Case BriefsHigh Courts

Delhi High Court: A Division Bench of Dr S. Muralidhar and Talwant Singh, JJ. quashed an order of reassessment passed by the Assessing officer for non-compliance of the procedure outlined by the Supreme Court in GKN Driveshafts India (P) Ltd. v. CIT, (2003) 1 SCC 72.

The short point involved in the present case was — whether the Assessing Officer could have proceeded to finalise the reassessment pursuant to notices issued under Section 147/148 of the Income Tax Act, 1961 without compliance of procedure laid down by the Supreme Court in GKN Driveshafts case?

The High Court observed: “This Court has emphasised ins several decisions that the procedure outlined by the Supreme Court in GKN Driveshafts (India) Ltd. is sacrosanct. in other words, where in response to a notice issued under Section 147 by the AO, the Assessee seeks the reasons to believe that prompted the reopening, and files objections thereto, those objections have to be considered on their merits and only a reasoned order has to be passed thereon by the AO. Importantly, this has to happen prior to the AO proceeding with the reassessment.”

In the present case, it was noted, the Assessment Officer had not chosen to dispose of the objections filed by the petitioner against reopening of the assessment, but had proceeded to the stage of passing the impugned reassessment order.

The Court, therefore, set aside the reassessment order. Directions were issued to the Assessing Officer to consider the petitioner’s objections to reopening of assessment and dispose of them by a reasoned order within 4 weeks of the date of the order.[Surendra Kumar Jain v. CIT, 2019 SCC OnLine Del 9393, decided on 29-07-2019]

Case BriefsHigh Courts

Chhattisgarh High Court: Prashant Kumar Mishra, J. quashed criminal proceedings pending against the petitioner-assessee before the Chief Judicial Magistrate for the commission of offences under Section 276-C (willful attempt to evade tax) and Section 277 (false statement in verification) of the Income Tax Act, 1961.

The gravamen of the offence alleged against the petitioner was that it concealed its income for the assessment year 1990-1991. Consequent to that, a penalty was imposed upon him by the Commissioner of Income Tax. He also granted sanction for petitioner’s prosecution, pursuant to which the criminal case which the subject matter of the present petition, was registered. The petitioner filed an appeal before the appellate authority — CIT (Appeals) — which appeal was allowed and the penalty was set aside on the finding that the petitioner did not conceal its income.

S. Rajeshwara Rao and M.K. Sinha, Advocates for the petitioner, contended that in view of the position that the penalty levied on the petitioner was set aside, the criminal proceedings pending on the file of CJM may also be quashed. Per contra, Naushina Ali appearing on behalf of A. Choudhary, Standing Counsel for the Revenue, opposed the present petition.

The High Court relied on K.C. Builders v. CIT, (2004) 2 SCC 731, wherein the Supreme Court held that “once the finding of concealment and subsequent levy of penalties under Section 271 (1)(c) of the Act has been struck down by the Tribunal, the assessing officer has no other alternative except to correct his order under Section 154 of the Act as per the directions of the Tribunal.” It was further held in the said case that “the finding of the Appellate Tribunal was conclusive and the prosecution cannot be sustained since the penalty after having been decided by the complainant following the Appellate Tribunal’s order, no offence survives under the Income Tax Act and thus quashing of prosecution is automatic.”

In the matter at hand, the High Court, following the law laid down in K.C. Builders, held that it will an empty formality to direct the petitioner to approach the trial Magistrate, who had otherwise kept the application preferred by the petitioners pending since 15-01-2014. Resultantly, the Court exercised its inherent powers and quashed the criminal proceedings pending against the petitioner. The petition was allowed. [System (India) Castings v. CIT, 2019 SCC OnLine Chh 63, decided on 26-06-2019]

Legislation UpdatesNotifications

Order under Section 119 of the Income-Tax Act, 1961

Section 44 AB of the Income-Tax Act, 1961 (‘the Act’) read with Rule 6G of the Income-tax Rules, 1962 (‘the Rules’) requires specified persons to furnish the Tax Audit Report along with the prescribed particulars in Form No. 3CD. The existing Form No.
3CD was amended vide notification no. GSR 666(E) dated 20th July, 2018 with effect from 20th August, 2018. However, the reporting under clause 30C and clause 44 of the Tax Audit Report was kept in abeyance till 31st March, 2019 vide Circular No. 6/2018 dated 17.08.2018.

