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Direct Tax Vista Your weekly Direct Tax recap Edn. 2 – 19th April 2022 By Vivek Jalan Partner, Tax Connect Advisory Services LLP |
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Apex Court pronounces Doctrines - An outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible; It is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer
In a very important judgement in the case of WIPRO FINANCE LTD Vs COMMISSIONER OF INCOME TAX [2022-VIL-11-SC-DT], The Hon’ble Apex Court reaffirmed the Dictum pronounced in India Cements Ltd. vs. Commissioner of Income Tax, Madras (AIR 1966 SC 1053) - Where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income.
The Hon’ble Apex Court further emphasised on the exposition in this decision which was further elaborated in the subsequent decision of The Apex Court in Empire Jute Co. Ltd. vs. Commissioner of Income Tax (1980) 4 SCC 25) - it is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.
In the instant matter, the appellant entered into a loan agreement with one CDC for borrowing amount to carry on its project for expanding its primary business of leasing and hire purchase of capital equipment to existing Indian enterprises - The loan was obtained in foreign currency. However, while repaying the loan, due to the difference of rate of foreign exchange, the appellant had to pay higher amount, resulting in loss to the appellant. Indeed, the loan amount was utilised by the appellant for financing the existing Indian enterprises for procurement of capital equipment on hire purchase or lease basis - the transaction of loan was in the nature of borrowing money by the appellant, which was necessary for carrying on its business of financing and it was certainly not for creation of asset of the appellant as such or acquisition of asset from a country outside India for the purpose of its business - In such a scenario, it was held that the appellant would be justified in availing deduction of entire expenditure or loss suffered by it in connection with such a transaction in terms of Section 37 of the Act as the loan is wholly and exclusively used for the purpose of business of financing the existing Indian enterprises, who in turn, had to acquire plant, machinery and equipment to be used by them.
UDIN for Audit Reports and Forms submitted by CAs have to be updated on Income Tax Portal
The functionality for updating UDIN against the Audit reports submitted by CA users has been enabled at e-filing portal www.incometax.gov.in. This functionality may not be used for updating UDIN for Forms submitted prior to April 2021. In this functionality only those Forms will be shown which are accepted by the Assessee. An Instruction document has been issued and it is to be read in conjunction with the Instruction for UDIN Functionality.
Most Forms now have this facility. Following Forms will be enabled shortly for UDIN update – Form 26A, Form 27BA, Form 3CEJ, Form 3AC, Form 10CCBBA, Form 10CCBC, Form 10CCBD, Form 10BBC, Form 3CT, Form 10BC, Audit Report SWF.
Where certificates in Form no.26A are furnished in respect of tax amount paid by the payee, AO cannot deem the payer to be in default
De novo adjudication is ordered with the objective of preventing miscarriage of justice, ensuring that people get fair and reasonable trials. When the matter is remanded back by the Tribunal to the lower authorities, the order of the Commissioner or any other adjudicating authority or Commissioner (Appeals) no longer sustains. The matter is required to be adjudicated afresh and both parties can make additional submissions. Moreover, even if the Court or Tribunal does not give any direction to the re-adjudicating authority regarding any aspect of the case, the re-adjudicating authority is still bound to go into each and every aspect before deciding upon the case.
In the case of Y.M. MOTORS PVT. LTD. Vs ASSTT. COMMISSIONER OF INCOME TAX [2022-VIL-462-ITAT-MUM], where the assessee has taken the plea on the basis of second proviso to section 40(i)(ia) of the Act and has also furnished certificates in Form no.26A in respect of tax amount paid by the payee along with additional evidences, the AO cannot deem the payer to be in default for non-deduction of TDS. When it was not done, the issue was restored to the file of the AO for de novo adjudication, and the impugned order passed by the CIT(A) was set aside.
Where the assessee furnishes the source of the investment, it shall be considered as having discharged its primary burden u/s 69
In Section 69 cases, the revenue generally resorts to decision by the Hon’ble Supreme Court in the case of r. Mallika Vs. CIT reported in [2017] 79 Taxmann.com 117 (SC), wherein it was held that “where assessee had not discharged burden as regards source from which investment had been made, investment was an unexplained investment and same was rightly added to income of assessee
However, where the assessee furnishes the source of the investment, it shall be considered as having discharged its primary burden u/s 69. The same was held in the case of ASTRAL PROPERTIES & CONSTRUCTIONS PVT. LTD. Vs INCOME-TAX OFFICER [2022-VIL-461-ITAT-DEL].
