-clause (ii) of clause (b) and clause (c) of sub-section (1) of section 12AB.

2. Be responsible for formulating and implementing appropriate security, archival and retrieval policies in relation to the said application made or order so passed as the case may be.

CASE-3

QUESTION: the Income Tax Act,1961 provides for taxation of a certain income earned in India by Mr. X a non-resident. The DTAA ,which applies to Mr. X provides for taxation of such income in the country of residence. Is Mr. X liable to pay tax on such income earned by him in India?

LET'S FIRST EXAMINE APPLICABLE PROVISIONS OF INCOME TAX ACT, 1961

ANSWER: Section 90(2) makes it clear that the Central Government has entered into a DTAA, with country outside India, then in respect of an assessement to whom such agreement applies, the provisions of the Act,1961 shall apply to the extent they are more beneficial to the assessee. This means that where DTAA has been entered, the assessee can opt to be governed by the provisions of DTAA, if the provisions of DTAA are beneficial in comparison to the provisions of the Income Tax Act, 1961.

However as per provisions of Section 90(4), the assessee, in order to claim relief under the DTAA, has to obtain Certificate (Tax Residence certificate) TRC from the government of that country, declaring the resident of country outside India. Further, he also has to provide below mentioned documents and information in Form 10F;

1. Status (Whether Individual, Company, Firm etc.) of the assessee;
2. PAN of the assessee, if allotted;
3. Nationality (in case of an individual) or country or specified territory of incorporation or registration (other than individuals);
4. Assessee's tax identification number in the in the country of residence, in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which the assessee claims to be resident;
5. Period for which the residential status, as mentioned in the TRC;
6. Address of the assessee in the country or specified territory outside India, during the period for which TRC as mentioned above is applicable.

However, the assessee is not required to provide information, which are already with the departmental officers or which are already mentioned in the TRC.

It is well settled that in case of any conflict between the provisions of DTAA and the Income tax Act, 1961, then provisions of DTAA would prevail over provisions under Income tax Act, 1961. [CBDT Circular No. 333 dated 02/04/1982]

In this case Mr. X is therefore not liable to pay tax on the income earned by him in India provided he submits the TRC (Tax Residence certificate) obtained from the government of the other country, where he resides and provides such information and documents as required by the income tax authorities in India.

CASE-4

PROBLEM

Mr. X intends to sell a piece of urban residential plot (belt for 48 months) to Mr. Y for a consideration of Rs. 2.00 Crores, in February, 2021. This asset has been held as an investment by Mr. X. Both parties are willing to enter into a written agreement in this regard. Initial payment will be Rs. 40.0 Lakhs. The buyer is given 12 months' time for completing the sale, at that point of time, balance amount has to be paid.

Following two options are considered;

• Option 1- Payment of Rs. 10.00 Lakhs by account payee cheque on the date of this agreement and Rs. 30.00 Lakhs in cash on the same date.
• Option 2- Payment of Rs. 10.00 Lakhs by account payee cheque on the date of this agreement and Rs. 30.00 Lakhs in ECS in the bank within a period of 7 days.

An increase of 30% in stamp duty is anticipated with effect from April 1 ,2021. The parties seek advice of professionals to plan suitably for reduction of Capital Gain Tax.

LET'S FIRST WE CONSIDER PROVISIONS OF SECTION 50 C OF THE INCOME TAX ACT, 1961

Section 50C of income tax act 1961 introduced vide Finance Act. 2002 w.e.f. 01.04.2003, which prescribes similar provisions in the case of transfer of land or building or both held in the nature of ‘Capital Assets'. (From assessment year 2003-2004).

SECTION 50C (1)- provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value of adopted or assessed or assessable by any authority of State Government for the purpose of payment of Stamp duty in respect of such transfer, the value of adopted or assessed or assessable shall be deemed to be full value of the consideration received or accruing as a result of such transfer. Therefore, if the value adopted or assessed or assessable for stamp duty purposes is more than the consideration returned by the assessee then the value adopted or assessed or assessable for stamp duty purposes will be deemed as full value of consideration.

The Finance Act, 2018 has provided relief to assesses in the sense that where the value adopted or assessed or assessable by the authority for the purposes of payment of stamp duty does not exceed one hundred and five per cent (105%) of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profit and gains from transfer of such asset, be deemed to be the full value of the consideration. The amendment is effective from the assessment year 2019-20.

The Finance At,2020 has amended provisions of Section 50C and from Assessment year the allowable gap has been increased from 5% to 10%. It means that where value adopted or assessed or assessable by the authority for the purposes of payment of stamp duty does not exceed one hundred and five per cent (110%) of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profit and gains from transfer of such asset, be deemed to be the full value of the consideration.

ANSWER: from above discussion on provisions of Section 50C (as amended) we know that if Stamp Duty Value of Capital Assets transferred will exceed 110% of Sale Consideration, then Stamp Duty Value will be considered as Full Value of Consideration for calculating Capital Gain in hands of transferor.

Where date of an agreement fixing the value of consideration and date of registration are not the same, the Stamp Duty Value may be taken as on the date of Agreement for transfer (and not as on the date of registration) for such transfer. However, this exception shall only apply to those cases where amount of consideration (or part thereof) has been received by way of an account payee cheque/draft or by use of electronic clearing system through a bank account before the date of agreement.

In the given problem, the Stamp Duty value in the month of February,2021 in which agreement happen (at the time of agreement) can be taken as full value of consideration only if consideration (or a part thereof) is received by an account payee cheque/raft or through ECS.

In above given problem a part of consideration has been received through banking challan.

For calculating Capital Gain Tax, we have to consider Full Value of consideration at the time of Agreement that is Rs. 2.00 Crores or Stamp Duty Value in February,2021 whichever is more (on the assumption that Stamp Duty Value is more than 110% of the sale consideration). The Stamp Duty Value in February,2021 (i.e., at the time of agreement not at the time of registration) will be considered, whether mode of payment is as per Option 1 or Option 2 given above.

OPTION1- if this has been adopted, it will be violation of provisions of section 269SS (i.e., receipt of advance of more than Rs. 20,000 or more in cash) and Mr. X, the transferor has to penalty under Section 271D (which is equal to 100% of the amount of cash received.

OPTION2- it is advisable to adopt this option to avoid violation of provisions of Section 269SS and penalty under Section 271D of the Income tax Act, 1961.

CASE-5

PROBLEM 1: - Mr. X, a resident individual held 25% equity shares of MNC Limited, an Indian company. The Company's paid up share capital as on March 31, 2021 was Rs. 10,00,000/- divided into 1,00,000 Equity Shares of Rs. 10/-each and issued at premium of Rs. 20/-. The shares were allotted to shareholders in October,2014.

The company paid Rs. 60/- per share on Buy Back of shares.

Please explain and compute the tax effect in the hand of MNC Ltd., and Mr. X in below mentioned situations;

1. Share of MNC Ltd., are listed on Recognized Stock Exchange;
2. Share of MNC Ltd., are not listed on Recognized Stock Exchange;

LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961

SECTION 10(34A)- provides that;

1. The income arisen to shareholders on Buy Back of shares by the company is exempted by Income Tax;
2. The Buy Back of share will be taxed in the hand of the company as tax on distribution of income under provisions of Section 115QA of the Income Tax Act, 1961.

