1. S.2(22)(e) Deemed dividend – HUF is the beneficial shareholder. Even if it is assumed that the Karta is the registered shareholder and not the HUF, as per Explanation 3 to S. 2(22), any payment to a concern (i.e. the HUF) in which the shareholder (i.e. the Karta) has a substantial interest is also covered
The Supreme Court had to consider the following question of law:
“Whether in view of the settled principle that HUF cannot be a registered shareholder in a company and hence could not have been both registered and beneficial shareholder, loan/advances received by HUF could be deemed as dividend within the meaning of Section 2(22)(e) of the Income-tax Act, 1961 especially in view of the term “concern” as defined in the Section itself?”
HELD by the Supreme Court dismissing the appeal that even if we presume that it is not a registered shareholder in the lending company, loan received by HUF is liable to be taxed as deemed dividend if Karta shareholder has substantial interest in HUF. (AY. 2006-07)
Gopal and Sons (HUF) v. CIT (2017) 391 ITR 1/145 DTR 289/245 Taxman 48/ 291 CTR 321 (SC)
2. S.9(1)(i) : Income deemed to accrue or arise in India – Business connection – Formula One Grand Prix of India event constitute business income, liable to deduct tax at source – DTAA – India–UK [S.195, Articles, 5, 13]
Formula One World Championship Limited (‘FOWC’) and Jaypee Sports International Limited (‘Jaypee’) filed applications before the Authority for Advance Ruling (AAR). FOWC had entered into a ‘Race Promotion Contract’ (RPC) dated September 13, 2011 with Jaypee, granting Jaypee the right to host, stage and promote the Formula One Grand Prix of India event for a consideration of US$ 40 million. Some other agreements were also entered into between FOWC and Jaypee as well as group companies of FOWC and Jaypee. In the applications filed by FOWC and Jaypee before the AAR, advance ruling of AAR was solicited on two main questions:
(i) Whether the payment of consideration receivable by FOWC in terms of the said RPC from Jaypee was or was not royalty as defined in Article 13 of the ‘Double Taxation Avoidance Agreement’ (DTAA) entered into between the Government of United Kingdom and the Republic of India; and
(ii) Whether FOWC was having any ‘Permanent Establishment’ (PE) in India in terms of Article 5 of DTAA?
(iii) Whether any part of the consideration received or receivable by FOWC from Jaypee outside India was subject to tax at source under Section 195 of the Indian Income-tax Act, 1961 (the ‘Act’).
The AAR answered the first question holding that the consideration paid or payable by Jaypee to FOWC amounted to ‘Royalty’ under the DTAA. Second question was answered in favour of FOWC holding that it did not have any PE in India. As far as the question of subjecting the payments to tax at source under Section 195 of the Act is concerned, AAR ruled that since the amount received/receivable by FOWC was income in the nature of Royalty and it was liable to pay tax there on to the Income Tax Department in India, it was incumbent upon Jaypee to deduct the tax at source on the payments made to FOWC. FOWC and Jaypee challenged the ruling on the first issue by filing writ petitions in the High Court contending that the payment would not constitute Royalty under Article 13 of the DTAA. Revenue also filed the writ petition challenging the answer of the AAR on the second issue by taking the stand that FOWC had PE in India in terms of Article 5 of the DTAA and, therefore, tax was payable accordingly.
The High Court reversed the findings of the AAR on both the issues. Whereas it has held that the amount paid/payable under RPC by Jaypee to FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in India and, therefore, taxable in India. While deciding this question, the High Court has not accepted the plea of the Revenue that it was not a dependent PE. The High Court has also held, as the sequitur, that Jaypee is bound to make appropriate deductions from the amount payable to FOWC under Section 195 of the Act.
All three parties filed appeals before the Supreme Court. As per FOWC and Jaypee, no tax is payable in India on the consideration paid under RPC as it was neither Royalty nor FOWC has any PE in India. It is pertinent to mention that the Revenue had not challenged the findings of the High Court that the amount paid under RPC does not constitute Royalty. Therefore, that aspect of the matter had attained finality. The main question in the appeals therefore pertained to PE. After analysing various case laws on the subject, the Court was, the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country. As per Philip Baker 27, a PE must have three characteristics: stability, productivity and dependence. All characteristics were present in this case. Fixed place of business in the form of physical location, i.e. Buddh International Circuit, was at the disposal of FOWC through which it conducted business. The Court observed that “Aesthetics of law and taxation jurisprudence leave no doubt in our mind that taxable event has taken place in India and non-resident FOWC is liable to pay tax in India on the income it has earned on this soil.
