Section 269T of the Income –Tax Act – Whether repayment of capital to partners in the guise of uncrossed cheque would tantamount to invite penalty under section 269 T?

Section 269T of the Income –Tax Act – Whether repayment of capital to partners in the guise of uncrossed cheque would tantamount to invite penalty under section 269 T?

Case : ITO Vs M/s Universal Associates (ITAT Ahmadabad)

Issue : Whether repayment of capital to partners in the guise of uncrossed cheque would tantamount to invite penalty under section 269 T?

Facts of the Case:

Section 269T of the Income –Tax Act stipulates that no company (including a banking company), co-operative society or firm shall repay to any person any deposit otherwise than by an account payee cheque or account payee bank draft where the amount of the deposit, or where the amount of the deposit is to be repaid together with any interest, the aggregate of the amount of the deposit and such interest, is ten thousand rupees or more.

In this case , IT Appellate Tribunal was of the view that the assessee has been able to explain reasonable cause for failure to observe with the provisions of law under section section 269 T. The defendant firm repaid the partner’s capital along with interest at the time of their retirement through uncrossed cheques and it able to prove that it had reasonable cause for failure to comply with the provisions of law.

In this case , CIT was of the view that assessee made payments bona fide and the default was highly technical in nature and  hence, the learned CIT(A) found justification in defendant’s claim and thus in canceled the penalty.

The Appellate Tribunal in this case , was of the view that penalty levied by the Assessing Officer merely on technical mistake if any committed by the assessee which has not resulted in any loss of revenue, the levy of penalty was harsh and could not have been sustained in law.

Colorable Transactions of sale of shares of a closely held company can be regarded as transfer of land and hence, short term capital gain is payable.

Bhoruka Engineering Inds. Ltd. v. DCIT (ITAT Bangalore)-

In this case, Bhoruka Steel Ltd sold its land to Bhoruka Financial Services Ltd (BFSL) for a meager value of Rs 3.75 Crores. Immediately after that, the appellant company and BFSL sold their share holding of 98.73% to DLFCDL for Rs 89.28 Crores. The appellant company has not paid any tax for the above by devising a strategy. They moved to Magadh stock exchange from Bangalore stock exchange by paying STT and claimed exemption under Long Term Capital Gains. (LTCG) under u/s. 10(38) of the IT Act, 1961.

Bhoruka Engineering Inds. Ltd and its group have on the face of it sold their entire share holding in BFSL, but in fact, sold land itself to DLF-CDL and at the same time giving a colour of exempted long-term capital gains against the short-term capital gains arising on the transfer of the landed property. In the circumstances s and fact of the case, that this is a clear case of colourable device to escape payment of taxation on short-term capital gains. By selling the shares to DLF-CDL, the assessee company and its associates have in fact sold the assets and properties of BFSL which included the land as well, which if sold in the normal course, would be answerable to levy of short-term capital gains taxation.

If Assessing Officer fails to demonstrate link between tax-free investment and borrowed funds, no disallowance u/s 14A of interest expenditure

If Assessing Officer  fails to demonstrate link between tax-free investment and borrowed funds, no disallowance u/s 14A of interest expenditure

This was held in CIT vs. K. Raheja Corporation Pvt Ltd (Bombay High Court) – advocate for the Revenue could not show as to how interest on borrowed funds to the extent of Rs.2.79 crores was ascribable to earning dividend income which are not liable under Section 10(33) of the Act (as it then stood). Hence, in the facts of the present case, for want of any material or basis to hold that the interest expenditure directly or indirectly was ascribable for earning the dividend income, the decision of the Income Tax Appellate Tribunal in deleting the dis­allowance of interest made under Section 14A of the Act cannot be faulted

It was the opinion of the Income Tax Appellate Tribunal that the investments in mutual funds and equity shares were made by the assessee during the assessment years 1994­-95 till 1998-­99 and it has been time after time held by the Income Tax Appellate Tribunal that these investments have been made out of the assessee’s own funds and not out of the borrowed funds. Even the investments made in the assessment year 1999­-2000 have been held by the Income Tax Appellate tribunal to be out of assessee’s own funds and not out of borrowed funds by its order dated 24^th June 2011.

It is to be noted that in this case, Section 14A was not on the statute book when the Income Tax Appellate Tribunal passed orders in the assessment years prior to the assessment year in question.