SECTION 115QA- provides that a domestic company distributing its income through buy back of shares or have to pay income tax /distribution tax @20% (surcharge @12% and education chess @4%) i.e., equal to @23.30%.

Since tax on buy back of shares will be payable by the company buying the shares and hence to avoid double taxation of the same income, income in the hand of shareholders is exempted.

ANSWER 1- Please Note That: in both cases, whether shares of MNC Ltd., are listed on Stock Exchange or not income arises in the hand of shareholders is exempted by provisions of section 10(34A) of the Income Tax Act, 1961.

Let's calculate tax in hand of MNC Ltd., on buy back of shares.

PROBLEM 2- Mr. X a non-Resident Indian. He acquired/ purchased shares in ABC Ltd., by utilising foreign currency on January 1, 2011 for Rs.10.00 These shares were sold by him in the Recognised Stock Exchange on January 1, 2020 for Rs. 30.00 lakhs. The Sale Consideration received Rs.30.00 again invested in purchase of shares of PQR Ltd., on March 31,2020. The shares purchased by Mr. X on March 31,2020 of PQR Ltd., again sold by him on June 30, 2020 for Rs.35.50 discuss the tax implications of above transaction by Mr. X.

LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961

ANSWER- The problem is based on provisions of Section 115F of the Act,1961 as;

1. Capital gain on transfer of shares of ABC Ltd.- since whole consideration has been invested in the shares of PQR Ltd., within a period of six (6) months from the date of sale and hence whole Capital Gain i.e., Rs. 20.00 lakhs will be exempted under provisions of Section 115F of the Act,1961;
2. Transfer of share of PQR Ltd., within a period of 3 years from the date of investment -the exemption given under Section 115F will be revoked. It means Long Term Capital Gain exempted in FY 2019-2020 of Rs.20.00 Lakhs along with Short Term Capital Gain on transfer of shares of PQR Ltd., in FY 2020-21 i.e., of Rs. 5.50 Lakhs will be taxable in hand of Mr. X in FY 2020-21.

Total Tax Payable by Mr. X in FY 2020-21; -

1. Long Term Capital Gain during FY 2019-20: Rs. 20.00 Lakhs
2. Short Term Capital Gain during FY 2020-21: Rs. 5.50 Lakh.

CASE-6

PROBLEM:  A Ltd., transfers a building worth of Rs. 25.00 lakhs to CEO, Mr. X a residential individual on his retirement under an agreement for not carrying any activity elated to its business for a period of five years. In the course of assessment under Section 143(3) of the Act,1961 the AO found that no tax has been deducted at source by A Ltd., and on that basis, he disallowed expenditure by invoking the provisions of Section 40(a)(ia).

LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961.

ANSWER: from above we it is clear that any sum received or receivable, in cash or kind under an agreement for not carrying out any activity in relation to any business, is taxable in the hands of recipient under Section28(va) under the head" Profits and Gains from business or profession". It is taxable in the hand of recipient as income from business, even if the recipient is an employee of the company and his regular income is taxable under head "Salaries". The Tax is deductible under provisions of Section 194J of the Income Tax Act, 1961.

A Ltd., has not deducted tax at source. However, the Assessing Officer is not legally tenable by invoking the provisions of Section 40(a)(ia).

Please Note That:

1. Section 40(a)(ia) is applicable only in case of interest, commission/brokerage, rent, royalty, fees for professional services or fees for technical services.
2. Amount taxable in the hands of recipient under Section 28(va) is not covered under provisions of Section 40(a)(ia).

CASE-7

PROBLEM: Mr. A (Chartered Accountant) is running a proprietorship firm and his firm is converted into a partnership by inducting his son as new partner on 31.03.2021 with 50% share. All assets and liabilities of the erstwhile proprietary firm were transferred into newly constituted partnership firm.

Mr. A was credited and paid an amount of Rs. 5.00 Lakhs from the firm. Your advice is required on below mentioned points; Changeability of amount of Rs. 5.00 lakhs paid to Mr. A when it stands paid for;

1. Transfer of business into partnership;
2. Goodwill by the incoming partner.

LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961

ANSWER;

1. Where proprietor business is converted into a partnership, the exclusive interest of the proprietor is reduced and the business assets become sets of the firm in which he becomes a partner. Consequently, this transaction will be considered as transfer under Section 45(3) of the Income Tax Act, 1961.

In above case Mr. A has received Rs. 5.00 Lakhs from the firm, will be considered as consideration of transfer of his interest in proprietorship firm into a partnership firm ad same will be taxable as capital gain in his hands in the year of transfer of business to a partnership firm. According to the provisions of Section 45(3) the Rs. 5.00 Lakhs will be considered as book value recorded into books of accounts of the firm.

2. If the amount is paid by incoming partner as Goodwill;

Let's consider judgement of Supreme Court in case of CIT Vs. B.C. Srinivasa Shetty (1981)128 ITR 294- the apex court observed that the income chargeable to capital gain tax is to be computed by deducting from the full value of consideration," the cost of acquisition of capital asset" and if it is not possible to a certain the cost of acquisition, then transfer of such asset is not chargeable to tax.

SECTION 55 PROVIDES THAT

Cost of acquisition of self-generated asset, including goodwill of a business is NIL. The decision of Supreme Court is not applicable to those self-generating assets as mentioned in Section 55.

Since provisions of Section 55 does not cover Goodwill from Professional and hence the judgement of Supreme Court as mentioned above will be applicable and the Cost of Acquisition of Good from professional of Mr. A will not be a certain able and hence same will not be taxable under provisions of Section 48 of the Income Tax Act, 1961.

CONCLUSION

1. In first position the payment to Mr. A of Rs. 5.00 Lakhs will be taxable in his hands;
2. In second case since cost of acquisition of goodwill from professional is not ascertainable then the judgement of Supreme Court as mentioned above is applicable and no tax will be charged.

CASE-8

PROBLEM: -Mr. X holds 25% voting power in ABC (P)Ltd., he permits his own land to be mortgaged to a bank for enabling the company to obtain a loan. Mr. X requests the company to release the property from the mortgage. The company fails to do so, but for remaining benefit of the bank loan, it gives an advance of Rs. 10.00 Lakhs to Mr. X. The payment is authorized by a resolution passed at the meeting of Board of Directors of the company. The company's accumulated profit at the date of advance is Rs. 50.00 Lakhs. The Assessing Officer proposes to tax above payment of Rs. 10.00 Lakhs in the hand of company by invoking provisions of Section 2(22) (e) of the Income Tax Act, 1961.

ANSWER:

LET'S' CONSIDER APPLICABLE SECTION

Section 2(22)(e) in The Income- Tax Act, 1995

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise)made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent (10%) of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but" dividend" does not include-

a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;

ANALYSIS

From above we find that Mr. X is holding 25% voting power in ABC(P.) Ltd., a company in which public is not substantially interested and the accumulated profit of the company at the date of advance is of Rs. 50.00 lakhs, the criteria provided by provisions of section 2(22)(e) are fulfilled here.