Representations were received by the Soard that the implementation of reporting requirements under clause 30C (pertaining to General Anti-Avoidance Rules (GAAR)) and clause 44 (pertaining to Goods and Services Tax (GST) compliance) of the Form No. 3CD may be deferred further.

The matter has been examined and it has been decided by the Board that the reporting under clause 30C and clause 44 of the Tax Audit Report shall be kept in abeyance till 31st March, 2020.


[Notification dt. 14-05-2019]

Ministry of Finance

Legislation UpdatesNotifications

S.O. 1398(E) —In exercise of the powers conferred by clause (46) of Section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies for the purposes of the said clause, ‘Visakhapatnam Special Economic Zone Authority’, an authority constituted by the Central Government, in respect of the following specified income arising to that authority, namely:—

(a)  Lease Rent (charged as per Government prescribed rate);

(b)  Receipts from I-Card and Permit fees;

(c)  Allotment fee in respect of Standard Design Factories;

(d)  Auction/bid amount in respect of Plots/Building which fall vacant;

(e)  Transfer charges in respect of Plot/Building;

(f)  Fee for Issue of Form-I for exemption of Building Plans;

(g)  Processing fee for approval of Building Plans, conveying NOC’s etc.;

(h)  Site usage charges from Service Providers;

(i) License fee for allotment of Staff Quarters to the Staff; and

(j) Interest earned on (a) to (i) above.

2. This notification shall be effective subject to the conditions that Visakhapatnam Special Economic Zone Authority,-

(a)  shall not engage in any commercial activity;

(b)  activities and the nature of the specified income shall remain unchanged throughout the financial years; and

(c)  shall file return of income in accordance with the provision of clause (g) of sub-section (4C) of Section 139 of the Income-tax Act, 1961.

3. This notification shall be deemed to have been applied for the assessment year 2018-2019, and shall apply with respect to the assessment years 2019-2020, 2020-2021, 2021-2022 and 2022-2023.

[Notification No. 25 /2019/F. No. 300196/62/2018-ITA-I]

[Notification dt: 19-03-2019]

Ministry of Finance

Legislation UpdatesNotifications

S.O. 1397(E)— In exercise of the powers conferred by clause (46) of Section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies for the purposes of the said clause, ‘Andhra Pradesh Electricity Regulatory Commission’, Hyderabad, a Commission constituted under the Andhra Pradesh Electricity Reforms Act, 1998 (Government of Andhra Pradesh Act 30 of 1998), in respect of the following specified income arising to that Commission, namely:—

  1. (a)  Licence fee received under the Electricity Act, 2003;
  2. (b)  Grants-in-Aid received from Government; and
  3. (c)  Interest earned on (a) & (b) above.

2. This notification shall be effective subject to the conditions that Andhra Pradesh Electricity Regulatory Commission, Hyderabad,-

  1. (a)  shall not engage in any commercial activity;
  2. (b)  activities and the nature of the specified income shall remain unchanged throughout the financial years; and
  3. (c)  shall file return of income in accordance with the provision of clause (g) of sub-section (4C) of Section 139 of the Income-tax Act, 1961.

3. This notification shall apply with respect to the assessment year 2019-2020, 2020-2021, 2021-2022, 2022-2023 and 2023-2024.

