2013-2014 22nd Year

ALL GUJARAT FEDERATION OF TAX CONSULTANTS Room No. 114, Income Tax Office, 1st Floor, Narayan Chambers, Nr. Nehru Bridge, Ashram Road,

Ahmedabad - 380 009. Phone : 2657 6311 Extn. : 603 Email : president@agftc.co.in Web : www.agftc.co.in

TAX GURJARI Volume: 04/2013-14

Voice of All Gujarat Federation of Tax Consultants

CA. Sunil Talati President

CA. Rutvij P. Shah Han. Secretary

CA. K. V. Karkar Ed itor In Chief

CA. Jayesh Mor CA. Praful C. Shah Co-chairman Co-chairman

IPRESIDENT'S MESSAGE !

My Dear Follow Members,

It is a mixed feeling as this shall be my last formal communication from the office of the President of All Gujarat Federation of Tax Consultants.

All of us, men and women; have dreams. I also had a dream of my journey in this prestigious Federation. I firmly believe, we may be able to exist, but we will cease to live in the absence of dreams. I tried my best to keep them alive through my various actions and programmes during this year.

When I look back, I find that we have really come a long way since the inception of this Federation in the year 1992. Our Federation consists of all the Tax Associations of the State of Gujarat. It has completed 22 years of its meaningful existence and shall be soon celebrating its Silver Jubilee. Growing at a slow and steady pace, we have crossed the membership of 1100 consisting of all the Associations and tax practitioners in the nook and corner of our State of Gujarat. We have worked proactively to create awareness and popularize the importance of our Federation. With our strong conviction to practice our profession ethically, we have increased our endeavors to assist the Income Tax Department to improve the administration and resolve the problems of tax payers as well as tax consultants.

This is the 4th and last issue of Tax Gurjari being published in soft copies. If you recall, I promised in the first meeting that every quarter we shall be publishing the Tax Gurjari Magazines and send it by mail covering important latest decisions of Tribunals, High Courts and Supreme Courts as well as informative articles on varied subjects on Direct and Indirect taxes. During this year, we did various activities and programmes which I am not repeating or reproducing as they have been elaborately mentioned in the Annual Report recently circulated to you along with the notice of Annual General Meeting. While conducting these activities by way of organizing seminars and conventions at different places in small and big cities and while meeting various senior departmental officers, I realized that tax practice is an unending process. Every year there are new issues, new problems and new officers and bureaucrats to resolve or deal with the same. I also experienced finest moments in my life while meeting and listening to various members of the Federation of different age group hailing from different places and having different kinds of practices. It was not only a thrilling but life time memorable experience.

This communication would not be complete if I do not thank my membership fraternity, all my members from Palanpur and Mehsana to Petlad, from Dahod, Godhra to Rajkot and Bhavnagar, from Nadiad to Baroda and Surat and above all my local members from Ahmedabad. I thank each one of you for carrying out my dreams so as to make them reality. The most heartening experience of this entire journey was the continuous non-stop support and guidance from the team of Han. Past Presidents. I have yet to find out an institution where involvement, participation and guidance from the Hon'ble Past Presidents is so sincere, continuous and selfless.

A special mention is required for Past President Shri Biharibhai B. Shah and Shri Rajesh C. Shah for taking lots of pain and devoting substantial time for carrying out long pending and overdue amendments in the Constitution of the Federation. The same are now for consideration of Hon'ble Members in the ensuing Annual

General Meeting to be held on Sunday, the 20th July, 2014. I am also thankful to my Vice President Shri Samir Jani. Inspite of geographical distance, he had been a continuous support to me in all my endeavors and actions with a smiling face.

Last but not the least; I must convey my deep sense of thanks and gratitude to my Han. Secretary, CA. Rutvij P. Shah. He had done his article training in my office, and is now well established independent practicing Chartered Accountant, but was available to me 24 x 7 for any and every kind of work pertaining to the Federation. His company in all professional endeavors and also in tours and visits were extremely comfortable, since both of us share the goal of doing something positive for the professional fraternity. His enthusiasm; to do something for the members allowed the Federation to have all the latest circulars, notes, decisions and other matters of professional interest at the earliest possible in soft copies and by mail.

I can only end by wishing the incoming President and his team of All Gujarat Federation of Tax Consultants all the

very best with an assurance that I shall strive equally hard and work also with same enthusiasm after handing over the

charge to him. Long live the Federation.

With best regards,

3'd July, 2014

EDITORIAL

Dear friends,

(SUNIL TALATI)

PRESIDENT

It is a matter of joy to come out with fourth issue of Tax Gurjari during the year 2013-14. It is a wonderful journey and we have received great support from the contributors for articles and other materials published in thee-journal. You may recall that I had stated about desire of the President and Journal Committee to publish thee-journal at a shorter interval. Though the support received by us is tremendous, we could not go beyond quarterly issue of thee-journal. Publishing thee-journal on monthly basis requires even greater efforts on the part of all of us. I hope the future Editor would get greater contributions from various sections of the Federation for eventually publishing thee­

journal on monthly basis. The economy of the country is in shatters since last 4 years. It requires great efforts on the part of government, bureaucracy, business community as well as professionals, being an integral part of the society, to rebui ld the vibrant economy. We owe our duty to carry out our profession in ethical manner and assist the clients in better compliance of law, while guarding their interest. This would be a small but crucial step in the revival of the economy and creating brighter image of our country throughout the world. I am thankful to the President and Honorary Secretary of the Federation for extending their whole-hearted support throughout the year. I wish you all fulfilling and prosperous professional career ahead.

Warm regards, K.V. Karkar Editor

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1. INTRODUCTION

Income–tax Act, 1961 (hereinafter referred toas ‘The Act’) is the only legislation of our countrywhich refers to 92 Central Acts and variousState Legislations. To understand the varioustaxation issues relating to Real EstateTransactions, it is very essential to know theprovisions of general law with special referenceto Transfer of Property Act, Registration Act,Stamp Act, Development Control Regulations,etc. In this article, we have made an attemptto discuss some of the very important taxationissues relating to Real Estate Transactions.

Mumbai is supposed to be seventh biggest cityin the world with beautiful coastal line. Mumbaiis the commercial and financial capital of Indiaand also a Gateway of International Trade andIndustrial Development of India.

2. METHODS OF ACCOUNTING

a. PROJECT COMPLETION METHOD

A method of recognizing revenues andcosts from a long-term project in whichprofit is recorded only when the project hasbeen completed. Even if payments arereceived while the project is in progress,no revenues are recorded unti l i tscompletion. The completed-contractmethod is a conservative way of accountingfor long-term undertakings and is used forcertain types of construction projects.

It is held that recognition/identification ofincome under the Act, is attainable byseveral methods of accounting. It may benoted that the same result could beattained by any one of the accountingmethods. Completed contract is one suchmethod. Similar ly, percentage ofcompletion is another such method.

CIT v/s Bilahari Investments (P) Ltd.[(2008) 299 ITR 1 SC]

b. PERCENTAGE COMPLETION METHOD

Project completion method is a method ofrecognizing revenues and costs from along-term project in relation to thepercentage completed during the courseof the project. Thus, the percentage ofcompletion method allows a businessprofits (or losses) on a project before itscompletion.

It is held that assessee-contractor havingoffered profits for tax on the basis ofpercentage completion method which is astandard accounting practice and has beenconstantly followed by the assessee insubsequent years, the same could not berejected.

CIT vs. Advance Construction Co. (P)Ltd. [(2005) 275 ITR 30 (Guj)]

c. CHANGE OF METHOD OF ACCOUNTING

Disclosure of changes in an accountingpolicy used for construction contractsshould be made in the financial statementsgiving the effect of the change and itsamount. However, if a contractor changesfrom the percentage of completion methodto the completed contract method forcontracts in progress at the beginning ofthe year, it may not be possible to quantifythe effect of the change. In such cases,disclosure should be made of the amountof attributable profits reported in prioryears in respect of contracts in progress atthe beginning of the accounting period.

It is held that the assessee having changedhis method of accounting from work-in-progress in or iginal return to projectcompletion method in revised return,assessment had to be made as per revisedreturn.

Satish H. Patel [93 TTJ 458 (Pune)]

ACCOUNTING AND DIRECT TAXES ISSUES IN CONTRUCTION INDUSTRYCA. Vimal C. Punmiya

vimalpunmiya@gmail.com

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3. DISCLOSURE IN THE COURSE OF SEARCH– WHETHER INCOME MUST BE TAXED ONCOMPLETION OF THE PROJECT?

The conduct of search and seizure operation ina particular year does not lead to an inferencethat the undisclosed income detected as aconsequence thereof has to be taxed in theassessment year relevant to the previous yearin which search was conducted. In other words,accounting of profits has yet to be made on thebasis of method of accounting followed by theassessee.

It is held that undisclosed income in the formof ‘on money’ stood established by seizure ofdocument read with statement recorded unders. 132(4); however in computing undisclosedincome, expenditure incurred has to be allowed;income discovered has to be taxed inassessment years as per method of accountingfollowed by assessee. Dhanvarsha Builders& Developers (P) Ltd. vs. DCIT [(2006) 102ITD 375 (Pune)]

4. FINANCE COST, INDIRECT COST ANDCOMPUNDING CHARGES

A. INTEREST ON BORROWED CAPITAL –SCOPE OF SECTION 36(1)(iii)

The amount of the interest paid in respectof capital borrowed for the purposes of thebusiness or profession is allowed asdeduction.

[Provided that any amount of the interestpaid, in respect of capital borrowed foracquisition of new asset for extension ofexisting business or profession (whethercapitalised in the books of account or not);for any period beginning from the date onwhich the capi tal was borrowed foracquisition of the asset till the date onwhich such asset was first put to use, shallnot be allowed as deduction.]

It is held that construction projectundertaken by the assessee-builderconstituted its stock-in-trade and theassessee was entitled to deduction unders. 36(1)(iii) in respect of interest on loanobtained for execution of said project.

CIT vs. Lokhandwala Construction,(2003) 260 ITR 579 (Bom)

It is held that the assessee followingproject-completion method of accounting,the interest identifiable with that projectshould be allowed only in the year whenthe project is completed and the incomefrom that project is offered for taxation.The same cannot be deducted as periodcost from year to year. True profits in sucha case can be determined only when entirecost of the project, direct or indirect,including finance cost is added to the valueof work-in progress.

Wallstreet Constructions Ltd. & Anr.Vs. JCIT 2006 101 ITD 156 (Mum) (SB)

It is held that even though assessee wasfollowing competed contract method forreturning its income, its claim of financecost as a period cost in nature of interestwas allowable in the year in which it wasincurred or accrued, in accordance with AS– 7 issued by the ICAI.

JCIT vs. Raheja (P) Ltd. (2006) 102ITD 414 (Mum.)

B. ADVERTISEMENT EXPENSES TO BECAPITALISED AS WORK-IN-PROGRESS

It is held that assessee following projectcompletion method, and advertisementexpenses of the two projects beingallocable to individual project, suchadvertisement expenses have to becapitalized as work–in–progress to beallowed deduction in the year of completionof project.

Income Tax Officer vs. PanchvatiDevelopers [115 TTJ 139 (Mum)]

C. WHETHER COMPOUNDING CHARGESPAID BY BUILDERS ALLOWED AS ADEDUCTION

In this case, it was held in the order passedby a competent authority of Town Planningin unmistakable terms stated that he hadpermitted the payment of compoundingcharges by erring builders to regularize theinfirmity in the building construction. Therecould not be any doubt that what had beendone was to permit the assessee to

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compound the offence committed by itputting up an unauthorized construction.

Explanation to sec. 37(1) defines that anyexpenditure incurred for any purpose whichis an offence or which is prohibited by lawis not entitled to deduction. Hence,compounding of the offence underCorporation Act cannot take away therigour of explanation to sec 37 and thededuction is not available.

Mamta Enterprises – [135 Taxman 393(Karnataka)]

5. PROPERTY V/S BUSINESS INCOME

With several malls and business centersremerging taxability of rental income arisingtherefrom is an important issue. Supreme Courtin Shambhu Investment (P) Ltd. v. CIT(2003) 263 ITR 143 (SC) has held that“income derived from letting is assessable asincome from property and not business income.In this case assessee was letting out furnishedpremises on monthly rent basis to variousparties along with furniture, fixtures, light, air-conditioners, etc., for being used as “tablespace”.

Under the agreement, the assessee is alsoproviding services like watch and ward staff,electricity, water and other common amenitiesto the occupiers. These services are notseparately charged. Entire cost of property isalready recovered by way interest–free advanceby the assessee. Only intention was to let outthe portion of premises to respective occupants.It was held that income derived from lettingrightly held assessable as income from propertyand not business income.

It was held that income derived by assesseefrom shopping malls/business center wasassessable as business income and not asincome from house property. It held that “Thefact that the apex court held that the incomeearned by Shambhu Investment (P) Ltd. isassessable as property income has no relevancein the facts and circumstances of the presentcase. Because in that case facts showed thatthe main intention was to earn rental income.That was why the entire cost of the propertywas recovered from the tenants by way of

interest–free advance. In the instant case, onthe other hand, the assessee had taken bankloans to finance his projects like any otherbusinessman. As discussed hereinabove, everyaction of the present assessee appears to bewith the sole object of commercial exploitationof the premises.”

PFH MALL AND RETAIL MANAGEMENT LTD.V. ITO (2008)110 ITD 337 (KOL)

Letting out of all the rooms of a property, usedas a guest house by the assessee to a bank tobe used as a training centre was a part onrunning of the lodge business and, therefore,income from such leasing was assessable asbusiness income and necessary income wasassessable as business expenditure.

CIT V. PATESHWARI ELECTRICAL &ASSOCIATED INDUSTRIES (P) LTD. (2006)282 ITR 61 (ALL)

When property has been let out not only asproperty but with services which is a complexletting, the income cannot be said to be derivedfrom mere ownership of house property but maybe assessable as income from business. If theowner of a property carries on upon the propertysome activities which results in profits and gainsarising, not from the ownership of the propertybut from the owners used thereof, lettingvarious services to the tenants, those profitsand gains may be chargeable under section 28as income from business, apart from theassessment u/s 22 in respect of income fromhouse property.

CIT V. SARABHAI (P) LTD. (2003) 263 ITR197 (GUJ.)

6. INTEREST EARNED ON SURPLUS MONEYPARKED AS FIXED DEPOSIT WITH BANKTAXED UNDER THE HEAD THE BUSINESS

It is held that advances from customersintending to purchase flats, deposit of surplusmoney with bank in course of business – theaccrued interest arises out of business activities,hence such interest income is assessable asbusiness income and not as income from othersource.

CIT V. LOK HOLDINGS 308 ITR 356 (BOM)

It is held that merely because the income hasbeen assessed as business income, it will not

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automatically confer the benefit of a particulardeduction once there is a rider provision thatsuch income should be derived from a particularsource.

TRICOM INDIA LTD V. ACIT, ITA NO. 1924/MUMBAI/08, ITAT MUMBAI BENCH E

7. CAPITAL GAIN vs. BUSINESS INCOME

Whether a particular asset is stock-in-trade orcapital asset does not depend upon the natureof the article, but the manner in which it isheld. The same item may be stock-in-trade inthe hands of the assessee who deals in thatitem. But it will be capital asset in the case ofan assessee who uses it for earning income orholds as an investment. For example, a dealerin real estate holds a piece of land or houseproperty as stock-in-trade. But it will be acapital asset in the hands of a person who holdsit as an investment and derives income fromleasing or renting of the property.

Even stock-in-trade may become capital assetin certain circumstances and vice versa. If anassessee who deals in certain goods orcommodities as trader, on closure of thebusiness, retains the exist ing stocks asinvestment, the stocks will become capital assetin his hands from the t ime of closure,notwithstanding that they were stock-in-tradeearlier in his hands. Even in the course of abusiness, an assessee may try to transfer someof the stock-in-trade from his trading activityand decide to hold them as investment.

The stocks so held would assume the characterof capital asset from the date of such holding.This may usually happen in the case of dealerin shares and real estate. But in all these cases,the finding will be one of fact depending uponthe intention and conduct of the assesseesupported by di rect and circumstantialevidence. Similarly, when a capital asset isconverted into stock-in-trade, the same will nolonger be capital asset. However, this situationis covered by section 45(2).

The activity of an assessee in dividing the landinto plots and not selling it as a single unit ashe purchased, goes to establish that he wascarrying on business in real property and it is abusiness venture.

RAJA J. RAMESHWAR RAO V CIT (1961)42 ITR 179 (SC)

Ordinarily, where a person acquired landwith a view to selling it later afterdeveloping it and actually divided the landinto plots and sold the same in parcels, theactivity could only be described as abusiness adventure. Generally speaking,the original intention of the party inpurchasing the property, the magnitude ofthe transaction of purchase, the nature ofthe property, the length of its ownershipand holding, the conduct and subsequentdealings of the assessee in respect of theproperty, the manner of its disposal andthe frequency and multipl icity oftransactions afforded valuable guides indetermining whether the assessee wascarrying on a trading activity and whethera particular transaction should be stampedwith the character of a trading adventure.

CIT V TRIVEDI (V.A.) (1988) 172 ITR95 (BOM)

However, on some different facts andcircumstances, it was held that profit on thesale of land after plotting it out to secure betterpr ice cannot be taxed as profit from anadventure in the nature of trade. It shall betaxed under the head ‘capital gain’. CIT VSHASHI KUMAR AGRAWAL (2003) 131TAXMAN 823 (ALL)

Assessee had purchased a plot of land in 1958.In view of the Urban Land (Ceiling andRegulation) Act, 1976, she applied forconstruction of group housing on the excessland and sold the land to a developer andbuilder. The Assessing Officer held that theinstallments received from the builder arebusiness income. The Tribunal held that it isnot business income as there was no adventurein the nature of trade. On reference, the DelhiHigh Court upheld the decision of the Tribunaland held as under:

“The plot was purchased in the year 1958 andafter the operation of law, namely, the UrbanLand (Ceiling and Regulation) Act, 1976, it wasnot possible for the assessee to retain the land.It was very clear that on the assessee’s partthere was only an intention to transfer the land

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and not the portion that may be constructedby the builder on a future date. Clause 3 of theagreement merely provided the mode ofpayment. On the facts and in the circumstancesof the case, the Tribunal was right in holdingthat there was no adventure in the nature oftrade and thereby deleting business income ofRs. 11,87,387 from the income of the assessee.”

CIT v Radha Bai (2005) 272 ITR 264 (Del)

Where some land, which was contributed bypartners as capital and used as brick field andlater given for development, upholding thefinding of the Tribunal, it was held that the firmdid not acquire the land, with a view to sell itat a profit. It was treated in the accounts as afixed asset given to other for outr ightdevelopment without the assessee itself plottingit out, so that it had continued to be a capitalasset. There was no scope, it was found, forholding it either as business or even anadventure in the nature of trade. CIT vMohakampur Ice & Cold Storage (2006)281 ITR 354 (All)

What was necessary was to find out theintention of the assessee at the time of thepurchase of land. Where the land was neverpurchased by the assessee, she acquired thesame on the basis of a will on the death of herhusband. She sold the same in parcels becausethe huge area could not be sold in onetransaction. Such an activity could not amountto trade or business within the meaning of theAct.

CIT V SUSHILA DEVI JAIN (2003) 259 ITR671 (P&H)

A company can hold shares as stock-in-tradefor the purpose of doing business of buying andselling of such shares, while at the same timeit can also hold other shares as its capital forthe purpose of earning dividend income. Thus,where the finding was that the shares inquestion were never treated by the assesseeas stock-in-trade and they were held for earningdividend only, it was held that the Tribunal wasright in law in holding that the profit on sale ofsuch shares was to be treated as capital gains.

CIT v N.S.S. Investments Pvt. Ltd. (2005)277 ITR 149 (Mad)

Where it was an admitted position that the landin question was held as a capital asset by theassessee and not as a business asset and ithad also been noticed that the assessee hadrelinquished the land in lieu of forestdepartment allowing use of their land for layingdown the drainage and the question was as towhether loss arising on such transfer could beallowed as a business loss, it was held that theloss arising on account of transfer of land tothe forest department in lieu of the use of forestland for laying the drainage for discharge ofeffluent, was capital loss and could not beallowed as a business loss.

