Management of risk emanating from usage of social media by financial institution
Abstract
Nowadays social media is being used by financial institutions for advertising and marketing, product research, facilitating applications for new accounts, providing incentives, inviting feedback from the public and engaging with existing and potential customers, for example by resolving customer complaints or providing loan pricing.
As the number of social media platforms grows, so does the presence of social media in consumers' daily lives.
Since this form of customer interaction tends to be informal and occurs in a less secure environment, it presents some unique challenges to financial institutions like harm to consumers, compliance and legal risks, operational risks, reputation risks etc. Due to the probable impact of social media on financial institutions, Federal Financial Institutions Examination Council (FFIEC) has proposed guidance to financial institutions called "Social Media: Consumer Compliance Risk Management Guidance" vide docket no. FFIEC-2013-0001 on 17th January 2013, with the objective to ensure that all financial institutions effectively manage risk associated with social media usage and access.
In this white paper, we will look at the probable risk/impact of social media activities on financial institutions and how technology could play an effective role in managing such risk.
1. Introduction
Organizations have started using social media platform for integrating social activities within the employee lifecycle to encourage ongoing learning, increasing market share and revenue through improved customer relationships, enabling interaction and iteration to foster collaboration and innovation.
Social media technology is turning out to be a force for businesses to reckon with a breathtaking speed considering its far reaching effects across the entire range of business activity, from product development to marketing and sales to customer support.
The change social media has created, is happening so fast and at such large scale that it is posing unique challenges and risks to financial institutions including the potential for employees involved in social media to inadvertently leak sensitive company information, criminal hackers' ability to "re-engineer" confidential information — log-ins and passwords, for example — based on information obtained from employee posts, employee misuse of social applications while at work, damage to a brand or company reputation from negative employee or customer posts — or even from well-intentioned posts with unintended consequences, loss of customers, revenue or market share from any of the above
In order to ensure effective management of risks associated with usage of social media by financial institutions, the Federal Financial Institutions Examination Council (FFIEC) has proposed a guideline for financial institutions vide docket no. FFIEC-2013-0001 dated 17th January 2013, requiring financial institutions to have an adequate risk management program in place for identification, measurement, monitoring and control of the risks associated with social media activities.
In this white paper, we will look at the probable risk/impact of social media activities on financial institutions and how technology can be helpful in managing such risk.
2. Social Media platforms and their usage by financial institutions
Social Media is continuing to evolve and so thus its definition. Some recent definitions and various social media platforms in usage are as under
Top 20 Performers in social media such as Face book, Twitter and YouTube
| Power 100 Rank | Financial Institution | Country | Face book 'Likes' | Twitter Followers | YouTube Views | Power 100 Score |
| 1 | Chase | USA | 3,843,994 | 22,395 | 112,020 | 2,621 |
| 2 | Capital One | USA | 2,926,147 | 68,263 | 3,386,539 | 2,364 |
| 3 | ICICI Bank | India | 1,874,808 | 7,326 | 766,769 | 1,763 |
| 4 | E*TRADE Bank | USA | 51,614 | 11,845 | 14,898,145 | 1,578 |
| 5 | BofA | USA | 843,498 | 121,865 | 1,194,317 | 940 |
| 6 | Axis | India | 983,576 | 1,241 | 1,066,934 | 843 |
| 7 | GT Bank | Nigeria | 1,045,292 | 41,171 | 226,005 | 841 |
| 8 | Wells Fargo | USA | 495,175 | 36,718 | 4,741,294 | 759 |
| 9 | Citi | USA | 675,841 | 29,406 | 1,797,126 | 677 |
| 10 | Commonwealth | Australia | 359,812 | 18,438 | 1,529,065 | 476 |
| 11 | FNB | South Africa | 336,669 | 22,202 | 626,026 | 441 |
| 12 | Navy FCU | USA | 520,621 | 6,795 | 347,779 | 434 |
| 13 | Bank of Nova Scotia | Canada | 168,625 | 13,592 | 3,926,160 | 421 |
| 14 | NAB | Australia | 94,611 | 15,219 | 3,843,812 | 385 |
| 15 | TD Canada | Canada | 197,609 | 19,134 | 468,896 | 244 |
| 16 | Barclays | UK | 101,282 | 10,435 | 1,825,145 | 237 |
| 17 | Ally Bank | USA | 79,295 | 11,837 | 1,087,401 | 191 |
| 18 | RBC | Canada | 124,368 | 3,308 | 189,176 | 186 |
| 19 | PNC | USA | 112,390 | 7,374 | 1,189,666 | 178 |
| 20 | Goldman Sachs | USA | 24,844 | 38,164 | 435,369 | 167 |
Source: Introducing the Social Media Power 100 Rankings for Banks and Credit Unions dated 8th April 2013 in The Financial Brand. Link: http://thefinancialbrand.com/28643/social-media-power-100-banking-launch/
3. Risks emanating from usage of Social media
The influence of social media cannot be denied as they provide a huge opportunity to financial institutions from product development to marketing and sales to customer support.
However poor due diligence, oversight or lack of control leads to risks as usage of social media to attract and interact with customers can impact a financial institution's risk profile in number of ways such as:
| Social media risks | Impact area | Examples |
| Data | Unauthorized disclosures, Leakage of intellectual property |
| Technology | Virus, Worms, Trojans, impact on network availability | |
| Employee | HR policy violations, social engineering/impersonation, loss of productivity | |
| Financial institution | Copyright issue, lack of situational awareness, privacy risk, loss of control over content, trademark infringement | |
| Public | Unsatisfied constituents, negative publicity, false impression/misguidance |
3.1 Compliance and Legal Risks
Failure to address possibility of infringement or non-compliance with laws, rules, regulations, polices, procedures, ethical values applicable to social media use, emanates following types of compliance and legal risks
- Defamation or libel risk
- Infringement of copyright laws
- Unauthorized disclosure of confidential information
- Intellectual property rights leakage
- Enforcement actions and/or civil lawsuits for non-compliance with industry regulations etc
3.2 Reputational risk
Negative public opinion, privacy or transparency issues and consumer protection concerns may inflate reputation risks such as
3.2.1 Fraud and brand identity risks
Protecting the brand identity in a social media context can be challenging. Risk may arise in many ways, such as through
- negative comments made by other social media users,
- Spoofs and fraudsters,
- Posting unfavorable or confidential information on a public site.
A financial institution needs to consider the use of social media monitoring tools and techniques to identify and respond to the heightened risk appropriately. Further, an institution's policies and procedures should include monitoring and procedures for timely addressing fraudulent use of the institution's brand, such as through phishing or spoofing attacks.
3.2.2 Third-party risks
The proposed guidance states that use and monitoring of an institution's social media site is a direct responsibility of a financial institution, even if the functions are delegated to a third party. Even if a social media site is maintained by a third party on behalf of a financial institution, a financial institution will not be free of responsibility with regard to social media compliance. As a result, the proposed guidance cautions financial institutions to consider their ability to control content on a third-party site before using a third party to conduct social media activities.
3.2.3 Privacy risks
There can be potential reaction by the public to any use of consumer information via social media. The proposed guidance requires that financial institution should have procedures in place to address risks from other social media users posting unfavorable or confidential or sensitive information (for example, account number) on a financial institution's social media site or page.
3.2.4 Consumer complaints and inquiry risks
Financial institutions have started using social media to address customer complaints and questions but a reputation risks exist when the financial institution does not address consumer questions or complaints in a timely or appropriate manner. Reputation risk also arises when users post critical or inaccurate statements on a financial institution's social media site or page. The proposed guidance requires that a financial institution should have monitoring procedures in place to address statements or complaints, any errors or dispute posted on social media sites to which the financial institution must respond under applicable law, such as errors under Regulation E or Regulation Z or disputes under the Fair Credit Reporting Act. Monitoring may pose a real challenge as financial institutions need to ensure that such inquiries, complaints, or comments are addressed in a timely and appropriate manner. Also financial institution needs to consider how and when to address disparaging comments made about the financial institution in the social media.
3.2.5 Employee use of social media risks
Employee's communications can also subject the financial institution to compliance risk as well as reputation risk, for example; employee's own personal social media accounts may be viewed by the public as reflecting the financial institution's official policies or may otherwise reflect poorly on the financial institution, depending on the form and content of the communications. The proposed guidance requires that a financial institution should establish policies to address employee participation in social media that implicates the financial institution.
3.3 Operational risk
The proposed guidance describes operational risk as risk of loss from inadequate or failed processes, people or systems, which can arise from a financial institution's use of information technology, including social media. Financial institutions are exposed to operational risks when they are on social media. The social media site could be hacked. The hacker could then use the social media site to distribute malware/ malicious software to customers of the financial institution. To minimize such risk, financial institutions needs to have appropriate security safeguards in place to protect systems from hackers and malware. More so, the financial institution could develop an incident-response protocol in the event of a security or data breach.
4. Risk management expectations
The guidance provides that a financial institution must have a risk management program to identify measure, monitor and control the risks related to social media activities that is adequate in size and complexity to the level of the institution's involvement in social media.
A good risk-management program should include a number of components such as:
5. Usage of Information Technology (IT) for complying with proposed social media rules
- Monitoring Software: Helps in monitoring and tracking social media activity, software can help provide examples that illustrate for senior executives how social media can help the business. For example, on Face book, with the help of IT enabled tool for monitoring and tracking social media activity, financial institutions can find out a lot about customer's' life events, such as marriage anniversary, getting engaged, having children, buying a house/car, retiring and hospitalization etc. All of these major life events are opportunities to sell financial products.
Financial institutions needs to monitor the data/information posted to third party social media sites, and social media monitoring software/tool will be very helpful.
- Due diligence tools : Automated due diligence process can be developed for managing third party vendor relationships related to social media, such as software contracts and marketing services.
- Audit tool : By developing an automated auditing tool, financial institutions can monitoring all posts and block those violate a rule, for instance, by using the word "guarantee" or "recommend
6. Conclusion
Financial institutions are using social media as a tool to generate new business and provide a dynamic environment to interact with consumers. As with any product channel, financial institutions must manage potential risks and consumers by ensuring that their risk management programs provide appropriate oversight and control to address the risk areas discussed within this guidance
About Author(s)
Dinesh Darak, a Chartered Accountant with certification in IFRS, has over 10 years of work experience spanning across financial and regulatory reporting, corporate banking operation & functional consultancy. Currently he is working as a functional consultant in Banking and Finance Industry Domain at M/s Tata Consultancy Services Limited. He can be reached at dinesh.darak@tcs.com.