[Notification No. 24/2019/F. No. 300196/73/2018-ITA-I]

[Notification dt. 19-03-2019]

Ministry of Finance

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Dr. AK Sikri, SA Nazeer and MR Shah, JJ decided an issue relating to interpretation of Section 80HH of the Income Tax Act, 1961 referred to it by a division bench in 2014 and that the decision of the Court in Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax, Delhi-II, (2000) 9 SCC 63, was erroneous.

The issue before the Court was”

“while computing the deduction whether it is to be available out of ‘income’ as computed under the Income Tax Act, 1961 or out of ‘profits and gains’, without deducting therefrom ‘depreciation’ and ‘investment allowance’.”

The Court discussed the scheme of the Act at length and said:

“Reading of Section 80HH along with Section 80A would clearly signify that such a deduction has to be of gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act.”

It said that the scheme itself draws distinction between the concept ‘income’ on the one hand and ‘profits and gains’ on the other hand. Below is the point-wise summary of how the Court explained the scheme of the Act in order to reach the abovementioned conclusion:

  • Insofar as computation of income under the head ‘profits and gains’ from business or profession is concerned, Section 28 of the Act mentions various kinds of incomes which are chargeable under this head.
  • Section 29 mentions the method of arriving at ‘income’ which is to be computed in accordance with the provisions contained in Sections 30-43D of the Act.
  • Sections 30-43D contain deductions of various kinds which are in the nature of expenditure or the like nature.
  • After providing the deductions admissible in these provisions, one arrives at the figure of net profits which would become the net income under the head ‘profits and gains of business or profession’.
  • Under Chapter VI-A of the Act certain deductions are given by way of incentives. Assessees may earn these deductions on fulfilling the eligibility conditions contained therein, even when they are not in the nature of any expenditure incurred by the assessee.
  • Section 80A of the Act provides that in computing the total income of assessee, there shall be allowed from his gross total income, in accordance with the subject of the provisions of this Chapter, the deductions specified in Sections 80C to 80U.
  • Section 80A itself uses the expression ‘from his gross total income’ as it states that deduction is to be allowed to an assessee ‘from his gross total income’.
  • Section 80HH specifically mentions that deduction @ 20% of ‘profits and gains’.

The Court, hence, overruled the verdict in Motilal Pesticides as it missed the marked difference in the terms ‘Income’ and ‘Gross Total Income’

[Vijay Industries v. Commissioner of Income Tax, 2019 SCC OnLine SC 299, decided on 01.03.2019]

Case BriefsHigh Courts

Kerala High Court: A 2-Judge Bench comprising of K.Vinod Chandran and Ashok Menon, JJ. dealt with an appeal against the order of Income Tax Appellate Tribunal, where order of first appellate authority was affirmed. It was found that sale of assessee’s land comes under exception of capital gains under Section 45 of the Income Tax Act, 1961 and hence was not taxable.

Assessee is alleged with not declaring capital gain in the income return filed when he sold his property to the owners of a newspaper. Assessee contended that the land in question is an agricultural land and thus is not taxable. Assessee only showed a certificate issued by Village Officer as an evidence to show land as agricultural. Court found that this certificate could not have been relied on as it was issued after sale. Assessee submitted that under Section 2(14) of the Act according to which only those land come under the category of capital asset which comes under (a), (b) of clause (iii).

The High Court stated that merely the fact that land does not come under above provision does not exclude property from the definition of capital asset. High Court viewed that assessee had failed to show that the land in question was an agricultural land thus sale of this land would be taxable under the Act. Therefore, orders of first appellate authority and the Tribunal were set aside. [Principal Commissioner of Income Tax v. Kalathingal Faizal Rahman, 2018 SCC OnLine Ker 3239, decided on 02-07-2018]

 

 

Hot Off The PressNews

The Finance Act, 2018 has withdrawn the exemption under clause (38) of Section 10 of the Income-tax Act, 1961 (the Act) and has introduced a new Section 112A in the Act, to provide that long term capital gains arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10 per cent of such capital gains exceeding one lakh rupees. The said section, inter alia, provides that the provisions of the section shall apply to the capital gains arising from a transfer of long-term capital asset being an equity share in a company, only if securities transaction tax (STT) has been paid on acquisition and transfer of such capital asset.