In case of under-assessment or a mistaken order, A.O. can rectify the mistake u/s 154 or make a reassessment u/s 147 and not under Both

In EID Parry 216 ITR 489 (Mad) it was held that if an assessment happens to be a mistaken order, or an under-assessment the means available to the Assessing Officer  is either to make a reassessment u/s 147 or to rectify the mistake u/s 154 While, it is correct, as held in the above cases that the AO has to decide between the two and cannot begin both proceedings at the same time, the principle of constructive res judicata made applicable by the Madras High Court that the AO having started  rectification proceedings u/s 154 should stick to the same only and cannot drop that and his  proceedings  u/s 147 is not acceptable. The fact that the AO invoked s. 154 and dropped it does not affect the legitimacy of re-assessment u/s 147. The same principle was confirmed in the  CIT vs. M/s India Sea Foods by Kerala High Court.

In the above case , it was argued that ITO  can give up a rectification proceedings initiated under Section 154 and then proceed to make an income escaping assessment under Section 147 of the Income Tax Act for the same assessment year. The IT department appealed to Tribunal and The Tribunal based on decision of the Supreme court in ASST. COMMISSIONER OF INCOME TAX VS. RAJESH JHAVERI STOCK BROKERS P. LTD. reported in (2007) 291 ITR 500 held that an intimation under Section 143(1)(a) itself is an assessment which could be revised through an income escaping assessment under Section 147 of the Act.

Kerala High Court was of the view that Assessing Officer himself realized the mistake of initiating rectification proceedings and when he noticed that the correct recourse open to him under the Act is to make an income escaping assessment, he is entirely free to do it and in our view, there was nothing wrong in the Assessing Officer giving up rectification proceedings and the ITO was  initiating an income escaping assessment by issuing notice under Section 148 within the statutory period and hence , there is no wrong in doing the same.

Whether Owning a House will deny the exemption from Capital Gains under Section 54 F of Income Tax Act

A mother wanted to sell a old house which was bought by her late husband.So,  the property was sold and proceeds were divided between her three sons to  purchase three separate properties. This arrangement was fine so far as  practical life was concerned. However, wherever there is money, there is taxation. You have to pay either a short-term capital gain or long-term capital gain taxes .

Like,  it is in the above case , sons’ purchased  three properties from the sale  of one. The question: Is the exemption available when a person sells one residential house and reinvests the long-term capital gain in more than one house? The main issue causing the confusion and ambiguity is the usage of the  article ‘a’ before ‘residential house’. The word seems to imply that the  exemption would be available only against purchase of one residential house  and not two or more. In other words, the law seems to suggest that when a  taxpayer invests the capital gains in purchasing or constructing two  residential houses, only one of these, as opted for by the taxpayer, could be  allowed for the tax concession. But whether  this the true intention of the  legislation? Adopting the literal meaning of the article “a” as “only one”  in  Mukhi v Joint CIT Appeal no 3369 (BOM) of 2000 [AY 96-97] dt 16.1.02 ITD  649 (Mum) ITAT Mumbai Bench ‘C’, it was held that ‘a’ can be ‘any’ but ‘any’  cannot be ‘many’.

Then  there is the Allahabad High Court case of Shiv Narain Chaudhari v CWT  (108ITR104) where it was held that if the two flats of the building are  situated in same compound and within common boundaries and have unity of  structure, then they could be regarded as constituting one house.

Section 54F was that the investor should not be owning another house  other than the new house. In other words, say the taxpayer had sold some  commercial property. He could save the consequent capital gains tax by  investing the net sale proceeds in a residential house (new house). However,  this was allowed only upon the condition that he didn’t already own another  residential house (old house). (Subsequently the law has been amended and now  the taxpayer can own one residential house other than the new house –but this  was before the amendment was carried out. However, the principle applies  equally even today.)

 In the case of ITO vs Rasiklal N. Satra  (280ITR243 dt 19.9.05) ,the assessee sold shares (this was when long-term capital  gains earned on shares were taxable) and claimed exemption under Sec. 54F by  investing the same in purchase of residential flat at Vashi, Navi Mumbai. The  Assessing Officer (AO) noticed that the assessee was co-owner of a flat in  Sion (West), Mumbai.