Service tax paid by Service provider, on being pointed out by Department, can be treated as business expenditure
We are sharing with you an important judgment of the Hon'ble High Court of Gujarat in the case of Commissioner of Income Tax-III Vs. Kaypee Mechanical India (P.) Ltd. [(2014) 45 taxmann.com 363 (Gujarat)] on the following issue:
Issue:
Where assessee had not collected and deposited Service tax but on being pointed out, deposited the same along with Interest, can it be treated as expenditure deductible under Section 37 of the Income Tax Act, 1961?
Facts & background:
The Department conducted an audit of records of Kaypee Mechanical India (P.) Ltd. ("Kaypee" or "the Assessee") for the Financial Year 2003-04 to 2006-07. During the audit, the authorities raised an audit objection pointing out that the Assessee had not collected the service tax on mechanical erection and installation of plant and machinery, structure work, piping work, etc., for the period from financial year 2003-04 to 2006-07. Therefore, a demand of service tax of Rs. 23,07,450 along with interest of Rs. 9,36,353 was raised on Kaypee.
The Assessee deposited the amount of Rs. 32,44,004 towards the demand raised by the Department out of its own pocket. Further, Kaypee claimed the deduction of Service tax paid along with interest as business expenditure.
The Revenue contended that the Assessee should not be allowed to claim deduction of the Service tax paid along with interest as expenditure since the amount has been paid by Kaypee as an infraction of law.
The Commissioner (A) and the Hon'ble CESTAT accepted the contention of the Assessee. The Hon'ble CESTAT held that Kaypee has rightly debited the Service tax and interest thereon as expenses in the P/L account. The Revenue did not produce any material on record that the Service tax including interest which is debited in the P/L A/c had been recovered by Kaypee from its Service recipients. Therefore, the Service tax and interest thereon shall be treated as expenses of the Assessee, which were incidental and arising out of the business of Kaypee. The interest payment is compensatory in nature. Accordingly, it was held that the expenses incurred by the Assessee have direct nexus with the business operation of Kaypee. Therefore, the expenses are allowable under Section 37 of the Income Tax Act, 1961 ("the IT Act") as incurred wholly and exclusively for business purposes.
The Revenue filed an appeal against the order of the Hon'ble CESTAT with the Hon'ble Gujarat High Court.
Held:
The Hon'ble Gujarat High Court also upheld the view taken by the Hon'ble CESTAT and held that the amount was expended by the Assessee during the course of business, wholly and exclusively for the purpose of business. If the Assessee had taken proper steps and charged Service tax to the Service recipients and deposited with the Government, there was no question of the Assessee expending such sum. It is only because the Assessee failed to do so, that he had to expend the said amount, though it was not his primary liability. Be that as it may, this cannot be stated to be a penalty for infraction of law.
It is equally well settled that payment of interest is compensatory in nature and would not partake of the character of penalty.
Accordingly, it was held that Service tax and interest paid by the Assessee were rightly claimed as deductible business expenditure under Section 37 of the IT Act.
Therefore, the contention of the Revenue was rejected and the case was decided in favour of the Assessee.
(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)
Expectations from Budget 2014-15 in Indirect Taxes
Dr. Sanjiv Agarwal
The full Budget of 2014-15 is going to be the first official opportunity to implement the economic agenda where in Government will have to do a fine but difficult task of managing the conflicting needs of variety of stakeholders – business & industry, trade, commerce, exporters, banks, investors, agriculturists, house-holds, society and politics as well. The forthcoming budget should not only be investor friendly and taxpayer friendly but also be forward looking and progressive giving policy directions and accelerating growth. Initiated by earlier NDA Government, GST has been talked about by all Governments since then. Now that we have a stable Government, the Budget should clearly redefine the road map to much awaited GST and announce a sunset date for the transition to GST regime. It could be 2015 or even 2016, given the issues pending with the Empowered Committee of State Finance Ministers on GST.
The BJP Government is likely to make implementation of the Goods and Services Tax (GST) a priority as it gets down to work. The Finance Minister held a meeting with officials of the Revenue Department of direct tax and indirect tax to get an overview of the taxation issues. The Revenue Department has been asked to prepare a presentation for the new Finance Minister, detailing the features and architecture of GST, the areas of disagreement with State Governments and other issues that have delayed the implementation of the indirect tax regime. The Finance Minister is also expected to soon meet various State Finance Ministers to sort out differences and ensure an early rollout of GST. It is hoped that new Government may be able to move the official amendments to the Constitution Amendment Bill, key to the introduction of GST in the monsoon session of Parliament.
It has already been hinted out that the Government is keen on early rollout of GST. The BJP manifesto had promised to bring on board all State Governments in adopting GST. Earlier Gujarat and Madhya Pradesh were opposed to GST format but since both these states are governed by the same ruling party as at the centre, there is bound to be greater harmony this time which may pave a way for earlier implementation. Finance Minster will have to build consensus about the GST among State Governments. GST ought to be the top priority in the Budget.
On indirect tax front, while there is a need for systemic reforms and forward looking pro-growth steps in general, the Budget should lay emphasis on the following specific issues, besides laying a clear-cut road map for GST implementation:
- Simplification of tax / duty structure with few rates at least for one year till economy is back in black
- Reduction of Excise and Service Tax rates by atleast two percent to boost production, growth in services and address inflation
- Abolish education cesses and have separate allocation for the same
- Remove confusion and double taxation / overlapping tax regime with simultaneous levy of VAT as well as Service Tax in certain cases
- There should be no tax on tax and definition of sale consideration must be amended in all VAT laws. This will reduce considerable confusion and avoid litigation
- Refunds in Excise and Service Tax should be made simpler, faster and hassle free
- Benefits / exemption to special economic zones be rationalized
- There should be no retrospective tax provisions which give rise to tax liability. There has to be no room for uncertainty
- Multiple audits and investigations must be stopped. There should be single point jurisdiction for enquires, investigation, audit, adjudication etc.
- Presently adjudication has no prescribed limits. A time limit for adjudication process to be completed must be specified. Not only this, there should be time limit for issuing orders after personal hearing is done (say 2 months). Erring officials ought to be penalized
- The present law does not provide for transferring the cases to call book where cases are pending at higher / appellate forums but this practice is followed blatantly. Such practice only hampers the process and adversely impacts both-revenue as well as tax payer as tax liability continues without recovery and assessee is burdened with the risk of interest, in the event of demand getting confirmed.
- Routine aggressive stand on investigations and during search may be avoided. Arrests be made only when recovery is not forthcoming even after allowing time / opportunity
- Tax administration ought to be made more accountable and assessee friendly
- Tax reforms must also look at lowering of compliance costs.
- Cenvat credit mechanism may be made simpler and reduce administrative cost
- Excise duty cuts shall boost industrial growth and consumption
- Tax audit on the lines of income tax may be introduced in Service Tax
- Department officers ought to be trained in law, interpretation and time management skills
- CST rates may be lowered in the wake of GST.
So far as tax administration and reforms are concerned, it is expected that besides introducing DTC and GST at the earliest, it should aim at enhancing efficiency in tax administration, cutting down on tax collection costs, making law simpler and reducing tax litigation – existing and potential, substantially.
No dividend to be declared before set-off of carried forward losses and Short Depreciation of earlier years
GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
NOTIFICATION
NEW DELHI, the 12th June, 2014
G.S.R…………………………… (E).— In exercise of the powers conferred under sub‑section (1) of section 123 read with section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules to amend the Companies (Declaration and Payment of Dividend) Rules, 2014, namely:-
- (1) These rules may be called the Companies (Declaration and Payment of Dividend) Amendment Rules, 2014.
(2) They shall come into force on the date of their publication in the Official Gazette.
- In the Companies (Declaration and Payment of Dividend) Rules, 2014, in rule 3, for sub-rule (5), the following sub-rule shall be substituted, namely:-
"(5) No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year."
[File No. 1/31/2013-CL.V]
(Amardeep Singh Bhatia)
IT: Where assessee had not collected and deposited service tax but on being pointed out, deposited same, amount being expended by assessee in course of business was allowable as business expenditure
■■■
[2014] 45 taxmann.com 363 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax - III
v.
Kaypee Mechanical India (P.) Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 186 OF 2014†
APRIL 21, 2014
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Service tax) - Assessment year 2009-10 - During assessment proceedings, it was pointed out that assessee had not collected and deposited service tax on some services in earlier years and a demand of service tax was raised including interest thereon - Assessee paid up said amount though it was not his primary liability and treated it as business expenditure - Whether amount being expended by assessee wholly and exclusively for purpose of business, could not be stated to be a penalty for infraction of law and it was allowable as business expenditure - Held, yes [Para 6] [In favour of assessee]
FACTS
| ■ | During the assessment proceedings, the service tax authorities raised an audit objection pointing out that the assessee had not collected the service tax on mechanical erection and installation of plant and machinery, structure work, piping work and work contract works for the period from financial years 2003-04 to 2006-07 and a demand of service tax was raised and interest thereon. | |
| ■ | The assessee accepted the audit objection and paid up the said amount and claimed deduction thereof as business expenditure. | |
| ■ | The stand of the revenue was that this amount having been expended by the assessee for infraction of law, deduction thereof was not available. | |
| ■ | The Commissioner (Appeals) as well as the Tribunal accepted the claim of the assessee. | |
| ■ | On appeal: |
HELD
| ■ | The view of the Commissioner (Appeals), as confirmed by the Tribunal was to be upheld. The amount was expended by the assessee during the course of business, wholly and exclusively for the purpose of business. If the assessee had taken proper steps and charged service tax to the service recipients and deposited with the Government, there was no question of assessee expending such sum. It is only because the assessee failed to do so, that he had to expend the said amount, though it was not his primary liability. Be that as it may, this cannot be stated to be a penalty for infraction of law. [Para 6] | |
| ■ | It is equally well settled that payment of interest is compensatory in nature and would not partake of the character of penalty. [Para 7] |
CASE REVIEW
CIT v. Luxmi Devi Sugar Mills (P.) Ltd. [1991] 188 ITR 41 (SC) and Mahalakshmi Sugar Mills Co. v.CIT [1980] 123 ITR 429 (SC)followed.
Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC)distinguished.
CASES REFERRED TO
Haji Aziz Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC) (para 6), CIT v. Luxmi Devi Sugar Mills (P.) Ltd. [1991] 188 ITR 41 (SC) (para 7) and Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC) (para 7).
R.K.M. Parikh for the Appellant.