Shreyans Industries Ltd. v Jt. CIT (2005)277 ITR 433 (P&H)

8. 80-IB(10) [DEVELOPING AND BUILDINGHOUSING PROJECTS]:

The amount of deduction in the case of anundertaking developing and building housingprojects approved on or before the 31st day ofMarch, 2008 by a local authority shall behundred per cent of the profits derived in theprevious year relevant to any assessment yearfrom such housing project if:

(a) Such undertaking has commenced orcommences development and constructionof the housing project on or after the 1stday of October, 1998 and completes suchconstruction

(i) in a case where a housing project hasbeen approved by the local authoritybefore the 1st day of April, 2004, onor before the 31st day of March, 2008;

(ii) in a case where a housing project hasbeen, or, is approved by the localauthority on or after the 1st day ofApril, 2004 but not later than the 31stday of March, 2005, within four yearsfrom the end of the financial year inwhich the housing project is approvedby the local authority.

(iii) in a case where a housing project hasbeen approved by the local authorityon or after the 1st day of April, 2005,within five years from the end of thefinancial year in which the housing

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project is approved by the localauthority.

Explanation: For the purposes of thisclause, -

Ø in a case where the approval inrespect of the housing project isobtained more than once, suchhousing project shall be deemedto have been approved on the dateon which the building plan of suchhousing project is first approvedby the local authority;

Ø the date of completion ofconstruction of the housing projectshall be taken to be the date onwhich the completion certificate inrespect of such housing project isissued by the local authority;

(b) The project is on the size of a plot of landwhich has a minimum area of one acre;

(c) The residential unit has a maximum built-up area of one thousand square feet wheresuch residential unit is situated within thecities of Delhi or Mumbai or within twenty-five kilometres from the municipal limitsof these cities and one thousand and fivehundred square feet at any other place;

(d) The built-up area of the shops and othercommercial establishments included in thehousing project does not exceed three percent of the aggregate built-up area of thehousing project or five thousand squarefeet, whichever is higher.

(e) Not more than one residential unit in thehousing project is allotted to any personnot being an individual; and

(f) in a case where a residential unit in thehousing project is allotted to a person beingan individual, no other residential unit insuch housing project is allotted to any ofthe following persons, namely: -

(i) The individual or the spouse or theminor children of such individual,

(ii) The Hindu undivided family in whichsuch individual is the karta,

(iii) Any person representing suchindividual, the spouse or the minorchildren of such individual or the Hinduundivided fami ly in which suchindividual is the karta.

IMPORTANT JUDICIAL PRONOUNCEMENTS:

Ø One of the issues for consideration iswhether the assessee must be the ownerof the land on which the housing project isconstructed is now settled by the SpecialBench in RADHE DEVELOPERS & ORS.VS. ITO & ORS. (2008) 23 SOT 420(AHD.) In this case, the land was notregistered in the Assessee’s name.Contention of the Revenue was that inorder to claim a deduction u/s. 80-IB(10)the assessee must be the owner of the landon which the housing project isconstructed. It was held that there was nosuch condition in the provisions of thesection 80-IB(10). Deduction u/s. 80-IB(10) is allowable to an undertakingdeveloping and building housing projects,whether it is developed by it as a contractoror as an owner. It was also held that theterm “contractor” is not contradictory tothe term “developer”.

In this case, another important issue beforethe Bench was whether the profit earnedby the assessee included sale of extra FSIwhich was unutilised was eligible fordeduction. It was held that there was nocondition as to FSI under the scheme ofsec. 80-IB(10). It is not mandatoryrequirement to fully utilise permissible FSI.In the facts of the case it was held thatdevelopment agreement with the landowners makes reference to the land areaonly. Also, the sale deeds executed in thefavour of the buyers of the residentialhouses are for the sale of the plot of theland. In both the documents, the assesseehas not acquired or relinquished rights withreference to FSI.

There is no question of selling the unusedFSI to the individual buyers or calculatingprofitability on FSI as the same is notcontemplated u/s. 80-IB(10). Calculationgiven in the approved plan is for the

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maximum permissible FSI. By giving suchcalculation, it is not mandatory to makeconstruction to the fullest extent ofmaximum permissible FSI. Therefore,deduction could not be denied to theassessee on the ground that the profitearned by the assessee are not fordeveloping and building housing projectsdone but for the sale of extra FSI whichhas not been utilised for developing andbuilding the housing projects.

Ø The issue was where an undertakingdeveloping and building housing projectsis engaged as a sub-developer and all thesanctions are obtained by the developerwhether the sub-developer would beeligible for the deduction or main developeror both. It was held that the sub-developeris eligible for deduction.

SAROJ SALES ORGANISATION vs. ITO(2008) 115 TTJ 485.

Ø The Tribunal noted that subsequent to thetwo buildings being constructed on the saidplot, the plan of building ‘C,’ in respect ofwhich the assessee acquired thedevelopment right, was approved by thelocal authority. The original plan wasapproved in 1995, but final approval wasgiven to the modified plan 10-9-1998 andpermission for construction of the buildingwas finally given on 9-10-1998.The Tribunal also noted that in the originalapproved plan/layout building ‘C’ was notshown. Having observed that thecommencement certificate (CC) was in thename of the original owner since the titleof the property was not in the name of theassessee, the Tribunal held that:

(a) merely because the commencementcertificate is issued in the name of theoriginal land owner, the assesseecannot be deprived of deduction u/s.80-IB(10), as nowhere it is amandate of the said provision that theassessee must be the owner of theproperty which  he  undertakes  todevelop;

(b) merely because the agreement is notregistered, the assessee cannot be

deprived of the deduction u/s.80-IB(10) as the assessee has developedbuilding ‘C’;

(c) merely because the CC was obtainedprior to 1-10-1998 that does not meanthat the assessee has commenced thedevelopment and commencement  ofthe building ‘C’;

(d) CC was granted for the first time on24-2-1995 and hence, building ‘C’ wasnot part of the original project. Itobserved that on the said plot theowner had constructed building‘A’ consisting of 95 flats and tenementsand also building ‘B’. Just because theplot of land remained the same, itcannot be construed that building ‘C’is a part of the original housing project;

As regards the objection of the CIT(A) onthe area of plot of land on which the projectwas constructed, the Tribunal on factsfound that there was no clear cut findingby the AO and CIT(A) hence it restoredthe issue  to  the  file  of  the  AO  to  verifywhether the area of the plot on which thebuilding ‘C’ is constructed is one acre ornot. The appeal filed by the assessee wasallowed.

Essem Capital Markets Ltd. v. ITO (2011)TIOL 196 ITAT-Mum. [BCAJ]

Ø Whether the benefit of extension of the dateof completion of project upto 31st March,2003 were applicable to Asst. Yr. 2001-02and subsequent years only. In the case itwas held that the contention of theRevenue that the amendment on thesection 80-IB(10) extending the date ofcompletion of the project upto 31st March,2003 were applicable to the Asst. Yr. 2001-02 and subsequent years and the assesseein the instant case for the Asst. Yr. 2000-01 was not eligible to avail the benefit ofthe said amendments is not acceptable.

DY. CIT vs. ANSAL PROPERTIES &INDUSTRIES LTD. (2008) 22 SOT 45(DEL.)

Ø If the plan is approved before 01.10.1998but the construction of the project starts

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after 01.10.1998, then the Assessee iseligible to claim deduction u/s. 80-IB(10).

Also, if the plan is approved in the name ofSonal Venture (original owner), but theconstruction activity was carried out byShree Ostwal Builders Ltd. (Assessee),then the deduction can be claimed by theAssessee.

Further, commercial units are entitled fordeduction u/s. 80-IB(10), if the project isapproved before 01.04.2005 as commercialproject by the local authority.

Further, ITAT held that if the project isapproved as a residential project, but lateron if any flat purchaser converts the flatsinto godown then as the builder has nocontrol on the same, the builder is entitledto claim deduction in respect of the sameu/s. 80-IB(10).

ACIT v. SHREE OSTWAL BUILDERSLTD., I.T.A. No. 2144/MUM/2010.

Points to remember:

Ø For the removal of doubts, it is herebydeclared that nothing contained in this sub-section shall apply to any undertakingwhich executes the housing project as aworks contract awarded by any person(including the Central or StateGovernment).

Ø Provided that nothing contained in clause(a) or clause (b) shall apply to a housingproject carried out in accordance with ascheme framed by the Central Governmentor a State Government for reconstructionor redevelopment of existing buildings inareas declared to be slum areas under anylaw for the time being in force and suchscheme is notified by the Board in thisbehalf;

Ø Proportionate deduction for eligible housingunits in a project containing ineligiblehousing units.

It is held that provisions of sec 80-IB(10),do not provide for denial of deduction, if ahousing complex contains both the smallerand larger residential units. It concludedthat profits attr ibutable to eligible

residential units are entitle for deductioninspite of the fact that the other residentialunits are greater than 1500 sq. ft. built-up area.

BENGAL AMBUJA ITA NO./ 1735 (CAL.)2007

Ø Deduction in case of individual projects, ifthey are part of bigger project but gotsanction separately:

It is held that where some of the residentialunits in a bigger housing project, treatedindependently, are eligible for relief u/s 80-IB(10), relief should be given pro–rata andshould not be denied by treating the biggerproject as a single unit, more so, whenassessee obtained all sanctions,permissions and certificates for sucheligible units separately.

DY. CIT V. BRIGADE ENTERPRISE (P)LTD 119 TTJ 269

Ø Restr ict ion on commercial area –prospective or retrospective?

It is held that the restrictions on built-uparea of commercial constructions areeffective for projects stated after 1.4.2005.As a result, projects started before1.4.2005 will not be barred by suchlimitations.

ARUN EXCELLO FOUNDATION VS. ACIT 108TTJ 71

In the High Court of Bombay, it was held that,“Direct Taxation Deduction under 80-IB(10) ofIncome Tax Act, 1960 - Whether a housingproject having commercial area up to 10 percent of the project is eligible for deduction onthe entire profits of the project under section80-IB(10) up to 1st April, 2005 - Held, Wherea project fulfils the criteria for being approvedas a housing project, then deduction cannot bedenied under section 80-IB(10) merely becausethe project is approved as residential pluscommercial. Section 80-IB(10) allows deductionto the entire project approved by the localauthority and not to a part of the project. Ifthe conditions set out in section 80-IB(10) aresatisfied, then deduction is allowable on theentire project approved by the local authorityand there is no question of allowing deduction

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to a part of the project. In the present case,the commercial user is allowed in accordancewith the DC Rules and hence the assessee wasentitled to section 80-IB(10) deduction on theentire project approved by the local authority.”

Ratio Decidendi: “Where a project fulfils thecriteria for being approved as a housing project,then deduction cannot be denied under section80-IB(10) merely because the project isapproved as residential plus commercial andsection 80-IB(10) allows deduction to the entireproject approved by the local authority and notto a part of the project.”

CIT-II v. BRAHMA ASSOCIATES (2011)239 CTR 30, 197 TAXMAN 459 (Bom)

The assessee, a builder and land developer, hadentered into an agreement to develop andconstruct a building project on land situated atMira Taluka, Dist. Thane. For A.Y. 2005-06, theassessee filed a return of income in which itclaimed deduction u/s.80-IB(10) of the Act. TheAO noted that the housing project whichconsisted of 94,255 sq. ft. had shopping areato the extent of 7,935 sq. ft. The AO deniedthe deduction on the ground that in view of theamendment to section 80-IB(10) w.e.f. 1-4-2005, the assessee was not entitled todeduction u/s.80-IB(10) of the Act. Aggrieved,the assessee preferred an appeal to CIT(A) whoallowed the appeal. Aggrieved by the orderpassed by the CIT(A), the Revenue preferredan appeal to the Tribunal.

Held: The Tribunal noted that the assessee’sproject had commenced prior to 1-4-2005. Italso noted that in the case of BrahmaAssociates, the High Court has held that theamendment to section 80-IB is prospective inoperation. Since the assessee’s project hadcommenced in December 2003, the Tribunalheld the amendment to be not applicable tothe assessee’s case. The Tribunal dismissed theappeal filed by the Revenue.

ITO v. Chheda Construction Co. (JointVenture) ITA No. 2764/Mum./2009 [BCAJ]

Ø One acre area interpretation where eligibleand ineligible projects are constructed:

It is held that as per clause (b) to section80-IB(10), the project should be on a size

of plot of land which has the minimum areaof one acre. As a result eligible projectsshould be allowed deduction even thoughineligible projects are constructed on thesame piece of land.

VANDANA PROPERTIES ITA NO. 1253/ MUMBAI / 2007

Ø A TERRACE is known as a paved outdoorarea adjoining a residence. It adjoins theresidence externally and is not a part ofthe structure that composes the residentialunit. Hence, the terrace area allotted tothe flat owners for the exclusive use shouldnot be clubbed with the built-up areas ofthe flats to ascertain whether themaximum built up area of the flat is lessthan 1000 sq. ft. Built-up area in order tosatisfy the eligibility condition in clause (c)of section 80-IB(10).

Ø COMPLETION OF PROJECTS – as per therequirement of section 80-IB(10), theproject is required to be completed by31.03.2008. For the purpose, whetheroccupation certificate obtained from theAppropriate Authorities to the effect thatthe development is as per the approval andis ready for occupation is sufficient or willthe department insist on any othercertificate like completion certificate fromappropriate authorities?

In our opinion, the occupation certificategiven by the BMC would be sufficient proofthat the housing project is completed. Evenin DY. CIT vs. ANSAL PROPERTIES &INDUSTRIES LTD. (2008) 22 SOT 45(DEL), it was considered sufficient. But,occupation certificate are sometimes givenbui lding-wise. If al l the bui ldingsconstructed by the developers haveoccupation certificate before 31.03.08,may be sufficient compliance.

If, by any reason the occupation certificatewas not granted or disputed, despite thefact that the project is completed, someother proof like the architect certificatemay also help. It is preferable that thecertificate should elaborately describe thecompleted project item-wise.

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When construction is completed before31.03.2008, but the sale of some flats takeplace in subsequent years, deduction u/s80–IB(10) can be claimed. Generally, inincentive provisions granting tax holidays,there is always a specification as to thenumber of years the tax holiday can beenjoyed. But, in section 80–IB(10), thereis no specification as to the number of yearsthe tax holiday is available.

As on date, it appears that once anapproved project is completed before thecut off date fixed as per section 80–IB(10)and other eligibility conditions are alsofulfilled, there is no terminal year forclaiming the tax holiday. The assessee willbe entitled to deduction u/s 80–IB(10) inrespect of income from the sale, providedthat the legislature has not made anyamendments curtailing the availability ofthe deduction upto A.Y. 2009–10 or deletedthe provisions of the said section with effectfrom 01.10.2010.

RELIANCE JUTE & IND. LTD. v.CIT(1979)120 ITR 921 (SC).

9. DEVELOPMENT RIGHTS

DEVELOPMENT RIGHTS – WHO AREENTITLE – SOCIETIES OR MEMBERS?

In respect of tenants co-partnership co-operative societies, which are of the nature of“Flat Owners Societies” in which the flats areacquired by the society from the builder onownership basis and thereafter society isformed, and land is conveyed to the societyand individual members acquire ownershiprights over the building and underneath thedevelopment rights.

This concept has been recognized underBombay Stamp Act as on the conveyance infavour of the housing societies, stamp duty paidby the purchasers of flats on ownershipagreements is deducted from the stamp dutypayable on the market value of the propertytransferred in favour of the society as perproviso to Article 25 of Schedule 1 of BombayStamp Act.

Circular No. F.N. 4/28/68–WT dated 10.0.1969and 27.01.1969 explaining the provisions of

section 5(1)(iv), the Board clarified that flatsvested with individual members of society andwealth tax exemption will be available toindividual members.

I] Additional Area expected atRedevelopment

Liability of Income/Capital Gain Tax, if any,on:-

(A) Addi t ional area in the hands ofindividual members.

Ans. As per section 54 of the IncomeTax Act, 1961, if any residentialproperty which was held for a periodof more than 3 years is sold or givenfor redevelopment and the new flat ispurchased or acquired within a periodof 1 year before or 2 years after thesale or constructed within 3 years afterthe sale then capital gain arising onthe transfer of the old flat will beexempt from tax u/s. 54 of the IncomeTax Act, 1961 to the extent of the costof such new flat.

In the case of redevelopment, the newflat to be acquired is treated asconstructed for the purpose of thesection 54. Thus, if the new flat isacquired by the owner within a periodof 3 years from the surrender of theoriginal flat then the capital gainarising from the sale of the original flatcan be claimed to be exempted u/s.54 of the Income Tax Act.

If the new flat is not acquired by theowner within a period of 3 years thenthe Assessing Officer at his discretioncan disallow the same at any timeduring the assessment.

However, allotment of a flat or a houseby a co-operative society, of which theassessee is the member, is also treatedas construction of the house [CircularNo. 672, dated 16-12-1993]. Further,in these cases, the assessee shall beentitled to claim exemption in respectof capi tal gains even though theconstruction is not completed withinthe statutory time limit. [Sashi Varma

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v CIT (1997) 224 ITR 106 (MP)]. DelhiHigh Court has appl ied the sameanalogy where the assessee madesubstantial payment within theprescribed time and thus acquiredsubstantial domain over the property,although the builder failed to hand overthe possession within the stipulatedperiod. [CIT v R.C. Sood (2000) 108Taxman 227 (Del)].

Hence, relying upon the abovejudgments, even if in the case ofdevelopment, the new flat is acquiredby the owner after a period of 3 yearsfrom the surrender of the old flat, anassessee can claim exemption u/s. 54.

If the new flat acquired to claimexemption u/s. 54 is sold within aperiod of three years from the date ofpurchase then the capi tal gainexemption claimed earl ier wouldbecome taxable in the year the newflat is transferred.

Thus, in your case, the Receipt of extracarpet area over and above the existingarea could be claimed as exemptionu/s. 54 of the Income Tax Act, 1961.

Further, we would like to state thatunder the definit ion of “Transfer”according to sec 2(47) Income Tax Act,1961, transfer, in relation to a capitalasset, includes sale, exchange, orrelinquishment of the asset or theextinguishment of any rights thereinor the compulsory acquisition thereofunder any law.

An exchange involves the transfer ofproperty by one person to another andreciprocally the transfer of property bythat other to the first person. Theremust be a mutual transfer of ownershipof one thing for the ownership ofanother. Hence, the acquisition of newflat would be considered as exchangeand would be considered as transferfor the purpose of capital gain.

Argument could not be made that nocost is incurred by any member for the

acquisition of the new flat and hencecapital gain cannot be computed andthe case does not fall within the ambitof section 55(2). The member isforgoing his rights in the old flat. Andhence, it would be considered as thecost of acquisition of the new flat.

However, if the residential flat is heldfor a period of less than 3 yrs than thereceipt of extra area by the individualmembers would be taxable in thehands of the individual members.

(B) Cash compensation received uponsurrender of entitled additional area,in part or in full, by an individualmember.

Ans. If the individual member issurrendering a part of the existing areathen the individual member would beliable to pay capital gain tax. The saleconsideration would be calculated asper section 50C of the Income TaxAct, which is as follows:

“Where the consideration received oraccruing as a result of the transfer byan assessee of a capital asset, beingland or building or both, is less thanthe value adopted or assessed orassessable by any authority of a StateGovernment for the purpose ofpayment of stamp duty in respect ofsuch transfer, the value so adopted orassessed or assessable shall, for thepurposes of section 48, be deemed tobe the full value of the considerationreceived or accruing as a result of suchtransfer.”

However, if the individual member issurrendering a part of the additionalarea then the individual member wouldnot be liable to pay any income tax orcapital gain tax on the same.

(C) The society for receiving amenities andfacilities for the common use of itsmembers and their families.

Ans. If the society is receiving anyconsideration for amenit ies andfacilities for the common use of its

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members and their families then thesame is not taxable in the hands ofthe society or the individual membersas there is no cost of acquisition of thesame.