Where there is no dispute with regard to the fact that a transaction was executed between two parties i.e. assessee company and its Director - The Director is the giver of the amount in the transaction and the assessee company is the recipient of the amount - The assessee would be considered to have discharged its primary burden by furnishing the source of the investment - Under these facts it was open to Assessing Authority to make further investigation - In the absence of bringing any adverse material regarding creditworthiness of the Director and genuineness of the transaction - the addition made and sustained by the learned CIT(Appeals) is not justified.
Where there was sufficient material available on record for the AO to form a reasonable belief, reopening was justified
We have seen in the past many decisions favouring the assessee where the reopening of assessment was challenged alleging non-application of mind on the part of the AO while recording the reasons for reopening of the assessment. However, sometimes a wrong analysis of the facts of the case also boomerangs on the appellant. In the case of AMAR JEWELLERS LTD Vs THE ASSISTANT COMMISSIONER OF INCOME TAX [2022-VIL-98-GUJ-DT], it was held that the adequacy of the reasons provided by the AO fall outside the review powers and remains within the domain of the Assessing Officer at the stage of the proceedings where only a preliminary finding under section 147/148 has been made. The inquiry at this stage is only to see whether there are reasonable grounds for the ITO to believe and not whether the omission/failure and the escapement of income is established. Where there was sufficient material available on record for the AO to form a reasonable belief and where there was a live link existing of the material and the income chargeable to tax that escaped assessment, reopening was justified.
Test for disallowance u/s 36(1)(ii) is that - had the bonus or commission not been paid, would it have added to the profits or dividend of the company
The case was that there were are two share-holders and directors holding 50% equity shares each since inception of the company. Bonus was paid to both the directors. Assessing Officer disallowed the same relying upon Section 36 (1)(ii) of the Act holding that bonus was paid to avoid payment of dividend distribution tax.
It was held in the case of SRC AVIATION PVT.LTD. Vs ASSISSTANT COMMISSIONER OF INCOME TAX & ANR. [2022-VIL-96-DEL-DT], that the basic object of Section 36(1)(ii) is intended to prevent an escape from taxation by describing a payment as bonus. The simple test is that had the bonus or commission not been paid, it would have added to the profits or dividend of the company - the payment of bonus or commission is not allowable as deduction under Section 36 (1) (ii) of the Act in the hands of the assessing company.
However, the question to be determined in higher forums will be whether the tax paid in the personal file of the directors on such bonus received shall be refunded.
Considering only high profit earning comparables and excluding low profit comparables for Transfer Pricing Study are not justified
Many a times during a TP Scrutiny cases, biased assessments are conducted by AO / TPO / DRP. It is important to file the objections before the officers incase selection of the comparables are not justified. In the case of COLT TECHNOLOGY SERVICES (1) PVT. LTD. Vs DCIT [2022-VIL-459-ITAT-DEL] it was held that AO / TPO / DRP erred in accepting companies with exceptionally high operating margins as comparables of the appellant on an arbitrary basis and rejecting companies with low profits / losses as comparables of the appellant on an arbitrary basis. Therefore the levy of interest u/s 234B and 234C of the Income Tax Act on additional income agreed as per advance pricing agreement entered between appellant and the CBDT was held illegal.
Assessment u/s 147/ 143(3) is invalid where it can be proved that notice u/s 148/ 143(2) has not been issued or where there was no failure of the assessee in original assessment to disclose material facts
We have witnessed the recent cases where application of Section 148 post 1st April 2021 was contested. Incase of an older case in DR. SHRI GURUNATH SHANKARAPPA WACHCHE Vs ITO [2022-VIL-452-ITAT-PNE], it was held that recourse to reassessment under section 147 can be taken only after notice u/s 148 - In the absence of any notice u/s 148, there can be no re-assessment. Once it is proved that notice u/s 148 was not issued, there cannot be any question of making any reassessment. The appeal is was thus allowed.
In another case of M/s HANDMADE PAPER & BOARD INDUSTRIES Vs THE ACIT [2022-VIL-454-ITAT-JAI], it was held that the requirement of notice under section 143(2) of the Act is a mandatory condition and cannot be dispensed with. Omission on the part of the AO to issue notice under section 143(2) within the prescribed time limit cannot be a procedural irregularity and same is not curable.
In another case of RANJANA AGGARWAL Vs INCOME TAX OFFICER [2022-VIL-457-ITAT-DEL], it was held that when there is no allegation whatsoever by the AO of any failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of assessment the reassessment proceedings initiated by the AO and upheld by the CIT(A) are not in accordance with law.