ORDER
Akil Kureshi, J. - Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Ahmedabad ("Tribunal" for short) dated 5th July 2013, raising following questions for our consideration :—
| '(A) | "Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that the assessee's liability to pay Service tax had arisen during the previous year relevant to A.Y 2009-10, without appreciating that the liability had accrued in the F.Ys 2003-04 to 2006-07, which had merely been discovered by the Service Tax Department in the previous year relevant to A.Y 2009-10." | |
| (B) | "Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that the expenses were not debited as Service-tax and interest thereon but these expenses were incidental and arising out of the assessee's business, without appreciating that the assessee had debited the said expenses in the Profit & Loss Account towards Service Tax and Interest on Service-tax and thereby made an error both in law and in facts." | |
| (C) | "Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that Service-tax and interest thereon pertaining to the earlier years are allowable as deduction u/s. 37 (1) of the I.T Act, without appreciating that under the Income-tax Law payment of Service-tax is deductible u/s. 37 (1) of the Act only when included in the income of the assessee."' |
2. Though three separate questions are framed, the issue involved is only one viz., whether a sum of Rs. 23,07,450/- paid by the assessee by way of Service-tax and interest thereon of Rs. 9,36,553/- would be deductible from the income of the assessee under Section 37(1) of the Income-tax Act, 1961 ("the Act" for short).
3. Brief facts are that the said amount of Rs. 32,44,004/- which included the amount of Service-tax with interest, was paid by the assessee and he claimed deduction thereof as a business expenditure. Undisputedly, the primary liability to pay such service tax was on the service recipient and not the assessee who was the service provider. Under the Service Tax Act, however, the assessee had onous to collect the same from the customers i.e., the service recipients and deposit the same with the Service-tax authorities. The assessee failed in doing so. During the assessment proceedings, the service tax authorities raised an audit objection pointing out that the assessee had not raised and recovered service tax on certain services provided by it. The assessee accepted the audit objection and paid up the said amount which, as noted earlier, included the principal liability of service tax with interest thereon.
4. The admitted facts, therefore, were that the assessee deposited the said amount of Rs. 32,44,004/- towards service tax and interest on delayed depositing of service tax from his own pocket, though the primary liability to pay such tax was on the service recipient. However, the assessee having failed to discharge his duty of collecting the same from the service recipient and depositing the same with the Government authorities, had to discharge such liability.
5. The stand of the Revenue before us was that this amount having been expended by the assessee for infraction of law, deduction thereof was not available. We may notice that CIT [A] as well as the Tribunal accepted the claim of the assessee, though under a different provision than that claimed. The Tribunal, in particular, after referring to the decision of the CIT (A) at length, held and observed as under :—
"5. We have heard the rival contentions and perused the material on record. The appellant had not collected the service tax on mechanical erection and installation of plant and machinery, structure work, piping work and work contract works for the period from F.Y 2003-04 to 2006-07. There was an audit by the Service Tax Department and a demand of service tax was raised at Rs. 23,07,450/- and interest thereon at Rs. 9,36,553/- which was paid on 16.04.2009 by the appellant. When there is no collection of the service tax, it is impossible to route through P&L account. As per Service Tax Act, the appellant is an agent of the Government of India, collecting the service tax and remitting it to the Government Exchequer. The appellant had debited these expenses which have nature of service tax and interest thereon as expenses in the P&L account not as service tax and interest thereon. The liability has been crystallized in the year under consideration. The learned A.O had not brought on record any material that this service tax including interest had been recovered from the parties for which it had rendered service. These expenses were incidental and arising out of the business of the appellant. The interest payment is compensatory in nature. The expenses have direct nexus with the business operation. Therefore, it is allowable u/s. 37 of the IT Act as incurred wholly and exclusively for business purposes. We, therefore, do not found any reason to intervene in the order of the CIT (A). Accordingly, the Revenue's appeal is dismissed."
6. We have no hesitation in upholding the view of the CIT (A), as confirmed by the Tribunal. The amount was expended by the assessee during the course of business, wholly and exclusively for the purpose of business. If the assessee had taken proper steps and charged service tax to the service recipients and deposited with the Government, there was no question of assessee expending such sum. It is only because the assessee failed to do so, that he had to expend the said amount, though it was not his primary liability. Be that as it may, this cannot be stated to be a penalty for infraction of law. Reference to the decision of Supreme Court in case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 therefore is not of any help to the Revenue. It was a case in which the assessee had imported dates from Iraq, at a time when such import was prohibited. Due to this, the dates imported by the assessee by steamers were confiscated by the customs authorities. The assessee was given an option to pay redemption fine and have the dates released. The assessee having accepted such an option, claimed the redemption fine as a deduction in computing its profit as allowable expenditure. In this background, the Supreme Court held that no expenses which was paid by way of penalty for a breach of the law, even though it might involve no personal liability, could be said to be an amount wholly and exclusively laid for the purpose of the business of the assessee. In the present case, the amount involved is not by way of penalty. The decision in case of Haji Aziz & Abdul Shakoor Bros. (supra) is thus distinguishable.
7. It is equally well settled that payment of interest is compensatory in nature and would not partake the character of penalty. Reference in this respect can be had to the decision of Supreme Court in case of CIT v.Luxmi Devi Sugar Mills (P.) Ltd. [1991] 188 ITR 41 and in case of Mahalakshmi Sugar Mills Co. v.CIT [1980] 123 ITR 429 (SC).
8. In the result, Tax Appeal is dismissed.
POOJA*In favour of assessee.
†Arising out of order of Tribunal, dated 5-7-2013.
Who are required to file ITR-3 for AY 2014-15 and mode of filing?
Who can use ITR -3 Return Form?
This Return Form is to be used by an individual or an Hindu Undivided Family who is a partner in a firm and where income chargeable to income-tax under the head "Profits or gains of business or profession" does not include any income except the income by way of any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by him from such firm. In case a partner in the firm does not have any income from the firm by way of interest, salary, etc. and has only exempt income by way of share in the profit of the firm, he shall use this form only and not Form ITR-2.
Who cannot use ITR-3 Return Form?
This Return Form should not be used by an individual whose total income for the assessment year 2013-14 includes Income from Business or Profession under any proprietorship.
Annexure-less Return Form
No document (including TDS certificate) should be attached to this Return Form. All such documents enclosed with this Return Form will be detached and returned to the person filing the return.
Manner of filing this Return Form
This Return Form can be filed with the Income-tax Department in any of the following ways, -
(i) by furnishing the return in a paper form;
(ii) by furnishing the return electronically under digital signature;
(iii) by transmitting the data in the return electronically and thereafter submitting the verification of the return in Return Form ITR-V;
(iv) by furnishing a Bar-coded return.
A resident assessee having any assets (including financial interest in any entity) located outside India or signing authority in any account located outside India, shall fill out schedule FA and furnish the return in the manner provided at either 5(ii) or 5(iii).
From the assessment year 2013-14 onwards all the assessees having total income more than 5 lakh rupees are required to furnish the return in the manner provided at 5(ii) or 5 (iii). Also in case of an assessee claiming relief under section 90, 90A or 91 to whom Schedule FSI and Schedule TR apply, he has to furnish the return in the manner provided at either 5(ii) or 5 (iii).
Where the Return Form is furnished in the manner mentioned at 5(iii), the assessee should print out two copies of Form ITR-V. One copy of ITR-V, duly signed by the assessee, has to be sent by ordinary post to Post Bag No. 1, Electronic City Office, Bengal uru–5601 00 (Karnataka). The other copy may be retained by the assessee for his record.
Filling out the acknowledgement
Only one copy of this Return Form is required to be filed. Where the Return Form is furnished in the manner mentioned at 5(i) or at 5(iv), the acknowledgement should be duly filled in ITR-V.
Compiled by – CA Sandeep Kanoi
Deemed Dividend – Shareholders of different holdings cannot be clubbed to apply Section 2(22)(e)
The issue herein is whether any loan amount advanced by M/s Octave Apparels Private Limited to the respondent-assessee would fall under Section 2(22) (e) of the Act as deemed dividend.
The Tribunal noticed that the assessee was holding 1.07% shares of sister concern whereas the partners of the assessee firm Shri Balbir Kumar and Shri Harsh Kumar were holding 6.64% and 6% shareholding respectively. It was, thus, concluded that the assessee firm was holding less than 10% shareholding of the voting power and any amount advanced by closely held company to the assessee firm was not to be treated as deemed dividend under the provisions of section 2(22) (e) of the Act.
Interpreting Section 2(22) (e) of the Act, the Bombay High Court in CIT v. Universal Medicare (P) Limited, (2010) 324 ITR 263 noted as under:-
"Clause (e) of Section 2(22) is not artistically worded. For facility of exposition, the contents can be broken down for analysis: (i) Clause (e) applies to any payment by a company not being a company in which the public is substantially interested of any sum, whether as representing a part of the assets is of the company or otherwise made after the 31 May 1987; (ii) Clause (e) covers a payment made by way of a loan or advance to (a) a shareholder, being a beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power; or (b) any concern in which such shareholder is a member or a partner and in which he has a substantial interest; (iii) Clause (e) also includes in its purview any payment made by a company on behalf of or for the individual benefit, of any such shareholder; (iv) Clause (e) will apply to the Extent to which the company, in either case, possesses accumulated profits. The remaining part of the provision is not material for the purposes of this Appeal.
By providing an inclusive definition of the expression 'dividend ', clause 2(22) brings within its purview items which may not ordinarily constitute the payment of dividend. Parliament has expanded the ambit of the expression 'dividend ' by providing an inclusive definition.
In order that the first part of clause (e) of Section 2 (22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten percent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest. The Tribunal in the present case has found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the books of account of the assessee. The fact that there was a defalcation seems to have been accepted since this amount was allowed as a business loss during the course of assessment year 2006 2007. Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled. In our view, the finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law. How Ever, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been placed on the provisions of Section 2(22)(e) is correct. Section 2 (22)(e) defines the ambit of the expression `dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of Section 2(22) is to provide an inclusive definition of the expression dividend. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of Section 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfillment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the Expression 'dividend'. Consequently, the effect of clause (e) of Section 2(22) is to broaden the ambit of the Expression 'dividend ' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee. We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the amour t of Rs.32,00,00C/- is that there was a dividend under Section 2(22)(e) and no other basis has been suggested in the order of the Assessing Officer."
Following the decisions in Universal Medicare (I) Limited's case and Hotel Bilinp's case (supra), this Court in ITA No.14 of 2012 (Commissioner of Income Tax I, Ludhiana v. AZ's Arora Knit Fab Pvt. Limited, Ludhiana) decided on 19.4.2012 recorded that the shareholders of different holdings cannot be clubbed to decide the issue of fulfillment of the conditions laid down in Section 2(22) (e) of the Act. It was further observed that only the shareholder can be assessed on account of deemed dividend and not the company under the aforesaid provision.
Examining the factual matrix herein, as noticed earlier, Shri Balbir Kumar, partner possessed 6.64% of the shareholding whereas Shri Harsh Kumar, partner had 6% only. The share of the assessee i.e. M/s Octave Apparels was 1.07% and in such circumstances, the provisions of Section 2(22)(e) of the Act could not be resorted to. The Tribunal was, thus, right in concluding in favour of the assessee.