In deciding the case of JETHALALD.MEHTA V. DY. CIT [(2005) 2 SOT422 (MUM.), Hon. Income TaxAppellate Tribunal mainly relied uponSupreme Court decision in the case ofCIT V. B.C. SRINVASA SHETTY 128ITR 294 in which it was decided thatif there is no cost no capital gain canbe worked out hence amount receivedis to be treated as exempt receipt.

II] Corpus Money expected atRedevelopment

Liability of Income/Capital Gain Tax, if any,on:-

(A) Corpus Money received by theindividual members from the developerin lieu of surrender of part entitlementof FSI/development rights.

Ans. If the individual member isreceiving an area which is same ormore than the present area then theindividual member is not liable to paycapital gain tax on the same.

If, however, individual member isreceiving an area which is less thanthe present area than the individualmember is liable to pay capital gaintax as per section 50C of the IncomeTax Act, 1961 as already explainedabove.

(B) Corpus money received by the societyfrom the developer in lieu of surrenderof part entitlement of FSI/developmentrights, such funds being invested bythe society to earn interest income tomeet/subsidize the maintenance costsof its redeveloped premises andproperty.

Ans. If at the time of redevelopment,the society was in not in possession ofunutilized FSI/development rights,then the society would not be liable topay any capital gain tax on the receipt

of the Corpus Money on surrender of apart of FSI/development rights.

Further, if the society has unutilizedFSI/development r ights in i tspossession at the t ime ofredevelopment, then the receipt of theCorpus Money on surrender of the partof FSI/development rights would betaxable in the hands of the society.

Also, in the case of (1) New ShailajaCHS v. ITO (ITA NO. 512/M/2007BENCH B dated 2nd Dec, 2008(mum.) and (2) ITO v. LOTIACOURT CO- OP. HSG. SOC. LTD.(2008) 12 DTR (MUMBAI) (TRIB)396 it was held that where theassessee, a Co-op. Hsg. Soc. Ltd.became entitled, by the vir tue ofDevelopment Control Regulations, toTransferable development Rights(TDR) and the same was sold by it fora price to a builder, the question arosewhether the transaction of sale receiptcould be taxed. It was held that thoughthe TDR was a capital asset, therebeing no ‘cost of acquisition’ for thesame, the consideration could not betaxed. The same is held in the casesof NEW SHAILAJA CHS LIMITED(ITA NO. 512/MUM./2007), OMSHANTI CO-OP. HSG. SOC. LTD.(ITA NO. 2550/MUM/2008) &LOTIA COURT CO-OP. HSG. SOC.LTD. (ITA NO. 5096/MUM/2008).

Further, in the case of MAHESHWARPRAKASH 2 CHS LTD. 24 SOT 366(MUM.), it was held that the assessee-society acquired the right to constructthe additional floors by virtue of DCR,1991 which could not be available tothe assessee on expenditure of money.Prior to DCR, 1991, no society had anyright to construct the additional floors,so it was not a tradable commodity.Suddenly by virtue of DCR, 1991, theright was conferred by the Governmenton the assessee. Such right exclusivelybelonged to the building owned by thesociety. It could not be transferred toany other building.

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Similarly, similar right belonging toother societies could not be purchasedby the assessee for the purpose ofconstructing additional floors in its ownbuilding. Therefore, such right had noinherent quality of being available onexpenditure of money and, therefore,cost of such asset could not beenvisaged. Hence, the said view wasfully justified in terms of the decisionof the Apex Court in the case of B.C.Srinivasa Shetty.

Therefore, the right acquired by theassessee did not fall within the ambitof section 45 itself. The amendedprovisions of section 55(2) were alsonot applicable, since such right was notcovered by any of the assets specifiedin section 55(2)(a).

Therefore, the sum of Rs. 42 lakhsreceived by the assessee from thedeveloper was not chargeable to taxunder section 45. Therefore, theimpugned orders passed by the lowerauthorities were to be set aside.

(C) Corpus money received by the societyfrom the developer (as described in (B)above) and subsequently distributedto its members.

Whether such incomes enlisted aboveat A, B and C, if taxable, shall betreated as capital gains or deemed tobe income earned in the year ofreceipt?

Ans. As per Maharashtra Co-op.Societies Act, 1960, a co-operativesociety cannot distribute the corpusfunds to its individual member, it canonly declare dividends.

However, the declaring of dividends haslots of restrictions and formalities.

(D) Liability for income tax, if any, oninterest income ar ising frominvestment of such corpus money bythe society/individual members in theco-operative/other banks.

Ans. If the society receives interestincome form a co-operative bank thenthe same is exempt from tax.

And, if the interest income is receivedfrom other banks than the same istaxable and the society has to pay taxon the same.

However, as per recent Hon’bleTribunal Judgment in the case of ITOv. Sagar Sanjog C.H.S. Ltd., ITANos. 1972 to 1974 and 2231 to2233/ Mum/ 2005(BCAJ) it washeld that the interest income earnedout of the fund money invested wentto reduce the maintenance. Accordingto the Tribunal, the interest would havebeen taxable, had there been surplusleft after it being adjusted against themaintenance expenses. The Tribunalalso noted that there was nothing onrecord to suggest that the interestincome would be given to members ondissolution of the Society.

Thus, even the interest incomereceived from other than co-operativebank and spent on Society’s work thenthe concept of mutuality will apply andis not liable to tax but this view is notfree from litigation.

III] Rent for Temporary AlternativeAccommodation including Deposits, ifany:

Rental allowance may be received byindividual members in the event of needfor relocation during redevelopment. Suchamounts may be utilized in part or in fulltowards rent paid for alternative premisesor may remain entirely unspent if themember al ready has his/her ownalternative accommodation. Suchallowance may be received for about threeyears, either together in one tranche inadvance or in installments on a staggeredbasis.

Liability for income tax, if any, on suchrental allowance, including deposits, if any,received by the individual members:

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Whether such income, if taxable, shall betreated as income earned in the year ofreceipt (if received on a staggered basis)or entirely as income in one year (ifreceived fully in advance)?

Ans. In order to get the old buildingredeveloped, the existing structure of theold building is required to be demolishedand hence, it is necessary to vacant thesame. To facilitate redevelopment and tocompensate the flat owners for thehardship to be faced by them in this regard,the developer might offer them rentcompensation which they would be payingfor the temporary accommodation duringthe period of redevelopment.

The rent compensation so provided by thedeveloper to the owner should be expendedby the owners for the purpose of theirtemporary accommodation and otherexpenditure related thereto.

If the actual rent paid by the flat owners isless than the rent compensation receivedby them from the redeveloper then theexcess of such amount received will betaxable under the head income fromother sources, otherwise, the rentcompensation received by the flat ownersfrom the redeveloper is not taxable.

The rent compensation given to theindividual members shall be taxable in theyear of receipt if the rent compensation isreceived on staggered basis and the wholeis not spend by the individual members ontheir alternative accommodation.

However, if the rent compensation is givento the individual members in one tranchein advance, then the rent compensationreceived by the individual members wouldbe taxable on proportionate basis if thesame is not spend on the alternativeaccommodation.

IV] Hardship Allowance/ Compensation forInconvenience

Members opting not to be temporarilyrelocated during the redevelopment mayreceive “hardship allowance” from thedeveloper.

Members agreeing to be temporari lyrelocated during redevelopment mayreceive “compensation for inconvenience”from the developer.

Liability for income tax, if any, on suchallowance/ compensation and if taxable,mode of computation, i.e., whether asincome in the year of receipt or whetheron a staggered basis as received.

Ans. Along with extra area and rentcompensation, the redevelopers also offerlump sum amount to the flat owners inaddition to extra area and compensation.The transfer of TDR to bui lder fordevelopment of property does not attractcapital gain tax.

In deciding the case of JETHALAL D.MEHTA V. DY. CIT [(2005) 2 SOT 422(MUM.), Hon. Income Tax Appel lateTribunal mainly relied upon Supreme Courtdecision in the case of CIT V. B.C.SRINVASA SHETTY 128 ITR 294 inwhich it was decided that if there is no costno capital gain can be worked out henceamount received is to be treated as exemptreceipt.

Hence, the hardship allowance and thecompensation for inconvenience is nottaxable in the hands of the individualmembers as hardship allowance andcompensation for inconvenience can’t beworked out in monetary terms and haveno cost. Since there is no cost ofacquisition, as per Income-tax Act, 1961,the receipt would not be treated as a capitalreceipt and thus, is exempt from tax.

V] White Goods/ Household Amenitiesreceived by Members from Developer

Liability for income tax, if any, on individualmembers for white goods/householdamenities such as air-conditioners, washingmachine, modular kitchen, etc. that aresometimes included by developers in thenew premises on a complimentary basis.

Ans. Al l the white goods/ householdamenities which are attached to the flat,i.e., fixtures, modular kitchen, centralizedAC, etc. are treated as a part of the flat

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and thus, are exempt and not taxable inthe hands of the individual members.

Other movable items such as refrigerator,sofa set and other furniture which are notattached to the walls of the flat and exceeds50,000/- in value in totality are not treatedas a part of the flat and are thus taxable inthe hands of the individual members in theyear of receipt of such amenities u/s.56(2)(vii) of the Income Tax Act,1961, which is as follows:

“where an individual or a Hindu undividedfamily receives, in any previous year, fromany person or persons on or after the 1stday of October, 2009,—

(a) any sum of money, without consideration,the aggregate value of which exceeds fiftythousand rupees, the whole of theaggregate value of such sum;

(b) any immovable property, withoutconsideration, the stamp duty value ofwhich exceeds fifty thousand rupees, thestamp duty value of such property.

* The following sub-clause (b) shall besubstituted for the existing sub-clause(b) of clause (vii) of sub-section (2)of section 56 by the Finance Act, 2013,w.e.f. 01.04.2014.

(b) any immoveable property,-

(i) without consideration, the stamp dutyvalue of which exceeds fifty thousandrupees, the stamp duty value of suchproperty;

(ii) for a consideration which is less thanthe stamp duty value of the propertyby an amount exceeding fiftythousand, the stamp duty value of suchproperty as exceeds suchconsideration:

Provided that where the date of theagreement fixing the amount ofconsideration for the transfer ofimmoveable property and the date ofregistration are not the same, thestamp duty value on the date ofagreement may be taken for thepurposes of this sub-clause:

Provided further that the said provisoshall apply only in a case where theamount of consideration referred ttherein, or part thereof, has been paidby any mode other than cash on orbefore the date of agreement for thetransfer of such immoveable property;

(c) any property, other than immovableproperty,—

(i) without consideration, the aggregate fairmarket value of which exceeds fiftythousand rupees, the whole of theaggregate fair market value of suchproperty;

(ii) for a consideration which is less than theaggregate fair market value of the propertyby an amount exceeding fifty thousandrupees, the aggregate fair market value ofsuch property as exceeds suchconsideration”

*Amendments made by the FinanceAct, 2013- Transactions for inadequateconsideration in immoveable propertymade taxable w.e.f. assessment year2014-15.

The provisions of section 56(2) (vii) areamended, with effect from 01.04.2014, soas to provide that where any immoveableproperty is received by an individual or HUFfor a consideration which is less than thestamp duty value of the property by anamount exceeding Rs. 50,000, the stampduty value of such property as exceeds suchconsideration, shall be chargeable to taxin the hands of the individual or HUF asincome from other sources.

In other words, if the difference betweenstamp duty value and the purchaseconsideration is Rs. 50,000 or less, nothingwill be chargeable to tax in the hands ofthe recipient of property. If the purchaseconsideration is less than the stamp dutyvalue of the property and such differenceis more than Rs. 50,000, then thedifference between the stamp duty valueand purchase consideration will be taxableunder section 56 under the head ‘incomefrom other sources’.

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The following are important points to be noted:

· The immoveable property received shouldbe land or building or both.

· The immoveable property is receivedduring the previous year.

· The immoveable property is received onor after 01.04.2013

· The immoveable property received may besituated anywhere [whether in India orabroad].

· The immoveable property should be acapital asset as defined under section2(14).

· The immoveable property so receivedshould be for a consideration less than thestamp duty value and the di fferencebetween the two should exceed Rs. 50,000.In such a situation, difference between thestamp duty value and purchaseconsideration will be taxable.

· Rs. 50,000 limit for difference to be appliedproperty wise, i.e., specially to eachproperty received for consideration lessthan stamp duty value and not to all suchproperties received during the previousyear.

· It would appear that the provisions wouldapply only if consideration is quantifiablein money terms. If not, it would appearthat the provisions would not apply.

VI] Reimbursement of Expenses fromDeveloper

Liability for income tax, if any, on thesociety/ individual members forreimbursement from developer of expensessuch as stamp duty, fees of consultants(Archi tect, Lawyers, CharteredAccountants, etc.) cost of updatingmembers and holding general bodymeetings, administrative expenses towardsthe redevelopment process, etc. incurred/to be incurred.

Ans. Any amount which is reimbursed bythe developer is not taxable either in thehands of the society or the individualmembers, provided that the entire amount

of reimbursement has been spent on theexpenses it is reimbursed for.

Thus, if excess amount is reimbursed bythe developer than the amount which isactually spent for the purpose than theexcess amount would be taxable on thereceipt of the same.

However, in the case of a society, if excessamount is reimbursed to a society by thedeveloper than actually spent by thesociety, and the excess amount so receivedhas been used by the society for paymentof expenses which are for the welfare ofthe society or the individual members thanthe excess amount received by the societywould not be taxed and hence, would beexempt. Otherwise, the excess amountreceived by the society would be taxable.

VII] Liquidation & Disbursement ofExisting Sinking Fund

Liability for income/capital gain tax, if any,on the society/ individual members uponliquidation and disbursement to existingmembers (with permission from Registrar/any other authority) of existing, unutilizedsinking fund (generated by annualcontributions from members and bankinterest earned thereon.) prior to inductionof new members arising from saleableportion of redeveloped premises.

Ans. In our view, the sinking fund is to beused on the property itself either for thepurpose of development or heavy repair.

However, if the Registrar gives permissionthen the sinking fund could be distributedamongst the individual members, whichagain has a number of restrictions.

This distribution of sinking fund after thepermission of the Registrar would betaxable in the hands of the individualmembers to the extent of the interest onsuch a fund. The distribution of the principalamount would not be taxable in the handsof the society or the individual members.

VIII] TDS on receipt

Whether tax shall be deducted at source(TDS) from corpus money, allowances,

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compensations, reimbursement of fees ofconsultants and other expenses, rent fortemporary alternative accommodation anddeposits or any other form of receipt in thehands of the society/ i ts individualmembers?

Ans. As per the Income-tax Act, 1961, notax is to be deducted on the amountreimbursed by the developer to the societyor the individual members or on other itemssuch as corpus money, al lowances,compensations, reimbursement of fees ofconsultants and other expenses, rent fortemporary alternative accommodation anddeposits or any other form of receipt.

However, when the society makespayments such as professional fees,contractor, etc, the society is to deduct taxat source at the rate given hereunder andpay the same to the Income TaxDepartment and file the quarterly returns:

Contractor 1% in the case ofindividual/ HUF

2% in the case of othersu/s 194C

Rent 10% u/s 194I

Professional fees 10% u/s 194J

Commission & 10% u/s 194H

brokerage

IX] Tax Planning (Saving) Instrument.

Recommendation of umbrella of designatedschemes, funds, securities, etc. underwhich the society/ its individual membersmay invest taxable proceeds, if any, tominimize the impact of income/ capital gaintax.

Ans. In our view, whether there would beany capital gain tax liability arising onaccount of such transactions ofredevelopment, is not free from litigation,in view of the fact that various litigationsare going on in various courts in our countryand the issue would finally be settled whenthe Supreme Court decides the matter.

It is also to be noted that even the SupremeCourt changes its view from time to time

depending on the frequent amendments inthe Income-tax Act.

Further, we would like to state that IncomeTax Department have filed appeal beforeHon. High Court and, if the court allowsthem against the assessees then the samewould be taxable for the society otherwisetill now it is tax free. Even assuming thatHon High Court decides the case againstthe assessee then assessee will be liableto pay tax with interest but no penalty canbe charged in view of recent decision ofSupreme Court in the case of ReliancePetro products Pvt. Ltd. Vs. CIT (2010)322 ITR 158 (SC) on the principle that ifassessee gives all particulars of income inreturn and claim certain wrong deductiondue to ignorance of highly technical lawthen that will not attract penalty u/s271(1)(c) of the Income Tax Act, 1961.

Further we would like to say that based onthe above, till now the corpus moneyreceived by the society and the individualmembers is tax free but in case the HighCourt decides the case against the societythen to be on the safer side and to avoidlitigation with the Income Tax Department,we suggest that recipient can invest thesame in specified bonds to claim exemptionu/s. 54EC of the Income-tax Act. One canearn interest by investment in the bondsfor 3 yrs which would be an added benefit.The interest so earned would be taxable.Section 54EC of the Income Tax Act, 1961,is produced here below:

“Where the capital gain arises from thetransfer of a long-term capital asset andthe assessee has, at any time within aperiod of six months after the date of suchtransfer, invested the whole or any part ofcapital gains in the long-term specifiedasset, the capital gain shall be dealt within accordance with the following provisionsof this section,

(a) if the cost of the long-term specifiedasset is not less than the capital gainarising from the transfer of the originalasset, the whole of such capital gainshall not be charged under section 45;

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(b) if the cost of the long-term specifiedasset is less than the capital gainarising from the transfer of the originalasset, so much of the capital gain asbears to the whole of the capital gainthe same proportion as the cost ofacquisition of the long-term specifiedasset bears to the whole of the capitalgain, shall not be charged undersection 45:

Provided that the investment made onor after the 1st day of April, 2007 inthe long-term specified asset by anassessee during any financial year doesnot exceed fifty lakh rupees.

“long-term specified asset” for makingany investment under this sectionduring the period commencing fromthe 1st day of April, 2006 and endingwith the 31st day of March, 2007,means any bond, redeemable afterthree years and issued on or after the1st day of April, 2006, but on or beforethe 31st day of March, 2007, -

(i) by the National Highways Authorityof India constituted under section3 of the National HighwaysAuthority of India Act, 1988 (68 of1988); or

(ii) by the Rural E lectr if icationCorporation Limited, a companyformed and registered under theCompanies Act, 1956 (1 of 1956),

and notified by the Central Governmentin the Official Gazette for the purposesof this section with such conditions(including the condition for providinga limit on the amount of investmentby an assessee in such bond) as itthinks fit

X] Implications of VAT/Service Tax

Whether all receipts in the hands of thesociety/ its individual members shall be netof VAT and service tax

Responsibi lity/ liabil ity of society/i tsmembers towards the same for servicesrendered to it by professionals/consultants.

Ans. As Society is not providing anyservices to the developer, the society is notliable to pay service tax or VAT on any ofthe payments received by the society inthe form of reimbursements or corpusmoney or compensations, etc.

If the society is making any payment offees to the professionals or contractors,then the society is liable to pay service tax@ 12.36% to the professionals and servicetax or VAT to contractors on such apayment.

The professionals and the contractors wouldin turn pay the same to the CentralGovernment or respective StateGovernment as applicable.

XI] Responsibility/ Liability towards stampduty

Responsibility/liability of the society/itsindividual members towards stamp duty,if any, in transition from surrender ofexisting premises to the develop to theoccupation and registration of theredeveloped premises

Ans. Normal ly, in the cases ofredevelopment, the stamp duty and theregistration charges on surrender of theexisting premises to the developer for thepurpose of redevelopment would be paidby the developer.

Whereas, when the individual memberreceives the redeveloped premises from thedeveloper, he is liable to pay stamp dutyand registration charges on the same. Thestamp duty payable would be on the costof construction of the present area of thepremises and on the market value for theextra area received as per the readyreckoner value published by theGovernment of Maharashtra every year on1st January.

XII] Restructuring of Society

Whether the composition of the society mayneed to be restructured in any manner soas to facilitate minimization of the taxliability?

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Whether admission of new members (fromsaleable portion) in the existing society ortheir accommodation as an independentnew society would have any bearing on thetax liability of the society/its individualmembers?

