Direct Tax Vista

Your weekly Direct Tax recap

Edn. 3 – 26th April 2022

By Vivek Jalan

Partner, Tax Connect Advisory Services LLP

Is SAP ERP a software or is it a bundled computer?

The question before the Hon’ble ITAT in the case of M/s ARKEMA CHEMICALS INDIA P. LTD. Vs THE ASST. COMMISSIONER OF INCOME TAX [2022-VIL-489-ITAT-MUM], was whether the assessee is entitled to the deprecation at the rate of 60% on software ERP SAP being bundled as a computer as claimed by the assessee; or @ 25% as claimed by the AO considering the software as intangible asset.

The Hon’ble ITAT held that Part B of New Appendix I is a general entry whereas Entry 5 of Part A of New Appendix I is a specific entry read with Note 7. If a particular article would fall within the description by the force of the words used it is impermissible to ignore the specific entry in contra distinction with the general entry. SAP ERO software license acquired by the assessee was in nature of application software and is eligible for deprecation at the rate of 60%.

The scope of an ‘intimation’ under Section 143 (1) (a) of the Income Tax Act extends to the making of adjustments based upon errors apparent from the return of income and patent from the record.

It is established now that the scope of an ‘intimation’ under Section 143 (1) (a) of the Act, extends to the making of adjustments based upon errors apparent from the return of income and patent from the record. The jurisdiction of CPC is limited by clause (i) to (vi) of Section 143(1)(a). Based on TDS entries given in Form 26AS for deduction of tax u/s 194J, the adjustment could not have been made without conducting any enquiry. If the department finds that there is an anomaly, then it has liberty to do so by conducting scrutiny assessment under the provisions of law or to re-open the assessment u/s. 147 of the Act. Thus, CPC had no jurisdiction to make impugned adjustment within the meaning of section 143(1)(a) of the Act. The same was held in the case of ANITA SETH Vs DCIT [2022-VIL-481-ITAT-KOL]

Mandatory for various borrowers to get Legal Entity Identifier (LEI)

The RBI vide RBI/2022-23/34 [DOR.CRE.REC.28/21.04.048/2022-23] has extended the requirement of LEI to Primary (Urban) Co-operative Banks (UCBs) and Non-Banking Financial Companies (NBFCs). Further, even non-individual borrowers enjoying aggregate exposure of ₹5 crore and above from banks and financial institutions (FIs) shall be required to obtain LEI codes as per the timeline given in the Annex.

Aggregate sanctioned limit or outstanding balance, whichever is higher, for all fund based and non-fund based (credit as well as investment) exposure of banks/FIs to the borrower, shall be reckoned for this purpose. Borrowers who fail to obtain LEI codes from an authorized Local Operating Unit (LOU) shall not be sanctioned any new exposure nor shall they be granted renewal/enhancement of any existing exposure. However, Departments/Agencies3 of Central and State Governments shall be exempt.

Debit as well as credit entries to be taken for Sec 68 cases

Books of Accounts have to be read wholistically. The credit entries cannot be looked into in isolation after ignoring the debit entries despite the debit entries being carried out in the later years. The debit entries cannot be set aside for determining the income of the assessee for the reason that both the credit and debit entries are arising from the accounts of same parties. It has thus been held in the case of I.T.O. Vs M/s CAPAXO LOGISTICS PVT. LTD. [2022-VIL-484-ITAT-AHM], that the provision of section 68 will not be applicable on the transaction where assessee has given advances to these parties on earlier occasion which has been received back in the year under consideration.

In line with Finance Act 2022, Calcutta High Court holds that freebies given to the doctors for referring patients to them are immoral and opposed to public policy

The Medical industry works on referral commission to doctors in various forms like cash commission, cars, foreign trips, houses, etc. The Finance Act 2022 insert another Explanation under Explanation 1 to sub-section (1) of section 37 to further clarify the expression “expenditure incurred by an Assessee for any purpose which is an offence or which is prohibited by law” even in foreign country. Now, the Calcutta High Court has held that the nature of commission / bonus / freebies to the doctors for referring patients to them are immoral and opposed to public policy since acceptance of such payments or offers of like nature by medical practitioner is prohibited by law, are not entitled for deduction under Section 37 (1) of the Income Tax Act, 1961, as business expenditure and the same should be disallowable under Explanation 1 to Section 37 (1) of the Act.

The Hon’ble High Court has relied on the case of M/s Apex Laboratories Pvt. Ltd. where a similar nature of defence was taken by the Appellant that it was a Laboratory and was not a medical practitioner and as such payment or offer of these nature of commission/bonus/freebies etc. to the Doctors are not an offence by them under the law though acceptance of the same may be punishable offence for doctors or medical practitioners under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, such defence of the appellant laboratory was not accepted by the Hon’ble Supreme Court in the said case. The regulations of the Medical Council is a very salutary regulation and is in the interest of the patients and the public and once acceptance of this nature of payments are prohibited by the Indian Medical Council under the power vested in it with the Government now cracking down on these payments, the medical fraternity has to now look into business restructuring.