Source- CIT Vs. Octave Apparels (Punjab & Haryana High Court), ITA No. 132 of 2012 (O&M), Date of Order: 11.09.2012
Industry body Ficci has asked Finance Minister Arun Jaitley to expedite IT refunds by making the process taxpayer-friendly through issuance of an online passbook linked with the permanent account number (PAN) in which refunds are credited as dues for each financial year.
The passbook could also be used by the tax payer for payment of advance tax for the subsequent year, it said.
"Such a passbook would lend credit worthiness to the taxpayer and banks will also willingly lend, if the tax payer wishes to borrow to meet his or her tax liabilities," Ficci Chairman of National Committee on Transport Infrastructure K K Kapila said in a letter to Finance Minister Arun Jaitley.
Refund of income tax is a part of the working capital for any business entity, particularly consultants, whose main assets are in the nature of recoverables from clients, Ficci said.
"Linking the issue of refund to the finalisation of scrutiny assessments leads to avoidable and prolonged delays which adversely affect the working capital funding of the Assessee, particularly, the consultants. This has an adverse effect on the business since banks do not freely sanction working capital advance to the Consultants," Kapila said.
"It is, therefore, requested to delink the issue of refund from finalisation of the assessment. In case of any demand resulting as a consequence of scrutiny assessment, the Department has all the means at its disposal to recover the dues," he added.
The industry chamber requested the government to provide relief to the consulting engineering companies at par with other agencies of government for infrastructure projects.
"Government funded infrastructure projects are impeded by discrimination against the consulting engineering companies by levy of service tax. This critical issue originated with the introduction of Point of Taxation Rules 2011 & subsequent amendment in Finance Act 2012," Kapila said.
The consulting engineering companies provide services relating to survey, investigation, design, detailed project report & also supervision for implementation of such infrastructure projects. Besides, Ficci urged the government to charge service tax to infrastructure consultants via the Tax Deducted at Source (TDS) mode.
"This would mean that when a client makes payment to the consultants for their services, he simultaneously deposits the service tax amount with the tax authorities against the service tax account of the consultants". "This mechanism would solve the entire problem and the government will be able to collect its revenue faster, than it does at present and ensure full compliance," Kapila said IT : Renewal of exemption certificate under section 80G(5) was remanded for de novo consideration
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[2014] 45 taxmann.com 383 (Gujarat)
HIGH COURT OF GUJARAT
Director of Income-tax ( Exemption)
v.
Rampurji Gaushala Seva Trust*
M.R. SHAH AND R.P. DHOLARIA, JJ.
TAX APPEAL NO. 918 OF 2013†
NOVEMBER 11, 2013
Section 80G of the Income-tax Act, 1961 - Deduction - Donation to certain funds, charitable institutions (Exemption certificate) - Earlier assessee-trust was granted exemption certificate under section 80G(5) which was valid for three years - On expiry, assessee-trust again applied for exemption certificate - First Authority rejected exemption certificate on ground that there was no provision for dissolution clause in assessee's trust deed - On appeal, Tribunal held that there need not be any dissolution clause in trust deed, for purpose of exemption certificate under section 80G(5) - However, Tribunal remanded matter for de novo consideration by first authority - Whether there was no reason to interfere with Tribunal's order and question of requirement of dissolution clause in trust-deed was to be kept open - Held, yes [Para 4] [Matter remanded]
Manish Bhatt for the Appellant. Mrs. Mauna M. Bhatt for the Respondent.
ORDER
1. Feeling aggrieved and dissatisfied with the order dated 19th April 2013 passed by the learned Income Tax Appellate Tribunal (hereinafter be referred to as "the ITAT") in ITA No.2873/Ahd/2012, the revenue has preferred the present appeal with the following proposed substantial questions of law:
| "(A) | Whether the Appellate Tribunal has substantially erred in approving the clause No.(b) of amalgamation in the deed when as per Bombay Public Trust Act trustees do not have such power ? | |
| (B) | Whether in view of the fact that it is a public charitable trust, should the deed not have a clause that upon dissolution no asset will go to any trustee, donor settler etc.?" |
2. We have heard Mr. Manish Bhatt learned counsel appearing on behalf of the appellant.
3. It is not in dispute that on the basis of very trust deed, earlier the department granted exemption certificate under section 80G(5) of the Income Tax Act which was, as such, valid for the period from 23rd May 2001 to 31st March 2004. Thereafter, the assessee / trust applied for exemption certificate under section 80G(5). The same came to be rejected and the said order has been set aside by the learned Tribunal by impugned judgment and order and the matter is remanded to the first authority. It is to be noted that the first authority rejected the exemption certificate on the ground that in the trust deed there is no provision for dissolution clause. On appeal, the learned Tribunal has held that for the purpose of the exemption certificate under section 80G(5) there need not be any dissolution clause in the trust deed and, therefore, the learned Tribunal has set aside the order dated 23rd October 2012 passed by the DIT (Exemptions), Ahmedabad in DIT(E)/AHD/80G(5)/33/2012-13 and remanded back the matter to the authority for de novo.
4. Having heard learned counsel appearing on behalf of the appellant and considering the fact that the matter is remanded to the DIT (Exemptions) for de novo and more particularly when the earlier exemption certificate was granted to the assessee / trust which was valid for the period from 23rd May 2001 to 31st March 2004, we see no reason to interfere with the impugned order. However, the proposed question of law whether for the purpose of exemption certificate under section 80G(5) of the Income Tax Act, there is requirement of dissolution clause in the trust deed, is kept open and we do not express any opinion on the same.
5. In the facts and circumstances of the case narrated above, the present appeal deserves to be dismissed and accordingly it is dismissed with the aforesaid observations.
SB *Matter remanded.
†Arising out of Tribunal in IT Appeal No. 2873/Ahd./2012, dated 19-4-2013.
IT: Assessee was not required to fulfil conditions of section 80-IB(2)(i) for claiming deduction under section 80-IB(10) in relation to development of a housing project
IT: Where Assessing Officer approved indirect expenses allocated by assessee to projects eligible for section 80-IB(10) benefits, unless subjectivity emerging from assessment order was not found to be grossly unfair or bereft of reasonableness, Commissioner could not invoke section 263
IT: Interest expenditure should be allocated on basis of actual utilization of corresponding interest bearing loan for respective section 80-IB projects
IT: Depreciation on vehicles, furniture and fixture and office equipments installed in administrative office deserves to be allocated in order to compute eligible profits for section 80-IB(10) projects
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[2014] 45 taxmann.com 335 (Pune - Trib.)
IN THE ITAT PUNE BENCH 'A'
Nyati Builders (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Circle -2*
G.S. PANNU, ACCOUNTANT MEMBER
AND R.S. PADVEKAR, JUDICIAL MEMBER
AND R.S. PADVEKAR, JUDICIAL MEMBER
IT APPEAL NO. 619 (PUNE) OF 2011
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
JUNE 25, 2013
I. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profit and gains from industrial undertakings other than infrastructure development undertakings (Housing Project) - Assessment year 2006-07 - Assessee was engaged in business of building, construction and real estate development - Assessing Officer allowed deduction claimed by assessee under section 80-IB(10) - Commissioner found that assessee was not entitled to deduction in view of violation of provision of section 80-IB(2)(i) as project was formed by reconstruction of partnership firm already in existence - Whether for claiming deduction under section 80-IB(10) in relation to development of a housing project an assessee was not required to fulfil conditions prescribed in sub-section (2) of section 80-IB - Held, yes - Whether since assessee had furnished details regarding agreement with land owners executed after dissolution of firm, assertion of Commissioner that project was formed by splitting up or reconstruction of business already in existence was not justified - Held, yes - Whether deduction under section 80-IB(10) could not be denied on ground that permissions and/or approvals by the local authority were in name of either original land owners or name of architect - Held, yes [Paras 8, 10 & 15] [In favour of assessee]
II. Section 80-IB, read with section 263 of the Income-tax Act, 1961 - Deductions - Profit and gains from industrial undertakings other than infrastructure development undertakings (Housing project) - Assessment year 2006-07 - Assessee allocated indirect administrative expenses equally on ten actively pursued projects out of which 2 projects were eligible for section 80-IB(10) benefits - Assessing Officer approved allocation of expense - Commissioner in his revisionary order found that manner in which indirect expenses were allocated had resulted in excess claim of deduction under section 80-IB(10) - He directed Assessing Officer to allocate expenses in ratio of sales of projects - Whether unless subjectivity emerging from assessment order was found to be grossly unfair or bereft of reasonableness, Commissioner could not invoke section 263 - Held, yes - Whether merely because Commissioner devised an approach which would result in higher assessment of income, it was not enough to justify invoking of section 263, unless an error in assessment order was established - Held, yes [Para 20] [In favour of assessee]
III. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profit and gains from industrial undertaking other than infrastructure development undertaking (Housing project) - Assessment year 2006-07 - Whether interest expenditure should be allocated on basis of actual utilization of corresponding interest bearing loan for respective section 80-IB projects - Held, yes [Para 24] [In favour of assessee]
IV. Section 80-IB, read with section 32, of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertaking other than infrastructure development undertaking (Housing project) - Assessment year 2006-07 - Whether depreciation on vehicles, furniture and fixture and office equipments installed in administrative office deserved to be allocated in order to compute eligible profits for section 80-IB projects - Held, yes [Para 25] [In favour of revenue]
FACTS-I
| ■ | The assessee was engaged in the business of building, construction and real estate development and dealing in lands. It claimed deduction under section 80-IB(10) in relation to two projects, namely, Nyati Meadows and Nyati Garden out of the several projects being undertaken by the assessee in and around Pune. The Assessing Officer accepted the same. | |
| ■ | The Commissioner has invoked his revisionary power under section 263 after examination of the assessment records and found that the assessee was not entitled to the deduction under section 80-IB(10) in relation to Nyati Meadows project in view of the violation of the provisions of section 80-IB(2) as same was started by the splitting up/reconstruction of a business already in existence namely, Oasis Developers and that commencement certificate and completion certificate issued by PMC contained names of other persons and were not issued in name of assessee-company. | |
| ■ | On appeal before the Tribunal, the assessee submitted that it was only after the dissolution of the firm, assessee entered into supplementary agreements with the land owners which were duly registered by paying requisite stamp duty. |
HELD