Ans. No, the composition of the societyneed not be restructured in any manner soas to facilitate minimization of the taxliability.

The admission of the new members to theexisting society or their accommodation tothe new society would not make muchdifference to the tax liability of the societyor its individual members.

However, it would be advisable to admitthe new members to the existing societybecause due to increase in the number ofthe members of the society, the fixedcharges or expenses of the society likemaintenance, etc would be distributedamongst the members.

10. SECTION 194LA

As per Section 194LA of the Income-tax Act,1961, “Any person responsible for paying to aresident any sum, being in the nature ofcompensation or the enhanced compensationor the consideration or the enhancedconsideration on account of compulsoryacquisition, under any law for the time being inforce, of any immovable property (other thanagricultural land), shall, at the time of paymentof such sum in cash or by issue of a cheque ordraft or by any other mode, whichever is earlier,deduct an amount equal to ten per cent of suchsum as income-tax thereon :

Provided that no deduction shall be made underthis section where the amount of such paymentor, as the case may be, the aggregate amountof such payments to a resident during thefinancial year does not exceed one hundredthousand rupees.”

The specific definition of the term “agriculturalland” for the purpose of section 194LA as givenunder explanation to the said section reads“agricultural land” means agricultural land inIndia including…………………It is thus clear thatwhat is purported to be included is any land

classified as “agricultural land” in India andincludes such land situated in area referred toin sub clause (iii) of section 2(14).

The defini t ions of the two sections arereproduced hereunder:

Section 194LA states as fol lows:“agricultural land” means agricultural landin India including land situate in any areareferred to in items (a) & (b) of sub–clause(iii) of clause (14) of section 2.

Section 2(14)(iii) states as follows:agricultural land in India, not being land situate

(a) in any area which is comprised within thejurisdiction of a municipality (whetherknown as a municipal i ty, municipalcorporation, notified area committee, townarea committee, town committee, or by anyother name) or a cantonment board andwhich has a population of not less than tenthousand according to the last precedingcensus of which the relevant figures havebeen published before the first day of theprevious year; or

(b) in any area within such distance, not beingmore than eight kilometres, from the locallimits of any municipality or cantonmentboard referred to in item (a), as the CentralGovernment may, having regard to theextent of, and scope for, urbanisation ofthat area and other relevant considerations,specify in this behalf by notification in theOfficial Gazette;

Section 194LA is a much wider definition in itsscope and the same cannot be restricted bythe definition of section 2(14). Section 2(14)cannot curb the provisions of section 194LA,since section 194LA includes not only section2(14) but also any agricultural land situatedanywhere in India whether within municipallimits or outside municipal limits.

11. TAX AUDIT

Amount received as advance by builderfollowing project completion methodwhether tax audit applicable and penaltyunder section 271B imposable

In case it is taken that assessee is followingthe system in which income is returned oncompletion of the project and in case project

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goes on for more than 5 years and assesseegets its books of account audited for last yearin which project is completed, then from whereA.O. will be able to verify the figures of expensesand receipts etc. of earlier years. So, it is againstthe very principle of section 44AB that in projectcompletion assessee would get the books ofaccount audited in the last year and not inearlier years when he is debiting the expensesand showing sundry debits and different typesof receipts are also there. On the basis of above,it can be concluded that audit is to be carriedon for all the assessment years during whichthe project was constructed and the expenseswere debited to the P & L A/c.

It is held that amounts received as advance bythe assessee-builder from customers had anelement of profit and same were to be adjustedtowards the cost of flats booked by eachcustomer and thus, the amounts of advancehave to be included in “gross receipts” for thepurpose of s. 44AB; assessee being underobligation to get its accounts audited under s.44AB. It cannot be contended that the assesseefollowing project completion method would getthe books of account audited in the last yearand not in earlier years when he is debiting theexpenses and other items and showing differenttypes of receipts penalty under s. 271B wasimposable for its failure to get the same done

Gopal Krishna Builders [2006] 92 TTJ 215(Luck)]

12. CAPITAL GAIN

12.1 CAPITAL ASSET

Capital asset means any property of any kindheld by an assessee, whether or not connectedwith his business or profession

However, agricultural land in India is not acapital asset provided it is not situated:-

1. In any area wherein the terr itor ialjurisdiction of Municipality or CantonmentBoard having a population of 10,000 ormore;

2. In any area within 8 km. from amunicipality stated above.

Note: In order to qualify for agriculturalland in India, it is not necessary that the

land was once agricultural land. It must bean agricultural land at the time of sale. Inorder to determine whether a particularland is agricultural land or not, it is firstnecessary to ascertain what is the use towhich the land is been actually put. If ithas been used for agricultural purposes oreven if the agricultural use has ceased butit is apparent that the land is meant to beused for agricultural purpose, it would bean agricultural land.

Ranchhodbhai Bhaijibhai Patel V. CIT(1971) 81 ITR 446 (Guj)

12.2 TRANSFER IS A PRE-REQUISITE FORTAXING CAPITAL GAIN

Capital gain arises only when there is atransfer of capital asset. If the capital assetis not transferred or if there is anytransaction which is not regarded astransfer, there will not be any capital gain.However, w.e.f. assessment year 2000-2001 section 45(1A) has been inserted toprovide that in case of profits or gains frominsurance claim due to damage ordestruction of property, there will be capitalgain on such deemed transfer although noasset has been actually transferred in suchcase.

Judicial pronouncements — Whether atransaction constitutes transfer or not?

Where an assessee gives up the right toclaim specific performance for purchase ofimmovable property is it relinquishment ofa capital asset and thus transfer?

The assessee had entered into anagreement to purchase certain property.Both parties reserved the right to specificperformance of the agreement. Nearly fouryears thereafter, again another agreementwas entered into in the nature of deed ofcancellation, by which the assessee agreedfor termination of the earlier agreement andallowed the owner of the land to sell thesaid property to any person and at any priceof his choice. As a consideration for this,the assessee was paid a sum of Rs.6,00,000 apart from being refunded theadvance of Rs. 40,000. The question that

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arose for consideration was as to whetherthe amount of Rs. 6,00,000 received bythe assessee from the vendor could betreated as capital gains in the hands of theassessee.

K.R. Srinath v Asstt. CIT (2004) 268ITR 436 (Mad)

There is no transfer in family settlement:

Where a family settlement/ arrangement isarrived at in order to avoid continuous frictionand to maintain peace among the familymembers, the family arrangement is governedby the principles which are not applicable todealing between strangers. So, such bona fiderealignment of interest, by way of effectingfami ly arrangements among the familymembers would not amount to transfer. CIT vA.L. Ramanathan (2000) 245 ITR 494(Mad). In this case, the court followed thedecision of the Supreme Court in general lawlaid down in the case of Kale v DeputyDirector of Consolidation (1976) AIR 1976SC 807.

Giving up the right to obtain conveyance ofimmovable property amounts to transfer of acapital asset:

Where the assessee had paid the earnest moneyand acquired right to obtain conveyance ofimmovable property, such earnest money paidshall be cost of acquisition of such right and ifsuch right is given up, there is a transfer of acapital asset and the compensation receivedfor giving up such right is the considerationprice. CIT v Vijay Flexible Container (1990)186 ITR 693 (Bom)

In case of litigation pending, no capital gaintax unless the case is decided:

The AO held that the income accrues on thedate when an enforceable debt is created infavour of the Assessee. However, the Court heldto consider the issue as to whether the incomewould accrue even when the very existence ofthe income is under doubt and a subject matterof litigation. Further, the subject matter oflitigation cannot be a subject matter of taxavoidance.

ITO v. M/s. S. P. BUILDERS, CIT(A) XII/12(3)(4)/ IT – 184/07-08.

12.3 CONVERSION OF CAPITAL ASSETINTO STOCK– IN–TRADE

As per section 45(2), if a capital asset isconverted into stock–in–trade, the capitalgain is taxable in the year such stock issold, and the fair market value of the asseton the date of such conversion or treatmentshall be deemed to be the full value ofconsideration received or accruing as aresult of the transfer.

12.4 CONVERSION OF STOCK–IN–TRADEINTO CAPITAL ASSET

It was held that there is no provision similarto section 45(2) with respect to conversionof stock–in–trade into capital asset. It wasfurther held that holding period is to beconsidered from the date of acquisition.

CIT V. BRIGHT STAR INVESTMENTS (P)LTD (2008) 24 SOT 288 (BOM.)

KALYANI EXPORTS & INV (P) LTD &ORS. V. DY. CIT (2001) 78 ITD 95(PUNE) (TM)(139 AND 140)

However, in SPLENDORCONSTRUCTIONS (P) LTD VS. ITO(2009) 27 SOT 39 (DELHI), it was heldthat the period is to be considered fromthe date of conversion to investment. Thisdecision has not considered the decision ofthe Mumbai Tribunal in Bright Star (supra).

12.5 PIECEMEAL TRANSFER

In AJAI KUMAR SHAH JAGATI V ITO(1995) 55 ITD 348 (DEL.) AND M/S G.G. DANDEKAR MACHINES WORKS LTDV. JCT, ITA NO. 181/MUM/2001,BENCH–F, DATED 28THFEBRUARY,2007, possession of only apart of property was transferred againstproportionate consideration received duringthe relevant assessment year. It was heldthat capital gains arising only on the saidproportion amount of consideration couldbe charged in the relevant year and not onthe entire consideration stipulated in thesale agreement.

12.6 CAPITAL ASSETS CAN EITHER BESHORT-TERM CAPITAL ASSET ORLONG-TERM CAPITAL ASSET

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(A)Short-term capital asset: A capital assetheld by an assessee for not more than36 months immediately preceding thedate of its transfer is known as a short-term capital asset.

(B) Long-term capital asset: It means acapital asset which is not a short-termcapital asset. In other words, if theasset is held by the assessee for morethan 36 months or 12 months, as thecase may be, such an asset will betreated as a long-term capital asset.

Thus, period of holding of a capital asset isrelevant for determining whether capitalasset is short-term or long-term.

Exclusion/inclusion of certain period forcomputing the period of holding of an asset:

Case Exclusion/Inclusion of period

(ii) Property acquired in any mode given undersection 49(1) (e.g. by way of gift, will, etc.)Include the holding period of previous owneralso.

Judicial decisions for determining period ofholding

Property constructed on a land purchasedearlier: In case, a property is constructed on asite purchased much earlier, the question ariseswhether the period of holding the asset, i.e.,the property, should be reckoned from the dateof completion of the construction of the propertyor from the date of acquisition of the land.

The correct position is that the asset consistsof two components: (1) Land and (2) Building.When the property is sold, the period of holdinghas to be reckoned separately for the land andthe building. The consideration received canalso be split into two parts relating to eachcomponent.

In CIT v Vimal Chand Golecha (1993) 201ITR 442 (Raj), the land was purchased in 1962and building was constructed thereon in theaccounting years relevant to assessment years1968-69, 1969-70 and 1970-71. The buildingwas sold in 1970. It was held that the gainsattributable to land were assessable as long-term capital gains. The gains attributed to thebuilding were, however, short-term capital

gains. Similar view was held in the cases ofCIT v Lakshmi B. Menon (2003) 264 ITR76 (Ker) and CIT v C.R. Subramanian(2000) 242 ITR 342 (Kar).

Agreeing with the above Rajasthan High Courtview, it has been held that land can beconsidered a separate capital asset even if abuilding is constructed thereon. Thus, wherethe land is held for more than a prescribedperiod, the gains arising from the sale of theland can be considered as long-term capitalgains even though the building thereon, beinga new construction, is held for a period lessthan the prescribed one

CIT v Dr. D.L. Ramachandra Rao (1999)236 ITR 51 (Mad)

CIT v Citibank N.A. (2004) 260 ITR 570(Bom)

In the above cases, the burden will be on theassessee to satisfy how much of the saleproceeds should be apportioned for the landand how much of the sale proceeds pertainedto the structure.

CIT v Estate of Omprakash Jhunjhunwala(2002) 254 ITR 152 (Cal)

Period of holding of share in the co-operative housing society: Whilecomputing the capital gain tax in case oftransfer of his shares by a person who is amember of co-operative housing society,the relevant date would be date on whichthe member acquires the shares in the co-operative housing society and the date onwhich member had sold his shares therein.Thus, where the assessee acquired sharesin the society on 6-9-1979 and was allottedflat on 15-11-1979. He was givenpossession of flat in October 1981, andsold the shares of the society along withthe flat, on 4-12-1982, the capital gainsarising from the sale were long-termcapital gains, shares having been held formore than 36 months.

CIT v Anilben Upendra Shah (2003) 262 ITR657 (Guj)

Similarly, the assessee became a memberin Venus Apartments (Galaxy Co-operativeHousing Society). He was allotted a flat in

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the building of the society by resolutiondated 4-11-1980, passed by the managingcommittee of the society. On the date ofallotment, i.e., 4-11-1980, the propertywas under construction and came to becompleted on 12-9-1983. Physicalpossession was handed over to theassessee on 12-9-1983. On 30-4-1984, theflat was sold by the assessee for aconsideration of Rs. 3,75,000. Theassessee worked out long-term capitalgains at Rs. 1,59,395. The AssessingOfficer did not accept the stand of theassessee that the assessee had become theowner of the property as per resolutiondated 4-11-1980.

According to the Assessing Officer theassessee had held the property for a periodof less than 36 months and as such wasliable to short-term capital gains tax, it washeld that the assessee in the present casewas allotted a share by the co-operativehousing society on 4-11-1980, and the saleof the same took place on 30-4-1984, i.e.,after a period of 36 months. The Tribunalwas therefore justified in holding that thecapital gains arising were long-term capitalgains and the assessee was entitled todeduction from such gains as per law.

CIT v Jindas Panchand Gandhi (2005) 279 ITR552 (Guj)

Right to acquire any house property:Where a flat is booked with a builder undera letter of allotment or an agreement forsale, this would represent only a right toacquire a flat and if such right is acquiredmore than 36 months back, it becomes along-term asset. However, when thepossession of the flat is taken, the periodof holding would once again commencefrom the date of the possession of the flatas the small right to acquire a flat mergedinto larger right and small right upon amerger would lose its existence.

12.7 COST OF ACQUISITION

Cost of acquisition of an asset is the valuefor which it was acquired by the assessee.Expenses of capital nature for completing

or acquiring the title of the property areincludable in the cost of acquisition.

Judicial decision on cost of acquisition:

Cost of acquisition of an asset acquiredfrom the previous owner in any mode givenu/s 49(1): In this case, the cost ofacquisition is taken as the cost to theprevious owner and it is this cost which willhave to be indexed. For the purpose ofindexation the year in which the asset wasfirst held by the assessee (not the previousowner) is to be considered. The indexationwill be done as under:

Cost of acquisition to the previous owner ´CII of the year of transferCII of the year inwhich the asset is first held by the assessee

However, in the case of Mrs. Pushpa Sofat(2002) 81 ITD 1 (Chd)(SMC), the indexationof cost was allowed from the date of acquisitionof the asset by the previous owner and not thedate when the asset was acquired by theassessee from the previous owner under anymode given under section 49(1).

12.8 VALUATION AS ON 1.4.1981

Reference to the DVO can be made u/s 55Aonly when the AO is of the opinion that thevalue of the capital asset claimed by theassessee is less than the fair market value andnot when he was of the opinion that the fairmarket value of the property as on 01.04.1981as shown by the assessee was more than itsactual fair market value.

CIT V. Daulat Mohta HUF ITA No. 1031 Of2008 Dt. 22.09.2008 (Bombay High Court)

ITO V. Smt. Lalitaben B. Kapadia (2008)115 TTJ 938 (Mum)

Patel India (P) Ltd. V. Dy. CIT (1999) 63TTJ 19 (Mum)

12.9 NO REGISTRATION – 50C NOTAPPLICABLE upto 30/09/2009

In NAVNEET KUMAR THAKKAR VS. ITO(2007) 112 TTJ 76 (JD), it was held thatsection 50C embodies the legal fiction by whichthe value assessed by the stamp dutyauthorities is considered as the full value ofconsideration for the property transferred. It

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does not go beyond the cases in which thesubject transferred property has not becomethe subject–matter of registration and thequestion of valuation for stamp duty purposeshas not arisen.

Amendment w.e.f. 01/10/2009

Law is amended w.e.f. 01/10/2009 to includeall the cases whether registered or unregistered

12.10 EXEMPTION OF CAPITAL GAINSUNDER VARIOUS SUB-CLAUSES OFSECTION 10, SECTION 11(1A) ANDSECTION 13A

Exemption of capital gains on compensationreceived on compulsory acquisit ion ofagricultural land situated within specified urbanlimits:

With a view to mitigate the hardship faced bythe farmers whose agricultural land is situatedin specified urban limits has been compulsorilyacquired, the Finance (No. 2) Act, 2004 hasinserted a new clause (37) in section 10 so asto exempt the capital gains (whether short-termor long-term) arising to an individual or a Hinduundivided family from transfer of agriculturalland by way of compulsory acquisition wherethe compensation or the enhancedcompensation or consideration, as the case maybe, is received on or after 1-4-2004.

The exemption is available only when such landhas been used for agricultural purposes duringthe preceding two years by such individual or aparent of his or by such Hindu undivided family.

Where the compulsory acquisition has takenplace before 1-4-2004, but the compensationis received after 31-3-2004, it shall be exempt.But if part of the original compensation in theabove case has already been received before1-4-2004, then exemption shall not be availableeven though balance original compensation isreceived after 31-3-2004.

However, enhanced compensation received onor after 1-4-2004 against agricultural landcompulsorily acquired before 1-4-2004 shall beexempt.