Please Note That: - Section 2(22) (e) is applicable only in the case of those advances or loans which a shareholder enjoys for simply on account of being a person who is beneficial owner of shares (holding not less than 10% of the voting power). If, however, such loan or advances is given to a shareholder as a consequence of any further consideration which is beneficial to the company received from such shareholder, such advance or loan cannot be said to be deemed dividend within the meaning of the Act,1961.

Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the meaning of Section2(22) (e) of the Act but not the cases, where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

In above given case Mr. X permits his property to be mortgaged to the bank enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from mortgage. In such situation, for retaining the benefit of loan availed from bank, if decision is taken to give advance to the assessee, such decision is not to give gratuitous advance to its shareholder but to protect the business interest of the company.

The decision of proposal of Assessing Officer to tax advance received by Mr. X of Rs. 10.00 Lakhs from M/s. ABC (P) Ltd., is not taxable, because the transaction is not payment on the basis of gratitude but it is a payment to save the interest of company and continuous availing benefit of loan from the bank.

CASE-9

PROBLEM: - Assessment of X Ltd., is completed under Section 143(3) with an addition of Rs. 15.00 Lakhs to the returned income. The assesses-company goes in an appeal before CIT(Appeals). Which is pending

In this backdrop, your advice is required on below mentioned points;

1. Based on the fresh information that there is escarpment of income for the same assessment year, the AO wants to initiate reassessment proceedings, when an appeal is pending before CIT(Appeals). Can he do so?
2. Can the AO pass an order under Section 154 for rectification of mistake in respect of issue not being subject matter of the appeal?
3. Can the assesses-company seek revision under Section 264 in respect of matters other than those preferred in the appeal?
4. Can the Commissioner make a revision under Section 263 both in respect of matters covered in the appeal and other matters?

ANSWER:

LET'S CONSIDER PROVISIONS OF APPLICABLE SECTION

ANSWER TO ABOVE QUERIES

1. REASSESSMENT: The Assessing Officer may assess or reassess such income (other than the income involving matters which are subject matter of any appeal), which is chargeable to tax and has escaped assessment.
2. RECTIFICATION: Even if an appeal has been preferred against an order, a mistake in that part of the order which was not subject matter of appeal and which was left untouched by the appellate authority, can be rectified under Section 154(1) as given above.
3. REVISION BY COMMISSIONER UNDER SECTION 264: Where the order has been made the subject of an appeal to the CIT(Appeals) or the Tribunal (whether appeal to the tribunal is by the assessed or the department), the revision power of the Commissioner under Section 264 comes to an end. In other words, it cannot be exercise at all during the pendency, or even after disposal of the appeal by the CIT(Appeal) or the Tribunal.
4. REVISION BY COMMISSIONER UNDER SECTION 263; The Commissioner cannot make revision under Section 263 in respect of matters covered in an appeal before CIT(Appeals). However, Commissioner has jurisdiction and power to initiate proceedings under Section 263 in respect of issue not covered by CIT(Appeals).

CASE-10

PROBLEM: - M/s. X & Co., a partnership firm consisting of three partners enhanced working partners salary from Rs. 25,000/- to Rs. 50,000/- per month for each partner. The increase was in accordance with terms and conditions of Partnership Deed /authorized by Partnership Deed.

The Assessing Officer during course of assessment contended that the remuneration paid to working partners @Rs 50,000/- per partner per month is excessive and applied Section 40A(2)(a) though the payment was within statutory limit as specified in Section 40(b)(v). Whether action of AO is right?

LET'S CONSIDER PROVISIONS OF APPLICABLE SECTION

ANSWER TO ABOVE QUERIES

The facts of the case are similar to the facts in CIT Vs. Great City Manufacturing Co. (2013) 351ITR156, wherein the High Court observed that Section 40(b)(v) prescribed the limit of remuneration to working partners, and deduction is allowable up to such limit while computing the business income. If remuneration pad is within the ceiling limit provided under Section 40(b)(v), then recourse to provisions of Section 40A(2)(a) cannot be taken.

The Assessing Officer is only required to ensure that the remuneration is paid to the working partners mentioned in Partnership Deed, the terms and conditions of the Deed provided the payment of such remuneration to the working partners and the remuneration is within the limits prescribed under Section 40(b)(v) of the Act, 1961. If these conditions are complied with, then the AO cannot disallow any part of remuneration on the ground that it is in excess or it is excessive.

In view of the bone judgement, the increased remuneration, which is authorized by the Partnership Deed and is within limits specified under Section 40(b)(v) and paid to working partners, cannot be disallowed by invoking provisions of Section 40A(2)(a) of the Income Tax Act, 1961.

The action of Assessing Officer n above mentioned case was not appropriate.

CASE-11

PROBLEM: - An amount of Rs. 12,50,000/- paid by XYZ Limited, after approval by the Board on medical surgery of its Managing Director and same was claimed as expense in the accounts of the company. The AO (Assessing Officer) during assessment proceedings, taxed the amount paid by the company as a perquisite in the hands of its Managing Director. Critically analyse above case.

LET'S CONSIDER PROVISIONS OF APPLICABLE SECTION

LET'S ANALYSE ABOVE PROVISIONS

If we go through above definition of a perquisite under provisions of section 17(2)(vi) of the Income Tax Act, 1961, we found that;

1. Expenses on medical treatment of the employee or any member of his family outside India will be considered as perquisite provided that such expenses will not be considered as perquisite to the extent permitted by Reserve Bank of India.

2. Expenses of an attendant with the family members of an employee taking treatment abroad will be tax free to the extent it is approved by RBI.

3. Travel expenses of the patient (employee or his family member) and one attendant who accompanies the patient in connection with such treatment. It shall be tax free perquisite in the case of those employees whose Gross Total Income (before including therein such travel expenditure as perquisite) does not exceed Rs. 2,00,000/-.

ANSWER TO THE QUESTION; A Managing Director generally occupies the dual capacity in the company of being a director as well as an employee. In given case let's assume that MD is also an employee of the Company, the provisions of Section 17(2)(vi) get attracted and it provides that any expenditure incurred by an employer on treatment of his employee or any of his family members will not be taxed a perquisite to the extent allowed by the Reserve Bank of India.

The amount approved by RBI has not given in the question, let's assume that RBI has approved;

1. Rs. 12,50,000/- then there is no tax on the amount expended by employer as perquisite in the hands of MD;
2. Rs. 10,00,000/- then balance amount (Rs. 2,50,000) will be taxable as perquisite in the hands of MD.

CIT Vs. D.P. Kanodia (2008)296 ITR 616 in this case the High Court Allahabad observed that the reimbursement by the company of medical expenditure incurred outside India by the director cannot be considered as an amenity or benefit provide by the company to its director and therefore the provisions of Section 17(2)(iii)(a) would not be attracted. Therefore, such reimbursement cannot be considered as perquisite under provisions of Section 17(2)(iii)(a) of the Income Tax Act, 1961.

Thus, by applying above ratios the act of Assessing Officer to tax medical expenditure incurred by the XYZ Limited on its Managing director of the company as perquisite in hands of Managing Director is not correct.

