2017-TIOL-1081-HC-KOL-IT
Pr.CIT Vs RUNGTA PROPERTIES PVT LTD : CALCUTTA HIGH COURT (Dated: May 8, 2017)
Income tax - Section 2(22)(e)
Keywords - development of immovable property trade adventure - business income - deemed dividend - penny stock - trading loss
The assessee had undertaken development of its immovable property on the basis of an agreement. The question had thus arisen in course of assessment as to whether such developmental activities would constitute adventure in the nature of trade or not and profit from sale of flats constructed on such property would be treated as business income or it would be income from capital gains. The second point, which had arisen in relation to the A.Ys 2004-05 and 2006-07 was on the aspect of treatment of certain loans obtained by the assessee from another incorporated company, Rungta Engineering Co. Pvt. Ltd. Both the assessee and the said engineering company at the material time had a common shareholder, S.N. Rungta. He held more than 20% equity share capital in the assessee and also more than 10% equity share capital in Rungta Engineering Company. In this perspective, the Revenue wanted to treat certain sums reflected in the books of the assessee as loan from Rungta Engineering as 'deemed dividend' u/s 2(22)(e). The third point that had arisen for the A.Y 2006-07, relates to treatment of loss of Rs.25,30,396/- arising from purchase and sale of shares suffered by the assessee in the corresponding financial year over trading in shares of one M/S. Sharang Viniyog Ltd. In the assessment order, such loss had been referred to as loss on 'Penny Stock'. The AO had disallowed the claim of Rs. 25,30,396/- made by the assessee for treating the said sum as trading loss, finding the purchase and sale of shares in that company to be a colourable device to evade tax. The AO had directed the same to be added to the total income of the assessee. On appeal, the AO findings on all three counts were reversed by the CIT(A).
On appeal, the HC held that,
Whether development of immovable properties with aid of a builder and income generated thereof from sale of flats of the developed property, per se would not render such income to be taxable as business income - YES: HC
Whether in absence of any evidence that the owner is in the business of property development, the object clause in the memorandum cannot be treated as determining factor to conclude that this was part of the owner's regular business - YES: HC
Whether mere reference to property in corporate name of the sole proprietor business, can make it a property development company - NO: HC
++ the transactions which the assessee had entered into could not come within the ambit of adventure in the nature of trade. We accept the submission of Assessee's counsel that determination of that question involves enquiry into facts and requires analysis of the agreement or arrangement between the assessee and the developing company. Other factors which Assessee's counsel wants this court to consider are that the assessee caused improvement upon the property and retained substantial portion of it for self-use. The assessee’s arrangement with the developer was not a joint venture agreement and there was no profit or loss sharing arrangement. The ratio of the decision in the case of P.M. Mohammed Meerakhan - 2002-TIOL-780-SC-IT-LB cited by the Revenue does not apply on facts to the case of the assessee. There was clear intention of the assessee in that case to undertake business venture and on that basis the immovable property was treated to be stock-in-trade. In the cases of R.V. Gupta, Mohakampur Ice and Cold Storage cases, intention to resell the immovable assets was considered to be a major factor to determine a question of this nature, and the length of time the property was held by the assessee was also considered by the Court in each case to deal with the questions raised in those cases. On that yardstick, the Commissioner and the Tribunal rightly decided the issue in favour of the assessee in this appeal. In Razia Sulaiman case, the fact that the assessee was not in the business of selling of sites or flats weighed in favour of the assessee. In the cases Sohan Khan and Shanti Banerjee the same factors were applied to reject Revenue’s contention that development of immovable properties with aid of a builder and income generated from sale of flats of the developed property per se would not render such income to be taxable as business income. So far as assessee in this appeal is concerned, no material has been brought to our notice that it had carried on the business of property development. In the absence of any evidence that the assessee undertook the business of property development, the object clause in the memorandum cannot be treated to be determining factor to conclude that this was part of the assessee’s regular business. On the same reasoning, reference to property in corporate name of the assessee cannot make the assessee a property development company. The Tribunal as well as the CIT have concurrently found that gain of the assessee from the transactions of sale of flats did not constitute adventure in the nature of trade. The orders of the AO on the same point for the two other assessment years were also dismissed by the Commissioner and the Tribunal. There seems no perversity in such finding;