12.11 EXEMPTION OF CAPITAL GAINS U/s. 54, 54B, 54EC & 54F

a) Profit on transfer of house propertyused for residence [Section 54]:

Benefit of section 54 is confined to saleof a residential house after 36 monthsand reinvestment in a residential house.Reinvestment benefits are availableboth for purchase and construction ofthe house. Purchase has to be eitherone year before or two years later.Construction has to be completed withinthree years of the sale of the asset inrespect of which benefit ofreinvestment is claimed. There havebeen many decisions on purchase/construction of the house. Further,certain clarifications have also beenissued in this regard. These have beensummarized as under:

i. House includes part of the house:House property does not mean acomplete independent house. Itincludes independent residentialunits also, like flats in a multi-storied complex. The emphasis isnot on the type of the property, buton the head under which the rentalincome is assessed. [CIT (Addl.)v Vidya Prakash Talwar (1981)132 ITR 661 (Del)].

ii. Release deed may also be treatedas purchase: Where a property isowned by more than one personand the other co-owner or co-owners release his or theirrespective share or interest in theproperty in favour of one of the co-owners, it can be said that theproperty has been purchased bythe releasee. Such release alsofulfils the condition of section 54 asto purchase so far as releasee-assessee is concerned [CIT v T.N.Aravinda Reddy (1979) 120 ITR46 (SC)]

iii. Addition of floor to the existinghouse eligible for exemption undersection 54: The assessee sold hisresidential property and investedthe capital gain within the stipulated

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time in the construction of a newfloor on another house owned byhim by demolishing the existingfloor; it was held that he wasentitled to exemption under section54. [CIT v Narasimhan (PV)(1990) 181 ITR 101 (Mad)].

iv. No exemption under section 54 ifland only is sold: The houseproperty concerned must bebuilding or land appurtenant tobuilding. The basic t est waswhether the land appurtenant tobuilding could be used independentof the user of the building. If so, itcannot be said to be landappurtenant to building. Further,the basic requirement is that thecapital gain should arise from thetransfer of building or land, theincome of which is chargeableunder the head income from houseproperty. If the land alone is sold,the provisions of section 54 willhave no application inasmuch asthe income from land is notchargeable under the head incomefrom house property. [CIT vZaibunnisa Begum (1985) 151ITR 320 (AP)].

v. Successor is entitled to benefit ofexemption in case of death of theassessee: In case of assessee’sdeath during the stipulated period,benefit of exemption under section54(1) i s available to legalrepresentative, if the requiredconditions are satisfied by the legalrepresentative. [Ramanathan(CV) v CIT (1980) 155 ITR 191(Mad)].

vi. Purchase of limited interest in thehouse eligible for exemption undersection 54: Where an assessee hadsold the residential house andacquired only 15% interest inanother house and such otherhouse was already used forresidence prior to purchase, it washeld that the benefit should be

available to the assessee. [CIT vChandaben Maganlal (2000)245 ITR 182 (Guj)]. In comingto the conclusion, the High Courtfollowed its own earlier decision inCIT v Tikyomal Jasanmal(1971) 82 ITR 95 (Guj). In thatcase, what was purchased was aunit of house property, while in thepresent case before the High Court;it was a limited interest in theproperty.

vii. Construction in another propertynot eligible for exemption: Anassessee gifted some land to hiswife. He, thereafter, constructed abuilding on the said land. TheGovernment acquired the land andbuilding and paid compensation forland to the wife and for the buildingto the assessee (husband). It washeld that capital gain on land wasassessable in the hands of thehusband by virtue of section 64 buthe was not entitled to exemptionunder section 54 in respect ofcapital gain on the acquisition of theland of the wife as the capital gainto the wife did not arise on transferof a residential house. [T.N.Vasavan v CIT (1992) 197 ITR163 (Ker)].

viii.House of the firm used by partners:Where a firm’s property is used forresidence of partners andthereafter distributed to thepartners upon dissolution of thefirm and the partner sells the same,exemption can be claimed by thepartner under section 54. For thispurpose, period for which thisproperty was held by the firm shallalso be taken into account fordetermining the question whetherthe house property was a long-termcapital asset or not. [CIT v M.K.Chandrakanth (2002) 258 ITR14 (Mad)].

ix. There can be both purchase andconstruction: Where the assessee

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had partly invested the capital gainson the purchase of another houseand partly on the construction ofadditional floor to the house sopurchased within the prescribedtime limit, it was held that theIncome-tax Officer was not justifiedin rest rict ing exemption toinvestment on purchase only,holding that the exemption undersection 54 was admissible either forpurchase or for construction but notfor both. [Sarkar (B.B.) v CIT(1981) 132 ITR 661 (Del)].

x. Construction can start before thesale of asset: The construction ofthe new house may start before thedate of transfer, but it should becompleted after the date of transferof the original house. [CIT v J.R.Subramanya Bhat (1987) 165ITR 571 (Karn)]. The very factthat purchase of another house asalso the construction can take placebefore the sale means that cost ofpurchase or new construction neednot flow from the sale proceeds ofthe old property. [CIT v H.K.Kapoor (Decd) 1998 234 ITR753 (All) and CIT v M.Vasudevan Chettiar (1998) 234ITR 705 (Mad)].

xi. Allotment of a flat by DDA underthe Self-Financing Scheme shall betreated as construction of the house[Circular No. 471, dated 15-10-1986]. Similarly, allotment of a flator a house by a co-operativesociety, of which the assessee is themember, is also treated asconstruction of the house

[Circular No. 672, dated 16-12-1993]

Further, in these cases, theassessee shall be entitled to claimexemption in respect of capitalgains even though the constructionis not completed within thestatutory time limit. [Sashi Varma

v CIT (1997) 224 ITR 106(MP)].

Delhi High Court has applied thesame analogy where the assesseemade substantial payment withinthe prescribed time and thusacquired substantial domain overthe property, although the builderfailed to hand over the possessionwithin the stipulated period. [CITv R.C. Sood (2000) 108 Taxman227 (Del)].

xii. As per a circular of CBDT, the costof the land is an integral part of thecost of the residential house,whether purchased or constructed.[Circular No. 667, dated 18-10-1993]

xiii.Where an assessee who owned ahouse property, sold the same andpurchased another property in thename of his wife, exemption undersection 54 shall be allowable. [CITv V. Natarajan (2006) 154Taxman 399 (Mad)].

xiv. Where the assessee utilised the saleconsideration for other purposesand borrowed the money for thepurpose of purchasing theresidential house property to claimexemption under section 54, it washeld that the contention that thesame amount should have beenutilised for the acquisition of newasset could not be accepted.[Bombay Housing Corporationv Asst. CIT (2002) 81 ITD 454(Bom). Also followed in Mrs.Prema P. Shah, Sanjiv P. Shahv ITO (2006) 282 ITR (AT) 211(Mumbai)].

xv. Where non-resident Indian soldproperty in India and purchasedresidential property in U.K. andclaimed deduction under section54, it was held that it was notnecessary that residential propertyshould be purchased in India itself.[Mrs. Prema P. Shah, Sanjiv P.

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Shah v ITO (2006) 282 ITR (AT)211 (Mumbai)].

However, in another case, theTribunal held that the wordspurchase/ construction of aresidential house, in section 54F onplain and simple reading, mean thatthe purchase/construction of aresidential house must be in Indiaand not outside India.

Therefore, the benefit under section54F is not allowable for a residentialhouse purchased/constructedoutside India. Leena J. Shah vAsstt. CIT (2006) 6 SOT 721(Ahd)

b) Capital gain on transfer of land used foragricultural purposes [Section 54B]:

Any capital gain (short-term or long-term),arising to an assessee (only individuals),from the transfer of any agricultural landwhich has been used by the assessee orhis parents for at least a period of 2 yearsimmediately preceding the date of transfer,for agricultural purposes, shall be exemptto the extent such capital gain is investedin the purchase of another agricultural landwithin a period of 2 years after the date oftransfer to be used for agricultural purpose,provided the new agr icultural landpurchased, is not transferred within aperiod of 3 years from the date of itsacquisition.

Section 54B is applicable only to individualsand not to any other assessee this isbecause the section uses the expressionused by “his or a parent of his” which clearlyindicate that the “assessee” refers to anindividual. [CIT v Devarajalu (G.K.)(1991) 191 ITR 211 (Mad)].

However, Finance Act, 2012 has amendedthe section so as to grant the benefit toHindu undivided family also.

c) Capital gain on transfer of long-termcapital assets not to be charged oninvestment in certain bonds [Section54EC]:

Any long-term capital gain, arising toany assessee, from the transfer of anycapital asset on or after 1-4-2000 shallbe exempt to the extent such capitalgain is invested within a period of 6months after the date of such transferin the long-term specified assetprovided such specified asset is nottransferred or converted into moneywithin a period of 3 years from the dateof its acquisition.

Exemption under section 54EC is notavailable in respect of deemed capital gainson amount received on liquidation of acompany: Section 54E (now section 54EC)permits reinvestment benefit, if the saleproceeds/capital gains on sale of long-termcapital assets are invested in the mannerrequired by the section. Where ashareholder is made liable for deemedcapital gains on amount received onliquidation of a company, is he eligible forreinvestment benefit under section 54E(now 54EC)? It was held that section 54E(now 54EC) would have application onlywhere there is an actual transfer and notin a case, where there is only a deemedtransfer. [CIT v Ruby Trading Co. Pvt.Ltd. (2003) 259 ITR 54 (Raj)]

Benefit under section 54EC, etc. availableeven on transfer of depreciable assets:Although as per section 50 the profit arisingfrom the transfer of depreciable asset shallbe a gain arising from the transfer of short-term capital asset, hence short-term capitalgain but section 50 nowhere says thatdepreciable asset shall be treated as short-term capital asset. Section 54E [or say54EC or 54F, etc.] is an independentprovision which is not controlled by section50. If the conditions necessary undersection 54E are complied with by theassessee, he will be entitled to the benefitenvisaged in section 54E, even on transferof depreciable assets held for more than36 months. [CIT v Assam PetroleumIndustries (P.) Ltd. (2003) 131Taxman 699 (Gau). See also CIT v ACEBuilders Pvt. Ltd. (2005) 144 Taxman855 (Bom)]

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On the same analogy benefit under section54EC or 54F shall be available in the caseof depreciate asset if these are held formore than 36 months.

d) Capital Gain on transfer of asset, otherthan a residential house [Section 54F]:

Any long-term capital gain, arising toan individual or HUF, from the transferof any capital asset, other thanresidential house property, shall beexempt in full, if the entire net salesconsideration is invested in purchaseof one residential house within oneyear before or two years after the dateof transfer of such an asset or in theconstruction of one residential housewithin three years after the date ofsuch transfer. Where part of the netsales consideration is invested, it willbe exempt proportionately.

The above exemption shall be availableonly when the assessee does not ownmore than one residential houseproperty on the date of transfer of suchasset exclusive of the one which he hasbought for claiming exemption undersection 54F.

Section 54 and 54F are comparable inmany respects. Hence, the law andprecedents relating to section 54 as towhether the house property on whichinvestment is made is residential ornot, the law relating to time limits, theprecedent that construction could startearlier though completed within threeyears are all equally applicable forsection 54F. Hence, for judicialdecisions for section 54F, refer to thejudicial decisions given under section54.

12.12 CAPITAL GAIN ON THE TRANSFER OFLAND, FORMING PART OF BUILDINGWHICH IS DEPRECIABLE, CAN BE LONG-TERM

Section 50 provides for determination of thecost of construction of superstructure and itdoes not apply to land as land is not adepreciable asset. Hence, if the building

comprising of the land is sold, the capital gainon superstructure shall be short-term capitalgain in terms of section 50 and the capital gainon land, if held for more than 36 months, shallbe long-term capital gain. This is because theland is independent and identifiable capitalasset and it continues to remain so even afterconstruction of the building thereon. [CIT vCITI Bank NA (2003) 261 ITR 570 (Bom)].

12.13 BLOCK OF ASSETS – SECTION 2(11)

Where land and building were used for thebusiness, an important issue arises whether thenew constructed area received can be addedto the block of assets. The new constructed areawill not be a building used for the purpose ofthe business. If it is not an asset which will beused as a “Building” for the purpose of business,it may not become a part of the Block of Assets.

For the purpose of redevelopment, the oldbuilding has to be demolished. Such buildingmay be part of the block of asset. Issue arisesas to whether indexed cost of structure can bededucted to arrive at the long term capital gainson the sale of land. Indexation u/s. 48 is allowedonly in respect of cost of acquisition or cost ofimprovement of the capital asset transferred.Therefore, one may contend that only the landis transferred and not the building, which willbe demolished to enable the development ofland, hence the cost of structure cannot betaken into consideration and only index cost ofland will be considered.

13. INCOME FROM HOUSE PROPERTY

The annual value of property consisting of anybuildings or lands appurtenant thereto of whichthe assessee is the owner, other than suchportions of such property as he may occupy forthe purposes of any business or professioncarried on by him the profits of which arechargeable to income-tax, shall be chargeableto income-tax under the head “Income fromhouse property”.

HOW TO COMPUTE INCOME FROM HOUSEPROPERTY

Gross Annual Value Xxxxx

Less: Municipal Taxes Xxxxx

Net Annual Value Xxxxx

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Less: Deduction u/s 24

- Standard Deduction @ 30% Xxxxxx

- Interest from Borrowed Capital Xxxxxx

Income From House Property XXXXXX

Points to remember:

· Annual value of property is chargeable underthe head ‘Income from house property’. In orderthat the annual value be charged under thishead, it is irrelevant whether the actual incomefrom such house property has accrued or hasbeen received by the assessee.

· Property should consist of any buildings orlands appurtenant thereto.

· Section 22 is not confined only to houseproperty, but extends to all buildings whetherused as dwelling house or for other purposes[CIT v. Chennai Properties & InvestmentsLtd. (2004) 136 Taxman 202 (Mad);(2002) 266 ITR 685 (Mad)].

· The manner in which the building is used bythe assessee is not relevant. It can be used byhim for letting out on rent, leasing it out, usingit for his own residence, etc. However, thebuilding should not be occupied by the assesseefor his business or profession. Similarly, theperson to whom the building has been let outmay use it for any purpose, say, for his ownresidence or for his business or profession, etc.Further, building may take any form, e.g., acinema theatre, an auditorium or even anamphitheatre (which does not have a roof).

· Annual value of a building situated outsideIndia is also taxable under this head. In thecase of a resident but not ordinarily resident ora non-resident, annual value of such a buildingis charged to tax in India only if income fromsuch property is received or is accrued in Indiaduring the previous year.

· Land appurtenant to a building consists of suchportions of land that are taken to be a part andparcel of the building in order to enable theenjoyment of the possession of such building.Therefore, garden attached to the building,approach roads, etc., form part of the building.

· ‘Building’ does not include vacant land. Thus,income from vacant land is charged either under

the head ‘Profits and gains of business orprofession’ or under the head ‘Income fromother sources’, as the case may be.

· The assessee should be the owner of suchproperty.

· The house property should not be occupied bythe assessee for the purposes of his businessor profession, the profits of which arechargeable under the head ‘Profits and gainsof business or profession’

· Income received from giving the building toother person on hire or by license need notalways be treated under the head ‘Income fromhouse property’. Each case has to be looked atfrom a businessman’s point of view to find outwhether the letting was the doing of a businessor the exploitation of his property by an owner[Sultan Brothers (P) Ltd. v. CIT (1964) 51ITR 353 (SC)]. If it is for doing of a business,the relevant income will be charged under thehead ‘Profi ts and gains of business orprofession’.

· Interest on borrowed capital (of the currentyear and pre- construction period) is deductible.However, the maximum deduction available ifthe capital is borrowed on or after 1999 is Rs.1,50,000 and Rs. 30,000 if capital is borrowedbefore 1.04.1999.

· If the actual rent being in excess of MunicipalCorporation/standard rent, all the expenses andoutgoings have to be excluded from the rentreceivable and the net of the amount shouldbe considered to be the income of the Assessee.(ITO V. GOPICHAND P. GODHWANI (2005)1 SOT 374 (MUM.))

· Where assessee, co–owner of house property,claimed deduction on account of salary andbonus of sweepers, pumpman and liftman andelectricity charges being expenses incurred forelectric burning for pump motor and commonpassage, assessee was not entitled to deductionu/s. 24; however, annual value of assessee’shouse property should be assumed at reducedvalue, i.e., after deducting impugned amountsfrom rental, being only in relation to expenditurerequired to be necessar ily incurred forenjoyment / user of relevant property.

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J.B. PATEL CO. V.S DY. CIT (ASSTT.) (2009)118 ITD 556 (AHD)

· In the case of M.V. SONAVALA V. CIT, 177ITR 246 (BOM), it was held that “the incomefrom house property has to be computed onthe basis of the sum of which the property mightreasonably be let from year to year to theannual Municipal rateable value. The word “or”is disjunctive as such it is possible to take thesum for which property might reasonably letfrom year to year or the Municipal rateablevalue. It is pertinent to note that while decidingthis issue the Hon’ble jurisdictional High courttook into consideration the decisions of the ApexCourt rendered in the case of Devan Daulat RaiKapoor Vs. New Delhi Municipal Committee, 122ITR 700 (SC) and in the case of Sheila Kaushikvs. CIT, 131 ITR 435 (SC).”

14. RECENT AMENDMENTS IN THE BUDGET2013-2014

a. Section 56(2)(vii) has been amended w.e.f.01.04.2014 as already discussed earlier.

b. Section 43CA, a new provision has beeninserted after section 43C by the FinanceAct,2013, w.e.f. 01.04.2014;

SECTION 43CA OF THE INCOME TAX ACT,1961:

Special provision for full value ofconsideration for transfer of assets otherthan capital assets in certain cases.

43CA (1) Where the consideration received oraccruing as a result of the transfer by anassessee of an asset (other than capital asset),being land or building or both, is less than thevalue adopted or assessed or assessable by anyauthority of a state government for the purposeof payment of stamp duty in respect of suchtransfer, the value so adopted or assessed orassessable shall, for the purpose of computingprofits and gains from such transfer of suchasset, be deemed to be the full value of theconsideration received or accruing as a resultof such transfer.

(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as maybe, apply in relation to determination of thevalue adopted or assessed or assessable undersub-section (1).

(3) Where the date of agreement fixing thevalue of consideration for transfer of the assetand the date of registration of such transfer ofasset are not the same, the value referred to insub-section (1) may be taken as the valueassessable by any author ity of a stategovernment for the purpose of payment ofstamp duty in respect of such transfer on thedate of agreement.

(4) The provisions of sub-section (3) shall applyonly in a case where the amount ofconsideration or a part thereof has beenreceived by any mode other than cash on orbefore the date of agreement of transfer of theasset.

Existing provision in respect of the aboveamendment:

The white paper on Black Money presented bythe Government of India points out that veryhigh levels of stamp duty (over 5%) in manystates create incentives for tax evasion throughunder reporting of consideration in sale deed.

To combat tax evasion through under reportingof sale consideration in sale deed, section 50Cwas inserted in the Act by the Finance Act, 2002w.e.f. 01.04.2003.

In cases of transfer of capital asset being landor building or both, the said section deemsstamp duty value as the ful l value ofconsideration where the consideration shownin the sale deed is less than the stamp dutyvalue.

Currently, when a capital asset, beingimmoveable property, is transferred for aconsideration which is less than the valueadopted, assessed or assessable by anyauthority of a state government for the purposeof payment of stamp duty in respect of suchtransfer, then such value (stamp duty value) istaken as full value of consideration undersection 50C. These provisions do not apply totransfer of immoveable property, held by thetransferor of stock-in-trade.

Loopholes/Problems:

In CIT vs. Kan Construction and Colonizers(P) Ltd. [2012 20 taxmann.com 381], theAllahabad High Court held that section 50C isnot applicable to sale of plots by a builder since

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plots are his stock-in-trade and not capitalassets in view of the following:

· Section 50C uses the word “capital asset”. Forapplicability of section 50C, one of the essentialrequirements is that land or buildings soldshould be capital asset. Stock-in-trade has beenexcluded from the definition of capital asset bysection 2(14).

· Investment in purchase and sale of plots by abuilder who is indulged in selling buildings isancillary and incidental to his business activity.‘Stock-in-trade’ includes all such chattels as arerequired for the purpose of being sold or let onhire in a person’s trade.

To overcome the judicial decision in KanConstruction (supra), the Finance Act, 2013inserted new section 43CA with effect fromassessment year 2014-2015.

c. SECTION 194-IA OF THE INCOME TAX ACT,1961

Another amendment is in respect ofpayment on transfer of certain immoveableproperty other than agricultural land.

194-IA (1) Any person, being a transferee ,responsible for paying (other than the personreferred to in section 194LA) to a residenttransferor any sum by way of consideration fortransfer of any immoveable property (otherthan agricultural land) shall, at the time of creditof such sum to the account of the transferor orat the time of payment of such sum in cash orby issue of a cheque or draft or by any othermode, whichever is earlier, deduct an amountequal to one per cent of such sum as incometax thereon.

(2) No deduction under sub-section (1) shallbe made where the consideration for thetransfer of an immoveable property is less thanfifty lakh rupees.

(3) The provisions of section 203A shall applyto a person required to deduct tax in accordancewith the provisions of this section.

Explanation.- For the purpose of this section,-

(a) “agricultural land” means agricultural land inIndia, not being a land situated in any areareferred to in items (a) and (b) of sub-clause(iii) of clause (14) of section 2;

(b) “immoveable property” means any land (otherthan agricultural land) or any building or partof a building.

Under section 195, on transfer of immoveableproperty by a non-resident, tax is required tobe deducted at source by the transferee.However, there is no such requirement ontransfer of immoveable property by a residentexcept in case of compulsory acquisition ofcertain immoveable properties (section 194LA).

The Finance Act, 2013 inserted new section194-IA to introduce TDS on consideration ontransfer of immoveable properties.

The objects of this have been explained byExplanatory Memorandum as under:

“There is a statutory requirement under section139A of the Income Tax Act read with rule 114Bof the Income Tax Rules 1961 to quotePermanent Account Number (PAN) indocuments pertaining to purchase or sale ofimmoveable property for value of Rs. 5 lakh ormore. However, the information furnished tothe department in Annual Information Returnsby the Registrar or Sub-Registrar indicate thata majority of the purchasers or sellers ofimmoveable properties, valued at Rs. 30 lakhsor more, during the financial years 2011-2012did not quote or quoted invalid PAN in thedocuments relating to transfer of property. Inorder to have a reporting mechanism oftransaction in the real estate sector and also tocollect tax at the earliest point of time, it isproposed to insert a new section 194-IA…”

The Finance Minister in his speech explainedthe objects of the new section 194-IA as under:

“145. Transactions in immoveable properties areusually under- valued and under-reported. One-half of the transactions do not carry the PAN ofthe parties concerned. With a view to improvethe reporting of such transactions and thetaxation of capital gains, I propose to apply TDSat the rate of one percent on the value oftransfer of immoveable property where theconsideration exceeds Rs. 50 lakhs. However,agricultural land will be exempt.”