Now  since the assessee already owned an old house, the AO denied him the Sec. 54F  exemption. To this, the assessee contended that since he co-owned the old  house along with his wife (they were joint owners), he was not an independent  owner of the house and exemption can be denied only where he was the absolute  owner of the house. It was held that since the legislature has used the word  ‘a’ before the words ‘residential house’, it must mean a complete residential  house and would not include a shared interest in the house. Where the  property is owned by more than one person, it cannot be said that any one of  them is the sole owner of the property. In such case, no individual person on  his own can sell the entire property. Joint ownership is different from absolute  ownership. Ownership of a residential house meant ownership to the exclusion  of all others. Since Satra did not have full ownership of the house, it was  held that the he was not the owner of ‘a’ residential house on the date of  sale of the shares. Consequently, the exemption under section 54F could not  be denied to him.

In  spite of such contradictory decisions arising out of ambiguity, CBDT has not  issued any clarification in spite of requests from many quarters. We have  been given to understand that some of the ITOs have been sticking to the  literal meaning of ‘a’ as ‘one’, and others don’t. A clear cut clarification  from CBDT would help a number of taxpayers as also reduce the number of  litigations arising out of this issue.

 

Courtesy - Business Standard and Mr.SANDEEP SHANBHAG , Director, Wonderland Consultants

supplying seed and buying back the produce and market them seeds will fall under agricultural income? Whether it is an exempted Income?

CIT v. Namdhari Seeds P. Ltd ( 2012) 341 ITR 342 (Karn) (High court) 

S.2(1A):Agricultural income- Seeds-Company- Company supplying seeds to farmers under agreement income derived by company is not agricultural income.

The assessee company is in the business of cultivation, production and marketing of open-hybrid seeds both for the domestic and international market and entered in to agreement with the farmers for production of open –hybrid seeds for its own benefit or on behalf of its overseas principals. Assessee Company supplied the seeds, supervised the cultivation of seeds. After harvesting, the company purchased from farmers at fixed price. Assessee company has done the process of cleaning, grading and converted into certified seeds. Assessee has claimed entire income is exempt under section 10(1). Assessing Officer denied the exemption. On appeal before the Tribunal the tribunal opined that 10 percent of the net profit should be treated as business income and balance 90 percent of the net profit as agricultural income exempt from tax. On appeal to High Court by revenue the court held that the income is not agricultural income.( A.Y. 1998-99 to 2004-05)

REVOCATION OF A TRUST'S REGISTRATION of a TRUST UNDER SECTION 12 AA (1) (B)(II)

Once Commissioner grants registration to a trust under section 12AA(1)(b)(ii) after satisfying himself about activitiesof trust, such a registration cannot be cancelled by following very sameprovision of section 12AA(1)(b) to go into genuineness of activities of trust

HIGH COURT OF MADRAS

Commissioner of Income -tax-I, Madurai

v.

Sarvodaya Ilakkiya Pannai

Section 12AA of theIncome-tax Act, 1961 - Charitable or religious trust - Registration procedure -Assessment years 2008-09 to 2010-11 - Whether once Commissioner grantsregistration to a trust under section 12AA(1)(b)(ii) after satisfying himselfabout activities of trust, such a registration cannot be cancelled by followingvery same provision of section 12AA(1)(b) to go into genuineness of activities of trust - Held, yes - Whether, however, Commissioner is empowered to revokecertificate in terms of section 12AA(3) in event Commissioner is satisfied subsequently, i.e., after registration that activities of such trust orinstitution are not genuine or not being carried out in accordance with objectsof trust or institution as the case may be - Held, yes - Assessee-trust was formed with object of publishing and selling Sarvodaya Literature as also Gandhian and Sarvodaya ideologies - Commissioner granted registration toassessee-trust under section 12A - Subsequently, Commissioner passed an order under section 12AA(3) cancelling registration on ground that assessee wasengaged in purchase and sale of books which was a commercial activity - Onappeal, Tribunal set aside order of Commissioner holding that none ofconditions under section 12AA(3) were violated and therefore, satisfaction whichwas arrived at by Commissioner was not justified - Whether on facts and, having regard to aforesaid legal position, impugned order passed by Tribunal did not require any interference - Held, yes [In favour of assessee]