| S. 271D/ 271E: If assessee's plea about compulsion to pay/ receive loans in cash is not disputed, the violation of s. 269SS/269T is deemed to be bonafide and does not attract penalty |
According to the plea raised, the persons who have advanced these loans to the assessee are relatives of a salesman who reside in a village and were having no bank account. Such contention of the assessee has not been discarded or disproved. It is also not mentioned in the penalty order that the aforementioned amount taken by the assessee in violation of section 269SS and repayment thereof in violation of section 269T was not bonafide transaction and the same was made with a view to evade tax. If it is so, then according to the decision of Hon'ble Bombay High Court in the case of CIT vs. Triumph International Finance (I) Ltd 345 ITR 720, no penalty is imposable either under section 271D or under section 271E as the explanation submitted by the assessee would be considered to be reasonable cause under section 273B of the Act.
| S. 41(1)/68: Failure to establish genuineness of old liabilities means that there is a remission/ cessation of such liabilities |
The assessee failed to furnish the details in respect of sundry creditors amounting to Rs.23,34,721/-. Admittedly, these credits continued to be carried forward year after year. In the normal course everybody would ordinarily claim the dues and usually they take steps to recover the dues if it is a genuine liability. In this case, the liability remains to be recovered year after year. For invoking provisions of section 68 of the Act, if any sum is to be found credited in the books of the assessee maintained during the previous year, only then it would be possible to make addition under section68 of the Income tax Act. In the case of carried forward credit, which is from earlier year, provisions of section 68 cannot be applied. In the present case, the liabilities outstanding in the books of account of the assessee for the assessment year under consideration and only the provisions of the section 41(1) of the Act could be applied. In the present case the assessee failed to establish the actual existence of the impugned disputed amount in the books of account of the assessee. The assessee has drawn its balance sheet based on its books of account, in which the above amount, were being claimed as liabilities due, to various parties, as at the end of the accounting year under dispute. However, the assessee failed to establish the genuineness of these liabilities by producing supporting evidence. Simply the liabilities being reflected against certain names in the books of account would not establish the genuineness of liabilities (ITO vs. Shailesh D. Shah/ Yusuf R Tanwar vs. ITO (ITAT Mumbai) & ITO vs. Sajjan Kumar Didwani 65 SOT 179 followed)
| Applying commonsense approach, unclaimed liabilities are assessable as income even if not credited to P&L A/c |
If an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. Fact that amount is not credited to the P&L A/c & is shown as a liability makes no difference if creditor has written off the debt (CIT V/s T V Sundaram Iyengar and Sons Ltd 222 ITR 344 (SC) followed)
PFA
| S. 29/37(1): Loss due to fraud & financial irregularities has to be allowed in the year of detection |
Loss due to fraud and financial irregularities have to be allowed as a deduction in the year of detection. This is in line with the Board circular No.35D(XLVII- 20)(F.No.10/48/65-IT(A-I) dated 24.11.1965. The Hon'ble Supreme Court in the case of Associated Banking Corporation Of India Limited. vs CIT reported in 56 ITR 1(SC) has held that "the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realized that the amount embezzled could not be recovered" . In another decision, the Hon'ble Supreme Court in the case of Badridas Daga V/s CIT reported in 34 ITR 10) (SC) has held that "the losses which have been suffered by the assessee as a result of misappropriation by an employee have (1) which was incidental to the carrying on the business and should therefore be deducted in computing the profit of the business."
| S. 50C vs. s. 11: If a charitable institution invests the entire sale consideration in other capital asset, s. 50C should not be invoked |
The only issue in the appeal is, therefore, whether while taking the Value of Sale of capital Asset being immoveable property in case of an institution registered u/s 12A whether the provisions of section 11(1A) will prevail or deeming provisions of section 50C will apply.
The assessee is a charitable society and is registered under section 12A of the Act. The question of applicability of provisions of section 50C of the Act on transfer of capital asset in the case of a charitable society was examined by the Tribunal in the case of ACIT vs. Shri. Dwarikadhish Temple Trust, Kanpur in I.T.A. No. 256 & 257/LKW/2011, in which the Tribunal has held that where the entire sale consideration was invested in other capital asset, provisions of section 50C of the Act should not be invoked. It is specifically mentioned in section 50C(1) of the Act that the stamp duty value is to be considered as full value of consideration received or accruing as a result of transfer for the purpose of section 48 of the Act. It is true that the assessee is a charitable trust and the income of the assessee has to be computed u/s 11 of the Act. As per sub section (1A) of section 11 of the Act, if the net consideration for transfer of capital asset of a charitable trust is utilized for acquiring new capital asset, then the whole of the capital gain is exempt.