Section 194-IA provides that every transferee(purchaser or buyer), at the time of makingpayment or credi ting of any sum as

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consideration for transfer of immoveableproperty (other than agricultural land) to aresident transferor, shall deduct tax, at the rateof 1% of such sum. In order to reduce thecompliance burden on small taxpayers, nodeduction of tax shall be made where the totalamount of consideration for the transfer of animmoveable property is less than Rs.50,00,000. The provisions of section 203A[regarding obligation of deductors to obtainingtax deduction and collection account number(i.e. TAN) shall not apply in respect of taxdeducted under this section. This amendmentwill take effect from 01.06.2013.

AMENDMENTS IN SECTION 2(14) OF THEINCOME TAX ACT, 1961 BY FINANCE BILL2013-2014

By the provision of “Sec. 2(14) Capital Asset”,rural agriculture land was exempt from capitalgain. For being rural agriculture land, land mustsatisfy certain conditions laid down in section2(14). The Finance Minister amended theseconditions through Finance Bill, 2013-14. Forsimplicity, we discuss effect of this amendmentin two parts.

A. Criteria for being rural agricultural land priorto 01/04/2013

B. Criteria for being rural agricultural land after01/04/2013

v Criteria for being rural agricultural landprior to 1-04-2013:

Prior to 01/04/2013, following section isapplicable:

2(14)(iii) [Agricultural land in India, not beingland situate-

(a) in  any area  which  is  comprised  within  thejurisdiction of a municipality (whether knownas a municipality, municipal corporation,notified area committee, town area committee,town committee, or by any other name) or acantonment board and which has a populationof not less than ten thousand according to thelast preceding census of which the relevantfigures have been published before the first dayof the previous year; or

(b) in any area within such distance, not beingmore than eight kilometers, from the local limits

of any municipality or cantonment boardreferred to in i tem (a), as the CentralGovernment may, having regard to the extentof, and scope for, urbanization of that area andother relevant considerations, specify in thisbehalf by notification in the Official Gazette;]

Thus, if these conditions are satisfied than landwill be agricultural land.

· Land is situated within the jurisdiction of amunicipality or a cantonment board havingpopulation of less than 10000.

· Land is situated outside the notified distancefrom jurisdiction of municipality. Govt. cannotify maximum distance of 8 km.

If these conditions are satisfied then land isrural agricultural land and not liable for capitalgain tax.

The manner of measurement of distance wasnot given in the definition. Therefore, it wastaken by road. And same view was followed infollowing judicial pronouncement.

(1) CIT V.LAL SINGH [2010] 195 TAXMAN 420(PUNJ. & HAR.)

(2) CIT V. SANTINDER PAL SINGH [2010] 188TAXMAN 54 (PUNJ. & HAR.)

(3) LAUKIK DEVELOPERS V. DY .CIT [2007] 105ITD 657 (MUMBAI)

v Criteria for being rural agricultural landafter 1-04-2013:

After 01/04/2013 following sections areapplicable:

As per section 2(14) “capital asset” meansproperty of any kind held by an assessee,whether or not connected with his business orprofession, but does not include-

(iii) Agricultural land in India, not being a landsituated-

a) In any area which is comprised within thejurisdiction of a municipality (whether knownas municipality, municipal corporation, notifiedarea committee, town area committee, towncommittee, or by any other name) or acantonment board and which has a populationof not less than ten thousand [according to thelast preceding census of which the relevant

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figures have been published before the first dayof the previous year]; or

b) In any area within the distance, measuredaerially,-

(I) Not being more than two kilometers, from thelocal limits of any municipality or cantonmentboard referred to in item (a) and which has apopulation of more than ten thousand but notexceeding one lakh; or

(II) Not being more than six kilometers, from thelocal limits of any municipality or cantonmentboard referred to in item (a) and which has apopulation of more than one lakh but notexceeding ten lakh; or

(III) Not being more than eight kilometers, fromthe local l imits of any municipal i ty orcantonment board referred to in item (a) andwhich has a population of more than ten lakh.

Explanation.—For the purposes of this sub-clause, “population” means the populationaccording to the last preceding census of whichthe relevant figures have been published beforethe first day of the previous year;

Thus, if these conditions are satisfied thenagricultural land will be rural agricultural andaccordingly not liable for capital gain tax.

· Land is situated in any within the jurisdictionof a municipality or a cantonment board havingpopulation of less than 10000.

· Distance of land from municipali ty andpopulation limit.

Distance Population

Within 2 kilometers 10,000-1,00,000

2 kilometers –

6 kilometers 1,00,000-10,00,000

6 kilometers –

8 kilometers More than 10,00,000

The distance from the Municipal Corporationmeasurement:

Such distance is to be measured on straightline aerially as crow flies. The shortest aerialdistance has to be considered. Such shortestaerial distance is defined as “A straight linedistance between two places.’’ A human would

travel further to get from one point to anotherdue to obstacles or lack of roads or trails, but acrow can go in a straight line between them.Humans have to follow roads which have theirtwists and turns. But, a crow does not have toface the barriers that humans face. Hence, wemeasure the straight line distance between twoplaces.

“The distance as the crow flies is a way todescribe the distance between two locationswithout considering all the variable factors. Asan example, traveling from California to Maineinvolves a rather indirect route around, overand through mountain ranges and so forth. Thedriving distance might be about 3,500 miles,but the distance as the crow flies is about 2,800miles.

Human [By road]

Crow’s flight straight line distance (aerialmeasurement)

These amendments will take effect from 1stApril, 2014 and will, accordingly, apply inrelation to assessment year 2014-15 andsubsequent assessment years.

Effect of the amendment

a) Distance from jurisdiction or municipality orcantonment board within which agriculturalland is to be considered as urban land has beenchanged from uniformly 8 km to within 8 kmdepending on population of municipality orcantonment board.

b) Distance to be measured straight line aeriallyas crow flies and not by road method whichwas used by courts in various decisions. Thisamendment overcomes above court decisionswhich say that distance should be measuredby road.

c) More land will be covered under the urban landbecause aerially distance covered more area.

d) Earlier only notified area were covered underthe distance criteria but from now onwards anyarea will be covered under the distance criteria.

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e) Impact on Wealth Tax

The term agricultural land is not defined inWealth-tax Act. However, it is defined in section2(14) of the Income-tax Act. The definition fornon-urban land and agricultural land is similar.Hence, the above analysis wi l l also beapplicable for the purpose of determinationof net wealth as per the Wealth-tax Act. Thus,a person owning land will need to re-assess asto whether the land owned by him will qualifyfor exemption from wealth tax or not.

15. CHANGES AS PER DIRECT TAX CODE:

CHANGES IN HOUSE PROPERTY:

· Standard deduction earlier @ 30% is nowchanged to 20%

· Income from house property shall includeincome from the letting of any buildings alongwith any machinery, plant, furniture or anyother facility if the letting of such building isinseparable from the letting of the machinery,plant, furniture or facility.

· In case of the letting out house property, thegross rent will be the amount of rent receivedor receivable for the F.Y.

· Gross rent wi l l not be computed at apresumptive rate of 6 percent of the rateablevalue or cost of construction/ acquisition.

· In the case of house property which is not letout, the gross rent will be nil. As the gross rentwill be taken as nil, no deduction for taxes orinterest, etc. will be allowed. However, in thecase of one house property, which has not beenlet out, an individual or HUF will be eligible fordeduction on account of interest on capitalborrowed for acquisition or construction of suchhouse property (subject to a maximum ceilingof Rs. 1.5 lakh) from the gross total income.The overall limit of deduction for savings willbe calibrated accordingly.

CHANGES IN CAPITAL GAIN:

· The DTC provides that gains (losses) arisingfrom the transfer of investment assets will betreated as Capital Gain (losses). These gains(losses) will be included in the total income ofthe financial year in which the investment assetis transferred. The Capital Gains will besubjected to tax at the rate of 30% in the case

of non-resident and in the case of residents atthe applicable maximum marginal rate.

· Under the code, the current distinction betweenshort-term investment asset and long-terminvestment asset on the basis of the length ofholding of the asset will be eliminated

· The cost of acquisition is generally withreference to the value of the asset on the basedate or, if the asset is acquired after such date,the cost at which the asset is acquired. Thebase date will now be shifted from 01.04.1981to 01.04.2000. As a result, all unrealized capitalgains due to appreciation during the period from01.04.1981 to 31.03.2000 will not be liable totax as the assessee will have an option to takethe cost of acquisition of these assets at theprice prevailing as on 01.04.2000.

· The capital gain arising from transfer of anyinvestment assets held for less than one yearfrom the end of financial year in which it isacquired will be computed without any specifieddeduction or indexation. It will be included inthe total income and will be charged to tax atthe rate applicable to the taxpayer.

*********

Note: This has been presented as a paper at aconference organized by All Gujarat Federationof Tax Consultants held on 03.06.2014

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1. INTRODUCTION

The genesis of transfer pricing principle is thatthere are different tax rates in various taxjur isdict ions and accordingly there is anopportunity of tax arbitrage for the tax payers.Hence, there is a tendency of taxpayers to takeundue advantage of this tax arbitration and shifttheir profits overseas in a low tax jurisdiction.In order to curb this harmful tax practice, thelaw of transfer pricing was evolved as an anti-avoidance tax law to ensure that the controlledprice between two Associated Enterprises(‘AEs’) is at fair price or in other words is at“arm’s length”. The transfer pricing regulationsin India were earlier applicable only to the crossborder transactions undertaken by twoAssociated Enterprises.

Earlier, the taxpayers were under obligation toundertake domestic transactions with relatedparties at fair market value [Section 40A(2)(b)].However, whi le examining related partytransactions between two Indian Companies inthe case of CIT v Glaxo SmithKline Asia (P)Ltd. (236 CTR 113), the Supreme Courtsuggested that the government should considermaking Transfer Pricing Regulations applicableto domestic transactions as wel l . Thisrecommendation was provided consideringthere was no objective mechanism to arrive ata fair market value as per the erstwhileprovisions under the Income Tax Act.

While making this suggestion, the SupremeCourt categorically referred to two situationswhere transfer pricing provisions could berelevant in the context of domestic transactions.The two situations being:

· Transactions between loss-making andprofit-making Indian entities; and

· Transactions between two units of an Indianentity having differential tax rates.

In light of the above recommendation, FinanceMinister by way of an amendment vide FinanceAct, 2012, included certain domestic

transactions (hereinafter referred as SpecifiedDomestic Transactions or SDT) within thepurview of transfer pricing provisions. A newsection 92BA was inserted defining specifieddomestic transactions and provisions of section92, 92C, 92D and 92E have been amended toinclude within its scope such SDT. Rules relatingto computational & documentation aspectsincluding Form number 3CEB dealing withinternational transactions have been amendedto include within their scope such SDT.

2. Scope of Specified Domestic Transactions

Section 92BA has speci fied fol lowingtransactions within the meaning of SDTprovided the aggregate value of suchtransactions exceeds Rs. 5 crore in a previousyear.

(i) any expenditure in respect of whichpayment has been made or is to be madeto a person referred to in clause (b) of sub-section (2) of section 40A; [Paymentmade to related concerns U/s.40A(2)(b)]

(ii) any transaction referred to in section 80A;[Transactions relating to transfer ofgoods or services, between 10A/10AA/10B/10BA, units claimingdeductions under Part C of ChapterVIA with another unit of the assessee]

(iii) any transfer of goods or services referredto in sub-section (8) of section 80-IA;[Transactions relating to transfer ofgoods or services, between unitsclaiming deductions under section80IA with another unit of theassessee]

(iv) any business transacted between theassessee and other person as referred toin sub-section (10) of section 80IA;[Transaction of an assessee with anyparty, having close connection, whichin the opinion of Assessing Officers

TRANSFER PRICING ARTICLE ON SPECIFIED DOMESTIC TRANSACTIONSCA. Akshay Dave

CA. Nisarg Trivedi

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leading to more than the ordinaryprofit of units claiming deductions]

(v) any transaction, referred to in any othersection under Chapter VI-A or section 10AA,to which provisions of sub-section (8) orsub-section (10) of section 80-IA areapplicable; or [Transactions betweenunits calming deduction u/s 10AA orunder Chapter VI-A as falling under theprovision of section 80-IA(8)/(10)]

(vi) any other transaction as may be prescribed,

It can be noted that the specified domestictransaction also includes transactionexecuted outside India with a related partyas specified u/s. 40A(2)(b) of the Act,provided it is falling within the definitionof “international transactions” undersection 92B of the Act. E.g. payment madeto non-executive foreign director.

3. Impact of introduction of SDT provisions andits non-compliance

With the introduction of these provisions, alltransactions which are covered within the scopeof SDT shall be required to meet the “arm’slength” test. Further, this has imposed anobligation on the assesse to demonstrate thatthe covered transaction undertaken is at arm’slength price. For the purpose of demonstratingthe same, the assesse shall be required toundergo the process which was earlier requiredto be undertaken only in case of internationaltransactions with AEs. A brief process has beendiscussed in the ensuing paragraphs.

3.1 Computing the arm’s length price

While complying with the provisions of SDT, theassesse has to ensure that the controlledtransactions should be at arm’s length price.In order to determine that these transactionsare at arm’s length, the assesse should use themost appropriate method out of the six methodsprescribed under section 92C of the Act. Whileselecting the most appropriate method, eachtransaction shall be separately analyzed andaccordingly the best suited method consideringthe facts and circumstances of the case shallbe selected.

3.2 Documentation requirements

Similar to the requirement of maintainingdocumentation for international transaction,while complying with the provisions of SDT, theassesse shall be required to maintain detailedTransfer Pricing Document to substantiate thearm’s length dealing by the assesse. TheTransfer Pricing Document shal l be incompliance with section 92D read with rule 10Dof the Income-tax Rules, 1962. The documentscan be broadly classified into three categories,viz., Company & Industry overview, FunctionAsset & Risk (‘FAR”) analysis and economicanalysis. The same is briefly discussed asunder:

· Company & Industry Overview:

Under this section of TP Document, a briefbackground of the Company shal l beprovided. Further, the industry overviewgives the insights / highlights of theindustry in which the company is operating.This shall especially be helpful in case thereare certain restrictions which have beenprescribed by an industry body which mayhave influence on pr icing of thetransactions. Further, the industryoverview can be of importance in case ofprofit based methods like Transaction NetMargin Method (‘TNMM’), Cost plus Method(‘CPM’) or Resale Price Method (‘RPM’). Forexample, the Fast Moving Consumer Goods(‘FMCG’) industry has not performed wellin some financial year, which has impactedthe profit margins of the assesse, then itcan be presented to the tax officer that lowmargin of the assessee is attributable tothe industry scenario in which the businessoperations are undertaken by the assessee.

· FAR Analysis:

Under this section of the Transfer PricingDocumentation, the assessee is requiredto bring out the actual Functions performedby the assesse and its related parties,Assets employed by them and finally theRisk borne by them while undertaking thetransaction. This analysis is important ascollectively these three factors have a hugeinfluence on the price at which thetransaction shall be undertaken. With thehelp of this analysis, the assesse would be

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in a position to broadly characterize thetransactions in some category which canthen be benchmarked with the third partyinformation available in the public domain.

· Economic Analysis:

A detailed benchmarking analysis which theassessee has undertaken to arrive at arm’slength price shall be provided in this sectionof TP Documentation. This section shallelaborate on the analysis undertaken toderive the most appropriate method tobenchmark a particular transaction.Further, the section should consist of thedetailed application of the most appropriatemethod which substantiate the arm’s lengthtest for the transaction undertaken, etc.For example, this section should cover adetailed Transfer Pricing Search analysisemployed by the assessee in case theassessee has used TNMM as the mostappropriate method. Further, this sectionmay also cover, the proof of third partydocuments in case other price basedmethod has been employed to determinethe arm’s length price. Hence, this sectioncovers the ultimate outcome of the entireTP analysis undertaken by the assesse.

The above mentioned analysis shall berequired to be carr ied out for eachindividual transaction undertaken by theassessee. However, where the differenttransactions undertaken by the assesseeare closely linked to each other and it isnot possible to benchmark the transactionsindividually, the assessee may aggregatesuch transactions and performbenchmarking analysis / economic analysisto determine the arm’s length nature of thetransactions.

3.3 Steep penalties on non-compliance

The Income-tax Act has prescribed penaltiesfor non-compliance of the provisions of transferpricing which includes the provisions of SDT.Interestingly, most of the penalties prescribedare linked to the value of transactions andaccordingly the quantum of penalties becomeshuge on violation of any provision. A brief tablehas been reproduced below which capturesvarious sections under which penalties are

levied with respect to non-compliance ofTransfer Pricing provisions:

4. Some Issues

4.1 Computation of threshold of Rs. 5 crore

As discussed above, the aggregate amount oftransactions referred to in section 92BA shallexceed Rs. 5 crore to qualify for SpecifiedDomestic Transactions. However, it is notspecified in the definition as to what value hasto be considered while computing the aggregatevalue of the transactions, i.e., whether it is thearm’s length price or the actual price of thetransactions that need to be considered.However, since monetary limit has beenprescribed to determine whether the arm’slength of the transactions have to be computedor not, logically, the monetary limit would haveto be considered having regard to the actualrecorded value of the transactions.

Cases may arise where the same transactionfalls in more than one clauses of section 92BA.For example, transfer of goods and servicesbetween two units would fall both within clauses(ii) and (iii) of section 92BA. Similarly, purchaseof goods from persons specified under section40A(2)(b) for the purpose an eligible unit mayfall within clause (i) as well as clause (iv) ofsection 92BA, which refer to transactionsreferred to in section 80-IA(10).

In our view, the arguments for taking the actualtransaction value and to avoid of the duplicationof same transaction while computing thethreshold limit of Rs. 5 crore is more logicaland can be advanced.

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4.2 40A(2)(b) - Tax arbitrage

As discussed above, the amendment hasbrought all expenditure incurred with relatedparty within Transfer Pricing net, irrespectiveof the fact that there is no possibility of taxarbitrage for the transactions under review.Accordingly, the tax payers are required tocomply with the onerous obl igation ofcomplying with the provisions of determinationof arm’s length for all the related partyexpenditure incurred by them. Eventually, inmany cases this proves to be an unfruitfulexercise both for the taxpayers and taxauthorities as there is no motive for thetaxpayers to pay more to the related partyconsidering the other party is in the same taxbracket.

It shall be worthwhile to note here that beforeintroduction of Domestic Transfer Pricing, therelated party transactions under section40A(2)(b) of the Act were required to beundertaken at Fair Market Value (‘FMV’).However, since it was practically difficult toarrive at FMV, the Finance Ministry adoptingthe suggestions of the Supreme Courtincorporated the provisions of Arm’s LengthPrice (ALP) on the related party transactionsundertaken under section 40A(2)(b) of the Act.It may, however, be noted that the provisionsrelating to SDT are enacted in a manner whichdoes not exclude within its scope the abovetransactions.

4.3 40A(2)(b) - Direct Holding v/s. Indirect Holding

As per section 40A(2)(b) of the Act, thecompany having substantial interest in thebusiness or profession of other company shallbe considered as related parties. However, therecan be two ways of interpreting this clause.One way of interpreting could be to consideronly direct holding companies as related partiesfor this clause. The logic for this restrictiveinterpretation could be that since the legislaturehas not employed the words “indirect” whiledrafting the clause, there could be no intentionof the exchequer to include indirect holdingcompanies within the purview of section40A(2)(b) of the Act. Further, this view is alsosupported by Circular 6P of 1968 issued byCentral Board of Direct Taxes (‘CBDT’) which

clarified that only direct holding shall beconsidered for the purpose of determiningrelated party relationship. Considering the legalposition that circular issued by CBDT is bindingon Assessing Officer whether it would beadvisable for the taxpayers to take a stand thatindirect holding companies may not be coveredunder section 40A(2)(b) of the Act andaccordingly the same shall not be subject toDomestic Transfer Pricing provisions?