| ■ | For claiming deduction under section 80-IB(10) in relation to development of a housing project an assessee was not required to fulfil the conditions prescribed in sub-section (2) of section 80-IB. In the very scheme of section 80-IB, the aforesaid proposition is evident. Section 80-IB has several sub-sections which specifically require the assessee claiming deduction thereunder that it should not be formed by re-construction or splitting up of existing business and, if sub-section (2) and the conditions mentioned therein are to govern an assessee claiming deduction under the other sub-sections, including sub-section (10), then the legislature would not have provided specifically in some of the sub-sections that the business should not have been formed by the splitting up or re-construction of an existing business or by the transfer on any building or machinery previously used for any purposes. Wherever the legislature deemed it fit, the conditions enumerated in sub-section (2) of section 80-IB has been specifically made applicable by providing the same in the relevant sub-sections of section 80-IB and in the absence of such a mandate in sub-section (10) of section 80-IB, it cannot be understood that the conditions prescribed in sub-section (2) of section 80-IB are relevant to evaluate claim of an assessee for deduction under section 80-IB(10) in relation to developing and building housing projects. [Para 8] | |
| ■ | Apart from the legal position, the assessee also factually asserted that there was no splitting up or re-construction of business in the present case. In this context, the assessee pointed out that on the dissolution of the firm, assessee had taken over the assets and liabilities of the partnership firm, Oasis Developers by way of a dissolution deed. The erstwhile partnership firm had merely entered into development agreement with various land owners and paid a fraction of the total consideration and it was only after the dissolution of the firm, assessee entered into supplementary agreements with the land owners, which were duly registered by paying requisite stamp duty. The land owners also executed a registered power of attorney in favour of the assessee. The assessee made substantial payments as consideration to the said owners and undertook the entire obligations of developing and constructing the housing project. The assessee acquired further adjoining plots and amalgamated the same and there was further sub-division into smaller plots. The applications for layout sanction and building plan sanction was also done by the assessee through its Architect, Shri Shirish Dasnukar. It has also been pointed out that the assessee obtained the first 'commencement certificates' from the Pune Municipal Corporation (PMC) in December, 2000 which was much after the dissolution of the firm and it was the assessee who employed Architects, and invested its capital for undertaking construction and development of the project. Factually, according to the learned counsel, assessee virtually undertook a project which was not in existence at the time of the erstwhile firm. [Para 9] | |
| ■ | The revenue has not controverted factual matrix so brought out by the assessee, copies of the relevant material have also been placed on record. In the paper book filed, assessee has furnished the registered agreement with the land owners executed on 19-10-2000. Similarly, the details of payment made by the assessee to the land owners had also been placed in the paper book. The aforesaid factually does not justify the assertion of the Commissioner that the undertaking of the assessee qua the Nyati Meadows project was formed by splitting up or re-construction of a business already in existence by way of Oasis Developers. [Para 10] | |
| ■ | A perusal of the 'commencement certificate' and also the 'completion certificate' issued by the local authority shows that the approvals/completion certificates are in the name of Managing Director of the assessee-company or its appointed Architect, Shri Shirish Dasnukar or the name of the persons being original land owners. Assessee had furnished a certificate by the Architect, Shri Shirish Dasnukar certifying that he was appointed by the assessee-company to submit building plan, layout plan and to obtain permission to construct and also to obtain commencement and completion certificate from the PMC. The permissions accorded by PMC contain the name of the Architect appointed on behalf of the assessee and in any case there is no dispute to the fact that the permissions are in relation to the development of land on which assessee has undertaken the impugned housing project. Assessee acquired the development rights of land, developed housing project consisting of residential flats, incurred expenses, undertook all risks involved and received the sale consideration from the buyers after completion of the housing project in its own rights, therefore, deduction under section 80-IB(10) could not be denied on the ground that the permissions and/or approvals by the local authority were in the name of either the original land owners or the name of the Architect. In fact, it is noticed that the some of the approvals are also in the name of Mr. Nitin Nyati, who is the managing director of the assessee-company and the Architect, Shri Shirish Dasnukar, who have acted on behalf of the assessee-company. Moreover, the infirmity sought to be pointed out by the Commissioner is not at all mandated in section 80-IB(10) and therefore, the charge made by the Commissioner is without merit. [Para 15] |
FACTS-II
| ■ | The assessee incurred total indirect administrative expenses to the tune of Rs. 2.3 crore and Rs. 23 lakhs each was allocated to the two projects to calculate their respective profits eligible for benefit of section 80-IB(10). | |
| ■ | The Assessing Officer approved the allocation of expenses made by the assessee. | |
| ■ | The Commissioner found that the manner in which the total administrative indirect expenses has been allocated has resulted in excess claim of deduction under section 80-IB(10). He in his revision order directed the Assessing Officer to allocate the indirect expenses in the ratio of the sales of the projects. | |
| ■ | On appeal, the assessee contended that it had allocated the indirect administrative expenses equally,i.e., 10 per cent on the 10 actively pursued projects and had explained before the Assessing Officer the manner of allocation of indirect expenses. |
HELD
| ■ | It is noticed that section 263 does not envisage a situation where the Commissioner substitutes his own judgment in place of that of the Assessing Officer without establishing that the decision of the Assessing Officer was erroneous in law. Insofar as the present issue relating to the allocation of indirect expenditure to section 80-IB(10) eligible projects is concerned, there is no hard and fast rule prescribed for the same. The assessee brought to the notice of the Assessing Officer, as is revealed from the written submissions addressed to the Assessing Officer that there were 14 projects in hand out of which 10 projects were actively pursued during the year and only 2 projects were eligible for 80-IB(10) benefit. The assessee allocated the indirect administrative expenses equally, i.e., 10 per cent on the 10 actively pursued projects whether or not any sales were effected by the projects. The Commissioner has sought to differ with the aforesaid allocation and instead according to him the indirect expenses should be allocated on the basis of sales effected by the respective projects. | |
| ■ | Without going into the merits of the rival basis of allocation canvassed, the Commissioner has attempted to substitute his own judgment in place of that of the Assessing Officer, without establishing any error. While finalizing the assessment, Assessing Officer examined the issue and applied his mind to the manner of allocation of indirect expenses. Of course, such a discussion is not emerging in the assessment order but the details submitted by the assessee to the Assessing Officer were before the Assessing Officer and seek to justify the manner of allocation. Be that as it may, merely because the Commissioner devised an approach which would result in a higher assessment of income, is not enough to justify invoking of section 263, unless it is pointed out that there was an error within the meaning of section 263 either in law or on facts in the assessment order. The Tribunal is presently concerned with the issue which inherently involves a subjective assessment, i.e., allocation of indirect expenditure. Therefore, unless the subjectivity emerging from the assessment order is found to be grossly unfair or bereft of reasonableness, it is not open for the Commissioner to invoke section 263. [Para 20] |
CASE REVIEW-I
Parth Corpn. v. ITO [2008] 23 SOT 368 (Mum.) (Para 8) followed.
CASE REVIEW-II
CIT v. Gabriel India Ltd. [1993] 203 ITR 108/71 Taxman 585 (Bom.) (Para 20) followed.
CASES REFERRED TO
Parth Corpn. v. ITO [2008] 23 SOT 368 (Mum.) (para 6), G.V. Corpn. v. ITO [2010] 38 SOT 174 (Mum.) (para 6), CIT v. Sunidhi Properties [1998] 230 ITR 157 (Cal.) (para 6), Shreejee Ratna Corpn.v. ITO [IT Appeal No. 3106 (Mum.) of 2007, dated 10-2-2009] (para 8), CIT v. Radhe Developers[2012] 204 Taxman 543/17 taxmann.com 156 (Guj.) (para 13), Essem Capital Markets Ltd. v. ITO [IT Appeal No. 6814 (Mum.)] of 2006, dated 25-2-2011] (para 15), Amaltas Associates v. ITO [2011] 131 ITD 142/11 taxmann.com 420 (Ahd.) (para 13), KZK Developers v. CIT [2010] 130 TTJ 57 (Cuttack) (UO) (para 13) and CIT v. Gabriel India Ltd. [1993] 203 ITR 108/71 Taxman 585 (Bom.) (para 20).
Vipin Gujrati for the Appellant. Mukesh Verma for the Respondent.
ORDER
G. S. Pannu, Accountant Member - The captioned appeal by the assessee is directed against an order of the Commissioner of Income Tax-II, Pune (in short "the Commissioner) dated 30.03.2011 passed under Section 263 of the Income Tax Act, 1961 (in short "the Act") holding that the assessment order passed by the Assessing Officer under Section 143(3) of the Act dated 21.04.2008 for the assessment year 2006-07 was erroneous in so far as it was prejudicial to the interest of the Revenue within the meaning of Section 263 of the Act. Primarily, the Commissioner has set-aside the assessment order dated 21.04.2008 (supra) on the issue relating to assessee's eligibility for claiming deduction under Section 80-IB(10) of the Act and without prejudice to the same, he has also directed the Assessing Officer to re-compute the deduction allowable to the assessee under Section 80-IB(10) of the Act after re-working the element of indirect expenses, interest and depreciation in respect to two projects namely, 'Nyati Meadows' & 'Nyati Garden'.
2. In brief, the facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is inter-alia engaged in the business of building, construction and real estate development and dealing in lands. For the assessment year 2006-07 it filed a return of income declaring total income at Rs.9,16,86,210/-, wherein deduction under Section 80-IB(10) of the Act was claimed in relation to two projects namely, Nyati Meadows - Rs.4,90,53,069/- and Nyati Garden - Rs.43,98,779/- out of the several projects being undertaken by the assessee in and around Pune. The Assessing Officer completed the assessment under Section 143(3) of the Act determining the total income at Rs.9,20,86,210/- after making an addition of Rs.4,00,000/- on account of unverifiable personal element included in expenses. Ostensibly, assessee's claim for deduction under Section 80-IB(10) of the Act as made in the return of income and accompanied by the prescribed audit report in Form No.10CCB, at Rs.5,34,51,848/- with respect to two projects of 'Nyati Meadows' & 'Nyati Garden' was accepted as such.
3. Subsequently, the Commissioner has invoked his revisionary power under Section 263 of the Act after examination of the assessment records whereby the action of the Assessing Officer in allowing the deduction under Section 80-IB(10) of the Act was stated to be infirm. After considering the submissions of the assessee, the Commissioner has found it fit to set-aside the assessment order qua the action of the Assessing Officer in allowing deduction to the assessee under Section 80-IB(10) of the Act. The aforesaid action of the Commissioner is in challenge before us, and the assessee has filed a voluminous Paper Book wherein is placed copies of statement of facts, submissions made before the Commissioner and also to the Assessing Officer during the assessment proceedings under Section 143(3) of the Act, and other relevant documents. In the subsequent paras, we shall refer to the material in the Paper Book, to which our attention was drawn in the course of hearing.
4. On the other hand, the learned CIT(DR) appearing for the Revenue has primarily reiterated the reasoning advanced by the Commissioner in support of the case of the Revenue. We have heard the rival submissions and perused the relevant record.