Whether deemed dividend is to be charged to income tax at the hands of the common shareholder but not at the hands of the recipient of money, unless the recipient is also the shareholder of the company from whom the amount has been received - YES: HC
++ the next point on which argument has been advanced is on deemed dividend. The factual basis of in this appeal in relation to “deemed dividend” originates from a sum of Rs.22,09,808/- which was shown in the books of the assessee for the financial year 2003-04 as loan advanced to Rungta Engineering Company Private Limited. The engineering company had paid Rs.25,00,000 within the same financial year to the assessee. At the end of the same financial year, there was a debit balance so far as the engineering company is concerned in the books of the assessee. In this appeal, however, we are concerned with a sum of Rs.2,37,450/- on which the assessing officer has sought to charge income tax treating the same as deemed dividend in the hands of the assessee. It appears that the AO had taken the differential between the sums received as loan by the assessee and paid back to the engineering company, being Rs.3,30,192/- and treated the said sum as loan taken by the assessee from the engineering company. In the books of the engineering company, accumulated reserves and surplus on account of profits of the business had been shown to be Rs.2,37,450/-. This is the reason as to why the said sum was sought to be taxed as deemed dividend by the AO. Assessee's counsel has referred to a decision of a Coordinate Bench of this Court in Commissioner of Income Tax, Kol. – III Vs. M/s. Baljit Securities Pvt. Limited, wherein it was held that the definition of dividend has been enlarged by a legal fiction but in a situation of this nature, it would be the common shareholder who is to be taxed and not the recipient company. The counsel has also cited the analysis of this provision made in the case of Universal Medicare Pvt. Ltd. (supra) and has contended, referring to his own break-up analysis made in respect of the above referred provision that both in the second and third situations payment is deemed to have been made to the shareholder, though in the second situation payment is made to a concern of which such shareholder is a member and in the third case, the payment is made either on behalf of or for the individual benefit of a shareholder. From this analysis, the counsel wantsthis court to hold that the payment in this case is to be treated as payment to the shareholder, if at all. When payment has been made to anyone which comes within the second and third categories such payment shall be deemed to have been made to the shareholder and the payment shall take the character of “deemed dividend”. The person liable in such situations would be the shareholder and not the person or entity to whom the money may has actually been paid in the second and the third situations. On this point also we do not find any error committed by the Commissioner or the Tribunal to warrant interference;
Whether transactions in shares of a company can be declared as fictitious, merely for the reason that the scrips of this company was executed by a broker through cross deals and the broker was suspended for some time - NO: HC
++ on the last point, the Tribunal held that the AO had not brought on records any material to show that the transactions in shares of the company involved were false or fictitious. It is finding of the AO that the scrips of this company was executed by a broker through cross deals and the broker was suspended for some time. It is assessee’s contention on the other that even though there are allegations against the broker, but for that reason alone the assessee cannot be held liable. On this point the Tribunal held that as a matter of fact the AO doubted the integrity of the broker or the manner in which the broker operation as per the statement of one of the directors of the broker firm and also AO observed that assessee had not furnished any explanation in respect of the intention of showing trading of shares only in three penny stocks. AO relied the loss of Rs. 25,30, 396/- only on the basis of information submitted by the Stock fictitious. AO has also not doubted the genuineness of the documents placed on record by the assessee. AO’s observation and conclusion are merely based on the information representative. Therefore on such basis no disallowance can be made and accordingly no infirmity in the order of CIT(A), who has rightly allowed the claim of assessee. We agree with the reasoning of the Tribunal on this point also.