Before concluding on the above, it shall beworthwhile to also consider the Guidance Noteon Report under Section 92E of the Income TaxAct, 1961 issued by Institute of CharteredAccountants of India (ICAI) in this behalf. ICAIhas clarified, in its guidance note, that not onlythe direct holding but indirect holding by oneentity into the other shall also be consideredas related party for the purpose section40A(2)(b) of the Act. It shall be interestingdiscussion as to whether the guidance noteissued by ICAI shal l be binding on taxauthorities or the taxpayers and whether themention of indirect holding in the guidance noteof ICAI shall have any relevance for taxpayerswhi le taking a stand on whether thetransactions with indirect holding companiesshall be reported under Transfer Pricing Report?

In this connection, one would like to go throughthe penal provisions in case of non-complianceof Transfer Pricing provisions according to whichseparate penalties at the rate of two percent ofthe value of transactions may be levied byTransfer Pricing Officer (TPO) on account of non-reporting of transactions covered or non-maintenance of information as required underTransfer Pricing Regulations, etc.

While discussing on the parties covered underthe definition of section 40A(2)(b) of the Act,it shall also be important to observe that thelegislature has brought amendment by way ofFinance Act , 2012 effective from 1-4-2013 (i.e.,from Assessment Year 2013-14 onwards). Byway of this amendment, the scope of relatedparty transactions has been extended to includecompanies having common parent companywithin its ambit. Hence, the Government ofIndia is leaving no stone unturned to captureall the possible influenced / tainted domestic

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related party transactions within the complianceof Transfer Pricing.

4.4 How to determine arm’s length price for

directors’ remuneration? Since the scope ofdomestic transfer pricing is wide enough tocover all transactions under section 40A(2)(b)of the Act, it shall also include within its scopethe remuneration paid to directors by thecompany. This becomes a subject matter ofdebate as to how to benchmark theremuneration paid to its own directors by thecompany. Technically one may argue that itshall not be possible to benchmark the sameas there can never be uncontrolled paymenttowards director remuneration. The reasonbeing the remuneration paid even by anindependent company to its director shall beconsidered as controlled transaction andaccordingly the taxpayer will not be in a positionto obtain uncontrolled director remunerationpayment which may be adopted as a benchmarkby the company.

Further, using comparable salaries of peers insimi lar companies for benchmarking andproving the arm’s length nature of executivepay would also be difficult. This is because suchremunerations vary widely.

Further, justifying the handsome salaries givento top executives is going to be a tough call forIndian companies as assessing the contributionand potential of employees is highly subjectiveand would vary from company to company.

However, this being law as on date,remuneration to directors of all companiespassing the humble limit of five crores forapplicability of SDT would need to comply withits provisions and would accordingly need tobenchmark the same.

In the first audit cycle after executive pay wasbrought under transfer pricing provisions in theFinance Act of 2012, it has been observed thatthe tax officers are preparing to go deep intothe returns of managerial remuneration whichcompanies have fi led last November forF inancial Year 2012-13 to ver i fy thereasonableness of corporate salary spending.

Tax officers unimpressed by the justificationsgiven could disallow as business expenditure

what they think is the excess remuneration andadd the same to the taxable income of thecompanies. Such re-computation of income,called transfer pricing adjustments, would leadto higher tax claims.

The idea of subjecting executive pay to transferpricing rules is to prevent shifting of profits torelated parties, eroding the tax base andjeopardizing the interests of the largershareholder community of an enterprise.

Considering the above practical challenges, itwould be much appreciated if CBDT comes outwith a clar if i cation regarding ways tobenchmark directors’ remuneration. By the timethe required clarification comes from taxdepartment, the taxpayer shall be required tometiculously document the method to beadopted to arrive at the arm’s length price inits Transfer Pricing Study report.

The taxpayers may consider various approachesto benchmark its directors’ remuneration, likeshareholder approved manager ialremuneration, use of external HR compensationsurvey reports, references to the pay receivedby executives prior to them becoming directors,compliance with the ceiling on total managerialremuneration as required by the CompaniesAct, benchmarking based on the benefitsaccrued to the organization from thecontribution by the directors, documenting theprofile of director to justify that remunerationpaid to them commensurate to theirexperiences and qualifications, etc.

4.5 Impact on Tax Holiday undertakings

As mentioned in the introductory paragraph,the genesis of transfer pricing is to ensure thattransactions having possibility of tax arbitrageshall be undertaken at arm’s length price.Considering the same, CBDT had made anamendment in the Act to include not onlytransactions covered under section 40A(2)(b)of the Act, but also eligible tax holiday units ofthe assessee within the purview of SpecifiedDomestic Transactions subject to conditions.

As per section 80-IA(8) of the Income Tax Act,any transfer of goods and services by / toeligible unit to / by non-eligible unit needs tobe at arm’s length price. Accordingly, the

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taxpayers having tax holiday undertakings andwhere there is transfer of goods or serviceswithin eligible and non-eligible undertaking, thetaxpayer would be required to justify that suchtransfer within business is at arm’s length.

4.6 Meaning of Close Connection?

An interesting issue arises while analyzing SDTprovisions to tax holiday unit under section 80-IA(10) of the Act. The relevant extract of thesame is reproduced below:-

“…Where it appears to the Assessing Officerthat, owing to the close connection betweenthe assessee carrying on the eligible businessto which this section applies and any otherperson, or for any other reason, the course ofbusiness between them is so arranged that thebusiness transacted between them produces tothe assessee more than the ordinary profitswhich might be expected to arise in such eligiblebusiness, the Assessing Officer shall, incomputing the profits and gains of such eligiblebusiness for the purposes of the deductionunder this section, take the amount of profitsas may be reasonably deemed to have beenderived therefrom:

Provided that in case the aforesaid arrangementinvolves a specified domestic transactionreferred to in section 92BA, the amount ofprofits from such transaction shall bedetermined having regard to arm’s length priceas defined in clause (ii) of section 92F.…”

While reading the proviso to section 80-IA(10)of the Act, a question arises as to whether allthe transactions undertaken by eligible unitunder section 80-IA(10) of the Act needs to bedetermined at arm’s length price? It may appearunusual as the taxpayers would then berequired to determine arm’s length price evenfor uncontrolled transactions. This would beagainst the spirit of Transfer Pricing Law.Further, the meaning of word ‘close connection’has not been defined in the Act. This has createdambiguity for taxpayers while filing its returnof income. In absence of any speci fieddefinition, one may contend that the definitionof section 40A(2)(b) of the Act should beemployed to arrive at the arm’s length price.Alternatively, the taxpayer may consider thedefinition of section 92A of the Act, i.e.,

Associated Enterprise or may consider theparties to be closely connected in cases wherethe parties are covered as related parties asper Accounting Standard 18 issued by ICAI.The issue crops up since the definition /meaning assigned in al l three di fferentprovisions provide different parties.

5. Conclusion

It can be observed that with the introductionof Specified Domestic Transactions provisions,the taxpayers are left with onerous obligationto comply with detailed transfer pricing rules,l ike maintenance of Transfer Pr icingDocumentation, determination of arm’s lengthprice, etc. It shall be much appreciated if theprovisions of SDT are restr icted to thecircumstances in which there is a possibility oftax arbitrage like one involving tax holidayundertakings. Nevertheless, in case theseprovisions are continued to be extended to allclasses of transactions then the governmentshould consider bringing amendment in secondproviso to section 92C(4) of the Act, whichpermits only single track adjustment andprohibits consequential adjustments in the handof the other party.

Also, the finance ministry should evaluate netgain to the exchequer of these provisionsconsidering the fact that the tax authoritieswould also be required to invest their significanttime and resources in supervising thecompliances of these provisions.

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Considerable confusion prevails in the minds of eveneducated persons and some time even amongst TaxPractitioners as to the law of Wills in India.

Every person who has assets and property and afamily should make a Will, whether he is young oraged. It is an erroneous impression in the minds ofpersons that one should make a Will only when heis aged and not in good health.

With the above back ground, we would like to dealwith the topic of Wills, when and how it should bemade and whether i t requires witnesses orregistration or stamp paper for making a Will andthe advantages of making a Will.

In contrast to the complicated and legal wordingsrequired for executing a sale deed or a deed ofmortgage or a deed of gift, the drafting of a Willhas a very simple formality. The following aspectsare required to be kept in mind while dealing withWill and its advantages.

At the outset, it may be stated that the law of Willsis substantially governed by Indian Succession Act,1925, hereinafter referred to as “ISA”. However,many sections do not apply to Hindus, Buddhists,Sikhs, or Jains, shortly referred to hereafter as“Hindus, etc.” Further, most of the provisions donot apply to Muslims.

The subject will be discussed hereinafter underdifferent heads:-

(1) WHAT LAW GOVERNS THE TESTATOR?

So far as immovable properties are concerned,the making of Wills will be governed by thelaw of the place where property is situated.However, this proposition is important only ifthere are properties outside India.

So far as movable properties are concerned,it will be governed by the law of testator’sdomicile. In brief, it may be mentioned thatdomicile is determined on the basis of aperson’s residence and the intention to remainthere indefinitely but not on account of service,unless some circumstances should occur toalter his intention.

(2) WHAT IS WILL?

Will is a legal declaration by a testator withrespect to his property which he desires to becarried into effect after his death. Mereexpression of desire is not enough in law, butthere must be clear words bequeathing theproperty after the death of the testator.Therefore, during his life time Will is alwaysrevocable.

It is necessary to emphasize that Will neednot comprise the entire property of thetestator. It may be limited to a portion of it.Similarly, several Wills can be legally executedby the testator for different properties. If thereis no will qua a particular property, it devolvesby intestate succession. To avoid this situation,a residuary clause is generally added in theWi l l, bequeathing al l remaining andunmentioned properties to certain legatees.

(3) WHAT IS CODICIL?

It is document executed in the same manneras a Will changing or altering or adding to thedisposal made earlier in the Will. Just as aWill can be revoked by subsequent Will, acodicil can also be revoked by subsequent Willor Codicil. It may be noted that putting crosslines on the Will or codicil does not amountto cancellation or revocation of the Will/ codicilunless such cancellation follows the procedurerequired for making the Will and words areused to that effect.

(4) KINDS OF WILLS

Usually Will is made by a single individual forhis own property. However, the following twokinds of Wills may be mentioned:-

(i) Joint Wills: - In this case a singledocument is executed by two or morepersons disposing of their separate orjoint properties to same or differentlegatees. Such a Will operates separatelyand independently as regards eachtestator on his death. It is revocable byeach of them prior to his death and evenby survivor on the death of one of them.

WILLS AND ITS ADVANTAGESK. H. Kaji, Advocate

Manish K. Kaji, AdvocateCan be contacted at: kanishkakaji@gmail.com

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(ii) Mutual Wills: - In this case a Will ismade by two testators conferr ingreciprocal benefits on each other. This ismostly in case of husband and wife. SuchWills are revocable so long as both thetestators are alive, but if one of themdies and the other takes the advantageunder it, then it becomes irrevocable byhim/her.

(iii) Oral Wills are not valid in India exceptin the case of Muslims.

(5) CAPACITY TO MAKE WILL

All persons of sound mind not being minorsare competent to make a Will. In India personattains majority at completion of 18 years,unless guardian is appointed by Court of hisperson or property in which case he attainsmajority on attaining 21 years. Insane personcan also make a Will during his lucid interval.

As a Will disposes of the property aftertestator’s death, it can be revoked or alteredat any time during his life time.

There is no limitation on the person’s powerto deal with his property. He may exclude hisnear relations and give the property to totalstrangers in preference to his relatives. Evenif the Will is unreasonable excluding his closerelations, it would be valid and effective, if itis established that the person was of soundmind and not under coercion or undueinfluence while making the Will.

(6) EXECUTION OF A WILL

The requirements of making a Will are verysimple:-

It must bear his signature (which includeseven a mark or thumb impression) in presenceof a two witnesses who have seen the personsign the Will or to put his mark or thumbimpression. Two witnesses are essential forattesting the Will, but both need not be presentat the same time.

Will is not required to be executed on anystamp paper and it is not required to beregistered under any law. The language canbe very simple and it need not use legalwordings.

It is optional for a person to get the Willregistered so that the proof of making of theWill by testator becomes easier in case any

dispute or challenge is feared by the testatoror raised after his death. The attestingwitnesses or the testator may sign at any placebut generally and advisedly it should be putat the end of the document and also each pagemay be signed or initialed so as to avoidsubstitution of the page by someone. Thenormal phraseology used for Testator andattesting witnesses is as follows:-

Dated this ____ (date) day of ____________(month) _______ (Year).

__________________TESTATOR

Signed in the presence of___________________

(Name of the witness)

It is important to note that attesting witnessis not required to know the contents of theWill. He is only testifying that the Will is signedby the testator in his presence.

(7) REVOCATION OF WILL

The Will can be revoked in the following ways:-

(i) By another Will or Codicil.

(ii) By any writing declaring an intention torevoke the Will or Codicil and executedin the same manner as a Will.

(iii) By burning, tearing or otherwisedestroying the Will by the testator.

As said above, merely cancelling by crossingtwo lines over it will not amount to validrevocation. It may also be noted that there isno automatic revocation of the Will by themarriage of the testator. Provision in s. 69providing for cancellation of the Will onmarriage does not apply to Hindus, etc. butapplies to Christians & Parsis.

(8) PROPERTY WHICH CAN BE DISPOSED OF BY A WILL

It is obvious that any property which thetestator can dispose of while alive can bedisposed off by Will. This is so unless hisinterest in the property comes to an end ondeath, for example, in life interest.

(9) BEQUEST WITH REPUGNANT CONDITIONS

It may be noted that testator cannot bequeaththe property to someone and at the same timerestrict its enjoyment or disposal by such alegatee. In that case the bequest will be valid,but the condition will be invalid. This aspect

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requires to be made clear, because very oftenperson making a Wil l will bequeath theproperty to his wife, but provide that afterher death she will not be able to dispose ofthe property by Will to other persons such asher brother or parents, but the same shouldgo to testator’s children or any other person.If such is the intention of testator, he has toconfer only life interest to the legatee to usethe property during the life time and provideto whom it will go on death of life estate holder.Similarly, while bequeathing the property hecannot lay down a special mode of devolutionof property, once he has disposed of the samein favour of the legatee.

(10) DEPOSIT AND REGISTRATION OF WILL

As stated above, it is optional for the testatorto register his Will in which case himself andthe two witnesses will have to sign in thepresence of the sub-registrar under the IndianRegistration Act.

This ensures the validity and the genuinenessof the signature of the testator and the twowitnesses.

Another alternative available to the testatoris depositing the Will under provisions of theRegistration Act. This deposit ensures a safetyof the Will. The Will duly executed as aboveput in the sealed cover can be submitted tothe sub-registrar by the testator or by hisagent and the same can be withdrawn at anytime by the testator or his authorized agent.It may be noted that Will which is registeredor deposited can be revoked or cancelled atany time and another Will can be executed bythe testator without registering the same.

(11) COPARCENARY PROPERTY

Under Hindu Succession Act, as amended in2005, a male or female may dispose of byhis/her share in the Joint family property bywill. Male member can dispose of the shareby Will so also a daughter, who becomes acoparcener like a son may dispose of the sameby Will. Wife/mother who got the share in thejoint family property at the time of deemedpartition on account of death of the husband,or on actual partition between father and sonor between sons can also dispose of her sharein the property by Will.

(12) PROBATE OF WILL

Without going into the details of the procedurefor obtaining probate to be issued by the Court,it may be stated that procedure for getting aprobate is provided for in Indian SuccessionAct when author i ties such as Banks,Companies, Revenue Authorities, etc. do notaccept the Will unless the same is probated.It is nothing but certified copy of the Will underseal of the Court after issuing notice to heirs.

(13) WILLS AND TAX PLANNING

Quite often tax planning is resorted to by atestator through the medium of a Will. Alsosocial aspects may require the testator not togive away property to one or more legateesspecifically, but to create the trust of theproperties or part of the properties, mentioningthe beneficiaries, but providing indeterminateshares to the beneficiaries and leaving thedistribution of income or corpus to the trusteesof the trust consider ing the need orrequirement of various persons mentioned inthe trust deed as beneficiaries. The obviousadvantage in adopting this method is to seethat the income or corpus of the propertysettled on trust is distributed to all or some ofthe beneficiaries as per the requirement ofthose beneficiar ies such as education,marriage, settlement in life, etc. The taxadvantage will result if the trust created byWill does not give the income or corpusseparately to one or more beneficiaries, butprovides indeterminate shares in the incomeor property at the discretion of the trustees.In case of such a trust created by Will, it willbe a separate taxable entity liable to tax atthe appropriate rate and not at the maximummarginal tax rate which would be the positionif such trust with indeterminate shares wascreated during his life time. However, only onesuch trust with indeterminate shares can becreated for getting the benefit of being taxedat appropriate rate. The advantage would bethat the income distributed by trustees willnot be taxable in the hands of the beneficiarieswho receive the same, but will be taxed in thehands of the trustees at the appropriate rateand not at the maximum marginal rate. If atrust is created with specific shares to thebeneficiar ies, income or corpus which a

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beneficiary is entitled to have will be addedto its income or wealth. This situation will beavoided by creating a trust by Will withindeterminate shares.

(14) BEQUEST TO UNBORN PERSON

Very often the testator desires to bequeathhis property to his grand children who are notin existence at the time of making of the Willor even at the time of his death. Such abequest to an unborn person is governed bysection 112 & 113 of the Indian SuccessionAct. Under the said section, a direct bequestin favour of persons not in existence at thetime of testator’s death is declared void. Byway of exception to the above position, thesection provides for situation one where thereis a prior bequest in favour of an existingperson which is to precede the bequest to theunborn person who stands in particular degreeof relation to a specified individual and vestingof the bequest is otherwise deferred to such aunborn person until a time later than the deathof the testator. In such situation, under theabove exception, if a person answering thedescription is alive, either at the death of thetestator or comes in to existence between thatevent and such later time then the bequestshall go to such person, though he may nothave been in existence at the time of testator’sdeath and if such person is dead than thebequest shall go to his legal representatives.Further, under s. 113, bequest to the unbornperson has to comprise the whole of remaininginterest of the testator in the propertybequeathed. In both the situations, thebequest cannot remain in abeyance at anypoint of time. It is not possible to discuss indetail the above subject.

The rule against perpetuity is governed bysection 114 of the Indian Succession Act. Forthe sake of clarity sections 112 & 113 as wellas 114 are reproduced below to avoid anyconfusion.

“112. Bequest to person by particulardescription, who is not in existence attestator’s death. - Where a bequest ismade to a person by a particulardescription, and there is no person inexistence at the testator’s death whoanswers the description, the bequest isvoid.

Exception - If property is bequeathed toa person described as standing in aparticular degree of kindred to a specifiedindividual, but his possession of it isdeferred until a time later than the deathof the testator, by reason of a priorbequest or otherwise; and if a personanswering the description is alive at thedeath of the testator, or comes intoexistence between that event and suchlater time, the property shall, at suchlater time, go to that person, or, if he isdead, to his representatives.

113. Bequest to person not in existence attestator’s death subject to prior bequest.- Where a bequest is made to a personnot in existence at the time of thetestator’ s death, subject to a priorbequest contained in the will, the laterbequest shall be void, unless it comprisesthe whole of the remaining interest ofthe testator in the thing bequeathed.

114. Rule against perpetuity. - No bequest isvalid whereby the vesting of the thingbequeathed may be delayed beyond thelife-time of one or more persons livingat the testator’s death and the minorityof some person who shall be in existenceat the expiration of that period, and towhom, if he attains full age, the thingbequeathed is to belong.”