Finance Bill 2015: Critique Of Proposed Amendment To S. 2(15)
SHRI M. A. BAKSHI, VICE PRESIDENT (RETD), ITAT
The author argues with conviction that the proposed amendment to section 2(15) of the Income-tax Act will have the unintended consequence of benefiting large non-profit organisations while adversely affecting smaller non-profit organisations
Section 11 of the Income-tax Act 1961 provides for exclusion of income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of [fifteen] per cent of the income from such property;
where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes
Section 2(15) of the Income-tax Act 1961 defines charitable purposes as under:-
2(15) 'charitable purpose' includes relief of the poor, education, medical relief, preservation of environment (including water heads, forests and wildlife) and preservations of monuments or places of or objects of artistic or historical interest and the advancement of any other object of general public utility:Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;"Provided further that first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty five lakh rupees or less in the previous year
The present definition in section 2(15) was substituted by Finance Act 2008 with effect from 01.04.2009 and first proviso was added to state that the "advancement of any other object of general public utility" will cease to be a "charitable purposes" if it involves any trade commerce or business. Preservation of environment and preservation of monuments or places of historical or artistic interest have also be added to the definition implying that these are now taken out of the category of general public utility
Second proviso to section 2(15) added by Finance Act 2010 with effect from 01.04.2009 provides an exception to the application of first proviso if the turnover from the activity of trade, commerce or business does not exceed Rs 10 lakh in the previous year. The limit of Rs 10 Lakh was increased to Rs 25 Lakh by the Finance Act 2011 with effect from 01.04.2012.
The Finance Minister in his Budget speech of 2008 had stated that the CBDT would issue guide lines to determine whether an entity is carrying on any activity in the nature of trade commerce or business and that Chamber of commerce and similar organisations would not be affected by the amendment. However no such guide lines were issued. Department has issued notices to several organizations resulting in unwarranted litigation.
Delhi High Court in the case of INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND ANOTHER v. DIRECTOR GENERAL OF INCOME-TAX (EXEMPTIONS) AND OTHERS. [2012] 347 ITR 99 (Del) held that
The first proviso to section 2(15) introduced with effect from April 1, 2009 applies only if an institution is engaged in advancement of any other object of general public utility and postulates that such an institute is not "charitable" if it is involved in carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce, or business.
It further held that the proviso is inapplicable for the entities engaged in the activities of (i) relief of the poor ; (ii) education ; (iii) medical relief ; (iv) preservation of environment (including watersheds, forests and wildlife) ; (v) preservation of monuments or places or objects of artistic or historical importance
The constitutional validly of proviso to section 2(15) of the Income-tax Act 1961 was challenged in the Delhi High in the case of India Trade Promotion Organization vs. UOI (www.itatonline.org) The High Court vide judgment Dated January 22, 2015 Held that If the definition of "charitable purpose "in section 2(15) and section 10(23C) (iv) is construed literally, it is violative of the principles of equality & unconstitutional.
In order to uphold the Constitutional validity of the proviso to section 2(15) it was held that the proviso shall have to be read down;
I quote from the judgement "The expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running foul of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes (Info Parks Kerala v. Deputy Commissioner of Income-tax (2010) 329 ITR 404 (Ker) and Andhra Pradesh State Seed Certification Agency v. Chief Commissioner of Income-tax-III, Hyderabad 256 CTR 380 (AP) dissented from)
Finance Bill 2015 proposes to amend section 2(15) as under:-
In section 2 of the Income-tax Act, with effect from the 1st day of April, 2016,—(a)……..(b) in clause (15),—(i) after the word "education,", the word "yoga," shall be inserted;(ii) for the first and the second provisos, the following proviso shall be substituted, namely:—"Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;";
the proposed amendment in the proviso to section 2(15) is likely to benefit non -profit organisations having substantial receipts but will adversely affect non-profit organisations of small magnitude
As is evident the Bill Proposes to include Yoga in the definition of Charitable purposes for purposes of section 11. The proposed amendment in clause (15) of section 2 of the Income-tax Act 1961 further provides that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless–– (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year
In my humble view the proposed amendment in the proviso to section 2(15) is likely to benefit non -profit organisations having substantial receipts but will adversely affect non-profit organisations of small magnitude
Examples As per the proposed amendment a non-profit organisation with annual receipt of 500 Crs out of which 100 Crs may be from activities in the nature of trade, commerce or business will not lose the status of a Public charitable trust as receipts from the activities in the nature of trade commerce or business of the organisation do not exceed 20 % of the annual receipts of the previous year.