Revenue's appeal dismissed
2017-TIOL-818-ITAT-DEL BHARTI AIRTEL LTD Vs ADDL. CIT : DELHI ITAT (Dated: May 11, 2017)
Income Tax - Sections 28, 37, 40(a)(ia) & 194H.
Keywords - Commission - curative - pre paid sim cards - retrospectively - tax deducted at source.
The assessee had challenged disallowance of Rs.505,47,21,495 u/s 40(a)(ia), being the amount of free airtime given to distributors on sale of pre-paid sim-cards by holding the same to be in the nature of 'commission' liable for deduction of tax at source u/s I94H. The Tribunal dismissed the aforesaid grounds. The said order of the Tribunal was recalled for adjudicating the alternate contentions raised without prejudice, regarding the applicability of provisions of section 40(a)(ia). At the time of hearing of the recalled appeal, the alternative contentions were raised by the applicant before the Tribunal that disallowance u/s 40(a)(ia) was not at all warranted as the applicant was under bonafide belief that tax was not deductible at source and the disallowance be restricted to the amount remaining payable as on the last date of the previous year. Further, as per the assessee amendments in section 40(a)(ia) being curative and procedural in nature would apply retrospectively to the year under consideration and consequently, deduction should be allowed in subsequent year(s) when tax was paid by the payer/ payee and the same be restricted to 30% of the expenditure. Thus, the assessee had claimed that no tax is required to be deducted at source u/s I94H with respect to sale of pre-paid cards in view of the bonafide belief of the applicant that such transaction did not attract the mischief of the said section: failing which, it was alternatively claimed that no disallowance u/s 40(a)(ia) could be sustained in view of the fact that the payees had paid tax on their income, including income received from the assessee. The Tribunal while dealing with the aforesaid disjunctive reliefs directed that the relief on account of bonafide belief was subject to verification that the payees had paid tax on their income, which according to the assessee was, not in consonance with the decision of the Bombay High Court in the case of CIT vs. Kotak Securities Ltd: 340 ITR 333 = 2011-TIOL-693-HC-MUM-IT, accepted and relied upon by the Tribunal. Accordingly, assessee had prayed for modifying the said order. The remaining grounds contended by the assessee were not adjudicated upon by the Tribunal. In the recalled order another additional ground relating to allowability of deduction u/s 28 & 37 was admitted. The Tribunal refused to adjudicate the aforesaid additional ground on the premise that since relief had already been granted to the applicant in modified grounds of appeal the issue raised in the additional ground of appeal was merely academic and required no separate adjudication. Assessee argued that the said ground relates to the issue of allowability of deduction u/s 28 & 37 as against the issue of disallowance u/s 40(a)(ia) which has been precipitated in other modified grounds.
Having heard the parties, the Tribunal held that,
Whether disallowance u/s 40a(ia) is warranted if the assessee was under bonafide belief that tax was not deductible at source and Revenue has not controverted such belief - NO: ITAT
++ the first contention of the assessee is that Bombay High Court in case of CIT Vs. Kotak Security Ltd. has held that disallowance u/s 40a(ia) was not at all warranted as the assessee was under bona fied belief that tax was not deductible at source. The Bombay High Court has stated that if both the parties for nearly a decade proceeded on the footing that section 194J of the Act is not attracted then in the assessment year in question no fault can be found with the assessee in not deducting the tax at source u/s 194J of the Act and consequently no action could be taken u/s 40(a)(ia). The similar facts are also in the case of the assessee as it is undertaking similar transactions of sales of prepaid sim cards since 1995-96 without deducting tax at source and revenue also has not questioned non-deduction of tax at source by the assessee. The first time the disallowance has been made in the impugned assessment year. In view of this, it was contended that assessee was under a bona fide belief for almost more than a decade that provisions of tax deduction at source do not apply to the transaction of sale of prepaid sim cards. The revenue has not controverted that the belief of the assessee regarding non-deduction of tax at source was not bona fide. Therefore, respectfully following the decision of the Bombay High Court we also hold that in such circumstances no action could be taken u/s 40a(ia) of the Act. In the result, this contention of the assessee is allowed.