CASE-12

PROBLEM: M/s. ABC Ltd., has issued debentures in previous year 2020-21, where were to be matured at the end of five years from the date of issue. The debenture holders were given an option of one-time upfront payment of Rs. 60.00 per debenture on account of interest which was to be immediately paid by the company. As per option exercise by debenture holders, company paid interest upfront to them in the first year itself and same was claimed as expenditure in the year of payment. But in the books of accounts of the ABC Ltd., the same expenditure was shown as "Deferred Revenue Expenditure "and same will be deductible over a period of five years during the terms of debentures.

The Assessing Officer spread the upfront paid interest over a period of five years and allowed one fifth (1/5) of interest to be claimed during the previous year under consideration. Analyse the decision of AO.

LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961

ANSWER; the facts of the case was similar to case of Taparia Tools Ltd., Vs. JCIT (2015) 372 ITR 605, wherein the Supreme Court observed that under Section 36(1)(iii), the amount of interest paid in respect of Capital Borrowed for the purpose of business or profession, is allowable as deduction.

The moment the option of upfront payment of interest was exercise by the debenture holders, the liability to make payment interest by ABC Ltd, has raised. In the bone case not only the liability of payment of interest has arisen but also it was qualified and paid during concerned previous year by the ABC Ltd.

The fact that a different treatment was given in the books of accounts could not be the factor which would bar the company for claiming full expenditure as deduction in the same previous year in which payment was made.

Accordingly, the action of Assessing Officer in spreading the upfront payment of interest over period of five years and restriction the deduction during FY 2020-21 only one fifth of the same is not correct.

The company is eligible to claim whole amount of interest paid as upfront interest during FY 2020-21 will be allowed as deduction under Section 36(1)(iii) of the Income Tax Act, 1961.

CASE-13

PROBLEM: Discuss whether the following transactions are subject to tax as deemed income-

1. ABC Ltd., is a broadcaster of news channel in India. It pays to Malaysian Company [having no Place of Business (PE) in India] for downlinking television channels into India and International footprints through a channel.
2. Mr. A, a foreign citizen and a diamond merchant from US, has earned income of Rs. 10.00 Crores from display of uncut and u assorted diamonds in the Bharat Diamond Bourse a notified Special Zone in Surat.

LET'S CONSIDER APPLICABLE PROVISIONS OF INCOME TAX ACT, 1961

ANSWER;

1. Income of a foreign company for downlinking television channel in India: - by virtue of Explanation 2(ii) of Section 9(1) (vi0 for the Income Tax Act, 1961 as mentioned above the expression "Process" in the definition of royalty includes "Transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber or by any other similar technology (whether or not such process is secret). Consequently, the payment by ABC Ltd., to the Malaysian Company will be treated as "Royalty", which is deemed to accrue or arise in India.

In given case the payment given by ABC Ltd., to Malaysian company will be treated as income accrue or arise in India and accordingly taxable in India.

2. Display of uncut and u assorted diamonds: - Explanation 1(e) of section 9(1)(i) of the Income Tax Act, 1961 provides that -In the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamond in any Special Zone notified by the Central Government in the Official Gazette in this behalf.

Main conditions to be satisfied to claim exemption by a foreign company are

1. The recipient of income is a foreign company;
2. It is engaged in the business of mining of diamonds.

In the given case Mr. A is an individual diamond merchant residing in US and has not fulfilled above conditions of Explanation 1(e) of section 9(1)(i) of the Act, 961 and Haney his income from displaying uncut and u assorted diamonds at Bharat Diamonds Bourse will be considered as income accrue or arise in India.

CASE-14

PROBLEM: Mr. X is a shareholder of M/s. X Ltd., a closely held company. The other shareholders in the company are Mrs. X and father of Mr. X. Seventy-five (75%) of the shares of X Ltd., are held by Mr. X. During the relevant previous year 2020-21, the company gifts Rs. 50,000/- to son of Mr. X. The Assessing Officer, while completing the assessment of the X Ltd., wants to treat it as payments made on behalf of or for the benefit of the assessee and, therefore, considers the same under Section2(22) (e) as deemed dividend in the hands of Mr. X. Discuss whether contention of the AO is tenable in law.

LET'S CONSIDER PROVISIONS OF SECTION 2(22) OF THE ACT, 1961

ANSWER; from above it is clear that for attracting provisions of Section 2(22) (e) below mentioned three conditions have to be fulfilled;

1. Company should not be a company in which public are substantially interested as per section 2(18);
2. The shareholder should own benefit of at least 10% of the equity capital; and
3. The company should possess accumulated profits at the time of making payment.

If above three conditions are satisfied then the provisions of Section 2(22) (e) become applicable and payment made by company will be considered as deemed dividend in the hands of Mr. X.

The above conditions cover three types of payments

1. Any payment of any sum by way of advance or loan to a shareholder;
2. Any payment on behalf of a shareholder;
3. Payment for the individual benefits of a shareholder

Please note That; if payment made by X Ltd., to son of Mr. X., for an on belief of Mr. X or for the individual benefit of Mr. X, then Rs. 50,000/- will be considered as deemed dividend.

As decided by various courts the fiction created for particular purpose cannot extended beyond the purpose for which it is intended. Legal fictions are created for definite purpose and are limited to the purpose for which they are created and should not be extended.

In the given case, there is no case that the payment has been made to discharge any liability of Mr. X in the Company. Apart from Mr. X, his wife and father are also shareholder of X Ltd. There is no material evidence to show that the payment was made on behalf and for the benefit of Mr. XX, on the basis of relationship alone we should not consider that the payment was made on behalf of Mr. X a shareholder. The other shareholders are also in relationship of the payee. In this case the provisions of Section 2(22) (e) are not applicable.

CONCLUSION 

From above it is cleared that for applicability of provisions of Section 2(22) (e) of the Act,1961 is important to proof that the payment was made on behalf of and for the individual benefit of shareholder. Mere relationship between the company and the payee is not sufficient to brought payment under provision of Section 2(22) (e) of the Act, 1961.

CASE-15

PROBLEM: Mr. P, is a member of a prosperous HUF, went abroad for his studies. When he returned, he was accompanied with Miss S a German Girl. After some time, P & S were married under provisions of Special Marriage Act, S continuing to remain a Christian even after her marriage. After two years a son T was born to them and he was not baptized to Christianity. After some time, differences however arose between P & S and S has left India after getting divorced from P with her son T. The custody of son T was given to Mr. P by the court and Mr. P apart from his interest in HUF has huge amount of income from salaries and other sources. He wants to separate himself from HUF I which he and his son T are the only members. He wants to know that after separation from HUF. Whether he can be assessed in dual capacity as an Individual and the Karta of HUF.

ANSWER; in the given case Mr. P was married to Miss S under Special Marriage Act, 1954. Under. Provisions of Section 19 of that act provides that;

Effect of marriage on member of undivided family. - The marriage solemnized under this Act of any member of an undivided family who professes the Hindu, Buddhist, Sikh or Jaina religions shall be deemed to affect his severance from such family.

Thus, from the date of marriage of Mr. P with Miss S, itself Mr. P is legally separated. From his HUF. On this deemed partition Mr. P acquired his right to his share in the HUF properties -a right which is Sui generics. No circumstance, except those mentioned in law, e.g., unchastity, murder, lunacy, etc., could have disinherited-him from his share of the ancestral property.

