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Direct Tax Vista Your weekly Direct Tax recap Edn. 35 – 6th December 2022 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
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1. Liability admitted in VAT/GST may result in claim in Income Tax
Acceptance of Disputed liability in VAT/GST to buy ‘Peace’ may result in a requirement to buy further peace in Income Tax also. Most of the times in cases of Search under VAT/GST the authorities take a stock of cash and inventory and incase of any mismatch between the books and physical stock taking, there is a demand under the said enactments. Under duress or otherwise they admit (inspite of having sufficient grounds) the liability and pay the tax, interest and demand amount. One needs to beware that the same would also result in liabilities under Income Tax Assessments for the same period.
There are various questions under Income Tax w.r.t. the said issue –
1. What evidences to produce before IT Authorities to substantiate that actually there was no liability even under VAT/GST?
2. Whether the whole turnover under VAT/GST would be liable to income tax?
3. Whether Tax/interest/penalty under VAT/GST would be allowed as a deduction?
In these matters, the issue cannot be decided merely on the basis of written submissions and documents or evidences have to be produced to establish that the impugned stock/cash was part of the regular books. In such cases it may be a good idea that immediately after/at the time of the search/seizure an independent verification of the stocks/cash are made by a professional. It is also important to put forward all the arguments before the VAT/GST authorities before acceptance of claims if any. The payment may be made under protest under these enactments incase the assessee wishes to buy peace at all.
However, only the gross profit element of such shortage of stock can be subject to tax. There are various precedents in this regard - CIT vs. Samir Synthetics Mill [2010] 326 ITR 410 (Guj.); CIT vs. Gurubachhan Singh J. Juneja [2008] 302 ITR 63 (Guj.) ; CIT vs. Hariram Bhambani, Bombay High Court, ITA No. 313 of 2013.
As regards the disallowance demanded VAT/interest/penalty are concerned, the said sums may be regarded as penal in nature and, therefore, not allowable u/s 37(1) of the Act as it is hit by Explanation to Section 37(1) of the Act.
Notwithstanding the above, let us understand the case of SHIV BIRI MANUFACTURING CO. PVT. LTD Vs ASSTT. COMMISSIONER OF INCOME TAX [2022-VIL-1502-ITAT-KOL]
The process followed by the assessee was that, when the stock is received from West Bengal to Delhi sales office, firstly the invoice-wise/date -wise entry were made in the stock register maintained both manually and in the computer systems. Thereafter the bags were unloaded in the open area nearest to the godown. After the verification of condition of the biris/counting of bags by their own internal stock verifiers and after satisfactory verification which generally took 4 to 5 days, the bags were stacked in the godown. Hence the shortage was found at the time of physical verification. This in our view is a faulty procedure. Incase the unloading has to be made in a open area, the same should also be designated as a place of business.
Hence, it is important that the assesses take a whollistic 360 degrees approach so that the correct legal positions can be taken.
2. Whether Commercial Services rendered by Sec 11 Organisation can be considered as business?
The Apex Court’s Judgement in the case of M/S NEW NOBLE EDUCATIONAL SOCIETY VERSUS THE CHIEF COMMISSIONER OF INCOME TAX 1 AND ANR., [2022-VIL-23-SC-DT] discussed in our DTV Edn 29 and 31 could lay the basis of which future cases u/s 2(15) may be decided. The salient features of the judgement are as follows –
1. Section 2(15) cases of denial of exemption on the grounds of ‘objects’ of the trusts were slowly waning as Courts ruled on the ‘predominance of object’. Going forward these may be decided on the basis of ‘sole’ or ‘whole’ object’.
2. It is not a bar for trusts to generate surpluses in a given year or set of years per se.
3. Incase the surplus is generated in the course of providing charitable activities, there is no case for denial of exemption.
4. However, if the surplus is generated by other than charitable activities, then the exemption of the trust may be denied.