Whether amendment made to a provision of Finance Act 2014 can be applied retrospectively if the provision does not cure any defect but merely for non compliances, reduces the rates of disallowances - NO: ITAT
++ the second contention of the assessee was with respect to alternative plea that disallowance, if any, for non deduction of tax should be restricted to 30% of the expenditure. By Finance (No. 2) Act 2015 has amended the provisions of section 40(a)(ia) w.e.f 01.04.2015 to provide that the disallowance under the said sub-clause shall be restricted to 30% and the provisions of this section shall be applicable to all expenditure which is payable to resident on which tax is deductible under the heading B-deduction of tax at source of Chapter XVII. Therefore by this amendment it has increased the scope of expenditure and reduced the quantum of disallowance. Though the Finance Minister explained the amendment that earlier disallowance of 100% of such expenditure has caused undue hardship to the assessee particularly where the rate of taxes only 1% to 10%. Therefore, only 30% of such payment instead of 100% will be disallowed. In the explanatory memorandum, the reasons were also given of reducing the hardship. However, it was stated that these amendment will take effect from 1st April 2015 and accordingly apply for AY 2015-16 onwards. The contention of the assessee that rate of disallowance reduced from 100 % to 30 % of the expenditure by the Finance Act 2014 applies retrospectively cannot be accepted as the provision is not curative in nature, it does not cure any defect but merely for non compliances reduces the rates of disallowances.
Whether disallowance u/s 40(a)(ia) cannot be restricted to amount payable at the end of the year only as it also applies to the amount paid during the year - YES: ITAT
++ the next argument of the assessee was that disallowance u/s 40a(ia) should be restricted to the amount remaining payable at on the last date of the previous year. The Supreme Court in case of M/s. Palam Gas Services Vs. CIT, has held that disallowance u/s 40a(1a) cannot be restricted to amount payable at the end of the year only but also applies to the amount paid during the year also. In view of this, above argument of the assessee is rejected.
Whether disallowance u/s 40(a)(ia) can be made only if there is an order u/s 201 treating the assessee to be 'assessee in default' - NO: ITAT
++ the next argument of the assessee was that AO could not have disallowed the amount to the extent of no order u/s 201 passed treating the assessee to be "assessee in default". As per Section 201 a person who is required to deduct tax at source does not deduct or after deducting does not pay than such person shall without prejudice to any other consequence which he may incur, be deemed to be assessee in default in respect of such taxes and then consequently, the provision of recovery of tax, interest and penalty may apply. It is further provided that no such order of deeming assessee to be "assessee in default‟ shall not be made after the expiry of 7 years from the end of the financial year in which the impugned payment is made or credit is given. The provisions of section 40(a)(ia) provides that notwithstanding contrary in section 30 to 38, the amount shall not be deducted in computing the income, if tax has not been deducted on certain sums or after deduction it has not been deposited before the specified date. In view of this we do not agree with the contention of the assessee that unless there is an order u/s 201 of the Act the impugned amount cannot disallowed u/s 40(a)(ia).
++ The next contention of the assessee is that additional ground of appeal relating to allowability of deduction u/s 28 & 37. The assessee submitted that similar additional ground was admitted and adjudicated by coordinate bench for AY 2008-09 in assessee's own case in ITA No. 5816/Del/2012 dated 11.03.2014 = 2014-TII-60-ITAT-DEL-TP. Therefore, respectfully following the above decision of the coordinate bench in assessee's own case for earlier years we set aside the above additional ground of appeal after admission to the file of the AO to decide the claim of the assessee afresh after considering the provisions of section 40(a)(ii) and section 37(1) read with explanation 1 of that section or any other provisions of the income tax act.
Assessee's appeal partly allowed |
