Direct Tax Vista

Your weekly Direct Tax recap

Edn. 25 – 27th September 2022

By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

1. Scope of Limited Scrutiny on “High Ratio of Refund to TDS”

While converting a case of ‘Limited Scrutiny’ to ‘Complete Scrutiny’, the AO shall be required to form a reasonable view that there is possibility of under assessment of income if the case is not examined under ‘Complete Scrutiny’. In this regard, the monetary limits and requirement of administrative approval from Pr. CIT/CIT/Pr. DIT/DIT has been laid down in Instruction dated 29.12.2015 read with Instruction No. 5/2016. The AO should ensure that there exists credible material or information available on record for forming such view and it should not be based on mere suspicion, conjecture or unreliable source; Further there must be a direct nexus between the available material and formation of such view.

The scrutiny assessment proceedings would initially be confined only to issues under ‘Limited Scrutiny’ and questionnaires, enquiry, investigation etc. would be restricted to such issues. Only upon conversion of case to ‘Complete Scrutiny’, the AO may examine the additional issues besides the issue(s) involved in ‘Limited Scrutiny’. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting ‘Complete Scrutiny’ in such cases.

In case of a Limited Scrutiny on the issue of “High Ratio of Refund to TDS”, examination of expenditures, which have no relationship with the TDS, will give arbitrary powers to the Assessing Officer to do complete scrutiny of all the expenses in a limited scrutiny and thus circumvent the provision of Act which require mandatory approval of competent authority to convert limited scrutiny to complete scrutiny. Scrutiny of legal and professional expenses, business promotion expenses, professional expenses for seeking legal opinion cannot thus be included under the head of “High ratio of refund” to TDS. The same was held in the case of SULZER PUMPS INDIA PVT LTD. Vs THE DY. COMMISSIONER OF INCOME TAX [2022-VIL-1195-ITAT-MUM].

2. No TDS applicable on commission paid to foreign agents

Mere remittance of money to a non-resident would not give rise to the requirement of deducting tax at source, unless such remittance contains wholly or partly taxable income. The most important expression in section 195(1) of the Act consists of the words, 'chargeable under the provisions of the Act'. A person paying any sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. Explanation 2 to sub-section (1) of section 195 of the Act which was inserted by the Finance Act of 2012 with retrospective effect from April 1, 1962. However, once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Centre P. Limited, sub-section (1) of section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field.

The income by way of fees for technical services payable by a person who is a resident would be deemed to accrue or arise in India. However, this clause contains two Explanations, namely, where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source outside India. In other words, therefore, if the assessment of an assessee falls in either of these two clauses, the income by way of fees for technical services paid by the assessee would still not be covered within the deeming clause of sub-section (1) of section 9.

3. Late filing of Form 67 to not result in disallowance of foreign tax credit

Merely because form number 67 was not filed within the due date prescribed in Section 139 (1), but during the course of assessment proceedings, the assessee should not be denied credit for foreign taxes paid. The decision of Brinda Ramakrishna versus Income Tax Officer 5 (3) (1) Bangalore (2021) ITA No. 454/bang/2021 dated 17/11/2021 along with several other decisions fortifies the view that that rule 128 is merely a procedural provision. Any default in its compliance shall not result in disallowance of the credit eligible to be allowed and claimed.

The claim of the tax credit is made in the return of income and form number 67 is mandated by the rules and not the act, which is required to be filed on or before the due date of filing of the return of income, is directory in nature. Even otherwise, at the time of making, the assessment incase such form is made available before the assessing officer, the tax credit should not be denied.

Further by the amendment to the rule with effect from 1 April 2022, the assessee can file such form number 67 on or before the end of the assessment year. Therefore, legislature in its own wisdom has extended such date which is beyond the due date of filing of the return of income. This was held in the case of SONAKSHI SINHA Vs COMMISSIONER OF INCOME-TAX [2022-VIL-1192-ITAT-MUM]

4. Interest for delayed payments allowed to be capitalized

Interest although penal in nature, but not out of any offence or any prohibition under law but only relating to delay in payment of lease amount may be suitably capitalized. Also once the assessee capitalizes all the expenses in regard to work in progress, no distinction can be made between ordinary interest and penal interest for the purpose of capitalization. The same was held in the case of ITO, WARD-15(3), NEW DELHI Vs M/s LOGIX BUILDTECH PRIVATE LIMITED [2022-VIL-1190-ITAT-DEL]

5. Non-Compete Fees will be taxable u/s 28(va) as PGBP

Sec 28(1) lays down that The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year shall be charged under PGBP. However in Cl. (va) of Sec. 28, no such mandate as "carried on by the assessee" is provided. On the contrary, Cl. (va) refers to "any business" which means not necessarily the business of the assessee. Hon'ble Supreme Court in the case of Guffic Chem. (P.) Ltd. held that payment received as Non Compete fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 w.e.f. April 2003 that receipt by way of Non compete fee was made taxable u/s. 28(va) of the Act.

The question of capital gains did not arise as the assessee was not owner of any asset in the first place and there is no transfer of such alleged capital asset during the previous year.

Hence it was held in the case of SHRI ASHWINI KUMAR BAJAJ Vs DCIT [2022-VIL-1189-ITAT-DEL], that non-Compete Fees will be taxable u/s 28(va) as PGBP.

6. Tests to decide whether an income is to be assessed under House Property or PGBP

Before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under, another head. The deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. Each case has to be looked at from businessman’s point of view to find out whether the letting was doing of a business or the exploitation of the property by the owner. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.

Where the assessee is a company whose main object of business is to acquire properties and to let out properties, the rental income received therefrom was taxable as “income from business” and not “income from house property.

Tests which are to be applied for determining the real nature of income are laid down in judicial decisions, on the interpretation of the provisions of these two heads. Wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, in case provisions of Section 22 of the Act are satisfied with primary ingredient that the assessee is the owner of the said building or lands appurtenant thereto. Section 22 of the Act makes ‘annual value’ of such a property as income chargeable to tax under this head. How annual value is to be determined is provided in Section 23 of the Act. ‘Owner of the house property’ is defined in Section 27 of the Act which includes certain situations where a person not actually the owner shall be treated as deemed owner of a building or part thereof. On the other hand, under certain circumstances, where the income may have been derived from letting out of the premises, it can still be treated as business income if letting out of the premises itself is the business of the assessee.

The High Court in the case of PR. COMMISSIONER OF INCOME TAX-1, CHANDIGARH Vs M/s NOOR RESORTS PRIVATE LIMITED [2022-VIL-218-HP-DT] lays down the detailed tests in this regard.

(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII- ER 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)