As regards deduction of tax at source, the Court observed that, Jaypee was bound to make appropriate deductions from the amounts paid under Section 195 of the Act. The appeals preferred by the FOWC and Jaypee were dismissed, subject to observations as made above. (CA. No. 3849 of 2017,
dt. 24-4-2017)
Formula One World Championship Limited v. CIT (SC) : www.itatonline.org
3. S.9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – Common facilities is not technical services – Reimbursement of a common technical computer facility is not “fees for technical services”. Amount received by way of reimbursement of expenses does not have the character of income DTAA-India-Denmark [Art. 12]
Dismissing the appeal of the Revenue the Court held that; In order to constitute “technical services”, services catering to the special needs of the person using them must be rendered. The provision of a common facility is not a “technical services”. Amount paid towards reimbursement of a common technical computer facility is not “fees for technical services”. Amount received by way of reimbursement of expenses does not have the character of income. (CA. No. 8040 of 2015, dt. 17-2-2017)
DIT v. A.P. Moller Maersk AS (SC); www.itatonline.org
4. S.10(37) Capital gains – Exemption – Transfer of agricultural land – The fact that the assessee entered into a settlement with the Collector regarding the compensation amount does not mean that the acquisition was not “compulsory” if the prescribed procedure was followed – Exemption was allowed. [S.148, Land Acquisition Act, 1894, S.6]
The issue before the Court was ” whether, on the facts and in the circumstances of the case, the High Court was justified in denying the claim for exemption under section 10(37) of the Income –tax Act, 1961 to the appellant”
Reversing the judgement of the High Court the Court held that, The fact that the assessee entered into a settlement with the Collector regarding the compensation amount does not mean that the acquisition was not “compulsory” if the prescribed procedure was followed and proceedings under section 148 was quashed. (AY. 2009-10 )
Balakrishnan v. UOI( 2017) 391 ITR 178/80 taxmann.com 84 (SC)
5. S.10A : Free trade zone – Unabsorbed depreciation and business loss brought forward can be set off against current year’s profit Dismissing the SLP of the Revenue, the Court held that; Unabsorbed depreciation and business loss brought forward can be set off against current year’s profit. (AY. 2005-06)
CIT v. J. P. Morgan Services India Pvt. Ltd. (2017) 393 ITR 24 (SC)
6. S.14A : Disallowance of expenditure – Exempt income – Disallowance cannot be made in the absence of proof that expenditure has actually been incurred in earning dividend income – If the AO has accepted/the stand that no expenditure was incurred in earlier years he cannot take a contrary stand if the facts and circumstances have not changed – Argument that the dividend is not tax free in the hands of the payee not accepted. [S.10(33), 115O, 115R, R 8D]
Allowing the petition the Court held that disallowance cannot be made in the absence of proof that expenditure has actually been incurred in earning dividend income. If the AO has accepted the claim that no expenditure was incurred to earn dividend income in earlier years he cannot take a contrary stand if the facts and circumstances have not changed. Argument that the dividend is not tax free in the hands of the payee is not accepted, Section 14A disallowance has to be made also with respect to dividend on shares and units on which tax is payable by the payer u/s. 115-0 and 115R. (A.Y. 2002-03 )
Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (SC)(HC), www.itatonline.org
7. S.31 : Repairs – Current repairs – Textile Mill – Repair or substitution of old machine is not current repairs [S. 37(1)]
Allowing the appeal of the Revenue, the Court held that when each division of old textile mill performed different functions, repair or substitution of an old machine would not come within the definition of the word “current repairs” and the assessee is not entitled to deduction. (AY. 1974-75)
CIT v. Sarangpur Cotton Mfg. Co. Ltd. (2017) 393 ITR 108 (SC)
8. S.32 : Depreciation – Lessee cannot be said to be owner for claiming depreciation, however lessee is entitled to depreciation on the cost of construction incurred by him but not on the cost incurred by the owner and reimbursed by the lessee
Dismissing the appeal of the assessee the Court held that title to immovable property cannot pass when its value is more than
₹ 100/- unless it is executed on a proper stamp paper and is also duly registered with the sub-Registrar. Accordingly, a lessee cannot be said to be the “owner” for purposes of claiming depreciation. Under Explanation 1 to S. 32, the lessee is entitled to depreciation on the cost of construction incurred by him but not on the cost incurred by the owner and reimbursed by the lessee. (CA. No. 3360 of 2006, dt. 8-3-2017)(AY. 1992-93)