After marriage the status of Mr. P was that of an individual. When his son borne, he and his son have ordinary made up a HUF if and only if the son T were a Hindu. It was given in the above problem that Master T son of Mr. P never baptized to Christianity. But what is relevant here is the definition of "HINDU" given in various laws such as the Hindu. Succession Act, Hindu. Marriage Act, Hindu Minority and Guardianship Act, and Hindu Adoption and Maintenance Act. These legislation's governing customers prevailing in Hindu family provides different definitions of HINDU.

LET'S CONSIDER MOST APPROPRIATE DEFINITION

"Any child, legitimate or illegitimate, one of whose parents is Hindu, Buddhist, Jain or Sikh. By religion and who is brought up as a member of the tribe, group or community to such parents belong or belonged."

LET'S ANAYSE THE CASE Since Master T has been taken away. At the time of his. Infancy. To Germany by his mother, is not going to brought up as a Hindu. If he remained in India and were brought up as a Hindu by his father, he would have been a Hindu and along with his father could have formed a HU. But Master T does not have at the moment, a chance of becoming a Hindu. As he is a non-Hindu, he and his Hindu father cannot form a HUF. If in future, circumstances changed and Master T is made to be brought ups as a Hindu, whether in India and abroad, he would become a member if his father HUF.

It clear from above that Mr. P is to be assessed as an. Individual from the date of his marriage and not in dual capacity as an individual and kart of a HUF.

CASE-16

PROBLEM: M/s. ABC Limited has been penalized under provisions of GST Act,2017 to the tune of Rs. 50,000/- as Penalty for late filing of returns and Penal Interest on tax submitted late. The company has claimed above amount in its books as GST Paid, the AO has disallowed above expenditure and added the same in the income of company. Whether act of AO is tenable under provisions of Income Tax Act,1961 or not.

LET'S CONSIDER PROVISIONS OF SECTION 37(1) OF THE INCOME TAX ACT,1961

ANSWER: General Rule Provides that- if an assessee is penalised under one Act, he cannot claim that the amount is deductible against his income under another Act, because that will be frustrating the entire object of imposition of penalty. If the assessee resorts to unlawful means to augment his profits or deuce his loss, then the expenditure incurred for these unlawful activities cannot be allowed to be deducted whether the business is lawful or otherwise. Even if whole business of an assessee is illegal or unlawful then also his income will be taxable under the Act, 1961 but expenditure in the illegal or unlawful business is not allowed to be deducted.

The Explanation 1 has been inserted by the Finance Act (No.2),1988. Even if assessee has to pay fine or penalty because of inadvertent infraction of law, which does not involve any moral obliquity, the result will be the same. Even in such cases, deduction will not be permitted of the amount paid as penalty or fine or of the value the goods confiscated by the statutory authority as expenditure incurred wholly and exclusively for the purpose of carrying on the trade. It was held that fines or penalty paid for violation of any law cannot be allowed as deduction under provisions of the Income Tax Act,1961.

We have to keep following points in mind;

1. Penalty which is compensatory in nature and paid for breach of a contract or statute (not being one which is treated as an offence or prohibited by any law) is deductible;
2. Penalty or interest or fine under direct taxes is not deductible. For example, interest is levied on the assessee for delay in filing return will not be allowable as a business expenditure;
3. One of the important tests to determine whether levy is compensatory or penal in nature is whether for non-compliance of the provisions any criminal liability or prosecution is provided. If any criminal liability or prosecution is provided then the levy is certainly in penal nature. [CIT Vs. catholic Syrian Bank Ltd. (2003)130 Taxmann.com 447(Kerala)].

WHAT IS MEANING OF "COMPENSATORY"?

• Compensatory damages represent the money awarded to a plaintiff in a lawsuit.
• This type of compensation is awarded in civil court cases.
• There are two types of compensatory damages- general and actual.
• Actual damages are intended to provide funds to only replace what was lost.
• General compensatory damages awarded are more complex, as these compensatory damages do not represent a monetary expenditure.

In the case of M/s. ABC Limited the pantry imposed for non-filing of returns is penal in nature and hence not deductible but late payment of taxes is compensatory in nature and hence allowed as a deductible expenditure under provisions of Section 37(1) of the Income tax Act,1961.

LET'S DISCUSS SOME MORE DECISIONS;

1. Suppose a penalty under the GST Act,2017 has been levied on an assessee for purchasing goods for specified purpose on concessional tax rate than @1% (normal rate @4%) and not utilise the same for the purpose for which it was bought. This penalty or fine has been levied for breach of contract to utilise goods for specified purpose and same will be allowed as deduction.
2. A penalty for breach of contract is deductible and a penalty for breach of legal provisions of any Act, is no deductible.
3. The interest paid on arrears of GST and outstanding balance of GST is compensatory and hence allowed as deduction.
4. The penalty paid for non-payment of GST within the prescribed time, is not deductible as expenditure.
5. Where an assessee has paid penalty to Electricity Board for late supply of required materials as mentioned in the contract, is allowed as deductible expenditure. The penalty is paid for breach of terms of a contract and not violation of any provisions of Act and is on compensatory nature.
6. The damages paid for failure to comply with terms of agreement, due to change in government policies is allowable as deductible expenditure.
7. Penalty paid by the assessee contractor for non-completion of contract within a stipulated time is allowable as deduction.
8. The liquidation damages paid in consequence of contractual liability would be allowable as business expenditure.
9. An amount paid under Section 14B of the EPF as damages for default in making payment of PF contributions i.e., penal in character and hence not allowed as an expenditure.
10. Where there is allotment of quota for import of foreign cotton by federation and the assessee did not import the allotted quantity, the payment of guarantee amounts for bales not imported is not in nature of penalty and hence allowed as an expenditure.
11. The amount paid due to shortfall in export performance is allowable as deductions

CONCLUSION

The penalty or fine levied on the assessee is allowed as expenditure under provisions of Section 37(1) only on the basis of their nature, whether such fine or penalty is of compensatory nature or penal nature. If fine or penalty is of compensatory nature then it will be allowed as expenditure or in case it is penal, not allowed as deductible expenditure. A fine or penalty consisting of monetary as well as prosecution will be always considered as penal action and not allowed as deduction.

Therefore, the expenditure which can be deducted in connection with the business carried by the assessee is the expenditure which can properly be regarded as such. The penalties paid for violating the law in the course of the conduct of business cannot be regarded as deductible expenditure, as the assessee is expected to carry on business in accordance with the laws of land and not in violation of law. The penalty incurred by the assessee for the violation of applicable statute, unless the true nature of penalty is compensatory, is not to be regarded as deductible item of expenditure.

CASE-17

Sub: Whether grant received from holding company by a subsidiary company to coup subsidiary's continuous trading loss will be treated as Revenue Receipt/ Capital Receipt?

QUESTION: S Ltd., a subsidiary of H Ltd., has been incurring losses year after year. The holding company H Ltd. paid an amount of Rs. 1 crore to S Ltd. as a grant to recoup the losses. The assessing officer contends to consider this receipt as a trading receipt and includes it in the assessable income. Examine the case in the light of provisions of Income Tax Act and decided case law, if any.

