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From the Courts »
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Digest of important case law February 2014
May, 23rd 2014

S.2(14)(iii): Capital asset- Agricultural land-land was situated beyond 9kms from the municipal limit & the land is situated in the Revenue record of village Lasudia Parmar whose population was about 2,000 people -Capital gains on the sale of land were not chargeable to tax. [S.45]
Assessee declared income & claimed exemption from capital gains on sale of land by claiming the same to be agricultural land situated in the revenue record of village. The AO held that said agricultural land was situated within 8 kms from the limits of the municipal limits & refused to grant exemption being an agriculture land. CIT (A) allowed the appeal of the assessee by supporting the contention of the assessee that the land was situated more than 8 kms by road from the municipal limit by Straight Distance Method. Tribunal held against the assessee by holding that agricultural land was situated beyond 9 kms from the municipal limit of village & also relied on the judgment of the Gujrat High Court in the case of Balkrishna Harivllabhdas V. CIT (1982) 138 ITR 245 (Guj) & decision of Punjab & Haryana High Court in the case of CIT V. Satinder PalSingh (2010) 33 DTR (P& H) 281. On further appeal in HC , HC held in favour of assessee & said that certificate of Tehsildar & land Surveyor merely say that the impugned land was situated beyond 9kms from the municipal limit & the land is situated in the Revenue record of village Lasudia Parmar whose population was about 2,000 people . Therefore capital gains on the sale of land were not chargeable to tax. (AY.2008-09)
CIT .v. Ashok Shukla (2014) 99 DTR 250 (MP)(HC)

S.2(14)(iii)(b): Capital asset-Capital gains–Sale of agricultural land – Distance from municipal limits. [S.54B]
As the land in question was not situated within 8 kms from the municipal limit in terms of the approach by road, assessee was entitled to exemption u/s. 54B. (AY. 2007-08)
CIT .v. Shabir Hussain Pithawala (2014) 98 DTR 62(MP)(HC)

S.2(22)(e): Deemed dividend-Assessee was not beneficial owner-Deletion of addition was held to be justified.
During the search operation carried out by the department, it was noticed that the said company had given loans to various members including the assessee having shareholding & voting powers exceeding 10%. The assessee during the search operation, confronted with such shareholding pattern & the loans advanced. Assessee accepted certain sum u/s 2(22)(e) of the act . During the course of assessment proceedings, it was contended by family members that they had settled on aggregate of 5.12 lacs of equity shares of the said company held by them. It was the case of the assessee that he did not hold any beneficial voting power. AO rejected the contention of the assesse. CIT (A) dismissed the appeal. Tribunal allowed the appeal & held that trust deed was created nearly four years prior to the date of search & notarised. Tribunal also held that the companies’ act would not permit transfer of shares in the name of trust & that there was no dividend declared by the company & that the trust did not receive any income so as either to open a bank account or to file a return. On appeal in HC, HC held that Tribunal having found as a fact that shares in question stood settled on genuinely created trust & assessee was no more beneficial owner of the shares, no interference was called for with the order of Tribunal holding that deemed dividend u/s 2(22)(e) was not chargeable in the hands of the assessee.(AY. 2006-07)
CIT .v. Krupeshbhai N. Patel (2014) 99 DTR 209 (Guj.)(HC)
Editorial: Krupeshbhai N. Patel .v. Dy.CIT(2013) 140 ITD 176(Ahd) (Trib) is affirmed.
S.2(22)(e): Deemed dividend–Accumulated profits-Depreciation to be considered as per Income–tax Act and not as Companies Act.
While assessing income, the assessing authority is required to take into consideration the depreciation as provided under the Income–tax Act and not as provided under the Companies Act.
CIT .v. Pushparthy Packs (P.) Ltd. (2014) 98 DTR 65 (Bom.)(HC)

S.2(22)(e):Dividend–Deemed dividend–Sister concern transactions of commercial nature-Provision of deemed dividend is not applicable.
The assessee was 100% EOU engaged in the business of conversion of rough granite blocks into polished granite slabs, granite tiles and monuments. During the assessment proceedings, the AO found that 2 individuals S and V held shares in the assessee with voting power of 75% and 25% respectively. S also held 66.8% of the voting rights of a sister concern which had accumulated profits and also had credit balance in the name of the assessee. Therefore, the AO held that there was a loan or advance within the meaning of section 2(22)(e) of the Act and treated the amount of accumulated profit as deemed dividend and disallowed the benefits of deduction u/s. 10B. The CIT(A) deleting the addition made by the AO held that the transactions of the assessee with its sister concern were commercial in nature and that the provisions of section 2(22)(e) of the Act were not applicable.