Mother Hospital Pvt. Ltd. v. CIT (SC) www.itatonline.org
9. S.35D : Amortisation of preliminary expenses – Premium collected by a company on subscribed issued share capital is not “capital employed in the business of the Company” hence not includible in preliminary expenses for amortization. [S. 37(1)]
Dismissing the appeal of the assessee, the Court held that Premium collected by a company on subscribed share capital is not “capital employed in the business of the Company” within the meaning of S. 35D so as to enable the claim of deduction on the said amount as prescribed u/s. 35D. (AY.1996-97, 1997-98 )
Berger Paints India Ltd. v. CIT ( 2017) 393 ITR 113 (SC)
10. S.40(a)(ia) : Amounts not deductible – Deduction at source – Though there is a difference between “paid” and “payable” section covers not only those cases where the amount is payable but also when it is paid. [S.194C, 200]
Though there is a difference between “paid” and “payable”, S. 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. The contrary interpretation that s. 40(a)(ia) applies only to cases where amounts are “payable” will result in defaulters going scot free. S. 194C read with s. 200 are mandatory provisions. Court held that view taken by the High Courts of Punjab & Haryana, Madras and Calcutta is the correct view and the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd., (2013) 357 ITR 642 did not decide the question of law correctly. Thus, the judgment of the Allahabad High Court was overruled.
Palam Gas Service v. CIT (SC) : www.itatonline.org
11. S.45 : Capital Gains – An amount received from a wholly – owned subsidiary in consideration of transfer of shares of the WOS to a group of shareholders is not taxable as Capital Gains. The Department cannot subject a transaction to tax under the Gift-tax Act and also levy tax under the Income-tax Act.
Dismissing the appeal of the Revenue Court held that an amount received from a wholly-owned subsidiary in consideration of transfer of shares of the WOS to a group of shareholders is not taxable as Capital Gains. The Department cannot subject a transaction to tax under the Gift-tax Act and also levy tax under the Income-tax Act. (CA. No. 1864/2007, dt. 28-3-2017)
CIT v. Annamalaiar Mils (SC): www.itatonline.org
12. S.50B : Capital Gains – Slump sale – Undertaking is sold as a running business with all assets and liabilities for a slump price, no part of the consideration can be attributed to depreciable assets – If the undertaking is held for more than three years, it constitutes a “long-term capital asset” and the gains are assessable as a long-term capital gain [Ss. 45, 50(2)]
On appeal by the Department to the Supreme Court HELD dismissing the appeal. If an undertaking is sold as a running business with all assets and liabilities for a slump price, no part of the consideration can be attributed to depreciable assets and assessed as a short-term capital gain.. If the undertaking is held for more than three years, it constitutes a “long-term capital asset” and the gains are assessable as a long-term capital gain (CA, No. 4399 of 2007, dt. 18-4-2017)
CIT v. Equinox Solution Pvt. Ltd. (SC): www.itatonline.org
13. S.50B : Capital gain – Slump sale – Specific and separate valuation for land, building and machinery was ascertained hence the sale cannot be considered as “slump sale” – Review petition was dismissed [Ss.2(14), 2(42C) 45]
Dismissing the review petition against the order in Vatsala Shenoy v. JCIT [2016] 389 ITR 519 (SC), the Court held that by order of Court business continued by partners with controlling interest pending completion of winding up. Assets of firm ultimately put to sale in winding up and outgoing partners receiving net share of value of assets of firm after deduction of liabilities. Asset sold was capital asset and gains from transfer thereof capital gains. Specific and separate valuation for land, building and machinery was ascertained therefore the sale was not a case of “slump sale”. (AY. 1995-96)
Vatsala Shenoy v. JCIT (2017) 391 ITR 363/80 taxmann.com 351 (SC)
14. S.80HHC : Export business – Assessee was entitled to reduced interest paid by it from interest received by it, while calculating deduction – Delay of 3,381 days in refiling the special leave petition was not condoned [S.80HHC (4A)]
Dismissing the appeal of the revenue, the Court held that assessee was entitled to reduced interest paid by it from interest received by it, while calculating deduction. Delay of 3,381 days in refiling the Special Leave Petition, was not condoned, can’t stated that the concerned authorities need to wake up.
