Judicial Rulings and Finance Bill 2013
|ADMEASURING AN AGRICULTURE LAND AS CROW’S FLIES (AERIAL METHOD) OR ROAD DISTANCE METHOD|
|Proposed Amendment||A land shall not be treated as an agriculture land, if such land is situated within the distance measured aerially which should not be more than:|
(a) 2 Kms from the local limits of any Municipality which has a population of more than 10,000 but not exceeding 1,00,000;
(b) 6 Kms from the local limits of the Municipality, if the population is between 1 lakh to 10 lakhs; and
(c) 8 Kms, if the population is above 10 lakhs.
|Judicial Rulings||In following cases, for measuring a land Courts have decided to opt for the road distance as the most appropriate method and not the straight line distance or Aerial Method:|
(1) CIT v. Lal Singh  195 Taxman 420 (Pun & Har.)
(2) CIT v. Satinder Pal Singh  188 Taxman 54 (Pun & Har.)
(3) Laukik Developers v. Dy. CIT  105 ITD 657 (Mumbai)
|TREATMENT OF KEYMAN INSURANCE POLICY ASSIGNED TO AN EMPLOYEE DURING TERM OF HIS EMPLOYMENT|
|SECTION 10(10D) AND SECTION 80C|
|Proposed Amendment||A Keyman insurance policy assigned to an employee during his term of employment, with or without consideration, shall continue to be treated as Keyman insurance policy for the purposes of Sec. 10(10D).|
In other words, exemption under Section 10(10D) will not be available to the employee, if Keyman insurance policy is assigned to him during the term of employment.
|Judicial Rulings||In CIT vs. Rajan Nanda and others  18 taxmann.com 98 (Delhi) it has been held by the Delhi High Court that once there is an assignment of Keyman insurance policy by employer Company to an employee, insurance policy gets converted into an ordinary policy and in that case, maturity value received by an employee would not be subjected to tax in view of exemption under Section 10(10D)|
|SHIFTING OF TAX LIABILITY IN CASE OF ‘BUY-BACK’ OF UNLISTED SECURITIES FROM SHAREHOLDERS TO COMPANY|
|SECTION 10(34A) AND SECTION 115QA|
|Proposed Amendment||A new section 115QA is inserted which provides that unlisted domestic company shall be liable to pay additional tax at 20% on any income distributed to a shareholder on account of buy-back of shares.|
The distributed income means the consideration paid by the company on buy-back of shares as reduced by the amount received by the company on account of issue of shares.
In view of Section 10(34A), once the company is charged for the difference between buy-back and issue price of the shares, then shareholders will not be charged for any income arising from sale of the shares to the company by way of buy-back.
|Judicial Rulings||(1) In RST In re,  19 taxmann.com 215 (AAR – New Delhi), the Authority held that once it is found that section 46A is attracted when there is a buy-back of shares, the gains have to be taxed in terms of the provisions of section 46A, read with section 48. In that case, the buy-back of shares would not be exempt in view of section 47(iv).|
(2) In Armstrong World Industries Mauritius Multiconsult Ltd., In re  24 taxmann.com 213 (AAR – New Delhi), the Authority allowed the benefit of India-Mauritius DTAA and held that capital gain from buy- back of shares is not taxable in India, as no material is placed by revenue to justify that tax payer had devised a scheme for avoidance of tax.
|NO DISTINCTION BETWEEN RURAL AND OTHER ADVANCES FOR ADJUSTING BAD DEBTS WITH THE PROVISION OF BAD DEBTS|
|Proposed Amendment||In case of Banks and Financial Institutions, to which section 36(1)(viia) applies, the amount of deduction in respect of the bad debts actually written off under section 36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account created under section 36(1)(viia) without any distinction between rural advances and other advances.|
|Judicial Rulings||(1) In the case of DCIT v. Karnataka Bank Ltd.  25 taxmann.com 235, the Supreme Court held that in case of scheduled bank, deduction under section 36(1)(vii) is allowable independently and irrespective of provision for bad and doubtful debts created by it in relation to advances made by its rural branches, provided the amount is not deducted twice under section 36(1)(vii) and 36(1)(viia) simultaneously.|
(2) In the case of Catholic Syrian Bank Ltd. v. CIT  18 taxmann.com 282, the Supreme Court laid down following principles with regard to deduction for bad debts:
(a) Provisions of sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields.
(b) If amount of bad debt actually written off in accounts of bank represents only debt arising out of urban advances, allowance thereof in assessment is not affected, controlled or limited in any way by provisions of Section 36(1)(vii).