On appeal by the Department, the Tribunal observed that the assessee had filed additional details before the CIT(A) establishing that the transactions were regular business transactions. These evidences were also sent to the AO in the Remand Proceedings who had in his Remand Report conceded that the transactions were regular business transactions. Accordingly, the Tribunal dismissed the departmental appeal. (AY.2006-07)
Dy.CIT .v. Chariot International P. Ltd. (2014) 29 ITR 36 (Chennai)(Trib.)

S.2(24):Income–Charitable trust–Donation towards building construction was held not taxable –Donations used for the benefit of trustees is held to be taxable -Matter was set aside. [S. 2(24)(iia), 12]
Donations received by the assessee-society towards building construction cannot be brought to tax and the donations used for the benefit of trustees are taxable as income of the assessee. The matter was sent back to Assessing Officer to segregate the donations which have been diverted for personal benefit of the members of the society.
JB Educational Society .v. ACIT (2014) 159 TTJ 236 (Hyd.)(Trib.)
Joginapally B.R.Education Society .v. ACIT (2014)159 TTJ 236 (Hyd.)(Trib.)

S.2(31)(v): Association of persons-Linde and Samsung were independent of each other and were responsible for their own deliverables under the Contract, without reference to each other. Consequently, no AOP is formed.
Before an association can be considered as a separate taxable entity (i.e an Association of Persons), the same must exhibit the following essential features: (i) must be constituted by two or more persons; (ii) the constituent members must have come together for a common purpose; (iii) the association must move by common action and there must be some scheme of common management; (iv) the cooperation and association amongst the constituent members must not be perfunctory and/or merely in form. The association amongst members must be real and substantial which is sufficient to treat the association as a separate homogenous taxable entity. (b) On facts, as per the terms of the Contract, the scope of work to be executed by Linde and Samsung was separate and was accordingly specified in the annexures to the Contract. The payments to be made for separate items of work were also specified. The currency in which the payments were to be made was also separately indicated.

Linde and Samsung had joined together to (i) bid for the contract; (ii) present a façade of a consortium to OPAL for execution of the contract and accept joint and several liability towards OPAL for due performance of the contract and completion of the project; and (iii) put in place a management structure for inter se coordination and execution of the project. However, in all other respects, both Linde and Samsung were independent of each other and were responsible for their own deliverables under the Contract, without reference to each other. Consequently, no AOP is formed.
Linde A. G. v. DDIT (Delhi)(HC).

S.4: Income-Accrues or arise -Retention money received, after TDS, but subject to bank guarantee, is not chargeable to tax as income till all conditions are satisfied.
(i) Mere receipt of income is not the sole test of chargeability.
(ii) On facts, the right to receive the sum was uncertain and contingent upon satisfactory completion of several factors. Same uncertainly and unpredictability prevailed. The assessee had no absolute right to receive the amount. SSNNL had no obligation to release the same before completion of warranty period and even thereafter would release the amount only after making permissible adjustments. Mere fact that in the present case no recoveries were made from the bank guarantee or security deposit is of no consequence. The fact that tax was deducted at source on said amount also would be of no consequence. The assessee had no control over such deduction. Merely whether tax was deductible or not would not decide the taxability of certain receipts. The manner in which the assessee accounted for such receipt in its books of account can also not determine its tax liability.
Amarshiv Construction Pvt. Ltd. v. DCIT; (Guj) (HC)
S.4: Income-Capital or revenue-Subvention assistance from holding company-Capital receipt. [S.2(24)]
Subvention assistance from holding company to recoup anticipated losses of the assessee constituted capital receipt not chargeable to tax.
CIT .v. Deutsche Post Bank Home Finance Ltd. (2014) 98 DTR 144 (Delhi)(HC)

