NOTIFICATION/ CIRCULAR

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Clarifications on the Direct Tax Dispute Resolution Scheme, 2016

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Rule 114F - Reitrement or pension funds - CBDT substitutes certain clauses to clarify certain doubts

CASE LAWS

2016-TIOL-3094-HC-DEL-IT

CIT Vs DLF UNIVERSAL LTD: DELHI HIGH COURT (Dated: December 21, 2016)

Income tax - Section 145(1)

Keywords - appropriation of expenses - corresponding entries - method of accounting - substantial completion of projects & uniformity in revenue recognition

The assessee deals in real estate, its acquisition, development in various projects through layouts and sale of developed lands and flats. Its acquisition is through subsidiary companies that in turn purchase lands from agriculturists. The subsidiaries are funded for the purposes of such acquisition. Both the assessee and the subsidiaries obtain licenses from the Haryana Government for development of land. The subsidiaries do not develop the land but have entered into agreements to sell them only to the assessee company or their nominees at specified rates. During the concerned A.Y, the assessee used to advertise its schemes and after receipt of forms, the plots or constructed residential units/flats or commercial flats were sold to various prospective buyers each of whom entered into an agreement to pay the consideration of the plot or residential/commercial unit. The assessee showed these installments as receipts credited to "realization under agreement to sell" advance from the customer's account till the property was conveyanced in favour of the prospective buyers. At the time of conveyancing of the land to the prospective buyers, the subsidiary companies write off the property from their closing stock. The AO noticed that the assessee followed the mercantile system of accounting. This involved transfer from the advance account and crediting to the profit and loss account the sums of money received from the prospective purchasers. All direct expenses incurred on development of land and construction were debited proportionately to the profit and loss account only in the year of conveyancing by taking the average cost of the land. The AO found fault with this method of accounting and felt that the assessee should have followed the "substantial completion of projects" method of accounting in respect of its transactions. Therefore, the AO felt that it was not possible to arrive at a true profit and he applied proviso to Section 145 (1) to reject the method of accounting.

On appeal, the CIT(A) held that the expression "method of accounting" u/s 145 was wide enough to include not only the two recognized systems of accounting, i.e., cash and mercantile but all such methods employed by the assessee that have direct or indirect bearing on the working of the profits. It was reasoned that the assessee's business, i.e., township development is different from that of a contractor or one assessed for construction activity. The CIT (A) felt that it could be said that income accrues on a date earlier than when it is received, but it could be difficult to state whether income or amounts received earlier would accrue later. He therefore directed re-computation of the assessee's income in the light of the adjustments to be made in terms of the directions given by the Supreme Court in CIT v. Podar Cement (Pvt.) Ltd.

On appeal, the HC held that,

Whether an assessee is permitted to appropriate his expenses by using any method of accounting, till he is following a uniform pattern of revenue recognition - YES: HC

Whether when a township developer has consistently treated the amounts lying with it as profits, and brought the same to tax only upon execution of the conveyance deed, then a mere possibility that certain buyers can be handed over the possession earlier per se would result in any loss to Revenue - NO: HC

++ Proceeding to analyze the facts before it in Paras Buildtech case, the ITAT's decision that risks and rewards' of ownership was transferred to the buyers upon payment of booking advance amounts and even transferred to third parties was a ground for rejection, was disapproved. It was noted that these instances did not in any manner affect the treatment of the said amounts in the books of the Assessee. This Court is of the opinion that the above decision in Paras Buildtech concludes the issue against the revenue. Besides, the change in the accounting method in 1992-93 ipso facto could not have resulted in loss of revenue as is urged by the tax authorities in the present case. The distortions, which the revenue urges relate to the treatment of development charges as well as the treatment of expenditures such as brokerage, commission and interest payments. The assessee's explanation here is that the 30% of the sums realized by it were under compulsion of law to be treated as development expenses and kept in a separate escrow account under the control of the HUDA. The revenue has not disputed this position. In that sense, the assessee was justified by statute to appropriate the sums towards development expenses;

++ So far as the treatment of revenue with respect to brokerage and interest payments is concerned, the assessee again has an explanation, which is a rational one: i.e., that only such of the expenses attributable to the agreement with the purchasers was debited as expenditure. So far as the question of applicability to section 2 (47) of the Act or Section 53(A) of the Transfer of Property Act is concerned, legally speaking, part performance is undoubtedly an interest or right known to law. However, part performance, pre-supposes handing over a possession, at the time the agreement is entered into. Having regard to the assessee's uniform pattern of revenue recognition that only upon execution of the conveyance/sale-deed, would the amounts lying with it be treated as profit and brought to tax, the possibility that in law certain flat or plot buyers could be handed over possession earlier per se would not result in distortion of the kind stated by the revenue. There is no material or evidence in this regard nor was cited by the revenue. This Court is furthermore of the opinion most importantly that in the previous order of the Tribunal in DLF Universal vs. ACIT on the justification by the assessee in following the project completion method, which became conclusive, the revenue could not have urged all over again this aspect. For the forgoing reasons, the findings on this question are in favour of the assessee.