On the other hand a non-profit organisation with gross annual receipts of Rs 5 lakh will lose the status of the Public charitable trust if the receipts from the activities in the nature of trade commerce or business exceed 1 lakh in the previous year
Technically a non-profit organisation with petty receipt of Rs 100 from an activity which may fall in the nature of trade commerce or business will also lose the status of public charitable trust if it does not have any other receipt in the previous year.
This, in my humble view, may not be the intention of the proposed legislation. Finance Minister may consider the consequence of the proposed amendment before pressing it for approval of the parliament
Suggestion: The limit of 25 lakh under the existing law may simply be enhanced to 50 lakh or so Or Limit of "50 lakh( or any figure) or 20 % of the receipts of the previous year whichever is higher "may be incorporated"
ITAT Bar Association /Bombay chartered Accountants Society may take up the matter with the Finance Minister
PFA
| Transfer Pricing: The "bright line test" has no statutory mandate and a broad-brush approach is not mandated or prescribed. Parameters specified in paragraph 17.4 of Special Bench verdict in L. G. Electronics are not binding on the assessed or the Revenue. Matter remanded to the Tribunal for de novo consideration because the legal standards or ratio accepted and applied by the Tribunal was erroneous |
This High Court had to consider various issues arising from the judgement of the Special Bench of the Tribunal inL.G. Electronics India Pvt. Ltd. versus Assistant Commissioner of Income Tax, reported as (2013) 152 TTJ 273 (Del). The principal issue was whether advertisement, marketing and sale promotion expenditure ("AMP", for short) beyond and exceeding the "bright line" is a separate and independent international transaction undertaken by the resident Indian assessee towards brand building for the brand owner, i.e. the foreign Associated Enterprise ("AE", for short). There were several other core issues pertain to aspects of arm's length pricing of international transactions. HELD by the High Court remanding the issue to the Special Bench for reconsideration of the primary issue:
(i) In case of a distributor and marketing AE, the first step in transfer pricing is to ascertain and conduct detailed functional analysis, which would include AMP function/expenses.
(ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligations performed by the tested party including AMP expenses.
(iii) A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases.
(iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs.
(v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction.
(vi) The Assessing Officer/TPO can reject a method selected by the assessed for several reasons including want of reliability in the factual matrix or lack / non-availability of comparables. (see Section 92C(3) of the Act).
(vii) When the Assessing Officer/TPO rejects the method adopted by the assessed, he is entitled to select the most appropriate method, and undertake comparability analysis. Selection of the method and comparables should be as per the command and directive of the Act and Rules and justified by giving reasons.
(viii) Distribution and marketing are inter-connected and intertwined functions. Bunching of inter-connected and continuous transactions is permissible, provided the said transactions can be evaluated and adequately compared on aggregate basis. This would depend on the method adopted and comparability analysis and the most reliable means of determining arm's length price.
(ix) To assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. "Brand" has reference to a name, trademark or trade name and like "goodwill" is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value.
(x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The "bright line test" has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate "routine" and "non-routine" AMP or brand building exercise by applying "bright line test" of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be "NIL", or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as "NIL" when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). This would be necessary when the arm's length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses.
(xi) The Assessing Officer/TPO for good and sufficient reasons can de-bundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregate basis.
(xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. The exercise undertaken should not result in over or double taxation. Thus, the Assessing Officer/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off.
(xiii) CP Method is a recognised and accepted method under Indian transfer pricing regulation. It can be applied by the Assessing Officer/TPO in case AMP expenses are treated as a separate international transaction, provided CP Method is the most appropriate and reliable method. Adoption of CP Method and computation of cost and gross profit margin comparable must be justified.
(xiv) The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm's length price by applying CP Method, cannot be again factored or included as a part of inter-connected international transaction and subjected to arm's length pricing.
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