S.4: Income-Capital or revenue- Subvention payment received from parent company-Revenue receipt chargeable to tax.[S.2(24)]
Subvention payment received by the assessee from parent company to make good the loss and to see that company is run more profitably constituted revenue receipt. (AY. 1999-2000 to 2001-02)
CIT .v. Siemens Public Communication Networks Ltd (2014) 98 DTR 151 (Karn.)(HC)

S.4: Income-Capital or revenue- Forfeiture of warrants is capital receipt [S. 28(iv)]
While confirming the order of CIT(A) , the Tribunal held that amount received on account of forfeiture of amount due to non-payment towards warrants issue has to be treated as capital receipt and since the assessee has also transferred it to the capital reserve account in the balance sheet the amount cannot be taxed as income of relevant financial year. (AY.2006-07)
Dy. CIT .v. CNB Finwiz Ltd. (2014) 159 TTJ 146 (Delhi)(Trib.)

S.5:Scope of total income–Accrual–Fees received from students for entire course in one year should be apportioned proportionately for each year-Matter remitted to AO for proper quantification .
The Tribunal sent the matter back to Assessing Officer for proper quantification of the income on accrual basis as the fees received for full course from a student in one assessment year should be appropriated proportionately for each year under consideration during the course period.
JB Educational Society .v. ACIT (2014) 159 TTJ 236 (Hyd.)(Trib.)
Joginapally B.R. Education Society .v. ACIT(2014) 159 TTJ 236 (Hyd.)(Trib.)

S.5:Scope of total income –Accrual–Interest receivable on advances-Waiver of interest-No evidence was produced-Income accrued.
Assessee brought nothing on record to show that interest chargeable by it on advance to C as per the agreement was actually waived in the year under consideration. Such interest income had accrued to assessee and was liable to tax. (AYs. 2002-03 to 2004-05)
ITO .v. Ricoh India Ltd (2014) 98 DTR 435 (Mum.)(Trib.)

S.9(1)(i): Income deemed to accrue or arise in India -AOP Business connection – Fees for technical services off-shore supply & services .[S.2(31)(v),(9(1)(vii)]
Merely because a project is a turnkey project would not necessarily imply that for the purposes of taxability, the entire contract be considered as an integrated one. Where the equipment and material is manufactured and procured outside India, the income attributable to the supply thereof could only be brought to tax if it is found that the said income therefrom arises through or from a business connection in India. It cannot be concluded that the Contract provides a “business connection” in India and accordingly, the Offshore Supplies cannot be brought to tax under the Act.

In order to fall outside the scope of Section 9(1)(vii) of the Act, the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies. In view of the Explanation to Section 9(2) as substituted by Finance Act 2010 with retrospective effect from 01.06.1976, the decision of the Supreme Court in Ishikawajima-Harima Heavy Industries, in so far as it holds that in order to tax fees for technical services under the Act the services must be rendered in India, is no longer applicable. Therefore, in the event the services in question are not considered as an integral and inextricable part of equipment and material supplied, it would be necessary to examine whether any relief in respect of such income would be available to the assessee by virtue of the DTAA between Germany and India;

(f) The AAR exercises judicial power and necessarily has to follow the principle of law already accepted by it. This is also a necessary facet of Article 14 of the Constitution of India. The equal protection clause in the Constitution would necessarily imply that the judicial authorities interpreting the law must also follow a consistent view. Thus, in the event the Authority was of the opinion that the earlier view was erroneous, it was incumbent upon the Authority to refer the matter to a larger bench. In the present case, the Authority has sought to distinguish its earlier decision in the case of Hyundai Rotem, without pointing out any material dissimilarity in facts which would render the earlier decision inapplicable. We are also unable to find any material dissimilarity in facts that would warrant such a conclusion.
Linde A. G. v. DDIT (Delhi)(HC)

 
 
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