CIT v. Krishna K. Aggarwal (2017) 245 Taxman 75 (SC)
15. S.80HHC : Export business – Amendment Act, 2005 is prospective in operation and would apply to both categories of exporters having turnover below ₹ 10 crores and above ₹ 10 crores
Dismissing the appeal of the Revenue the Court held that; S. 80HHC as amended by Taxation Laws (Second Amendment) Act, 2005 is prospective in operation and the said section would apply to both categories of exporters having turnover below ₹ 10 crores and above ₹ 10 crores. CIT v. Avani Exports (2015) 232 Taxman 357 (SC) followed.
UOI v. Paliwal Overseas (P.) Ltd. (2017) 244 Taxman 195 (SC)
16. S. 132 : Search and seizure – Survey – Assessment – It is but natural that concealed income found at the time of search and survey has to be distributed among all the family members who were carrying on business. It is also a reasonable conclusion that the income had been earned over a period of time and should be spread over various years [Ss.133A, 260A]
Dismissing the appeal of the Revenue, the Court held that the Department has failed to bring on record any material to the contrary except the seized documents which, could not absolve the Department or give any right to negate the view taken by the First Appellate Authority and the Tribunal. So far as the income divided among the family members of the assessee is concerned, the Court held that all of them were carrying on same business from the same premises. Therefore, it is but natural that if any concealed income has been found at the time of search and survey, it has to be distributed among all the family members
who were carrying on business. (AY. 1988-89 to 1990-91)
CIT v. Rekha Bai (2017) 393 ITR 22 (SC)
17. S.142A : Estimate of value of assets by Valuation Officer –Income from undisclosed sources – Reference could have been made since proceedings was pending before the High Court – Finding was not disturbed in view of finding of Tribunal that local PWD rates were to be applied and not CPWD rates [Ss.69, 260A]
Reversing the judgment of High Court the Apex Court held that reference could have been made since proceedings were pending before the High Court. Finding was not disturbed in view of finding of Tribunal that local PWD rates were to be applied and not CPWD rates. BP 1988-89 to 1997-98)
CIT v. Sunita Mansingha (2017) 393 ITR 121 (SC)
18. S.143(1)(a) : Assessment – Even though there was a raging
controversy amongst the High Courts on whether expenditure for raising
capital is capital or revenue in nature, the judgment of the jurisdictional
High Court is binding on the assessee and any view contrary thereto is a
"prima facie" mistake that requires adjustment [S.35D]
On appeal by the Department to the Supreme Court held even though there was a raging controversy amongst the High Courts on whether expenditure for raising capital is capital or revenue in nature, the judgment of the jurisdictional High Court was binding on the assessee and any view contrary thereto is a “prima facie” mistake that requires adjustment .Accordingly, the order passed by the CIT (Appeals), the Income Tax Appellate Tribunal and also the order of the Gujarat High Court impugned herein cannot be sustained and were set aside as they have wrongly held that the issue was debatable and could not be considered in the proceedings under section 143 (1) of the Act.(CA No. 2315/2007, dt. 28-3-2017)
CIT v. Raghuvir Synthetics Ltd. (SC) : www.itatonline.org
19. S.147 : Reassessment – Audit objections – If the AO disagrees with the information/objection of the audit party and is not personally satisfied that income has escaped assessment but still reopens the assessment on the direction issued by the audit party, the reassessment proceedings are without jurisdiction [S.148]
Allowing the appeal of the assessee the Court held that if the AO disagrees with the information/objection of the audit party and is not personally satisfied that income has escaped assessment but still reopens the assessment on the direction issued by the audit party, the reassessment proceedings are without jurisdiction. (AY. 1991-92)
Larsen & Toubro Ltd. v. State of Jharkhand (SC) www.itatonline.org
20. S.158BD : Block assessment –Undisclosed income of any other person – Search and seizure – The fact that the search was invalid because the warrant was in the name of a dead person does not make the proceedings invalid if the assessee participated in them [S. 132, 158BC]
Dismissing the petition of the assessee, the Court held that the fact that the search was invalid because the warrant was in the name of a dead person does not make the proceedings invalid if the assessee participated in them. The issue of invalidity of the search warrant was not raised at any point of time prior to the notice under Section 158BD. In fact, the petitioner had participated in the proceedings initiated under Section 158BC of the Act. The information discovered in the course of the search, if capable of generating satisfaction for issuing a notice under Section 158BD, cannot altogether become irrelevant for further action under Section 158BD of the Act. (SLP No. 30282/2015, dt. 21-3-2017).