However, to provide the applicability of the tax regime under Section 112A of the Act to genuine cases where the STT could not have been paid, it has also been provided in sub-section (4) of Section 112A of the Act that the Central Government may specify, by notification, the nature of acquisitions in respect of which the requirement of payment of STT shall not apply in the case of acquisition of equity share in a company.

In order to have wider consultation in this matter, the draft of notification proposed to be issued under Section 112A(4) of the Act has been uploaded on www.incometaxindia.gov.in.  Stakeholders are requested to submit their comments/suggestions on the draft notification by 30th April, 2018 at the e-mail address dirtpl2@nic.in.

Ministry of Finance

Business NewsNews

Seeking to crackdown on shell companies, the government has proposed to remove exemption available to firms with tax liability of up to Rs 3,000 from filing IT returns beginning next fiscal. The Union Budget 2018–19 has rationalised the IT Act provision relating to prosecution for failure to furnish returns. Thus, a managing director or a director in charge of the company during a particular financial year could be liable for prosecution in case of any lapse in filing IT returns for any financial year beginning 01-04-2018. The income tax departments would now track investments by these companies. Also, the focus will be on those firms that show less profit and also those who file IT returns for the first time. There are around 12 lakh active companies in the country, out of which about 7 lakh are filing their returns, including annual audited report, with the Ministry of corporate affairs. Of this, about 3 lakh companies show ‘nil’ income.

The Section 276CC of the Income Tax Act, 1961 provided that if a person wilfully fails to furnish in due time the return of income, he shall be punishable with imprisonment and fine. However, no prosecution could be initiated if the tax liability of an assessee does not exceed Rs 3,000. The government has amended the provision with effect from 01-04-2018 and removed the exemption available to companies. In order to prevent abuse of the said proviso by shell companies or by companies holding benami properties, it is proposed to amend the provisions so as to provide that the said sub-clause shall not apply in respect of a company. The Budget announcement follows the recommendation of the task force on shell companies, which was set up in February, 2017. In the government’s fight against black money, shell companies have come to the fore as they are seen as a potential for money laundering. Till the end of December 2017, over 2.26 lakh companies were deregistered by the MCA for various non compliances and being inactive for long. Since 2017, the apex policy making body of the IT department — the Central Board of Direct Taxes (CBDT), has been sharing with the MCA specific information like PAN data of corporates, Income Tax returns (ITRs), audit reports and statement of financial transactions (SFT) received from banks.

[Source: The BusinessLine]

Business NewsNews

The Central Board of Direct Taxes (CBDT) has clarified that the pension received by a taxpayer from his former employer is taxable under the head “Salaries”. The Finance Act, 2018 has amended Section 16 of the Income–tax Act, 1961(“the Act”) to provide that a taxpayer having income chargeable under the head “Salaries” shall be allowed a deduction of Rs 40,000 or the amount of salary, whichever is less, for computing his taxable income. Accordingly, any taxpayer who is in receipt of pension from his former employer shall be entitled to claim a deduction of Rs 40,000 or the amount of pension, whichever is less, under Section 16 of the Act.

Earlier pensioners were not able to enjoy any allowance on account of transport and medical expenses, but after this provision they will also get the benefit of this deduction. Consequently the present exemption in respect of these two allowances stands withdrawn from FY18-19. However, in case of differently-abled persons, the transport allowance at enhanced rate shall continue to be available.

Pension received by dependent family members (as legal heirs) of the retired individual is known as family pension and is considered as ‘income from other sources’. So, in case an employee passes away, then after his death the for the family pension, a standard deduction under Section 57 (iia) is available under which an amount of Rs 15,000 or 1/3rd of the uncommuted pension received, whichever is less, shall be exempt. Spouse, children below the age of 25 years, unmarried daughter and dependent parents in certain cases shall come under the definition of dependent family members.

