Digest of important case law January 2013 to April 2013
June, 20th 2013
S.2(1A): Agricultural Income-Assessee filing letter explaining ownership of agricultural land purchased in 1986-87 and disclosing capital gains on sale thereof in subsequent year-Seized material not suggesting inflation of agricultural income-Income not to be treated as income from other sources. [S. 153A] The Assessing Officer made an addition on the ground that no agricultural lands were recorded in the balance-sheet and the assessee had not shown any documentary evidence in support of his claim. He accordingly treated the income claimed as not agricultural income but as income from other sources. Before the Commissioner (Appeals) the assessee contended that complete details of agricultural holdings were filed before the Assessing Officer and that he had also offered capital gains to tax on sale of agricultural lands in the financial year 2005-06, which was accepted by the Assessing Officer. The Commissioner (Appeals) held that this sort of addition could not be made in an assessment completed under section 153A without any reference to the seized material and that it was also not the case of the Assessing Officer that the seized material, if any, suggested inflation of agricultural income. The Commissioner (Appeals) treated the income as agricultural income and not as income from other sources as the assessee had filed a letter explaining that the ownership of the agricultural land purchased in the year 1986-87 by way of proper evidence and the requirement of using material being found during the course of search operation was not of any relevance and that it was not the case of the Assessing Officer that the seized material, if any, suggested inflation of agricultural income. On appeal :Held, that the order of the Commissioner (Appeals) was correct. (A.Ys. 2002-2003 to 2008-2009 )
S.2(14): Capital asset – Rural agricultural land – Distance of 5Km is held to be capital asset and liable to be assessed as capital gain.
The Central Government has published a notification dated 6-1-1994 contemplating that the area up to a distance of 5 km from the municipal limits of Panchkula in all directions shall not be an agricultural land. Since the impugned land fell outside the 5 km limit, it was held to be capital Asset. The expression ‘Municipality’ in section 2(14) of the Act is very wide. It is not restricted to a Municipality constituted under the relevant Municipal Laws such as Haryana Municipal Act, but it would include any other area known by any other name. Sub-clause (a) of clause (iii) of section 2 (14) deals with an area which falls within the jurisdiction of a Municipality, whereas clause (b) enable the Central Government to declare an area situated within 8 kms from the local limits of any Municipality referred to in clause (a) to notify having regard to extent and scope for urbanization of that area. The Notification dated 6-1-1994 takes into its ambit an area within 5 kms of the Municipality in the expression ‘capital asset’. Therefore, the urban area developed by the Authority forms part of a Municipality. The expression ‘by any other name’ appearing in item (a) of clause (iii) of Section 2 (14) has to be read ejusdem generis with the earlier expressions i.e. municipal corporation, notified area committee, town area committee, town committee. In view of the above, it is held that the land, subject matter of acquisition, is a capital asset falling within the scope of clause (iii) of section 2(14). (AY 2004-05)
S.2(14):Capital asset–Personal effect–Inherited assets-Sale consideration is not liable to capital gain tax. (S.45 )
Assessee sold certain items such as furniture, carpets, paintings, watches and crystal items inherited from his father in assessment year in question, said items being in nature of ‘personal effects,’ The Court held that the assessee was not liable to pay capital gain tax on sale of those items. Amendment to section 2(14), which has been brought about by the Finance Act, 2007 with, effect from 1-4-2008 and which alters the clause pertaining to ‘personal effects,’ has prospective application. With effect from 1-4-2008 even paintings, sculptures, works of art, archaeological collections and drawings, in addition to jewellery, have been excluded from the expression ‘personal effects’ which would be applicable from 1-4-2008. (A.Y. 2002-03)
Faiz Murtaza Ali v. CIT (2013) 214 Taxman 30 (Delhi) (HC)
S.2(14):Capital asset-Agricultural land situated beyond 8 kms from municipal limits and beyond 19 kms from centre of city-Not a capital asset–Land shown in revenue records as agricultural compensation is not assessable as capital gains. (S.45 ) The assessee’s lands were acquired by Reliance Projects Engineering Association Ltd through the Government of Gujarat and the assessee received compensation. He claimed the same as the agricultural income considering its agricultural nature. The Assessing Officer rejected the claim holding, that the assessee failed to provide proof that the land was agricultural and did not substantiate that the land was outside the purview of the definition of "capital asset" under section 2(14) of the Act, and treated the income as long-term capital gains. The Commissioner (Appeals) held that the land was located in a village which was 19.34 kms away from the main city. Further, the Commissioner (Appeals) opined that the Assessing Officer invoked the powers conferred by the Act and have obtained the Government records from the Land Revenue Department for ascertaining whether the land fell within the boundaries of 8 kms from the municipal limits or not. Accordingly, the Commissioner (Appeals) held that the land was located outside the village, which was located at a distance of more than 19 kms away from city and granted relief to the assessee. On appeal by the Department:
Held, dismissing the appeal, that the land was located beyond 8 kms of the Municipal limits of the Jamnagar and was also located beyond 19 kms from the centre of the city of Jamnagar. On this issue, the definition of capital asset provided in section 2(14)(iii) was not met. There was no notification issued by the Central Government regarding the same being a capital asset. Therefore, the land held by the assessee was agricultural land. It was borne out from the records of the Revenue Department that the lands were described by the District Collector, Jamnagar, as agricultural lands. There was no material in the possession of the Assessing Officer to hold that the land was a capital asset within the meaning of section 2(14) of the Act. The decision of the Commissioner (Appeals) did not call for any interference (A. Y. 2007-2008).