ANSWER: The facts of the case are similar to CIT v. Handicrafts and Handlooms Export Corporation of India Ltd. (2014) 360 ITR 0130 (Delhi), where the assessee was a government company operating a channelizing agency for sale of handicrafts and handlooms abroad. In the relevant previous year, it received a grant of Rs. 25 lakhs from its holding company, the State Trading Corporation of India (STC) to recoup the losses. The Assessing Officer opined that the said amount was a revenue receipt and therefore chargeable to tax.

TRIBUNAL'S VIEW: The Appellate Tribunal held that the grant received was not taxable as revenue receipt since the said grant was given to recoup the losses incurred by the assessee and was hence, in the nature of capital contribution.

HIGH COURT'S OBSERVATIONS: The High Court examined the judgment of the Supreme Court in Sahney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253, which laid down the test for determining whether subsidy received by an assessee is taxable as capital or revenue receipt.

As per the said test, if any subsidy is given, the character of the subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. The point of time, the source and the form of subsidy are immaterial. The object for which the subsidy is given, would, thus determine the nature of subsidy. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt.

The High Court observed that grant was not paid by a third party or by a public authority but by the holding company. However, it was not on account of any trade or commercial transaction between the subsidiary and holding company.

Further, the intention and purpose behind the said payment was to secure and protect the capital investment made by holding company. The payment of grant by holding company and receipt thereof by the assessee was not during the course of trade or performance of trade, and thus, could not partake the character of a trading receipt. The same was in the nature of a capital grant.

The High Court observed the difference between Government Grant and payment made by holding company, as pointed out by the Division Bench in Handicrafts and Handlooms Corporation Ltd. v. CIT (1983) 140 ITR 532. The grants given were specific amounts paid by holding company to the assessee, in order to enable the assessee, which was its subsidiary and was incurring losses year after year, to recoup these losses and to enable it to meet its liabilities. These amounts, therefore, cannot form part of the trading receipts of the assessee since these were not in the nature of grants received from an outsider or the Government on general grounds such as for carrying on of trade.

Thus, the grant given by the holding company in this case is in the nature of capital receipt since its purpose is to secure and protect the capital investment made in the subsidiary company. The decision of AO to consider the grant given by Holding Company to its subsidiary to coup with subsidiary continuous losses as revenue/trading receipt is not tenable.

CASE-18

Sub: Whether foreign exchange gain will be considered as Capital gain in case business of company has not commenced.

Section involved - Charing Section 4, Section 28(i) and Section 263 of the Income Tax Act,1961

QUESTION: - Assessee-company was constituted as a special purpose vehicle to carry out foundational tasks for setting up a coal-based power plant. Assessee had not commenced any business activity during the relevant period to assessment year. Assessee had entered into contract for purchase of plant and machinery from abroad. In relation to such purchase, on account of cancellation of contracts and on account of notional adjustment, due to favorable fluctuation of foreign exchange rate, assessee had gained certain income. AO accepted the contention of the assessee. CIT revised the order and directed the AO to redo the assessment. Whether act of CIT to revise the Assessment Order is right, please explain on the basis of pronounced judgement if any.

LET'S FIRST CONSIDER APPLICABLE PROVISIONS IT ACT,1961

SECTION 4- IS THE CHARGING SECTION, PROVIDES THAT

1. Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and ¹subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

2. In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

SECTION 28 IN THE INCOME- TAX ACT, 1995 provides that -The following income shall be chargeable to income- tax under the head" Profits and gains of business or profession", -

1. the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;

2. any compensation or other payment due to or received by, -

• any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
• any person by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
• any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;
• any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;

3. income derived by a trade, professional or similar association from specific services performed for its members;

(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);

(iiib)cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;

(iiic)any duty of customs or excise re- paid or re- payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;

4. the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

5. any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm: Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted.

Explanation 2.- Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as" speculation business") shall be deemed to be distinct and separate from any other business.

SECTION 263- gives power to CIT to revised orders prejudicial to revenue

1. The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
2. No order shall be made under sub- section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
3. Notwithstanding anything contained in sub- section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.

Explanation.- In computing the period of limitation for the purposes of sub- section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.

ANSWER- the above-mentioned case was same as PCIT v. Coastal Gujarat Power Ltd. (2019) 264 Taxman 244 (Bom.)(HC).

THE TRIBUNAL HELD THAT- the imports made by the assessee were part of the project of setting up power plant. It was recorded that; the business of the company had not commenced during period relevant to assessment year in question. The profit or loss which arose to an assessee on account of appreciation or depreciation in the value of foreign currency held as capital asset which was liable to be treated as capital in nature. Accordingly, the order of AO is affirmed.

On appeal the High court also affirmed the order of the Tribunal.

CONCLUSION

From above judgment it is cleared that since business of the company has not commenced during the relevant previous year under consideration. Any profit /loss arose to the assessee due to fluctuation in foreign exchange will be treated as profit/loss of Capital Nature and not of Revenue Nature. The order of CIT to revise AO order is not tenable.

CASE-19

Sub: Treatment of dividend income received by a resident assessee from a company situated in Malaysia under Income Tax Act, 1961;

PROBLEM :- Mr. X( aged 70 years resident in India) gets a dividend of Rs. 2,00,000/- from shares held in a company situated in Malaysia. The other income of Mr. X is Rs. 12,00,000/-. The company in Malaysia has deducted TDS and not tax is payable on dividend income in Malaysia. The AO wants to tax the dividend income of Mr. X in India since he is a resident in India. Please decide whether decision of AO is tenable or not?

LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961

ANSWER: Form above Mr. X is resident in India. It appears that dividend (after TDS from Malaysian company) is received in India. Consequently, it is chargeable to tax in India according to the provisions of Section 5(1) (c) of the Income Tax Act, 1961.

In this case relief may be provided under Indo-Malaysian Avoidance of Double Taxation Agreement, which provides that -Article 10 of the Indo-Malaysian Avoidance of Double Taxation Agreement provides that dividend income paid by a Malaysian company to a resident of India may be taxed in India. Such dividend income may be taxed in Malaysia at the maximum rate of 10%. In other words, even if it is taxed in Malaysia at the rate of 10% (or less), it can be taxed in India, on such doubly taxed income, relief will be provided within the parameters of Article 23 of the DTAA Agreement.

COMPUTATION OF TAX LABILITY OF MR. X

CASE-20

Sub; Whether any sum received from a subsidiary company by a holding company under scheme of arrangement sanctioned by High Court under provisions of Section 391 to 394 of the Companies Act, 2013 , be treated as ‘Slump Sale' and liable to Capital Gain Tax?

QUESTION: ABC Finance Corp., a finance company had received certain amount from its subsidiary, under a scheme of arrangement sanctioned by the High Court under sections 391 to 394 of the Companies Act, 1956. Can this scheme of arrangement be treated as slump sale to attract capital gains provisions? Discuss in the light of decided case law.

LET'S CONSIDER SOME IMPORTANT DEFINITIONS

MEANING OF ‘SLUMP SALE'

In simple words, ‘slump sale' is nothing but transfer of a whole or part of business concern as a going concern; lock, stock and barrel.