[Press Release no. 1527822, dt. 05-04-2018]

Ministry of Finance

Legislation UpdatesRules & Regulations

G.S.R.399(E).– In exercise of the powers conferred by Section 295 read with Section 115TD of the Income Tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income Tax Rules, 1962, namely:-
1. (1) These rules may be called the Income Tax (8th Amendment), Rules, 2017.
(2) They shall be deemed to have come into force from the 1st day of June, 2016.
2. In the Income-tax Rules, 1962, after rule 17CA, the following rule shall be inserted, namely: –

17CB. Method of valuation for the purposes of sub-section (2) of section 115TD.– (1) For the purpose of sub-section (2) of section 115TD of the Act, the aggregate fair market value of the total assets of the trust or institution, shall be the aggregate of the fair market value of all the assets in the balance sheet as reduced by-

(i) any amount of income-tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of income-tax claimed as refund under the Act, and
(ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset.

(2) For the purpose of sub-rule (1), the fair market value of the asset shall be determined in the following manner, namely:—

(I) Valuation of shares and securities,—

(a) the fair market value of quoted share and securities shall be the following:—

(i) the average of the lowest and highest price of such shares and securities quoted on a recognised stock exchange as on the specified date; or
(ii) where on the specified date, there is no trading in such shares and securities on a recognised stock exchange, the average of the lowest and highest price of such shares and securities on a recognised stock exchange on a date immediately preceding the specified date when such shares and securities were traded on a recognised stock exchange,

(b) the fair market value of unquoted equity shares shall be the value, on the specified date as determined in accordance with the following formula, namely:—
Fair market value of unquoted equity shares = (A+B – L) × (PV)/(PE),
where,
A = book value of all the assets in the balance sheet (other than bullion, jewellery, precious stone, artistic work, shares, securities, and immovable property) as reduced by-

(i) any amount of income-tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of income-tax claimed as refund under the Act; and

(ii) any amount shown in the balance sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

B=fair market value of bullion, jewellery, precious stone, artistic work, shares, securities and immovable property as determined in the manner provided in this rule;
L=book value of liabilities shown in the balance sheet, but not including the following amounts, namely:—

(i) representing contingent liabilities other than arrears of dividends payable in respect of the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference shares and equity shares;
(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv) any amount representing provision for taxation, other than amount of income-tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of income tax claimed as refund under the Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi) any amount cumulative preference shares;

PE = total amount of paid up equity share capital as shown in the balance-sheet;
PV= the paid up value of such equity share,

(c) The fair market value of shares and securities other than equity shares shall be estimated to be price it would fetch if sold in the open market on the specified date on the basis of the valuation report from a merchant banker or an accountant in respect of such valuation.

(II) The fair market value of an immovable property shall be higher of the following:-

(a) price that the property shall ordinarily fetch if sold in the open market on the specified date on the basis of the valuation report from a registered valuer; and
(b) stamp duty value as on the specified date.

(III) The fair market value of a business undertaking, held by a trust or institution, shall be its net assets determined in accordance with the following formula:-

Fair market value = (A + B-L), which shall be determined in the manner provided in sub-clause (b) of clause (I) of subrule (2).

(IV) The fair market value of any asset, other than those referred to in clauses (I), (II) and (III), shall be the price that
the asset shall ordinarily fetch if sold in the open market on the specified date on the basis of valuation report
from a registered valuer:
Provided that in case no valuer is registered for valuation of such assets, the valuation report shall be obtained from a valuer who is a member of any one of the professional valuer bodies viz. Institution of Valuers, Institution of Surveyors (Valuation Branch), Institution of Government Approved Valuers, Practicing Valuers Association of India, the Indian Institution of Valuers, Centre for Valuation Studies, Research and Training, Royal institute of Chartered Surveyors; India Chapter, American Society of Appraisers, USA; Appraisal institute, USA or a valuer who is appointed by any public sector bank or public sector undertakings for valuation purposes.