ITO v. Amrutilal B. Shah(2013) 22 ITR 668(Mum) (Trib)
S.2(15): Charitable purpose-Trade business or commerce-Public utility-Activity of evolving, prescribing, standards Activities cannot be termed as business activity-Exemption was granted. (S.10) (23C).
The Bureau of Indian Standards (BIS), a sovereign entity created under the Bureau of Indian Standards Act, 1986, had been granted exemption under section 10(23C).
The Director of Income-tax (Exemption) withdrew the said exemption on the ground that activities of BIS were in the nature of business and hence, covered by the proviso to section 2(15). The assessee challenged the said order by way of Writ to the High Court, wherein it was held that, activities of Bureau of Indian Standards (BIS) in prescribing of standards of goods/articles and enforcing those standards through accreditation and continuing supervision through inspection, etc., cannot be considered as trade, business or commercial activity merely because testing procedures involves charging of fees. Accordingly allowing the Petition the DIG was directed to issue the exemption certificate under section 10(23C) of the Act.
Bureau of Indian Standards v DGIT (Exemptions) (2013) 212 Taxman 210 (Delhi) (HC) S.2(22)(e): Dividend- Deemed dividend-Share application money – Colour device – Not “loan or advance”, cannot be assessed as deemed dividend.
The assessee was a beneficial shareholder of three companies named Kingston Properties P Ltd. (KPPL), New Dimensions Consultants P Ltd (NDCPL) & R. S. Estate Developers P Ltd (RSEDPL). NDCPL & RESEDPL advanced various sums of money to KPPL towards “share application money”. However, some of the advances were returned by KPPL while some were adjusted towards allotment of shares. The AO held that the transaction was a “colourable device” and a “loan and advance” which fell within the ambit of s. 2(22) (e). The said “loan and advance” was assessed as “deemed dividend” in the hands of the assessee – beneficial shareholder – following Universal Medicare Pvt. Ltd. (2010) 324 ITR 263 (Bom). The CIT (A) reversed the AO. On appeal by the department to the Tribunal HELD dismissing the appeal:
Share application money or share application advance is distinct from ‘loan or advance’. Although share application money is one kind of advance given with the intention to obtain the allotment of shares/equity/preference shares etc., such advances are different form the normal loan or advances specified both in section 269SS or 2(22) (e) of the Act. Unless the mala fide is demonstrated by the AO with evidence, the book entries or resolution of the Board of the assessee become relevant and credible, which should not be dismissed without bringing any adverse material to demonstrate the contrary. It is also evident that share application money when partly returned without any allotment of shares, such refunds should not be classified as ‘loan or advance’ merely because share application advance is returned without allotment of share. In the instant case, the refund of the amount was done for commercial reasons and also in the best interest of the prospective share applicant. Further, it is self-explanatory that the assessee being a ‘beneficial share holder’, derives no benefit whatsoever, when the impugned ‘share application money/advance’ is finally returned without any allotment of shares for commercial reasons. In this kind of situations, the books entries become really relevant as they show the initial intentions of the parties into the transactions. It is undisputed that the books entries suggest clearly the ‘share application’ nature of the advance and not the ‘loan or advance’. As such the revenue has merely suspected the transactions without containing any material to support the suspicion. Therefore, the share application money may be an advance but they are not advances which are referred to in section 2(22) (e) of the Act. Such advances, when returned without any allotment or part allotment of shares to the applicant/subscriber, will not take a nature of the loan merely because the same is repaid or returned or refunded in the same year or later years after keeping the money for some time with the company. So long as the original intention of payment of share application money is towards the allotment of shares of any kind, the same cannot be deemed as ‘loan or advance’ unless the mala fide intentions are exposed by the AO with evidence. (A. Y. 2002-03 to 2007-08)
DCIT v. Vikas Oberoi (Mum.) (Trib.) www.itatonline.org.
S.2(22)(e):Dividend-Deemed dividend-Loans and advances-Legal fiction does not extend to broaden the concept of shareholderto make tax loans or advances as deemed dividend in the hands of deemed share holder. (Companies Act, S.153, 187C)
Duringsearch various papers relatingshare holding pattern of Amod Stampings Pvt Ltd were seized. It was found that said company had granted loans to various companies wherein share holdings and voting power exceeded 10 percent.It was explained that on creation of Trust a part of said company were settled in favour of Trust and after excluding of shares the assessee did not have more than 10 percent voting power and the assessee had no beneficial interest in the said Trust. The Assessing Officer held that creation of Trust was an afterthoughtand taxed theamount as deemed dividend.Before Commissioner (Appeals) it was contended that as per section 153 of the Companies Acta company is not permitted to include the name of the trust in the register of members. It was also contended that the provision of section 187C have been madeineffective w.e.f.13th December, 2000 and therefore there is no requirement at present to declare beneficial interest etc., therefore suchbeneficial interest was is not declared in the register of the Company or the Registrar of the Companies. However Commissioner (Appeals) up held the addition.On appeal the Tribunal held that since the said Company was not permitted to include name of Trust in its register, name which was earlier noted as shareholders remainedsame, howeverthrougha Board meeting it was resolved to acknowledge change in vesting of shares, hence in view of the facts deemed dividendcould not be taxed in hands of assessee.Legal fiction created under section 2(22) (e) does not extend further for broadening concept of shareholder so as to tax loans or advances as ‘deemed dividend’ in hands of a ‘deeming shareholder’. (.AY. 2006-07)