Direct Taxes

Questions & Answers

1. Gift/Receipt from Relatives – Section 56(1)(va)

Q.1 Whether the relatives defined restricts to real brother, sister or cousins also?

Ans. Explanation to the said section defines the expression “relative” to mean :

1. spouse of the individual;

2. brother or sister of the individual;

3. brother or sister of the spouse of the individual;

4. brother or sister of either of the parents of the individual;

5. any lineal ascendant or descendant of the individual;

6. any lineal ascendant or descendant of the spouse of the individual;

7. spouse of the person referred to in clauses (ii) to (vi).

In the light of the words used in the Explanation ‘Cousins’ would not fall-in the Explanation. In the Explanation expression used is “means” which is restrictive and not “includes” which is wider.

Q.2. Wealth Tax — Section 5(vi)(b)

1. Plot up to an area of 500 Sq. Metres is exempt. Whether in case of plot in excess of 500 Mtrs., the quantity of 500 Sq. Mtrs., out of the same can be claimed as exempt ?

2. Commercial building/Shop let out will be exempt (Not residential)

3. Investment in partnership firm whether taxable 4(1)(b).

Ans. (1) Section 5(vi) is reproduced hereunder:
‘one house or part of a house or a plot of land belonging to an individual or a Hindu undivided family :
Provided that wealth-tax shall not be payable by an assessee in respect of an asset being a plot of land comprising an area of five hundred square metres or less.

In my view, a plot of land in excess of 500 square metres would not qualify for exclusion. The land area of the plot should not exceed 500 square metres. Question of bifurcation does not arise.

(2) Commercial Building/Shop would fall in section 2(ea)(5) “Any property in the nature of commercial establishments or complexes”. Commercial establishments or complexes have not been defined in the Wealth Tax Act. In the absence of the definition, meaning in common or in commercial parlance would prevail. The Pune Bench of I.T.A.T. in Satvinder Singh Kalra vs. Dy. Commissioner of Wealth-tax (2007) 112-TTJ-489 after applying ‘Shri Balaganesan Metals vs. M. N. Shanmugham Chetty (1987) 2 SCC 707 and C.I.T. vs. Arvind Investments Ltd. (1991) 94-CTR (Cal.) 263 : 1991) 192-ITR-365 (Cal.) held : “A property would fall within the exceptions under sub-cl. (5) of cl. (i) of s. 2(ea), if it is in the nature of commercial establishment or complex and is also used for the purpose of any business or trade, whether by assessee or anybody else; office premises let out by the assessee on leave and licence basis to companies and used by the licensees for carrying on their business and related activities are in the nature of commercial establishments and not includible in the net wealth. The Delhi High Court in C.W.T. vs. Awaz Builders (P) Ltd. (2007) 207-CTR-754 observed: ‘to bring the property within the purview of the WT Act, Revenue ought to have shown that it is not a commercial building but a residential building.’ In my view, commercial building/shop let out would be exempt.

3. Section 4(1)(b) reads as under :— “of an assessee who is a partner in a firm or a member of an association of persons (not being a co-operative housing society), there shall be included, as belonging to that assessee, the value of his (interest in the assets of the firm) or association determined in the manner laid down in Schedule III”.

However, asset of the firm should be as defined in 2(ea) of the Act. Other assets which are not taxable assets would be excluded. Exemption u/s 5 shall have to be allowed. The Supreme Court in C.W.T. vs. T. S. Sundaram (1999) 237-ITR-61 held that the assets exempt under section 5 of the Wealth-tax Act, 1957, should be included and then apportioned among the partners. The Rajasthan High Court in C.W.T. vs. Smt. Sita Devi & Mohan Lal (2002) 257-ITR-258 held that valuation of a single asset belonging to firm is irrelevant.

Q.3. Foreign visit

Visit by Director of Co. which does not have any employee (Not liable for FBT) can bear expenditure of Directors on their foreign visit for visit for business possibilities/tour. Tax implications in case of company as well as individual recipients (Directors).

Ans. Yes, if the foreign visit of the directors of the company is for business purposes – the expenditure would be allowable u/s. 37(1) of the Act. Such expenditure shall not be income in the hands of the Directors. The Hon’ble Supreme Court in Empire Jute Co. Ltd. vs. C.I.T. (SC) 124-ITR-1 observed at page 10 : “If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue amount.” The Apex Court in M/s. S. A. Builders Ltd. vs. CIT (Appeals) (2007) 288-ITR-1 at page 8 observed: “In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed”. The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”

Q.4. Charitable Trust

If no registration u/s. 12AA entire gross receipts

(Voluntary Contribution also) will be taxable without giving effect to amount spent for object / donation received with condition for specific purpose at maximum rates on net surplus or on gross amount.