5. The first and foremost point raised by the Commissioner to establish that the assessment order dated 21.04.2008 (supra) was erroneous within the meaning of Section 263 of the Act is with regard to assessee's eligibility for deduction under Section 80-IB(10) of the Act in relation 'Nyati Meadows' projects. As per the Commissioner, the assessee was not entitled to the deduction under Section 80-IB(10) in relation to 'Nyati Meadows' projects in view of the violation of the provisions of Section 80-IB (2) of the Act. According to the Commissioner, assessee is to be understood as an 'industrial undertaking', which was required to fulfill the conditions mentioned in clauses (i) to (iv) of Sub-section (2) of Section 80-IB of the Act. In particular, the Commissioner has emphasized that clause (i) of Sub-section (2) of Section 80-IB of the Act disentitles the assessee for the claim of deduction under Section 80-IB(10) of the Act in relation to the 'Nyati Meadows' project. Clause (i) of Sub-section (2) of Section 80-IB of the Act requires that an 'industrial undertaking' should not have been formed by splitting up or re-construction of a business already in existence. According to the Commissioner, the project 'Nyati Meadows' undertaken at Survey Nos. 10/1 and 9/2, Wadgaon Sheri, Pune was earlier started by a partnership firm namely, M/s Oasis Developers constituted by three partners in 1998 and assessee company was admitted as a partner at a later stage that in January 2000. The said firm was subsequently dissolved in October, 2000 and all the assets and liabilities of the firm were taken over by the assessee company. The assessee company further acquired the adjoining plots of land and amalgamated the same and the amalgamated plot was subdivided into three plots namely, A, B & C. On this basis, the charge made by the Commissioner is that the 'industrial undertaking'. i.e. 'Nyati Meadows' project was started by the splitting up/re-construction of a business already in existence namely, M/s Oasis Developers, which is violative of clause (i) of Sub-section (2) of Section 80-IB of the Act. As per the Commissioner, the aforesaid violation disentitles the assessee from the deduction under Section 80-IB(10) of the Act in relation to the 'Nyati Meadows', project.
6. The stand of the assessee before the Commissioner as well as before us is to the effect that neither in law and nor on facts the aforesaid stand of the Commissioner is justified to deny the claim of deduction under Section 80-IB(10) of the Act in relation to the 'Nyati Medows' project. As per the assessee, the view taken by the Commissioner that section 80-IB(2) of the Act applied to assessee claiming under Section 80-IB(10) of the Act in respect of housing project is untenable and in support of the said proposition reliance has been placed on the following decisions :- (i) Parth Corpn. v. ITO [2008] 23 SOT 368 (Mum.) and (ii) G.V. Corpn. v. ITO [2010] 38 SOT 174 (Mum.). In the aforesaid cases, according to the learned counsel similar situation has been considered and it has been held that Section 80-IB(2) does not control Section 80-IB(10) of the Act which is in relation to housing projects. Apart therefrom it has also been argued that the construction of a building or of flats, etc. does not amount to 'manufacture' or 'production' as held by the Hon'ble Calcutta High Court in the case of CIT v. Sunidhi Properties [1998] 230 ITR 157 and therefore, the Section 80-IB(2) of the Act is inapplicable in situations involving Section 80-IB(10) of the Act.
7. On the other hand, the learned CIT(DR) appearing for the Revenue has pointed out that there is no specific exclusion in Section 80-IB(10) of the Act to say that the provisions of Sub-section (2) of Section 80-IB of the Act are not applicable and referred to the wording of Sub-section (2) of Section 80-IB of the Act to point out that the said section is made applicable only to the 'industrial undertaking' which fulfills the conditions prescribed thereunder, and in the present case the project 'Nyati Meadows' of the assessee does not comply with Section 80-IB(2)(i) of the Act.
8. We have carefully considered the rival submissions. On this aspect, in the case of Parth Corpn. (supra) the Mumbai Bench of the Tribunal came to a conclusion that the nature of deduction under Section 80-IB(10) of the Act is independent of the provisions of Sub-section (2) of Section 80-IB of the Act and the condition of the assessee company being an 'industrial undertaking' manufacturing or producing any article or thing is not applicable to the claim of deduction under Section 80-IB(10) of the Act, in case of an assessee, developing and building housing project subject to fulfillment of the conditions prescribed in Section 80-IB(10) of the Act. In-fact, it is seen that the decision of the Parth Corpn.'s case (supra) was subsequently followed by another Mumbai Bench of the Tribunal in the case of Shreejee Ratna Corpn. v. ITO (ITA No. 3106/Mum./2007 dated 10.02.2009). In view of the aforesaid, it is, therefore, not possible to uphold the view taken by the Commissioner that an assessee claiming deduction under Sub-section (10) of Section 80-IB is also governed by Sub-section (2) of Section 80-IB of the Act. Even, otherwise, in our considered opinion, for claiming deduction under Section 80-IB(10) in relation to development of a housing project an assessee is not required to fulfill the conditions prescribed in Sub-section (2) of Section 80-IB of the Act. We say so for the reason that in the very scheme of Section 80-IB, the aforesaid proposition is evident. Section 80-IB has several sub-sections which specifically require the assessee claiming deduction thereunder that it should not be formed by re-construction or splitting up of existing business and in our considered opinion, if Sub-section (2) and the conditions mentioned therein are to govern an assessee claiming deduction under the other sub-sections, including Sub-section (10), then the legislature would not have provided specifically in some of the sub-sections that the business should not have been formed by the splitting up or re-construction of an existing business or by the transfer on any building or machinery previously used for any purposes. A gainful reference in this regard can be made to Sub-sections (7), (7A) and (7B) which relate to deductions in the case of any hotel, multiplex theatre and convention centre respectively. Clause (c)(i), clause (c)(ii), clause (b)(i), clause (b)(ii) and clause (b)(iii) of Sub-sections (7), (7A) and (7B) respectively contain conditions that the deduction is available in respect of hotel or multiplex theatre or convention centre respectively only if the business is not formed by splitting up or re-construction of a business already in existence, etc. We are only trying to emphasise that wherever the legislature deemed it fit, the conditions enumerated in Sub-section (2) of Section 80-IB has been specifically made applicable by providing the same in the relevant sub-sections of Section 80-IB of the Act and in the absence of such a mandate in Sub-section (10) of Section 80-IB, it cannot be understood that the conditions prescribed in Sub-section (2) of Section 80-IB are relevant to evaluate claim of an assessee for deduction under Section 80-IB(10) of the Act in relation to developing and building housing projects. In our considered opinion, the aforesaid point made out by the Commissioner is untenable and is hereby set-aside.
9. Apart from the legal position, the learned counsel also factually asserted that there was no splitting up or re-construction of business in the present case. In this context, the learned counsel pointed out that on the dissolution of the firm, assessee had taken over the assets and liabilities of the partnership firm, M/s Oasis Developers by way of a Dissolution deed dated 12.10.2000. The erstwhile partnership firm had merely entered into development agreement with various land owners and paid a fraction of the total consideration and it was only after the dissolution of the firm, assessee entered into supplementary agreements with the land owners on 19.10.2000, which were duly registered by paying requisite stamp duty. The land owners also executed a registered power of attorney in favour of the assessee. The assessee made substantial payments as consideration to the said owners and undertook the entire obligations of developing and constructing the housing project. The assessee acquired further adjoining plots and amalgamated the same and there was further sub-division into smaller plots. The applications for layout sanction and building plan sanction was also done by the assessee through its Architect, Shri Shirish Dasnurkar. It has also been pointed out that the assessee obtained the first 'Commencement Certificates' from the Pune Municipal Corporation (PMC) in December, 2000 which was much after the dissolution of the firm and it was the assessee who employed Architects, and invested its capital for undertaking construction and development of the project. Factually, according to the learned counsel, assessee virtually undertook a project which was not in existence at the time of the erstwhile firm.
10. The learned CIT(DR) has not controverted factual matrix so brought out by the assessee, copies of the relevant material have also been placed on record. In the Paper Book filed, assessee has furnished the registered agreement with the land owners executed on 19.10.2000 at pages 180 to 202. Similarly, the details of payment made by the assessee to the land owners has also been placed in the Paper Book. The aforesaid, in our view, factually does not justify the assertion of the Commissioner that the undertaking of the assessee qua the 'Nyati Meadows' project was formed by splitting up or re-construction of a business already in existence by way of M/s Oasis Developers.
11. In the result, on the aspect of the violation of Section 80-IB(2) of the Act, in law and on facts also, we find no substance in the stand of the Commissioner which is hereby set-aside.
12. The second point made out by the Commissioner with regard to the project 'Nyati Meadows' that the 'Commencement Certificate' and 'Completion Certificate' issued by the PMC contained names of other persons and are not issued in the name of assessee company. On this basis, it is sought to be made out by the Commissioner that the project 'Nyati Meadows' cannot be said to be a project undertaken by the assessee and as per him, assessee is not entitled to deduction under Section 80-IB(10) of the Act on this score also.
13. On this aspect, the learned counsel for the assessee submitted that the stand of the Commissioner is untenable inasmuch as it is not at all necessary for an assessee to claim deduction under Section 80-IB(10) of the Act to be the owner of the land in question. In this connection, it has been asserted that the provisions of Section 80-IB(10) of the Act do not mandate that the 'Commencement Certificate' and the 'Completion Certificate' issued by the local authority should be in the name of the assessee claiming the deduction. In this regard, reliance has been placed on the following judgments : (i) CIT v. Radhe Developers [2012] 204 Taxman 543/17 taxmann.com 156 (Guj.), (ii) Essem Capital Markets Ltd. v. ITO, ITA No. 6814/Mum./2006 dated 25.02.2011, (iii) Amaltas Associates v. ITO [2011] 131 ITD 142/11 taxmann.com 420 (Ahd.), and, (iv) KZK Developers v. CIT [2010] 130 TTJ 57 (Cuttack) (UO).
14. On this aspect, the Hon'ble Gujarat High Court in the case of Radhe Developers (supra) was considering an assessee's claim for deduction under Section 80-IB(10) of the Act which was sought to be negated by the Revenue on the ground that assessee was not the owner of the land and approvals of the local authority as well as the permission to develop and commence construction were not in the name of the assessee. The Hon'ble High Court did not approve the objection of the Revenue and held that the assessee was eligible for benefit under Section 80-IB(10) of the Act even where the title of the lands had not passed on to the assessee or the development permissions were obtained in the name of original land owners and not of the assessee. Similarly, the Mumbai Bench of the Tribunal in the case of Essem Capital Markets Ltd.(supra) noted that even where the title of the property was not in the name of the assessee and the commencement certificate was also in name of original owner, having regard to the business realities, the assessee cannot be deprived of deduction under Section 80-IB(10) of the Act inasmuch as it was the assessee who had actually developed and constructed the housing project.