There are important judgements and shall be helpful in earlier similar cases.
Taxability of corpus donation by trusts not registered u/s 12A/ 12AA is a capital receipt
We all know that for 12A/ 12AA/ 80G registered trusts corpus donations are not liable to tax. However, even “corpus donations" received for specific purpose by the trust, which is not registered under section 12A/12AA of the Act, are not taxable as they assume the nature of “Capital Receipt". The same was held in the case of VERSOVA KOKNI SUNNI JAMAT TRUST Vs CENTRALISED PROCESSING CENTRE [ 2022-VIL-449-ITAT-MUM]
Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022
On April 12, 2022, the Department of Economic Affairs (DEA) has issued the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022 to further amend the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
The following changes amendments have been made –
i. In Rule 2(e) which specify “Convertible note”, the period of five years has been substituted with the words ten years.
ii. In Rule 8 which specify “Issue of Employees Stock Options and sweat equity shares to persons resident outside India” has been modified to include Share Based Employee Benefits.
iii. In In Rule 19(1) which specify “Merger or de-merger or amalgamation of Indian Companies” has been modified to include scheme of compromise.
iv. In Schedule I Paragraph (2)(f) which specify ‘Real Estate business or construction of farm house as sectors prohibited for FDI’ the explanation has been substituted as follows -
“For the purpose of this rule, ‘real estate business’ means dealing in land and immovable property with a view to earning profit from there and does not include development of townships, construction of residential or commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships, real estate broking services and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014 and earning of rent or income on lease of the property, not amounting to transfer.”
Revenue has no power to re-characterize a transaction entered into by the Assessee
Can share application money be treated as a loan with an interest imputation? The ITAT Mumbai, in the case of Strides Pharma Science Ltd. Vs DCIT (ITAT Mumbai), [ITA No. 7992/Mum./2019 dated 6th April 2022] answered in favour of the assessee.
During the relevant A.Y., the assessee had invested as share application money in two Associated Enterprises (AEs). The share application money was remitted to its A.Es from time–to–time during the relevant A.Y. In addition to this, during the earlier years, the assessee had invested the share application money in three A.Es which was outstanding as on 31.03.2014. During the proceedings before the TPO, the assessee was asked to show cause as to why there should not be any interest imputation on the share application money. The AO passed draft assessment order dated 20.12.2018, under section 143(3) r/w section 144C(1) of the Act on the basis of adjustment proposed by the TPO. The DRP, vide its directions dated 30.09.2019, issued u/s 144C(5) of the Act upheld the order passed by the TPO following its directions issued in preceding AY and accordingly rejected the objections filed by the assessee.
The Hon’ble ITAT, relying on the judgement of Hon’ble Bombay HC, in the case of DIT v/s Besix Kier Dabhol, held that the AO or the TPO are not empowered to convert and re-characterize a transaction of share application into a loan transaction.
Depreciation allowed on non-compete fees and Market information
In the case of, Chemetall Rai India Limited Vs DCIT (ITAT Pune) [ITA Nos. 1542 & 1535/PUN/2017], The Hon’ble ITAT held that the authorities below were not justified in denying depreciation on Non-compete fees and Market information comprising of Commercial information, Customer data, Distribution network and Suppliers contract.
In reaching the conclusion for granting depreciation on Non-compete fees, the Tribunal relied on the judgment of Hon’ble Bombay High Court in Pr. CIT Vs. Piramal Glass Limited (2019) 105 CCH 0034 Mum HC. As regards the depreciation on Customer data and Distribution network etc., the Tribunal relied on another decision in Brembo Brake India Pvt. Ltd. Vs. DCIT [TS-5119-ITAT-2015 (Pune)-O].
It is a settled proposition of law that in case of difference between the assessees books of account and as per the TDS certificate, then on the said difference, the only embedded portion of the profits is to be taken into consideration and addition is to be made thereon. There are number of judicial pronouncements by which the principle to this effect has been laid down that the total sale cannot represent as the profit of the assessee. The net profit rate has to be adopted and once the net profit is adopted it cannot be said that there is perversity of approach. However the Revenue continues to Act differently and the same was again reiterated in the case of Purna Chandra Rout Vs ITO (ITAT Delhi) [ITA No. 1087/Del/2020].
(The author is a FCA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman Indirect Tax Core Group of CII and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)