5. This judgement would apply prospectively. However, it would also apply to already existing trusts.
Again we discussed in our DTV Edn 30, The Apex Court’s judgement in the case of ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) Vs AHMEDABAD URBAN DEVELOPMENT AUTHORITY [2022-VIL-24-SC-DT] where It was held that The General test under Section 2(15) where an assessee takes the benefit of the limb “advancing general public utility”, is that it cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (“cess, or fee, or any other consideration”). However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that –
(i) the activities of trade, commerce or business are connected to the achievement of its objects of GPU; and
(ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years
Generally, the charging of any amount towards consideration for such an activity (advancing general public utility - GPU), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”. In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3), reaffirm this interpretation and bring uniformity across the statutory provisions.
Hence, now the AOs need to take cognizance of these judgements and assess accordingly. Most of the times there is a question by AOs as to the taxability of commercial income in the nature of ‘consultancy& other fees/charges’ received by an Institution exempt u/s 11. The question asked by the AO is whether the ‘commercial’ transactions is as per the “objects” of the Institution and whether the intention of the assessee is to make profit from such transactions. It is alleged that such transactions are of the nature of ‘income from PGBP’ and the revenue earned from such consultancy/commercial activity cannot be regarded as charitable in view of the provisions of section 2(15) r.w.s 11 and 12 of the Act. Accordingly, either the entire exemption is disallowed or the assessee's claim of exemption only with regard to its share in commercial/consultancy fee/charge is disallowed.
The Contention of the assessee is always that the test to determine as to what would be a charitable purpose within the meaning of section 2(15) of the Act is to ascertain what is the “dominant object/activity”. If the dominant object is the activity of providing education, it will be charitable purpose under section 2(15) of the Act, even though, some profit arises from such activity. Now armed with two Apex Court’s decisions, it is but obvious that the assessee came out successful in the case of M/s INSTITUTE OF CHEMICAL TECHNOLOGY UNIVERSITY OF MUMBAI Vs NATIONAL FACELESS ASSESSMENT CENTRE (NFAC) DELHI-VS COMMISSIONER OF INCOME TAX [2022-VIL-1507-ITAT-MUM].
3. Section 68 Addition: When there is no case for disallowance for purchases, Creditors also cannot be disputed
AOs have to go by double entry system in their assessment exercise. They cannot accept one limb of an accounting transaction and dispute the other limb. Incase the sales, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Officer, then the Assessing Officer cannot make additions of the sundry creditors under Section 68 of the Income Tax Act, inasmuch as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AO. This was held in CIT VERSUS. RITU ANURAG AGARWAL [2009 (7) TMI 1247 - DELHI HIGH COURT]. The same was held in the case of I.T.O., WAR 1(2), KOLKATA Vs M/s MOHAN JUTE LTD [2022-VIL-1518-ITAT-KOL]. Similar issue has been squarely covered by the various other decisions of the Co-ordinate Benches namely ITO vs. Zazsons Exports Ltd. reported in [2016] 158 ITD 1 (Lucknow-Trib) and Gulf Steel & Minerals vs. ITO in ITA No. 57/Ran/2016 dated 04.05.2018
4. GIFT City and overseas Branches of Indian banks can deal in financial products not permitted in domestic market
The foreign branches/foreign subsidiaries of Indian banks/AIFIs can deal in financial products, including structured financial products, which are not available or are not permitted by the Reserve Bank in the domestic market without prior approval of RBI.
Similar permission has been granted to branches and subsidiaries of Indian banks/All India Financial Institutions (AIFIs) operating in IFSCs including those operating out of GIFT City. However, the banks and AIFIs will have to ensure that such branches and subsidiaries do not deal in products linked to Indian Rupee unless specifically permitted by Reserve Bank. They cannot also accept structured deposits from any Indian resident. Further, the financial products dealt with by the foreign branches and subsidiaries as well as IFSCs will attract prudential norms such as capital adequacy, exposure norms, periodical valuation, and all other applicable norms. Parent bank shall adhere to more stringent among the host and home regulations in respect of prudential norms. Further, the activities of branches/subsidiaries in foreign jurisdictions and IFSCs would be subject to the laws in India unless specifically exempted by law.
(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)