15. In the present case, the learned counsel has taken us through the Paper Book wherein is placed the 'Commencement Certificate' and also the 'Completion Certificate' issued by the local authority mainly at pages 85 to 93 of the Paper Book. A perusal of the aforesaid shows that the approvals/completion certificates are in the name of Managing Director of the assessee company or its appointed Architect, Shri Shirish Dasnurkar or the name of the persons being original land owners. At page 203 of the Paper Book, assessee has furnished a certificate by the Architect, Shri Shirish Dasnurkar certifying that he was appointed by the assessee company to submit building plan, layout plan and to obtain permission to construct and also to obtain commencement and completion certificates from the PMC. The permissions accorded by PMC contain the name of the Architect appointed on behalf of the assessee and in any case there is no dispute to the fact that the permissions are in relation to the development of land on which assessee has undertaken the impugned housing project. Assessee acquired the development rights of land, developed housing project consisting of residential flats, incurred expenses, undertook all risks involved and received the sale consideration from the buyers after completion of the housing project in its own rights, therefore deduction under Section 80-IB(10) of the Act could not be denied on the ground that the permissions and/or approvals by the local authority were in the name of either the original land owners or the name of the Architect. In-fact, it is noticed that the some of the approvals are also in the name of Mr. Nitin Nyati, who is the Managing Director of the assessee company and the Architect, Shri Shirish Dasnurkar, who have acted on behalf of the assessee company. Moreover, the infirmity sought to be pointed out by the Commissioner is not at all mandated in Section 80-IB(10) of the Act and therefore, in our considered opinion, the charge made by the Commissioner is without merit.
16. Therefore, in so far as the stand of the Commissioner that the assessee's 'Nyati Meadows' project is not entitled for deduction under Section 80-IB(10) of the Act is concerned, the same is hereby held to be without merit having regard to the aforesaid discussion.
17. Further as per the Commissioner, the quantification of deduction under Section 80-IB(10) of the Act made in the assessment order dated 21.04.2008 (supra) was erroneous and prejudicial to the interest of the Revenue within the meaning of Section 263 of the Act. As per the Commissioner while arriving at the eligible profits under Section 80-IB(10) of the Act for the two projects in question, the manner in which the total administrative indirect expenses of Rs.2,30,25,230/- has been allocated has resulted in excess claim of deduction under Section 80-IB(10) of the Act. During the year under consideration, assessee incurred total indirect administrative expenses to the tune of Rs.2,30,25,230/- and Rs.23,20,253/- each was allocated to the two projects namely, 'Nyati Meadows' & 'Nyati Garden' to calculate their respective profits eligible for benefit of Section 80-IB(10) of the Act. The assessee contended that there was total 14 projects on hand, out of which the administrative expenses have been allocated on 10 projects at 10% to each project instead of 14 projects. The assessee explained that the four projects were such, which were either completed before the commencement of the year or the same were not actively pursued during the year, and therefore, they were not considered for allocation of the indirect administrative expenses. Therefore, 10% of the expenses on each of the 10 projects was allocated to compute the profitability of respective projects The Commissioner in his order has directed the Assessing Officer to allocate the indirect expenses in the ratio of the sales of the projects and thereby re-compute the deduction under Section 80-IB(10) on the profits of the two projects namely 'Nyati Meadows' & 'Nyati Garden'.
18. On this aspect, the learned counsel for the assessee submitted that the assessee had explained before the Assessing Officer the manner of allocation of indirect expenses, and a copy of its submissions is placed at pages 71 to 78 of the Paper Book. The learned counsel also explained that the issue raised by the Commissioner was a subjective matter and even in the course of the proceedings before the Commissioner, assessee had made three alternative workings for allocation of indirect expenses to the two projects. The alternative (a) was on the basis of total direct expenses incurred on various projects; alternative (b) was on the basis of receipt against each project; and, alternative (c) was on the basis of sale effected by respective projects. The learned counsel pointed out that while as far as alternatives (a) & (b) are concerned, the expenses allocable to the two projects in question were coming lower than the amounts allocated in the assessment order, whereas on the basis of alternative (c) the administrative expenses allocable would work out to be higher, which would result in reduced deduction under Section 80-IB(10) of Rs. 1,47,361/- only. On this basis it is sought to be made out that there is no error in the order of the Assessing Officer who has approved the allocation of expenses made by the assessee after due application of mind.
19. On the other hand, the learned CIT(DR) has contended that the Commissioner has noticed that allocation of administrative expenditure was made by the assessee on an adhoc basis and therefore the direction of the Commissioner to allocate the same on the basis of respective sales effected by the project is justified.
20. We have carefully considered the rival submissions. At the outset, we may notice that Section 263 of the Act does not envisage a situation where the Commissioner substitutes his own judgement in place of that of the Assessing Officer without establishing that the decision of the Assessing Officer was erroneous in law. In so far as the present issue relating to the allocation of indirect expenditure to Section 80-IB(10) eligible projects is concerned, there is no hard and fast rule prescribed for the same. The assessee brought to the notice of the Assessing Officer, as is revealed from the written submissions addressed to the Assessing Officer placed at pages 71 to 78 of the Paper Book, that there were 14 projects in hand out of which 10 projects were actively pursued during the year and only 2 projects were eligible for 80-IB(10) benefit. The assessee allocated the indirect administrative expenses equally i.e. 10% on the 10 actively pursued projects whether or not any sales were effected by the projects. The Commissioner has sought to differ with the aforesaid allocation and instead according to him the indirect expenses should be allocated on the basis of sales effected by the respective projects. The learned counsel, at the time of hearing referred to page 305 of the Paper Book wherein is placed balance-sheet for preceding year 31.03.2001 where in relation to a project in which no sale was effected, the assessee allocated a portion of indirect expenditure, based on the same methodology. The aforesaid aspect has been sought to be pointed out to justify that assessee has carried out the above said allocation uniformly and not an adhoc basis. Without going into the merits of the rival basis of allocation canvassed, in our view, what the Commissioner has attempted is only substituting his own judgement in place of that of the Assessing Officer, without establishing any error. We say so for the reason that while finalizing the assessment, Assessing Officer examined the issue and applied his mind to the manner of allocation of indirect expenses. Of course, such a discussion is not emerging in the assessment order but the details submitted by the assessee to the Assessing Officer placed at pages 71 to 78 of the Paper Book were before the Assessing Officer and seek to justify the manner of allocation. Be that as it may, merely because the Commissioner devised an approach which would result in a higher assessment of income, is not enough to justify invoking of Section 263 of the Act, unless it is pointed out that there was an error within the meaning of Section 263 of the Act either in law or on facts in the assessment order. We are presently concerned with the issue which inherently involves a subjective assessment, i.e. allocation of indirect expenditure. Therefore, unless the subjectivity emerging from the assessment order is found to be grossly unfair or bereft of reasonableness, it is not open for the Commissioner to invoke Section 263 of the Act. In coming to the aforesaid conclusion, we are guided by the parity of reasoning laid down by the Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108/71 Taxman 585. Therefore, on this aspect also we are not in an agreement with the Commissioner for invoking Section 263 of the Act and the assessee has to succeed.
21. The last issue raised by the Commissioner is with regard to the allocation of interest expenditure and depreciation on general and common assets for allocation to the respective projects in order to quantify the profits eligible for the purposes of Section 80-IB(10) of the Act. On this aspect, the first point made out by the assessee was that the issue of depreciation on general assets installed in the administrative offices, was not contained in the show-cause notice issued under Section 263 of the Act and therefore, the Commissioner has proceeded to adjudicate the issue without jurisdiction. At the time of hearing, the learned counsel fairly conceded that though the same was not raised in the show-cause notice issued originally, however in the course of the proceedings, the Commissioner confronted the assessee on this aspect and also allowed opportunity to the assessee to make out its case. Considering the aforesaid, we find no error on the part of the Commissioner in examining the same in the impugned proceedings.
22. With regard to the interest expenditure, the Commissioner has directed the Assessing Officer to allocate the interest expenditure on the basis of the loans directly utilized for the respective projects and for interest on other loans raised for general purposes, the Commissioner directed that the interest thereof be allocated amongst the various projects on the basis of sales.
23. In our considered opinion, after considering the rival stands, the directions of the Commissioner require modification. No doubt the Commissioner is correct in directing the Assessing Officer to examine the eligible profits for 80-IB(10) projects by considering the relatable interest expenditure. The assessee has incurred interest expenditure to the tune of Rs.1,04,73,519/- and no expenditure was allocated to the 80-IB(10) projects. The case of the assessee is that it had also received interest income to the tune of Rs.1,25,30,316/- and therefore no expenditure remained to be allocated to the respective projects. The assessee also pointed out before the Commissioner that there was no specific loan for the 80-IB(10) projects and also the fact that it had received advances from customers in relation to the sale of flats in 80-IB(10) projects which was more that the amount invested in work-in-progress of the respective projects, and thus no loan funds were used in such projects. The Commissioner, on the other hand, observed that the interest income earned by the assessee was out of surplus funds, which was assessable under the head 'other sources' and it had no link to the project undertaken and thus such interest income would not off-set the expenditure by way of interest on loans.
24. The plea of the assessee, in our view, deserves to be examined as to whether or not any interest expenditure has been incurred in relation to the 80-IB(10) projects. Even in the course of hearing before us, the learned counsel submitted to the proposition that interest expenditure, if allocable, should be allocated on the basis of actual utilization of the corresponding loans and not on the basis of the sales effected by the respective projects as directed by the Commissioner. On the aforesaid aspect we are in agreement with the assessee and accordingly modify the directions of the Commissioner. The Assessing Officer shall examine the utilization of the interest bearing loans raised and on that basis allocate the interest expenditure to the 80-IB(10) projects, if any, of the amount of loan that has been utilized for such projects. The assessee shall also be allowed an opportunity to demonstrate as to whether or not the interest income earned to the tune of Rs.1,25,30,316/-has a nexus with the interest expenditure claimed of Rs. 1,04,75,190/-. Therefore, while upholding the action of the Commissioner in principle, we direct the Assessing Officer to carry out the verification exercise as directed above and recompute the profits of projects 'Nyati Meadows' & 'Nyati Garden' for the purposes of Section 80-IB(10) of the Act, if warranted on facts.
25. Lastly, with regard to the depreciation on vehicles, furniture & fixture and office equipments installed in the administrative office, learned counsel fairly submitted that such depreciation was not allocated to the 80-IB(10) projects. The same, in our view, deserves to be allocated in order to compute the eligible profits for the 80-IB(10) projects. On this aspect, the order of the Commissioner is upheld.
26. In the result, the order of the Commissioner is modified as above and assessee partly succeeds.
27. Resultantly, appeal of the assessee is partly allowed.
■■*Partly in favour of assessee.