(15) PROVISION FOR ACCUMULATION

It may be noted that under s. 117 of IndianSuccession Act provision to accumulate incomewholly or in part for a period longer than 18years from the death of the testator shall bevoid to that extent. There are certainexceptions which are as under:

“117. Effect of direction for accumulation –

(1) Where the terms of a will direct that theincome arising from any property shallbe accumulated either wholly or in partduring any period longer than a periodof eighteen years from the death of thetestator, such direction shall, save ashereinafter provided be void to theextent to which the period during whichthe accumulation is directed exceeds theaforesaid period, and at the end of suchperiod of eighteen years the property

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and the income thereof shall be disposedof as if the period during which theaccumulation has been directed to bemade had elapsed.

(2) This section shall not affect any directionfor accumulation for the purpose of—

(i) the payment of the debts of thetestator or any other person takingany interest under the will, or

(ii) the provision of portions for childrenor remoter issue of the testator orof any other person taking anyinterest under the will, or

(iii) the preservation or maintenance ofany property bequeathed; and suchdirection may be made accordingly.”

(16) BEQUEST TO AN EXECUTOR

It may be noted that under s. 141 of IndianSuccession Act, the bequest to an executormentioned in the Will to carry out theprovisions of the Will is invalid unless heproves the will or otherwise manifests anintention to act as executor.

(17) BEQUEST TO AN ATTESTING WITNESS

Bequest is inval id under s. 67 IndianSuccession Act, but the section does not applyto Hindus, etc. Hence, it would be valid forHindus, etc.

(18) GENERAL

(1) It is also suggested that if the testatordoes not desire to register the Will, heand the witnesses can execute the samebefore a notary. It will be sufficient proofthat the Will has been executed by thetestator and attested by two witnesses.It may be noted that at present thenotary requires passport size photographto be affixed to the document at the end.

(2) Property which is subject toencumbrance cannot be bequeathedwithout liability. The liability has to bedischarged either by the testator’s estateor by the legatee as provided by the Will.

(3) Even if the property such as shares orhouse in a society contains nominationin favour of wife or son, it can bebequeathed to anyone because thenominee is not entitled to be the owneron the death of the testator, but he holds

the same on behalf of the legal heirsmentioned in the Will or on interstatacy.The situation will be different, if thereare joint holders (such as wife or son)on the record. Then, the second holderbecomes the owner of the property.

(4) Section 118 of Indian Succession Actputs restriction on bequest to charity, incase of person having a nephew or nieceor any nearer relatives, except providedby following the requirements mentionedin section 118. However, this sectionhas been struck-down by the SupremeCourt as unconstitutional in the decisionin AIR 2003 SC 2902.

(5) If a person who has made the Will ceasesto be a Hindu, etc. and becomes aChristian he will not be governed byHindu Law, but will be totally governedby all provisions of Indian SuccessionAct.

In brief, the following are the benefits/advantages of making a Will:

(i) Procedure is very simple.

(ii) Different Wills can be executed fordifferent properties.

(iii) Can be easily revoked, by followingthe same procedure.

(iv) One discretionary trust can becreated by Will for tax benefit asstated above.

(v) Capital gain on transfer of capitalassets is avoided by giving theproperty by Wi l l as againsttransferring the same during thetestator’s life time.

(vi) It enables the testator to give theproperty to anyone he desires asagainst mandatory provisions ofsection 8 (in case of male) or section15 (in case of female) (HinduSuccession Act) under whichproperty wil l go to the heirsmentioned in the above sections.

It is, therefore, very desirable for a person havingproperty to make a Will so that the property, afterhis death, can go to the persons he desires.

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ITR Volume 364 : Part 2 (Issue dated : 9-6-2014)

SUPREME COURT

Exemption —Educational institution—Registration—Rejection of application for certificate on groundentire income not used for educational purposes—Appeal—Supreme Court—Objects of society sinceamended—Order of High Court set aside and libertygranted to apply for registration afresh forassessment years in question with amendedobjects—Income-tax Act, 1961, s. 10(23C)(vi)— OmPrakash Shiksha Prasar Samiti v. Chief CIT . . . 329

HIGH COURTS

Assessment —Best judgment assessment—Limitation—Failure to issue notice under section143(2)—Failure to issue notice of hearing beforemaking best judgment assessment—Concurrentfinding that assessment ante-dated and timebarred—Conclusion reached by Tribunal based onappreciation of pure questions of fact—Income-taxAct, 1961, ss. 143(2), 144— CIT v. AmarchandSharma and Udani (AP) . . . 203

Business expenditure —Disallowance—Payments onwhich tax deductible at source—Commission—Salespromotion scheme—Incentive offered on case tocase basis to stockists/dealers/agents—Relationshipbetween assessee and distributors/stockists wasthat of principal to principal—Distributors/stockistsnot acting on behalf of assessee—Not a commissionpayment within meaning of clause (i) of Explanationbelow section 194H—No disallowance could be madeunder section 40(a)(ia)—Income-tax Act, 1961, ss.40(a)(ia), 194H— CIT v. Intervet India P. Ltd. (Bom). . . 238

——Pharmaceutical company—Deposit made byassessee of excess price charged for drugs over andabove price fixed by Government—Statutoryliability—Allowable—Income-tax Act, 1961, s. 37—CIT v. Warner Hindustan Ltd. (AP) . . . 208

Deduction of tax at source —Non-resident—Taxability in India—Non-resident agent of artistesin foreign countries engaged by assessee to bringforeign artistes to perform in India—No participationof agent in event organised by assessee as an

artiste—Agent's commission not taxable in India—Income-tax Act, 1961, s. 201—Double Taxation Avoidance Agreement between India and U. K., arts. 7, 18— Director of Income-tax (International Taxation) v. Wizcraft International Entertainment P. Ltd. (Bom) . . . 227

Depreciation —Factory building—Creche for childrenof women employees within factory compound—Util ised in the process of manufacturing ofproducts—Entitled to depreciation at ten per cent.—Income-tax Act, 1961— CIT v. Warner HindustanLtd. (AP) . . . 208

Double taxation relief —Mutual agreementprocedure—Not relevant for deciding whetherpermanent establishment existed—Especially whereforeign Government expresses reservations onpoint—Double Taxation Avoidance Agreementbetween India and the U. S. A., art. 27— Director ofIncome-tax v. e-Funds IT Solution (Delhi) . . . 256

Kar Vivad Samadhan Scheme —Condition precedentfor consideration of declaration—Pendency ofproceedings—Appeal addressed to wrong officer byassessee and not disposed of on technical grounds—Receipt of appeal not denied—Designated authorityought to have intimated officer to return papers toenable assessee to file appeal before appropriateauthority—Assessee not informed of its appeal notbeing accepted—Refusal to grant benefit underScheme on ground appeal not filed before competentauthority—Not justified—Authorities to considerdeclaration filed by assessee on merits—Finance(No. 2) Act, 1998, ss. 88, 89— Radha Vinyl P. Ltd.v. CIT (AP) . . . 199

Loss —Set off—Advances written off and claimed ascapital loss to be carried forward for set off forsubsequent years—Advances not given in ordinarycourse of business—No claim as bad debts—Noevidence to show that it was a case of anintercorporate deposit—Loan cannot capital loss—Income-tax Act, 1961, s. 2(14), (47)— CromptonGreaves Ltd. v. Deputy CIT (Bom) . . . 244

Non-resident —Permanent establ ishment—Subsidiary company in India whether permanentestablishment—Principles governing—Mutualagreement procedure not conclusive on existence

Recent Important Decisions

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of permanent establishment—No material to holdassessees had fixed place of business in Indiathrough which business of enterprise wholly or partlycarried on—No finding that assessee had right touse premises belonging to Indian company, or thatpremises of Indian company were at its disposal—That Indian company provided services to assesseeand was dependent for its earning upon assesseeor that Indian company did not bear sufficient riskor that Indian subsidiary was reimbursed cost plus16 per cent. not relevant test—Assignment or sub-contract to Indian company not factor to be appliedto determine applicability of article 5(1)—Indiancompany separate entity and not permanentestablishment merely because there was interactionor cross transactions between i t and foreignprincipal—Indian company not author ised orhabitually exercising authority to “concludeâ€contracts or maintaining stock or merchandise fromwhich it delivered goods or merchandise on behalfof assessee—Transactions between assessee andIndian company at arm’s length and taxed onarm’s length principle—Employees of Indiancompany not to be treated as employees ofassessee—Employees merely performingstewardship services—Indian company notpermanent establ ishment of non-residentassessee—Income-tax Act, 1961, s. 9(1)(i)—DoubleTaxation Avoidance Agreement between India andthe U. S. A., arts. 5(1), (2), (4), 7— Director ofIncome-tax v. e-Funds IT Solution (Delhi) . . . 256

——Taxability in India—Double Taxation AvoidanceAgreements—“Fees for technical services†—Definition—Scope of—Indian subsidiary company setup to provide services to overseas group entities—Secondment of employees of overseas entities toassist Indian company during initial year to ensurequal ity control and bui ld skil l set of Indiancompany’s employees—Amounts to provision oftechnical services and making available technicalknowledge—Seconded employees continuing toremain on payroll of overseas entities—Overseasentities paying their salaries and Indian companythereafter reimbursing overseas employers—Reimbursement of salaries was payment fortechnical services—Payment accrued to overseasentities—Not a case of diversion of income byoverriding title—Payments taxable in India andIndian company bound to deduct tax at sourcethereon—Income-tax Act, 1961, s. 195—DoubleTaxation Avoidance Agreement between India andthe U. K., art. 13(4)—Double Taxation Avoidance

Agreement between India and Canada, art. 12(4)—Centrica India Offshore Pvt. Ltd. v. CIT (Delhi) . . .336

Penalty —Concealment of income—Failure todisclose amount received on account of refundableempty bottle deposit either in profit and loss accountor in balance-sheet—Concealment detected insearch operations—Deliberate concealment on partof assessee—Receipt acknowledged as tradingreceipt in ear l ier years—Penalty justi fied—Unreconciled difference in balance-sheet—Nopenalty leviable in view wrong entries—Income-taxAct, 1961, s. 271(1)(c)— Kuldeep Wines v. CIT(Appeals) (AP) . . . 195

Reassessment —Change of opinion—Assessee notfil ing returns and not subjected to regularassessment—Challenge to initiation of reassessmentproceedings on ground of change of opinion notavailable—Mutual agreement procedure adoptedand income of assessee partly taxed in India—Justification to initiate reassessment proceedings—Reasons recorded for 2000-01 and subsequent yearsidentical—Reasons for all assessment years otherthan 2000-01 communicated and assessee awareof reasons for 2000-01—Failure to communicatereasons not prejudicial to assessee and does notaffect validity of proceedings—Income-tax Act,1961, ss. 143(3), 147, 148— Director of Income-tax v. e-Funds IT Solution (Delhi) . . . 256

——Notice—Notice within four years—Industrialundertaking—Special deduction—Windmill—Issue ofdeduction under section 80-IA raised by AssessingOfficer dur ing assessment proceedings andresponded to by assessee—That issue not discussedin assessment order not material—Reopening ofassessment on premise that deduction wronglyallowed—Not permissible—Income-tax Act, 1961,ss. 80-IA(4), 147, 148— CIT v. Prima Paper andEngineering Industry (Bom) . . . 222

——Notice—Validity—Notice after four years—Condition precedent—Failure to disclose materialfacts necessary for assessment—Industrialundertaking—Special deduction—Allocation ofcommon expenditure between section 80-IB unitand non-section 80-IB unit disclosed—Deductionallowed after considering material—Notice after fouryears to withdraw special deduction—Notice notvalid—Income-tax Act, 1961, ss. 147, 148— LalithaChem Industries P. Ltd. v. Deputy CIT (Bom) . . .213

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——Notice within four years—Export—Exemption—Failure to bring proceeds of export into India withinsix months from end of assessment year—Assesseedeclaring its book profits after reducing amount ofdeduction under section 10AA during originalproceedings—Both issues not subject matter ofconsideration in original assessment proceedings—Reasonable belief that income chargeable to tax hasescaped assessment—Income-tax Act, 1961, ss.10AA, 147, 148— Eleganza Jewellery Ltd. v. CIT(Bom) . . . 232

ITR Volume 363 : Part 3 (Issue dated : 12-5-2014)

SUBJECT INDEX TO CASES REPORTED IN THISPART

HIGH COURTS

Accounting —Appeal to Appellate Tribunal—Duty ofTribunal to pass speaking order—Rejection ofaccounts and estimate of income—Change inestimate by Tribunal without giving reasons—Matterremanded—Income-tax Act, 1961, ss. 145, 254—CIT v. Ram Singh (Raj) . . . 417

——Rejection of accounts—Flat rate assessment—Wide fluctuations in production compared toconsumption of electricity and also no record ofwork-in-progress—Rejection of accounts justified—Flat rate assessment on the basis of evidence—Justi f ied—Income-tax Act, 1961— RajmotiIndustries v. Joint CIT (Guj) . . . 467

——Rejection of accounts—Liquor business—Non-maintenance of sales vouchers—Rejection ofaccounts justified—Income-tax Act, 1961, s. 145—CIT v. Ram Singh (Raj) . . . 417

Bad debt —Money-lending—Whether transactionwas in the ordinary course of business—Factualmaterial to be looked into—Whether assessee hasaccounted for accrued interest in earlier years andoffered it for taxation—Aspect not examined—Matterremanded—Income-tax Act, 1961, s. 36(1)(vii)—Peninsular Plantations Ltd. v. Asst. CIT (Ker) . . .441

Business expenditure —Disallowance—Paymentssubject to deduction of tax at source—Commissionor brokerage—Definition—Exclusion—Payments inrelation to services relating to securities—Incomeearned from mutual fund houses—Brokerage forcanvassing and marketing various mutual fundschemes to potential investors after collecting detailsfrom assessee—Services rendered in relation to

securities—Disallowance under section 40(a)(ia) notwarranted—Income-tax Act, 1961, ss. 40(a)(ia),194H— CIT v. Tandon and Mahendra (All) . . . 454

Capital gains —Long-term capital gains—Transfer—Transfer of immovable property—Time of transfer—Agreement for sale of land to developer—Part ofconsideration paid and buyer in possession of landin April 2003—Buyer given power of attorney to sellportions of land—Transfer took place in April 2003—Income-tax Act, 1961, s. 45— CIT v. Cochin StockExchanges Ltd. (Ker) . . . 382

Hotel —Special deduction—Earnings in convertibleforeign exchange—All units of assessee to be takentogether—Eligibility criteria for deductions undersections 80HHD and 80-IB the same—Computationof benefit cannot be given separately to each hotel—Income-tax Act, 1961, ss. 80HHD, 80-IB— Hoteland Allied Trades P. Ltd. v. Deputy CIT (Ker) . . .328

Income —Computation of income—Disallowance ofexpenditure on earning non-taxable income—Noevidence of expenditure to earn non-taxableincome—Disallowance under section 14A notjustified—Income-tax Act, 1961, s. 14A— CIT v.Torrent Power Ltd. (Guj) . . . 474

Income from undisclosed sources —Estimation ofincome—Pharmaceutical drugs—Unaccountedconsumption of raw materials—No direct evidenceof unaccounted sales outside books of account—Estimate of profit element at thirty-five per cent. ofsuch extra consumption—Reasonable—Income-taxAct, 1961— CIT v. Leo Formulations P. Ltd. (Guj) .. . 322

Industrial undertaking —Special deduction—Condition precedent—Manufacture or production ofarticle—Assessee purchasing transformer oil frommarket and centrifuging by centrifuging machineto make it usable in transformer—No new substanceor articles or things emerged from processing—Nomanufacturing activity or production of any newarticles or things—Assessee not enti tled todeduction—Income-tax Act, 1961, s. 80-IA(2)(iv)(c)— CIT v. S. K. Transformer P. Ltd. (All). . . 394

——Special deduction—Export turnover—Applicationof formula for arriving at deduction—Commissionto foreign agent—Not to be reduced from exportturnover—Income-tax Act, 1961, s. 80HHC— CIT v.Koncherry Coir Factories (Ker) . . . 463

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International transactions —Arm’s length price—Comparable uncontrolled price method—Reliableand authentic price publications—Mere base oforganisation not relevant—Appellate authoritiesaccepting reliability and authenticity of organisationand its publ ication of rate l ist submitted byassessee—Transfer Pricing Officer’s objectionthat rates quoted not based in Malaysia and that itwas an independent organisation not justified—Income-tax Act, 1961, s. 92C—Income-tax Rules,1962, r. 10D(3)(c)— CIT v. Adani Wilmar Ltd. (Guj). . . 338

Interpretation of taxing statutes —Plain and naturalmeaning— CIT v. Tandon and Mahendra (All) . . .454

Precedent —Effect of Supreme Court decision inAsst. CIT v. Hotel Blue Moon [2010] 321 ITR 362(SC) and CIT v. Suresh N. Gupta [2008] 297 ITR322 (SC)— CIT v. B. Nagendra Baliga (Karn) . . .410

Reassessment —Notice—Validity—Issues gone intodur ing assessment proceedings and fi rstreassessment proceedings—Cannot be revisited athird time—Reassessment impermissible—Income-tax Act, 1961, s. 148— Vodafone South Ltd. v. Unionof India (Delhi) . . . 388

——Notice after four years—Condition precedent—Failure to disclose material facts necessary forassessment—Scrutiny assessment based on materialsubmitted by assessee—Notice after four years tore-compute income—Notice not valid—Income-taxAct, 1961, s. 148— Ferromatik Milacron India P.Ltd. v. Asst. CIT (Guj) . . . 461

——Notice after four years—Principles governing—Assessment accepting assessee’s investmentsshown as funded by three companies—Companiesfound subsequently to be bogus—Disclosurerendered untrue—Reopening after four yearspermissible—Requirement that Assessing Officershould specify that income escaping assessmentexceeds Rs. 1 lakh—Met if such statement recordedwhile placing reasons for approval of Commissionerpr ior to issuance of notice—Sanction ofCommissioner—Merely stating “yes†—Noinference that Commissioner did not apply mindwhile granting sanction—Income-tax Act, 1961, ss.147, prov. , 148, 149(1)(b), 151(2)— Lalita AshwinJain v. ITO (Guj) . . . 343

Recovery of tax —Garnishee order—Application forstay of recovery proceedings—Rejection of stay

application and passing of garnishee order on thesame day—Legal but not in consonance withprinciples of fair play—Income-tax Act, 1961, s.220— Sony India P. Ltd. v. Addl. CIT (Delhi) . . .330

Revision —Commissioner—Powers—Industrialundertaking—Special deduction—Assessing Officer,while allowing deduction, factually not satisfied withmaterial available and recording that he attemptedto collect material but failed—Order prejudicial tointerests of Revenue—Commissioner justified ininitiating revision—Income-tax Act, 1961, ss. 80-IB, 263— CIT v. Abad Constructions P. Ltd. (Ker) . .. 372

Search and seizure —Block assessment—Blockassessment only on basis of evidence discoveredduring search—Income-tax Act, 1961— CIT v. B.Nagendra Baliga (Karn) . . . 410

——Block assessment—Delay in furnishing returns—Interest—Delay due to failure of Income-taxDepartment to furnish necessary seized documentsin time—Interest could not be levied—Income-taxAct, 1961, s. 158BFA(1)— CIT v. B. Nagendra Baliga(Karn) . . . 410

——Block assessment—Levy of surcharge whethervalid—Income-tax Act, 1961, s. 113— CIT v. B.Nagendra Baliga (Karn) . . . 410

Transfer of cases —Scope of power—Reasons fortransfer should be given—Assessee must be givenopportunity to be heard—Assessee part of a groupof companies—Assessee having substantialtransactions with other companies in the group—Transfer of proceedings to another AssessingOfficer—Assessee participating in suchproceedings—Order of transfer—Valid—Income-taxAct, 1961, s. 127— Sahara Hospitality Ltd. v. CIT(Bom) . . . 435

Undisclosed investment —Purchase of property—Evidence that there was undervaluation ofproperty—Assessee failing to disprove evidence bygiving evidence to show market value of land in thelocali ty—No evidence that witness give falseevidence—Addition on account of undisclosedinvestment justified—Income-tax Act, 1961— CITv. P. M. Aboobacker (Ker) . . . 447

Words and phrases —†In relation to†and“relating to†—Meanings of— CIT v. Tandonand Mahendra (All) . . . 454