As per section 2(42C) of Income -tax Act 1961, ‘slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
‘Undertaking' has the same meaning as in Explanation 1 to section 2(19AA) defining ‘demerger'.

As per Explanation 1 to section 2(19AA), ‘undertaking' shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

Explanation 2 to section 2(42C) clarifies that the determination of value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as assignment of values to individual assets and liabilities. Thus, if value is assigned to land for stamp duty purposes, the transaction will be a qualifying slump sale under section 2(42C)

A sale in order to constitute a slump sale must satisfy the following quick test:

i) Business is sold off as a whole and as a going concern;

ii) Sale for a lump sum consideration;

iii) Materials available on record do not indicate item-wise value of the assets transferred

TAXABILITY OF GAINS ARISING ON SLUMP SALE

1. Section 50B of the Income-tax Act, 1961 provides the mechanism for computation of capital gains arising on slump sale. On a plain reading of the Section, some basic points which arise are:

2. Section 50B reads as ‘Special provision for computation of capital gains in case of slump sale'. Since slump sale is governed by a ‘special provision', this section overrides all other provisions of the Act.

3. Capital gains arising on transfer of an undertaking are deemed to be long-term capital gains. However, if the undertaking is ‘owned and held' for not more than 36 months immediately before the date of transfer, gains shall be treated as short-term capital gains.

4. Taxability arises in the year of transfer of the undertaking.

5. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act.

6. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.

7. In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking.

ANSWER:

The facts of the case are similar to that of SREI Infrastructure Finance Ltd. v. Income-tax Settlement Commission (2012) 207 Taxman 74 of Income tax Act (Delhi), where the Delhi High Court held that it would be wrong to infer that section 50B is applicable only in case of actual "sale" of assets. Moreover, section 50B of Income tax Act shall be applicable in all types of "transfer" mentioned in section 2(47). When a scheme under sections 391 to 394 of the Companies Act, 1956 is sanctioned by the Court, it is treated as a binding statutory scheme because the scheme has to be implemented and enforced. However, this cannot be a ground for the assessee to escape tax on ‘transfer' of a capital asset under the provisions of the Income-tax Act, 1961. The taxability of the said transaction is to be decided as per the provisions of the Income-tax Act, 1961.

LET'S CONSIDER DECISION OF HIGH COURT IN ABOVE REFERRED CASE

SREI Infrastructure finance Limited vs. Income tax settlement commission(2012) 207 Taxman 74

The transfer of an undertaking under a Scheme of arrangement under Section 391-394 of Companies Act, 1956 is ‘Slump sale' which is taxable under Section 50B of the Income-tax Act.

BRIEF FACT OF THE CASE

1. The petitioner (SREI Infrastructure Finance Limited) under a scheme of arrangement, transferred its project financing business and assets-based financing business, for a consideration of Rs.375 lakhs.

2. The Settlement Commission (Income Tax Settlement commission) has held that the consideration of Rs. 375 lacs received by the petitioner was taxable under Section 50B of the Act as "slump sale".

PETITIONER'S CONTENTION

The contention of the petitioner is that the ‘transfer' under the Scheme of Arrangement is not a ‘sale' under Section 50B of the Act. The Scheme of Arrangement sanctioned by the High Court of Calcutta under Sections 391 to 394 of the Companies Act, 1956 is statutory in nature and character. Section 50B of the Act has no applicability as the ‘transaction' was under the Scheme of Arrangement and the same is not a ‘slump sale' as contemplated under Section 2(42C) of the Act.

The petitioner claims that Section 2(42C) of the Act deals with limited category/type of transactions i.e., sales, which are construed as a ‘slump sale' and the broader and wider definition of the term ‘transfer' as defined under Section 2(47) of the Act is not applicable to ‘slump sales.

HIGH COURT'S RULING

1. The term ‘slump sale', has been defined in Section 2(42C) of the Act, to mean transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

2. The term ‘transfer' as used in said section is with reference to the transaction in the nature of ‘slump sale'. Thus, any type of ‘transfer' which is in nature of slump sale i.e., when lump sum consideration is paid without values being assigned to individual assets and liabilities are covered by the definition under Section 2(42C) and then by Section 50B of the Act.

3. Section 50B of the Act was inserted to supersede decisions which held that a slump sale (i.e., transfer of business as a going concern) was not taxable for want of cost of acquisition.

4. The High Court further held that it would not be appropriate to construe and regard the word ‘slump sale' to mean that it applies to ‘sale' in a narrow sense and as an antithesis to the word ‘transfer' as used in Section 2(47) of the Act. Use of word ‘sale' in the term ‘slump sale' does not and is not intended to narrow down the concept of ‘transfer' as defined and understood in Section 2(47) of the Act.

5. Fair reading of Section 50B(1) of the Act and proviso thereunder makes it clear that it applies to all ‘transfers' that can be categorized as a ‘slump sale'. Section 50B(2) of the Act also refers to transfer by way of sale i.e., ‘slump sale'.

THE HIGH COURT OBSERVED THAT the Income Tax Act,1961 was enacted to tax the income or gains made by a taxpayer. The Companies Act, 1956, on the other hand serves, and is intended to serve a different purpose. When a scheme under Section 391-394 of the Companies Act, 1956 is sanctioned by the Court, it is treated as a binding statutory scheme because the scheme has to be implemented and enforced. This cannot, or is not, a ground to escape tax on ‘transfer' of a capital asset as per provisions of the Act.

Therefore, although the scheme is approved by the court under sections 391 to 394 of the Companies Act, 1956 it shall be treated as slump sale and capital gains provisions would be attracted.

CASE-21

PROBLEM- A Ltd., a non-banking finance company, is engaged in the business of leasing and hire purchase business. It purchases motor vehicles or motor cars from Shakti Motors and leases out to its customers. The lease agreement with the customers states that in case of default of customers for payment of lease rent or other terms and conditions, the A Ltd., has power to repossess the motor cars/vehicles leased out. Since the registration of vehicles are in the name of lessees and per provisions of Motor Vehicles Act, 1988. A Ltd., has claimed a depreciation of Rs. 5.00 Lakhs on the motor cars leased out as on 31/03/2021. The claim is rejected by the Assessing Officer on the ground that the assessee (A Ltd.) in only finances for purchase of leased vehicles and hence it is neither owner or used the same motor cars in his business.

SECTION 32- provides the method of calculation of depreciation and conditions to be fulfilled are;

• The assets must be owned, wholly or partly, by the assessee.
• The assets must be in use for the business or profession of the taxpayer. If the assets are not used exclusively for the business, but for other purposes as well, depreciation allowable would be proportionate to the use of business purpose. The Income Tax Officer also has the right to determine the proportionate part of the depreciation under Section 38 of the Act.
• Co-owners can claim depreciation to the extent of the value of the assets owned by each co-owner.
• You cannot claim depreciation on the cost of land.
• Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account.

SECTION 37- says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession".