IT : Where search unearthed that assessee had offered less sale consideration and buyer had also confirmed said fact, difference be treated as undisclosed income of assessee
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[2014] 45 taxmann.com 380 (Kerala)
HIGH COURT OF KERALA
Dr. A.V. Sreekumar
v.
Commissioner of Income-tax, Central, Kochi*
DR. MANJULA CHELLUR. CJ.
AND A.M. SHAFFIQUE, J.
AND A.M. SHAFFIQUE, J.
IT APPEAL NO. 192 OF 2013†
DECEMBER 12, 2013
Section 69A of the Income-tax Act, 1961 - Unexplained money (Immovable property) - Assessment year 2004-05 - Search conducted at premises of assessee revealed that assessee had received sale consideration at Rs. 14 lakhs though she had offered only Rs. 9,50,000 in her return - Assessee submitted that she had received differential towards sale of furniture and cost of repairs - On enquiry, Assessing Officer found that purchaser had confirmed sale value at rate of Rs. 10,40,000 and concluded that balance was assessee's undisclosed income - Tribunal had confirmed said order - Whether there was no scope for further interference - Held, yes [Para 3] [In favour of revenue]
V.V. Asokan, K.I. Mayankutty Mather, Mahesh V. Ramakrishnan and P. Rahul for the Appellant.Jose Joseph for the Respondent.
JUDGMENT
Dr. Manjula Chellur, CJ. - This appeal pertains to assessment year 2004-05. Though the search conducted by the Department lead to re-opening of assessments pertaining to the years right from 1999-2000, we are now concerned with the assessment year 2004-05 in respect of sale of apartment at Bangalore.
2. Though the Commissioner of Income Tax (Appeals) considered the assessment years 1999-2000, 2000-01 by separate order and for the assessment year 2004-05, Tribunal considered all the three years together and passed a common order. So far as the present controversy, it relates to sale consideration received by the assessee by the sale of flat which said to have been purchased by the assessee in the year 1998- 99. The value of the flat was declared as Rs. 9,10,000/-. However, this was found to be incorrect from the material seized at the time of search. It revealed that total receipt was Rs. 14,00,000/- on sale of flat, out of which a sum of Rs. 9,50,000/- was credited to the bank account of the assessee and the balance amount of Rs. 4,50,000/- was credited to the bank account of her husband, Sri. A.V. Karunakaran. However, she tried to explain that the amount of Rs. 9,50,000/- includes Rs. 40,000/- for the sale of car parking. Her husband said to have received Rs. 2,50,000/- towards sale of furniture and Rs. 2,00,000/- towards cost for repairs done for the flat. She tried to substantiate the said contention even by securing the statement of son of the purchaser of the property by name one Ramkumar. On analysing the facts of the case, Commissioner of Income Tax (Appeals) was of the opinion, Mr. Ramkumar paid a total amount of Rs. 12,40,000/- out of which Rs. 2,00,000/- was towards repairs. Therefore, Commissioner of Income Tax (Appeals) concluded, the sale consideration of the flat should be taken as Rs. 10,40,000/-. Aggrieved by this opinion, both Revenue and the assessee were before the Tribunal.
3. Tribunal, after analysing the entire facts on record, opined that the enquiry conducted by the assessing officer revealed that Rs. 2,50,000/- said to have been received towards the value of the furniture was created statement but in fact it was not correct. Therefore, they have rejected the explanation given for Rs. 2,50,000/- towards sale value of furniture. Having regard to the fact that the buyer confirms the sale value at Rs. 10,40,000/-, Tribunal rightly opined that the Commissioner of Income Tax (Appeals) was justified in fixing the sale consideration at Rs. 10,40,000/-.
In the light of material from the above said facts, which was relied upon by the assessing officer, the Commissioner of Income Tax (Appeals) and Tribunal, we are of the opinion, there is no scope for further analysation of the facts to take a different opinion. Accordingly, the appeal is dismissed.
POOJA †Arising out of order of Tribunal in IT Appeal No. 691/Coch./2007, dated 8-2-2013.
Person whose income is subjected to withholding tax is entitled to claim its refund and not the deductor
IT : Where TDS was deposited by petitioner company on behalf of a foreign company, credit of refund could only be given to said foreign company
Beneficiary of discretionary trust won't have right over its income; no tax if income wasn't received by him
IT: Discretionary trust is one which gives a beneficiary no right to any part of income of trust property, but vests in trustees a discretionary power to pay him, or apply for his benefit, such part of income as they think fit
The address of the Prime Minister's Office is as follows:
South Block,
Raisina Hill,
New Delhi,
110 011
Phone: 91-11-23012312.
Fax: 91-11-23019545 / 91-11-23016857
IT : Proceedings before first Appellate Authority being continuation of assessment process, since audit report was produced at that stage, Appellate Authority was duty bound to take note of said audit report and grant benefit under section 10A
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[2014] 45 taxmann.com 379 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax, Central Circle
v.
American Data Solutions India (P.) Ltd.*
N. KUMAR AND MRS. RATHNAKALA, JJ.
IT APPEAL NOS. 587 OF 2007 & 232 OF 2008†
DECEMBER 18, 2013
Section 10A, read with section 251, of the Income-tax Act, 1961 - Free trade zone (Audit report) - Assessment years 2001-02 and 2003-04 - Assessee, a company engaged in software development, claimed deduction under section 10A - As said return was not accompanied by Form No. 56-F, relief under section 10A was denied to assessee - However, assessee produced Form No. 56F at appellate stage - First appellate authority had accepted said Form and, granted benefit under section 10A - Department challenged said order on ground that Commissioner (Appeals) was not justified in its decision as said Form was not produced before Assessing Officer - Whether proceedings before first Appellate Authority being continuation of assessment process, since audit report was produced at that stage, Appellate Authority was duty bound to take note of said audit report and grant benefit - Held, yes - Whether, thus, no interference with said order was called for - Held, yes [Para 4] [In favour of assessee]
K.V. Aravind for the Appellant. C.P. Ayappa for the Respondent.
JUDGMENT
1. These two appeals are preferred by the Revenue against two separate orders passed by the Tribunal holding that, the assessee is entitled to deduction under Section 10-A of the Income Tax Act (for short hereinafter referred to as 'the Act'), though the report of an accountant as defined in the Explanation to sub-section (2) of Section 288 of the Act was not filed along with the return of income, as it was filed subsequently.
2. The assessee is a Company engaged in Software development. While filing the return of income, the assessee claimed deduction under Section 10-A of the Act. As the said return was not accompanied by Form No.56-F, the relief under Section 10-A of the Act was denied to the assessee. However, the assessee produced the Form No.56F at the appellate stage. The first Appellate Authority having accepted the said Form No.56-F, after giving opportunity to the assessee, granted the benefit under Section 10-A of the Act. Aggrieved by the said order, Revenue preferred an appeal before the Tribunal. The Tribunal was of the view that there is no illegality committed by the first Appellate Authority in extending the benefit and therefore, denied to entertain the appeal. Aggrieved by the said order, the present appeals are filed.
3. These appeals are admitted to consider the following substantial questions of law:
In I.T.A. No. 587/2007
"Whether the Commissioner of Appeals was justified in allowing the appeal on the ground that the Assessing Officer has not looked into Form No. 56(g), when such form was actually not produced by the assessee before the Assessing Officer?"
In I.T.A. No. 232/2008
"Whether the Tribunal was correct in holding that the certificate required u/s.10A(5) of the Act having not been filed along with the return will not disentitle the assessee to claim relief u/s.10A of the Act as the assessee had filed Form No. 56F before the Assessing Officer in assessment proceedings?"
4. This Court in the case of CIT v. Ace Multitaxes Systems (P.) Ltd. [2009] 317 ITR 207 (Kar.) held that, sub-section (7) of Section 80-IA of the Act does not cast any obligation on the assessee that the return must be accompanied by the audit report. It appears to be proper reasoning as to why in all cases it cannot be accompanied by audit report. For meeting the practical difficulties of the assessee, it is not necessary that in all cases, it must be accompanied by the audit report. In fact, the provision on which reliance is placed by the Assessing Authority to deny the benefit is similar under Section 10A(5) also. Therefore, the Appellate-Authorities after referring to three judgments of different High Courts, who have also taken the same view while dealing with the case under Section 10-A itself, has granted the benefit. The proceedings before the first Appellate Authority is continuation of the assessing process and admittedly, this audit report is produced at that stage. Even though it was not produced before the Assessing Authority, the lower Appellate Authority was duty bound to take note of the said audit report and grant benefit, if the assessee is entitled to. That is precisely what the lower Appellate Authority has done.
5. In that view of the matter, the order of the Tribunal, declining to interfere with the order of the Appellate Authority is valid. In view of the same, the substantial questions of law raised in these appeals are answered in favour of the assessee and against the Revenue.
6. Hence, both the appeals are dismissed.
POOJA*In favour of assessee.
†Arising out of order of ITAT passed in IT Appeal No. 1460/Bang/2005, dated 9-3-2007 and IT Appeal No. 951/Bang./2006, dated 1-11-2007.
Regards,
Pawan Singla , LLB
M. No. 9825829075No capital gains when revaluation reserve is credited to partner's capital account; not taxable under sec. 45(4)
June 14, 2014[2014] 45 taxmann.com 359 (Mumbai - Trib.)
IT: Where revaluation of assets of partnership firm and credit of revalued amount to capital account of partners in their respective profit sharing ratio did not entail any transfer as defined under section 2(47), gains on revaluation could not be brought under tax net
IT: Where return of assessee was just processed under section 143 (1), and where after recording reasons, Assessing Officer had issued notice under section 148, reassessment proceedings were validly initiated
On Saturday, 14 June 2014 6:36 AM, "info@cliofindia.com" <info@cliofindia.com> wrote:
www.cliofindia.com info@cliofindia.com
COMPANY CASES (CC) HIGHLIGHTS
F Where rival shareholding groups mired in disputes arising out of main petition, directions for disposal of main petition pending which status quo to be maintained : Vikram Bakshi v. Ms. Sonia Khosla (Dead by LRs.) p. 392
F Winding up : Preferential payments : Unsecured creditor not entitled to claim priority over secured creditors and workmen : Oil and Natural Gas Corporation Ltd. v. Official Liquidator of Ambica Mills Co. Ltd. p. 405
F Order u/s. 20(4) of 1985 Act not bar to proceedings under 1993 Act : S. H. Associates v. Rajasthan Financial Corporation Ltd. (Delhi) p. 421
F Rules :
Companies (Accounts) Rules, 2014 p. 193
Companies (Management and Administration) Rules, 2014 p. 250
Companies (Registration Offices and Fees) Rules, 2014 p. 224
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