(3) In the case of CIT. v. South Indian Banks Ltd.  191 Taxman 272 (Ker), the High Court held that for application of ceiling provided in Sec. 36(1)(vii), Legislature does not make any distinction between provision created in respect of advances made by rural branches of bank and advances made by other branches of bank.
|PARALLEL PROVISIONS IN LINE WITH SEC. 50C TO DEAL WITH TRANSFER OF IMMOVABLE PROPERTY FORMING PART OF STOCK-IN-TRADE|
|Proposed Amendment||Where the sales consideration arising on account of transfer of land or building or both (other than capital asset, i.e., stock-in-trade) is less than the value adopted by stamp valuation authorities, then for the purpose of computing profit and gains on such transaction, the value adopted by stamp valuation authorities shall be considered as full value of consideration.|
|Judicial Rulings||In the following cases, Courts have held that the actual sales consideration arising on transfer of land or building shall be the full value of consideration, even in cases where the valuation by stamp valuation authorities exceeds the apparent consideration. In other words, the provision of section 50C would have no application and it can’t be invoked in cases where immovable properties are held as stock-in-trade.|
(1) CIT v. M/S Kan Construction And Colonizers (P) Ltd  20 taxmann.com 381 (Allahabad)
(2) K.R. Palanisamy v. Union of India  180 Taxman 253 (Mad.)
(3) Asst CIT v. Excellent Land Developers (P.) Ltd.  1 ITR (TRIB.) 563 (Delhi)
(4) CIT v. Thiruvengadam Investments (P.) Ltd  320 ITR 345 (Mad.)
|IMMOVABLE PROPERTY RECEIVED FOR INADEQUATE CONSIDERATION GIVES RISE TO INCOME FROM OTHER SOURCES|
|Proposed Amendment||Where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as income from other sources.|
The existing provisions provide that where any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property would be charged to tax as income from other sources. The existing provision does not cover a situation where the immovable property has been received by an individual or HUF for inadequate consideration.
|Judicial Rulings||(1) In CIT v. Khoobsurat Resorts (P.) Ltd.  28 taxmann.com 93, the Delhi High Court held that the provision of section 50C enabling the revenue to treat the value declared by an assessee for payment of stamp duty, ipso facto, can’t be a legitimate ground for concluding that there was undervaluation in the acquisition of immovable property. If Parliamentary intention was to enable such a finding, a provision akin to section 50C would have been included in the statute book to assess income on the basis of a similar fiction in the case of an assessee who acquires such an asset.|
(2) In the following cases, the Courts held that in no case stamp duty valuation can be treated to be the purchase price. There is no rule of law to the effect that the value determined for the purpose of stamp duty is the actual consideration passing between the parties to sale:
(a) Krishna Kumar Rawat v. Union of India  214 ITR 610 (Raj.)
(b) Dinesh Kumar Mittal v. ITO  193 ITR 770 (All)
(3) Unless it was established on record that some additional consideration was passed to seller from purchaser, it could not be said that revenue had any right to make any addition holding that land was sold for a higher price as was held in the case of CIT v. Bhanwarlal Murwatiya  215 CTR 489 (RAJ).
|THE TAX INCENTIVE UNDER SECTION 80JJAA INTENDED FOR EMPLOYMENT OF BLUE COLLARED EMPLOYEES ENGAGED IN MANUFACTURING SECTOR|
|Proposed Amendment||The deduction shall be available to that Indian company only which is deriving profits from manufacture of goods in its factory.|
The amount of deduction shall be at 30% of additional wages paid to the new regular workmen employed in such factory, in the previous year, for three assessment years, including the assessment year relevant to the previous year in which such employment is provided.
|Judicial Rulings||In Asstt. CIT v. Texas Instruments (India) (P.) Ltd.  27 SOT 72(Bang.)(URO), the Tribunal allowed deduction to the assessee engaged in business of software development in respect of salary paid to new employees being software engineers, simply because the assessee was covered by the Industrial Disputes Act, 1947 as per notification of the Karnataka Government.|
|THE POWERS OF AO TO DIRECT SPECIAL AUDIT UNDER SECTION 142(2A) FURTHER WIDENED|
|SECTION 142(2A) AND SECTION 153|
|Proposed Amendment||The powers of the AO to direct special audit have been widened. The AO can now order a special audit not only due to the reason of nature and complexity of accounts but he can now order a special audit in the following additional circumstances:|
(a) The volume of the accounts;
(b) Doubts about the correctness of accounts;
(c) Multiplicity of transactions in the accounts; or
(d) Specialized nature of business activity of assessee.