ANSWER- the above question is based on Supreme Court ruling given in case of ICDS Ltd. Vs. CIT [2013] 29 Taxmann.com.com 129. In this case, motor vehicles were registered in the name of lessees during the period of lease as per requirement of the Motor Vehicles Act, 1988. The depreciation was not claimed by the lessees for income tax purposes. The Apex Court gave ruling in favour of the leasing company to have the benefit of claiming depreciation as deduction expenditure under provisions of Section 32 of the Act, 1961, on the basis of following arguments-

"The Motor Vehicles Act, 1988 mandates that during the period of lease, the Vehicle be registered in the Certificate of Registration in the name of lessee and, on conclusion of the lease period, the vehicle again register in the name of lessor (hire purchase) company as the owner. The section leaves no choice to the lessor to allow the vehicles to be registered in the name of lessee, thus no inference can be drawn from registration certificate as to ownership of the legal title of the vehicles leased and if the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which as specifically recorded in order of Appellate, was not done. It would be strange situation to have no claim of depreciation in case of a particular depreciable asset due to vacuum of ownership during period of lease. As aforesaid the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hand of lessee. This reaffirms the position the position that the assessee is in fact the owner of the vehicles, in so far as section 32 is concerned."

CONCLUSION: please note that in above case if lessee claim lease rent as deductible revenue expenditure under provisions of Section 37 of the Income Tax Act, 1961 and have not claimed depreciation under Section 2, then the leasing company (A Ltd.) is entitled to claim depreciation as deductible expenditure on vehicles leased under Section 32.

CASE-22

Sub: Applicability of provisions of section 35AD of Income Tax Act, 1961

PROBLEM: Indian Gas Limited commenced its operation of laying and operating cross country gas pipeline network for distribution on 01.07.2017. The company incurred Capital Expenditure of Rs. 300 Lakhs ( including cost of land of Rs. 45 Lakhs and cost of financial instrument of Rs. 5 lakhs) during the period from 01/04/2016 to 30/06/2017. The company did not claimed deduction from such expenditure in the earlier assessment years. The entire expenditure was capitalized on 01.07.2017. Further during the previous year 2017-18 ( from July 2017), the company has incurred Capital expenditure of Rs. 200 lakhs exclusively for that business.

1. Compute the amount of deduction allowable under Section 35AD assuming that the company has fulfilled all the conditions specified in Section 35AD ;
2. If the company has loss from such business in the Ay 2018-19 , how the same is to be set off and carried forward?

SOLUTION:

1. Section 35AD provides for investment -linked tax incentive for Specified Business. One such specified business of laying and operating a cross-country natural gas or cured or petroleum oil pipeline network for distribution, including storage facilities benign an integral part of such network. The benefit will be available in a case where business relates to lying and operating a cross country natural gas pipeline network for distribution.

Under section 35AD , 100% of the Capital Expenditure incurred during the previous year, wholly and exclusively for the above business would be allowed as deduction from business income. However , expenditure incurred on acquisition of any land , goodwill or financial instrument or where the payment is made in a mode other than by A/c payee cheque or A/c payee draft or through ECS would not be eligible for deduction.

Further the expenditure incurred, wholly and exclusively , for the purpose of specified Business prior to commencement of operations would be allowed as deduction during the previous year in which the assessee commences operation of his specified business. A condition has been inserted that such amount incurred prior to commencement should be capitalized in the books of account of the assessee on the date of commencement of its operations.

However, the actual deduction u/s. 35AD for AY 2018-19 would be restricted to the profits derived from specified Business for that year. The difference would be treated as loss from Specified Business to be carried forward according to provisions of Section 73A.

2. Section 73A provides that any loss computed in respect of the Specified Business shall be setoff only against profits and aims, if any , of any other Specified Business. The unabsorbed loss, if any, will be carried forward for setoff against profits and gains of any Specified Business in the following Assessment Year and so on. There is no time limit specified for carry forward and set-off and therefore , such loss can be carried forward indefinitely for setoff against income from specified business.

CASE-23

Sub: Relief under Double Taxation Avoidance Agreement.

QUESTION: The Income Tax Act, 1961 provides for taxation of a certain income earned in India by Mr. X a non-resident. The DTAA ,which applied to Mr. X provides for taxation of such income in the country of his residence. Examine ,is Mr. X is liable to pay tax on such income earned by him in India?

ANSWER: the provisions of section 90(2) make it clear that where the Central Government has entered into a DTAA with a country outside India, then in respect of an assessee to which such agreement applies, the provisions of the Act, 1961 shall apply to the extent they are more beneficial to the assessee. This means that where the DTAA has been entered, the assessee can opt to be governed by the provisions of DTAA ,if the provisions are beneficial in comparison to the provisions of Income Tax Act, 1961.

However according to Section 90(4) , the assessee, in order to claim relief under the agreement ,has to obtain a Certificate [ TRC i.e. Tax Resident Certificate] from the Government of that country, declaring the residence of the country outside India. Further , he also has to provide the following information in Form 10F;

1. Status (Individual, Company, Firm ,etc.) of the assessee;
2. PAN;
3. Nationality ( in case of individual) or country or specified territory of incorporation or registration ( in case of other than individuals);
4. Assessee's tax Identification Number in the country or specified territory of residence and in case here is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or specified territory of which the assessee claimed to be residence;
5. Period for which the residential status , as mentioned in the TRC referred to Section 90(4) or Section 90A(4) , is applicable ;and
6. Address for which assessee in the country or specified territory outside India, during the period for which the TRC , as mentioned in (v) above is applicable.

However, the assessee may not be required to provide information or any part thereof , if the information or the part thereof , as the case may be, is already contained in theTRC referred to in Section 90(4) or 90A(4).

The Supreme Court of India has held, in CIT Vs. PVAL Kulanagan Chettiar (2004)267 ITR 654, that in case of any conflict between the provisions of the DTAA and the Income Tax Act, 1961, the provisions of DTAA would prevail over those of the Income Tax Act, 1961.

Mr. X is therefore ,not liable to pay tax on income earned by him in India provided he submits the TRC( Tax Residence Certificate) obtained by him from the Government of the other country, and provides such other documents and information as may be prescribed.

CHAPTER IX- DOUBLE TAXATION RELIEF

Agreement with foreign countries or specified territories.

90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,-

(a) for the granting of relief in respect of-

(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or

(d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.

(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.

(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed.

Explanation 1.- For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favorable charge or levy of tax in respect of such foreign company.

Explanation 2.- For the purposes of this section, "specified territory" means any area outside India which may be notified as such by the Central Government.

Explanation 3.- For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.

Explanation 4.- For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.

CONCLUSION

As we are aware that Income of a resident in India from sources anywhere in world will be taxable under provisions of Income Tax Act, 1961. In case a person, who is a non-resident in India during previous year and he earns any income from India, then taxability of that Income will be decided on the basis of source of income as well as residence of assessee. The Central Government has entered into DTAA with various countries to provide relief to our non-resident citizens on the income taxable in both countries. A non-resident Indian can opt provisions of DTAA, if these provisions are beneficial to him than the provisions of Income Tax Act, 1961 because the provisions of DTAA will prevails on Income Tax Act, 1961 in case of any dispute. The non-resident has to submit TRC and other documents and information as required to be submitted by the Income Tax Act, 1961.

DISLCAIMER: Above questions and answers series is only for sharing information with the readers. The views expressed here are personal views of the author, same should not be considered as professional advice. We suggest our readers to consult with tax consultants in case of necessity and more understanding on subject matter.