(3) For the purpose of sub-section (2) of section 115 TD of the Act, the total liability of the trust or institution shall be the book value of liabilities in the balance sheet on the specified date but not including the following amounts, namely:—

(i) capital fund or accumulated funds or corpus, by whatever name called;
(ii) reserves or surpluses or excess of income over expenditure, by whatever name called;
(iii) any amount representing contingent liability;
(iv) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(v) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of income-tax claimed as refund under the Act, to the extent of the excess over the income-tax payable with reference to the income in accordance with the law applicable thereto.

Explanation.— For the purposes of this rule,-

(a) “accountant” shall mean a fellow of the Institute of Chartered Accountants of India within the meaning of the Chartered Accountants Act, 1949 (38 of 1949) who is not appointed by the trust or institution as an auditor;
(b) “balance-sheet” in relation to any trust or institution, shall mean the balance-sheet of such trust or institution (including the notes annexed thereto and forming part of the accounts) as drawn up on the specified date which has been audited by an accountant;
(c) “merchant banker” shall mean a category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(d) “quoted share or security” in relation to share or security means a share or security quoted on any recognised stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made in the ordinary course of business;
(e) “recognised stock exchange” shall have the same meaning as assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(f) “registered valuer” means a person registered as a valuer under section 34AB of the Wealth-tax Act, 1957 (27 of 1957);
(g) “securities” shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(h) “specified date” means the date referred to in Explanation to section 115TD of the Act;
(i) “stamp duty value” means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;
(j) “unquoted share and security” in relation to share or security means share or security which is not a quoted share or security.”

[Notification No. 32/2017 /F. No. 370142/21/2016-TPL]

Note:- The principal rules were published in the Gazette of India Extraordinary, Part III, section 3, sub-section (i), vide notification number S.O. 969(E), dated the, 26th March, 1962 and were last amended vide notification number GSR No. 331(E) dated the 5th April, 2017.

MINISTRY OF FINANCE

Case BriefsHigh Courts

Bombay High Court: While disposing of an appeal under Section 260-A of the Income Tax Act, 1961 the Division Bench of M.S. Sanklecha, A.K. Menon, JJ. held that the provisions of Section 145-A of the Act are applicable to manufacturing and trading companies and not to a service provider company. For the assessment of a real estate consultancy, the Assessing Officer included the service tax billed by it for rendering services as trading receipts on invocation of Section 145-A(ii) of the Act (prescribes ‘method of accounting in certain cases’). Besides, the Assessing Officer also invoked Section 43-B of the Act (allows ‘certain deductions only on actual payment’) stating that the service tax billed had not been paid over to the Government till the due date of filing the return. Later, the Commissioner of Income Tax (Appeals) also upheld the Assessing Officer’s order. On further appeal, the Tribunal however held that Section 145-A(a)(ii) of the Act would have no application in respect of the service tax billed on rendering of services.

The High Court noted that Section 145-A(a)(ii) of the Act only covers cases where the amount of tax, duty, cess or fee is actually paid by the assessee to bring the goods to the place of its location and condition as on the date of valuation. In the instant case, the assessee was rendering services and had not incurred any liability for bringing any goods to the place of its location. Since, the service tax billed has no relation to any goods nor does it have anything to do with bringing the goods to a particular location, Section 145-A(a)(ii) of the Act would not apply to the service tax billed on rendering of services. The Court also observed that since the assessee had not claimed any deduction on account of the service tax payable in order to determine its taxable income, there could be no occasion to invoke Section 43-B of the Act. Therefore, the appeal was found to involve no substantial questions of law, and was accordingly dismissed. [Commissioner of Income Tax v. Knight Frank (India) Pvt. Ltd.,  2016 SCC OnLine Bom 9728, decided on August 16, 2016]