An amendment is also proposed to Section 153 in respect of period to be excluded from the period of limitation for completion of assessments and reassessments. It provides that the period to be excluded shall be:
(1) the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited under section 142(2A); and
(a) Ending with the last date on which the assessee is required to furnish a report of such an audit under that sub-section; or
(b) Where such direction is challenged before a Court, ending with the date on which the order setting aside such direction is received by the Commissioner.
In other words, where direction of AO for special audit is challenged before a Court, the period to be excluded from limitation period of assessment shall end with the date on which the order setting aside such a direction is received by the Commissioner.
|Judicial Rulings||The expression “nature and complexity of accounts” has been interpreted by the various Courts in a very restricted manner. In the following cases Courts have divergent views on what will constitute nature and complexity for the AO to direct a special audit under section 142(2A).|
(1) In Delhi Development Authority v. Union of India  25 taxmann.com 234 (Delhi), the High Court held that the accounts do not become complex merely because there are large number of entries. Numerousness of entries by itself does not lead to ‘complexity of accounts’
(2) In V. Vishnudas Kini v. Dy CIT  109 Taxman 15 (Ker.), the High Court justified the special audit as gross receipts and expenses claimed under various heads were more than 2 crores, volume of vouchers and bills were big and correctness of expenses could not be verified without a laborious task.
(3) In ATS Infrastructure Ltd. v. Asst. CIT  30 taxmann.com 361 (All), the High Court confirmed the special audit as the assessee had opted for dubious method of accounting.
(4) In the following cases the term ‘complexity of accounts’ has been defined:
(a) Swadeshi Cotton Mills Co. Ltd. v. CIT  32 Taxman 271 (All)
(b) Sahara India (Firm) v. CIT  169 Taxman 328 (SC)
|‘TAXES DUE’ INCLUDE INTEREST AND PENALTY WHEN RECOVERABLE FROM DIRECTORS OR PARTNERS OF COMPANY OR LLP RESPECTIVELY|
|SECTION 167C AND SECTION 179|
|Proposed Amendment||Where tax is due from a LLPs/Companies and such tax can’t be recovered from them, then the relevant partners/directors shall be jointly and severally liable for payment of the ‘tax due’.|
The Finance Bill, 2013 proposes a clarificatory amendment by way of an Explanation that the expression ‘tax due’ would include penalty, interest or any other sum payable under the Act.
|Judicial Rulings||In the following cases, Courts have held that the phrase ‘tax’ as contemplated under section 179 doesn’t include penalty and interest. Thus, only tax due excluding penalty and interest can be recovered from the directors of private company under section 179:|
(1) Maganbhai Hansrajbhai Patel v. Astt. CIT  26 taxmann.com 226 (Guj.)
(2) Sanjay Ghai v. Asstt. CIT  26 taxmann.com 203 (Delhi)
(3) H. Ebrahim v. Dy. CIT  185 Taxman 11 (Kar.)
|SEIZED ASSETS ARE NO LONGER AVAILABLE FOR ADJUSTMENT TOWARDS ADVANCE TAX LIABILITY|
|Proposed Amendment||“Existing liability” does not include advance tax payable in accordance with the provisions of the Act.|
|Judicial Rulings||Various Courts have taken a view that the term “existing liability” includes advance tax liability of the assessee. In the following cases, it was held that amount of cash seized from assessee in search proceedings under section 132 can be adjusted against his advance tax liability:|
(1) Nikka Mal Babu Ram v. Asstt. CIT  41 SOT 407 (Chd.)
(2) Ram S. Sarda v. Dy. CIT  25 taxmann.com 455 (Rajkot)
(3) Satpaul D. Agarwal (HUF) v. Asst. CIT  62 TTJ (Mum.) 98
(4) CIT v. Ashok Kumar  334 ITR 355 (P&H).
|TAX RESIDENCY CERTIFICATE IS NOT SUFFICIENT TO CLAIM DTAA BENEFIT|
|SECTION 90 AND SECTION 90A|
|Proposed Amendment||Submission of TRC is a necessary but not a sufficient condition for claiming benefits under DTAA|
|Judicial Rulings||(1) The landmark judgment by the Hon’ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan [2003 132 Taxman 373 (SC)] is something which holds the forte, as far as matter related to TRC is concerned. It held that the TRC would be sufficient proof for claiming DTAA benefits.|
(2) Further, the Authority for Advance Rulings (AAR) in the case of Dynamic India Fund [ 23 taxmann.com 266 (New Delhi)] has given the benefit of provision of Indo-Mauritius Treaty based on existence of TRC.