Ans. If the Trust is not registered u/s. 12A with the concerned Commissioner of Income-tax, provisions of sections 11-13 would not apply. Such Trust shall be assessable under the normal provisions and income shall have to be computed under concerned Head of income. Section 2(24)(iia) is wider and includes “Voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) (or by any university or other educational institution referred to in (sub-clause (iiiad) sub-clause (vi) or by any hospital or other institution referred to in (sub-clause (iiiae) or sub-clause (via) of clause (23C), of section 10 :

Explanation.— For the purposes of this sub-clause, “trust” includes any other legal obligation;

If any amount is received with a condition to be spent on a specific purpose, it may be claimed that such amount was not in the nature of income on account of diversion by over-riding title at the receipt level and such amount was in trust with the assessee. Real nature has to be seen. Character of receipt has to be seen. The Supreme Court in C.I.T. vs. Bijli Cotton Mills (P) Ltd. (1979) 116-ITR-61 held charity collection as not income where right from the inception those amounts were received and held by the respondent under an obligation to spend them for charitable purposes only, with the result that those amounts were not its trading receipts. Similar view has been expressed in Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. C.I.T. (2004) 270-ITR-1 holding the deductions/deposits as not trading receipts. Tax if at all chargeable should be charged only on net surplus and not on the gross receipts.

Q.5. Penalty u/s. 271D

Is there any time limit for initiation/levy ? Can it be imposed on non-assessee simply on information from a person pursuing suit u/s. 138 ?

Ans. Section 271D is reproduced hereunder:—

1. If a person takes or accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted.

2. Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.

The phraseology of section 271 is “(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person”. Thus there is difference in the phrasesology of the two sections. It does not say that the penalty should be initiated in the assessment proceedings – it can be initiated after the assessment as well, but within reasonable time. The Chandigarh Special Bench of I.T.A.T. in Dewan Chand Amrit Lal vs. Dy. C.I.T. (2006) 283-ITR-203 (AT) observed : “The Legislature has consciously not prescribed any limitation for initiation of penalty proceedings under sections 271D and 271E. The limitation has been prescribed for imposition after its initiation by the competent authority. It followed F.C.I. vs. CST (1998) 109-STC-131 (SC) and Prabhudayal Amichand vs. CIT (1999) 237-ITR-483 (MP). It also observed: “The authority competent to impose penalty under sections 271D and 271E is the Deputy Commissioner (now the Joint Commissioner) and the Assessing Officer does not have the power either to initiate the penalty proceedings or impose the penalty. There is no procedure for reference by the Assessing Officer to the competent authority for imposition of penalty under section 271D or 271E. Therefore, the limitation for completion of penalty proceedings as provided under section 275(1)(c) has to be computed from the date of issue of show-cause notice by the competent authority. Even if a show-cause notice is issued by the Assessing Officer for imposition of penalty under section 271D or 271E that notice would be without any jurisdiction as the Assessing Officer has no authority under law either to initiate or impose the penalty under section 271D or 271E. Under section 271, recording of satisfaction before initiation of penalty in the course of proceedings is a condition precedent for imposition of penalty for specified defaults. Under sections 271D and 271E, there is no such requirement of recording of satisfaction in the course of any proceedings. The validity of penalty proceedings has to be seen with reference to the authority empowered to impose the penalty on the relevant date. It followed C.I.T. vs. Dhadi Sahu (1993) 199-ITR-610 (SC) and Varkey Chacko vs. C.I.T. (1993) 203-ITR-885 (SC). In the case of ITO vs. Ramkishore Rewaram Tada (2006) 287-ITR-239 (MP), the Madhya Pradesh High Court held the order barred by limitation when it was beyond the period specified u/s. 275 of the Act. In the said case, proceedings were initiated by the I.T.O. on 7-4-1993 but order passed on 31-10-1997 in contravention of section 275(1)(c) of the Act. When I look at section 271D, it nowhere commands initiation by the Assessing Officer. Imposition is by the Joint Commissioner and, therefore, show cause notice has to be issued by the Joint Commissioner. If a person is not an assessee, probably the provision may not apply.