Sec 148 re-opening not possible incase of mere Change of Opinion, where no new tangible material had come to the knowledge of AO ; Reopening also not possible

Another judgement of a High Court on the ground that there is no failure on the part of the writ applicant to fully and truly disclose all facts and no new tangible information had come to the knowledge of the Department as against that available at the time of 143(3). Re-opening on a mere change of opinion is not allowed by The Hon’ble Gujarat High Court in the case of AIA ENGINEERING LIMITED Vs THE ASSISTANT COMMISSIONER OF INCOME TAX [2022-VIL-102-GUJ-DT]. Similar view, that a mere change of opinion cannot result in invoking Sec 148 was taken by The Calcutta High Court in the case of PEERLESS HOSPITEX HOSPITAL AND RESEARCH CENTER LIMITED Vs PRINCIPAL COMMISSIONER OF INCOME TAX-1 [2022-VIL-104-CAL-DT]

The special provision u/s 40b for payment of salary to partner shall override the general provision of Sec 40A(3)

The Department finds innovative ways of litigation. In one such case the AO as well as the CIT(A) held that the remuneration paid to the working partner of the firm was high and was a violation of provisions of section 40A(3) of the Act. The Hon’ble ITAT Mumbai overturned the decisions in the case of M/s RATILAL & SONS Vs INCOME TAX OFFICER CIRCLE [2022-VIL-492-ITAT-MUM]. The assessee being a partnership firm and section 40(b) being the special provision dealing with computation of income of firm, same shall be applicable for determining the amount of deduction available to the assessee, especially when the remuneration was paid to the Working Partner - Section 40A(3) was wrongly invoked by the Revenue for disallowing remuneration paid to the Working Partner, which is within the permissible limits as per section 40(b) of the Act.

Filing of an appeal within a period of limitation is the Rule and the condonation of delay is an exception

Sometimes assessees are guilty of laches while filing appeals and even condonation petitions are ill drafted sometimes. In a reminder to all, in the case of SHRI SOPAN GAHINAJI LANKE Vs THE ASSTT. CIT, (TDS) RANGE, PUNE [2022-VIL-490-ITAT-PNE], it was reiterated and held that law of limitation being a substantive law has to be followed and the appeals which are to be filed within a time limit has to be strictly adhered to. If a matter has to be condoned, then the reasons furnished for condonation of delay must be candid and convincing. Therefore, the condonation of delay cannot be claimed as a matter of right and only on genuine reasons the delay has to be condoned and not otherwise.

However, basis this decision we hope that even genuine condonation petitions are not rejected by the Authorities and it gives rise to further litigation on grounds other than merits.

New persons required to file returns even as Tax collections beat all estimates

India's tax collections soared to a record high of Rs 27.07 lakh crore in the fiscal year ended March 31, 2022. Direct taxes, which comprise income tax paid by individuals and corporate tax, came in at Rs 14.10 lakh crore - Rs 3.02 lakh crore higher than the budget estimate - increase of a whopping 49% as vis-à-vis last fiscal. This year more than 7 Crore people have filed their income tax returns and the Government wishes to ensure that this number further increases.

Notification No. 37/2022/F.No. 370142/01/2020-TPL(Part1) has been issued on 21st April, 2022. A new rule 12 AB has been introduced where in U/s 139 (1) (b) the following individual or a HUF or an association of persons or a body of individuals, whether incorporated or not, or an artificial juridical person, is supposed to file return of income inspite of having income lesser that taxable limit -

(i) if his total sales, turnover or gross receipts, in the business exceeds Rs. 60 Lakhs during the PY; or

(ii) if his total gross receipts in profession exceeds Rs. 10 Lakh during the PY; or

(iii) if the aggregate of TDS/TCS during the previous year, in the case of the person, is Rs. 25000 (Rs. 50000 incase of senior citizen) or more; or

(iv) the deposit in one or more savings bank account of the person, in aggregate, is Rs. 50 Lakh or more during the PY

Filing Income tax returns has benefits and it is important that citizens of our Country participate in Nation Building by complying with their tax obligations.

Addition by treating old unsecured loans as unexplained cash deposits quashed

Where old Loan parties are coming in the Balance Sheet, as an opening balance from the previous years and no new loans have been taken during the year, the addition of treating the unsecured loans, which is old loan, was held to be erroneous in the case of INCOME TAX OFFICER Vs SHRI VIKEASH JAYANTILAL MANDVIWALA [2022-VIL-474-ITAT-SRT]

Circumstantial evidence to prove the communication cannot establish frequent communication between financially independent parties

The SEBI alleged ‘insider trading’ on the grounds that there existed a close relationship between the appellants and that based on the circumstantial evidence (trading pattern and timing of trading), it could be reasonably concluded that the appellants in C.A. No.7590 of 2021 were “insiders” in terms of Regulation 2(1)(g)(ii) of the PIT Regulations. It was held by The Hon’ble Apex Court in the case of Balram Garg Vs Securities And Exchange Board of India (Supreme Court of India) Civil Appeal No. 7054 of 2021 dated 19/4/2022 as follows –

- Records and facts adequately establish that the there was a breakdown of ties between the parties, both at personal and professional level and that the said estrangement happened much prior to the transaction between the two parties

- In the absence of any material available on record to show frequent communication between the parties, there could not have been a presumption of communication of UPSI by the appellant Balram Garg.

- The trading pattern of the appellants in C.A. No.7590 of 2021 cannot be the circumstantial evidence to prove the communication of UPSI by the appellant Balram Garg to the other appellants

(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)