Gunjan Girishbhai Mehta v. DIT (SC): www.itatonline.org
21. S.194A : Deduction at source – Interest on compensation – Motor accident claim – Interest so computed in hands of each claimant was below threshold limit of ₹ 50,000 per year, considering the smallness of the amount the appeal was dismissed and the question of law left open
Dismissing the appeal of the Revenue, the Court held that; interest so computed in hands of each claimant was, below threshold limit of ₹ 50,000 per year. Considering the smallness of the amount the appeal was dismissed and the question of law was left open.
CIT v. Hansaguri Prafulchandra Ladhani and ors (2017) 383 ITR 82 (SC)
22. S.245H : Settlement Commission – Payment of tax was made before filing Special Leave Petition – Payment to be taken to have been made within time [S. 245C]
Assessee could not make the payment within time granted by the Settlement Commission. On a writ the High Court refused to extend time. The assessee filed SLP and payment was made before filing of the SLP. Allowing the petition the Court held that, the payments was to be taken to have been made within time. (AY. 2004-05 to 2010-11)
Sandeep Singh v. UOI (2017) 393 ITR 77 (SC)
23. S.254(2) : Appellate Tribunal-Rectification of mistake apparent from the record – Non consideration of paper book filed is a mistake apparent from the record, Tribunal was directed to hear the appeal of the assessee afresh on the basis of documents which have been already found to be filed by the assessee
Allowing the petition the Court held that non consideration of paper book filed was a mistake apparent from the record, Tribunal was directed to hear the appeal of the assessee afresh on the basis of documents which had already been found to have been filed by the assessee. (AY. 1996-97)
Nisha Synthetics Ltd. v. CIT ( 2017) 145 DTR 345 (SC)
24. S.271(1)(c) : Penalty – Concealment – Omission by the AO to explicitly specify in the penalty notice whether penalty proceedings was being initiated for furnishing of inaccurate particulars or for concealment of income makes the penalty order liable for cancellation
The Karnataka High Court had to consider the following question of law.
“Whether, omission of assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case?”
The High Court ruled in favour of the assessee with the following observations:
“The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(1)(c) of the Income-tax Act, 1961 (for short ‘the Act’) to be bad in law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of CIT v. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565. In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed.”
The Department filed a Special Leave Petition to challenge the aforesaid judgment of the High Court. HELD by the Supreme Court dismissing the SLP: (CC. No. 11485/2016, dt. 23-11-2015)
“We do not find any merit in this petition. The Special Leave Petition is, accordingly, dismissed.” (AY. 2009-10 )
CIT v. SSA’s Emerald Meadows (SC); www.itatonline.org
25. S.271(1)(c) : Penalty – Concealment – Income disclosed in return and income assessed is nil, penalty is not leviable
Dismissing the appeal of the Revenue, the Court held that penalty is not leviable if the income disclosed in the return and the income assessed is nil.
JCIT v. Classic Industries Ltd (2017) 393 ITR 20 (SC)
Finance Act, 2016 – Pradhan Mantri Garib Kalyan Yojna, 2016
26. S.199A : Pradhan Mantri Garib Kalyan Yojna, 2016 – Court declined to enter into or encroach upon policy making arena and suggest a different policy on ground that it was not within its domain [Constitution of India]
Challenging Section 199A of the Finance Act, 2016, Pradhan Mantri Garib Kalyan Yojna, 2016 the petitioner urged for a different and better scheme which could have got more good money in banks and honest taxpayers would have deposited amount. However Court declined to enter into or encroach upon policy making arena and suggest a different policy on ground that it was not within its domain court, therefore there was no justification to issue notice in instant petition and accordingly it was dismissed.
Siddharth Mehta v. UOI (2017) 244 Taxman 289 (SC)