(3) The Ruling of AAR in the case E Trade Mauritius Ltd. [ 190 Taxman 232 (AAR – New Delhi)] is also relevant here as in this case money was routed to India through Mauritian entity and the ultimate holding company was from USA. The AAR held that the benefits under the Indo-Mauritius Treaty could not be denied as the assessee was a resident of Mauritius holding TRC issued by Government of Mauritius.
|COMPULSORY PENALTY OF RS. 500 PER DAY, IF AIR IS NOT FURNISHED EVEN AFTER SERVICE OF NOTICE AND EXPIRY OF NOTICE PERIOD|
|Proposed Amendment||(1) If a person fails to furnish an Annual Information Return within the time prescribed, a penalty of Rs.100 per day during which the failure continues shall be levied.|
(2) Where such person fails to furnish the return within the period specified in the notice under section 285BA(5), a penalty of Rs. 500 for per day during which the failure continues, beginning from the day immediately following the day on which the time specified in such notice for furnishing the return expires, shall be levied.
|Judicial Rulings||This amendment and the new proviso is proposed in the light of the ruling of the Gujarat High Court in Patan Nagrik Sahakari Bank Ltd. v. Director of Income-tax (CIB)  20 taxmann.com 754 (Guj.) where facts were as under:|
(a) Assessee-co-operative bank claiming deduction under section 80P was unaware of its obligations to file AIR under section 285BA, as there were no CAs /other professionals who could guide it.
(b) Assessee failed to file AIR within due date of 31-8-2007.
(c) It received first notice under section 285BA(5) for AIR return on 17-12-2008 and it failed to file it within notice period. Only after it received second notice on 11-9-2009 that society filed AIR
(d) Penalty was imposed for violation of section 285BA by invoking section 271FA and order imposing penalty was challenged by a petition in the Gujarat High Court
The Gujarat High Court held as follows:
(a) For the period after service of the notice dated 17-12-2008 under section 285BA(5) of the Act, it could not be said that the petitioner had any reasonable cause for not filing the annual information return within a period of 60 days of service of the said notice.
(b) It was the case of the petitioner that till September 11, 2009, when the second notice was issued, it did not realize the seriousness of the matter and it was only thereafter that it took steps for furnishing the annual information return.
(c) However, merely because the petitioner had not immediately taken steps after the issuance of the first notice on December 17, 2008, it could not be said that the reasonable cause had been made out by the petitioner, thus, the period prior thereto had not to be taken into consideration while considering the quantum of penalty to be imposed under section 271FA of the Act.
(d) However, with effect from the date of service of the notice dated December 17, 2008, issued under section 285BA(5) of the Act, any default on the part of the petitioner would be viewed as a conscious disregard of its statutory obligation.
In view of above ruling of the Gujarat High Court the tax impact of the proposed amendment shall be as under:
(a) If reasons for non-filing of AIR till the date of service of notice under 285BA(5) are explained satisfactorily and income-tax authority is satisfied with assessee’s explanation that there was a reasonable cause for not filing return, no penalty is imposable by reason of section 273B for this period. Otherwise, penalty of Rs.100 per day for delay till date of service of notice.
(b) If AIR is filed within the 60 day notice period after receipt of notice, Rs. 100 per day penalty for delay from date of service of notice till date of filing, as there can be no reasonable cause within the meaning of section 273B for not filing return after date of service of notice. In this case penalty of Rs. 500 per day under proviso not applicable.
(c) If AIR is filed, after notice period, after receipt of notice, section 273B would not come to the rescue of the assessee. For notice period penalty would be Rs. 100 per day. For delay after the expiry of notice period, whether Rs. 500 per day would be leviable or Rs. 600 per day would be leviable (Rs. 100 per day under main provision and Rs.500 per day under proviso) is the moot question. Proviso does not say “further penalty”. So, it appears that only penalty of Rs. 500 per day is leviable for delay after expiry of notice period. However, if period of delay after expiry of notice period falls before 1-4-2014, penalty will be Rs. 100 per day as proviso comes into effect from 1-4-2014 only.
|APPROVAL FROM JOINT CIT IS NOT MANDATORY IF APPROVAL FROM CIT IS OBTAINED FOR ASSESSMENT IN SEARCH CASES|
|Proposed Amendment||With a view to remove the procedural ambiguity, the proposed proviso makes it clear that section 153D shall not apply requiring approval by Joint CIT, where the assessment / reassessment order is passed by the Assessing Officer with the prior approval of the Commissioner under sub-section (12) of section 144BA. It is because an order passed under Section 144BA(12) is with the approval of an authority higher than the JCIT|
|Judicial Rulings||In Akil Gulamali Somji v. ITO  20 taxmann.com 380 (Pune), the Tribunal held that an assessment order under section 153C can be passed by Assessing Officer only after obtaining prior approval under section 153D of Joint CIT inasmuch as compliance of section 153D is mandatory|