Revenue's appeal dismissed

2016-TIOL-3093-HC-AHM-MISC

FLIPKART INTERNET PVT LTD Vs STATE OF GUJARAT: HIGH COURT OF GUJARAT (Dated: December 1, 2016)

Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001 - Section 4(2) - Gujarat Tax on Entry of Specified Goods into Local Area Rules, 2001 - Rule 5

Keywords - constitutional validity - e commerce & entry tax

The assessee preferred this petition stating that they had already paid entry tax on the goods imported and brought into the State of Gujarat. Prior to bringing goods into the State of Gujarat they had already suffered/paid the Central Sales Tax to the concerned State, and therefore, they were entitled to the benefit of Section 4(2) of the Entry Tax Act, 2001 whereby while making payment of entry tax, the CST paid is required to be reduced to the extent of the amount of tax paid; if any, under the CST Act on the purchase of specified goods in the course of inter-state trade or commerce.

Also, in these petitions, vires of the provisions of the Gujarat Tax on Entry of Specified Goods into Local Areas [Amendment] Act, 2016 amending the Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001 was challenged.

On appeal, the HC held that,

Whether a claim for obtaining benefit of CST paid u/s 4(2) of the Entry Tax Act, 2001 is to be made to the appropriate authority together with necessary challans evidencing payment of such CST - YES: HC

++ The petitioners have to make appropriate claim before the appropriate authority claiming the benefit u/s 4(2) of the Entry Tax Act, 2001 as required under Rule 5 of the Entry Tax Rules and as and when such claims are made, the appropriate authority is required to consider the same in accordance with Section 4(2) of the Entry Tax Act, 2001, however, subject to concerned person to prove by producing necessary Challan, the payment of CST in other State on such goods brought/imported within the State of Gujarat and having followed the procedure as required under Rule 5 of the Entry Tax Rules, 2001;

Whether relevant provisions of Gujarat Tax on Entry of Specified Goods into Local Areas (Amendment) Act, 2016 seeking to levy Entry Tax on goods purchased by individual consumers through e-commerce portals for personal use is constitutionally valid - YES: HC

++ Having gone through and considered the recent decision of the Apex Court rendered in case of Jindal Stainless Limited, the relevant provisions of the Gujarat Tax on Entry of Specified Goods into Local Areas (Amendment) Act, 2016 amending the Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001, & amending the Gujarat Tax on Entry of Specified Goods into Local Area Rules, 2001 seeking to levy Entry Tax on goods purchased by individual consumers through electronic commerce portals for their personal use and consumption, the constitutional validity which are challenged in the present writ petitions and the levy of Entry Tax on such goods purchased within the State of Gujarat are required to be held intra vires and constitutionally valid;

Assessee's application dismissed

2016-TIOL-3092-HC-MUM-CUS

KALPAVRUKSHA CHARITABLE TRUST Vs UOI: BOMBAY HIGH COURT (Dated: December 13, 2016)

Customs - Notification No.64/88, dated 1-3-1988 - Petitioner is a charitable Trust running a medical diagnostic centre and challenges a decision dated 23-9-1997 of respondent No.2 and a demand notice issued by respondent No.4 on 28-10-1997.

Held: Demand raised on the footing that diagnostic centres, without indoor patient treatment facilities, are not eligible for customs duty exemption - One cannot only take advantage of the fact that an institution of diagnostic treatment can be termed as a hospital and once certified by the Ministry of Health and Family Welfare, they are entitled to avail of the exemption Notification but in each case it must not only be providing medical, surgical or diagnostic treatment irrespective of the patients' caste, creed, race, religion or language but must give free treatment, on an average, to at least 40% of all their outdoor patients and free to all indoor patients belonging to families with an income of less than Rs.500/per month, and keeping for this purpose 10% of the hospital beds reserved for such patients - On the own showing of the petitioner, it does not satisfy these conditions - it is apparent that the demand has been raised after a factual satisfaction - That satisfaction is based on inspection, scrutiny and verification of the records and documents provided by the petitioner itself - Once such is the basis for the demand, it cannot be said to be vitiated by perversity or any error of law apparent on the face of the record so as to warrant interference, in writ jurisdiction - A conditional exemption is available and can be availed of on tendering proof of satisfaction of the terms and conditions thereof, else the exemption cannot be availed of - Once being aware of the clear stipulations in the exemption Notification, but failing to satisfy them, the petitioner was not entitled to any exemption - Demand is rightfully raised and is confirmed - Writ petition dismissed: High Court [para 13 to 15]

Petition dismissed