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observed that letting out of machinery, plant and furniture were inseparable from the letting of the building and therefore, the rental income was chargeable to tax under the residual head (ie, IFOS). The view of the AO was upheld by the CIT(A). On further appeal, the ITAT observed that in case of the lessee where the taxpayer had leased a part of the building along with a right to use the common facilities such as lift, lobby, staircase, etc, there was mere exploitation of the premises without letting out of machinery, plant or furniture and accordingly, it held the income from such letting out to be taxable as income from house property. However, the rental income from other lessees was held to be taxable as IFOS by the ITAT on the basis that there was a composite lease wherein the lease of building and facilities (such as fittings, fixtures, air conditioning plant etc) were inseparable. The taxpayer, aggrieved by the decision of the ITAT on the latter part, filed an appeal before the HC. The HC affirmed the ruling of the ITAT. The HC held that the real test to be applied is whether or not letting is composite and inseparable and if so, the rental income would be taxed under the residual head of income. It further held that the finding of the ITAT treating the letting out of facilities and premises to be composite and inseparable is correct and accordingly, the income from such letting should be taxed as IFOS. Garg Dyeing & Processing Industries v ACIT (ITA No 319 of 2012) (Delhi HC) Reopening of assessment not valid on the basis of a change in opinion and after the expiry of 4 years in absence of any failure to disclose material facts by the taxpayer The taxpayer had three Export Oriented Units (“EOUs”) eligible for deduction under section 10A and 10B of the Act. It filed its return of income and claimed the deduction in respect of its two units. As the taxpayer had incurred a loss in the third unit, the deduction under section 10A / 10B was not claimed with respect to this unit. Subsequently, the taxpayer revised its return of income for claiming deduction on some previously incurred expenses and along with it the taxpayer attached a note stating the reasons for revising the return as well as for not claiming deduction under section 10A / 10B in respect of the third unit. The assessment under section 143(3) of the Act was completed by the AO after making certain additions on the basis of detailed investigation. Post completion of the assessment, a notice for reassessment proceedings in the case of the taxpayer was issued after 5 years from the end the relevant assessment year (“AY”). The reasons recorded by the AO, inter alia, included not setting off of loss of the third unit before allowing deduction under section 10A / 10B of the Act which resulted in excess deduction under said section(s) and under -statement of book profit under section 115JB of the Act. The taxpayer challenged the action of the AO in initiating the reassessment proceedings by filing a writ petition before the HC. The taxpayer argued that the reassessment proceedings initiated after 4 years from the expiry of the relevant AY were time barred and invalid in absence of any failure on the part of the taxpayer to disclose truly and fully all material facts necessary for assessment. In the case of the taxpayer, the AO was fully aware of all the facts at the time of original assessment and no new facts came to AO’s record to invoke section 147 of the Act. Further, the AO after examining the return of income and all other documents accompanying the return (including the note stating reasons for not claiming the deduction for the third unit) had completed the assessment of the taxpayer. In view of these facts, the reassessment proceedings, being initiated on the basis of change in opinion, is not justifiable and time barred. The HC ruled in favour of the taxpayer and quashed the reassessment proceedings. The observations of the HC were as under: Though the AO had recorded ‘reasons to believe’ for initiating reassessment proceedings such reasons did not specify the tangible material which persuaded the AO to exercise the extraordinary powers under section 147 of the Act. In the instant case, there was intensive examination during original assessment in respect of the issue, which was the basis for reopening of assessment and accordingly, the AO was duty bound to indicate the material which compelled him to re-initiate the proceedings. The absence of any tangible material having a live link for validation of the formation of opinion of the AO amounts to change of opinion, which cannot be a legitimate ground for initiating the reassessment proceedings. Moser Baer India Limited v DCIT (WP(C) 7677 of 2011) (Delhi HC) Shortfall in withholding of tax not to attract disallowance under section 40(a)(ia) of the Act The taxpayer made payments to sub-contractors and withheld taxes at the rate of 1 percent as contractual fee. During the course of the assessment proceedings, the AO contended that the tax should have been withheld at the rate of 10 percent under section 194I of the Act as the payments were in the nature of machinery hire charges. The AO disallowed proportionate payments by holding the same to be a case of shortfall in withholding of tax as per the provisions of section 40(a)(ia) of the Act. On first appeal, the CIT(A) ruled in favour of the taxpayer. Puneet Bansal Sudipta Bhattacharjee Atti Tyagi Mukesh Butani, New Delhi +91 124 339 5010 mukesh.butani@bmradvisors.com Rajeev Dimri, New Delhi +91 124 339 5050 rajeev.dimri@bmradvisors.com Gokul Chaudhri, New Delhi +91 124 339 5040 gokul.chaudhri@bmradvisors.com Bobby Parikh, Mumbai +91 22 3021 7010 bobby.parikh@bmradvisors.com Abhishek Goenka, Bangalore +91 80 4032 0100 abhishek.goenka@bmradvisors.com Sriram Seshadri, Chennai +91 44 4298 7000 sriram.seshadri@bmradvisors.com Sumeet Hemkar, Singapore +65 6408 8004 sumeet.hemkar@bmradvisors.com Snippet UK corporate tax rate cut to 21 percent, introduction of research and development tax credit and amendments in GAAR UK government confirmed its draft legislation reducing the corporate tax rate from 22 percent to 21 percent with effect from April 2014. A new research and development tax credit has been introduced which is expected to make UK more attractive for research and development activities. Also, 2013 is expected to see new tax reliefs to support investment in the production of animation, high-end television and video games. Amendments are also made in ‘double reasonable test’ of GAAR to make it operate as intended. Source: www.internationaltaxreview.com
On further appeal at the instance of the Revenue Authorities, the ITAT observed that for invoking section 40(a)(ia) two conditions need to be satisfied, viz, payment should be liable to tax withholding and such tax has not been withheld. If both these conditions are satisfied then such payment can be disallowed under section 40(a)(ia) of the Act. However, where tax is withheld by the taxpayer under bona fide wrong impression under a specific section, then provisions of section 40(a)(ia) cannot be invoked. The provisions of section 40(a)(ia) requires the payer to withhold tax and to deposit the same with the Government treasury; and does not govern a case of shortfall in withholding of tax. In case of shortfall of tax due to any difference of opinion, the taxpayer cannot be treated as an ‘assessee in default’ under section 201 of the Act and no disallowance can be made under section 40(a)(ia) of the Act. This view was confirmed by the HC by dismissing the appeal of the Revenue Authorities. CIT v S K Tekriwal (ITA No 183 of 2012) (Calcutta HC) Diagnostic centre is not an industrial undertaking within the meaning of section 80IA of the Act The taxpayer was engaged in providing services such as X-ray, CT scan etc through an advanced radiological clinic since 1948. The taxpayer established a new Magnetic Resonance Imaging (“MRI”) unit and started claiming deduction under section 80IA of the Act on the MRI and CT scan machines installed by it. During the assessment proceedings for the AY 1999-00, the AO disallowed the claim of deduction of the taxpayer. The AO held that the deduction under section 80IA is allowable to a new industrial undertaking while the taxpayer has claimed deduction on the installation of machines which, being a mere expansion of existing facility of the taxpayer, were not entitled to said deduction. On appeal, the CIT(A) confirmed the order of the AO. However, on further appeal, the ITAT allowed the claim of the taxpayer by relying on its own orders for earlier years. The Revenue Authorities challenged the orders of the ITAT before the HC and contended that the deduction under section 80IA is available to a new industrial undertaking engaged in ‘manufacture or production of any article or thing’, which is not the case of the taxpayer. Further, the machines installed by the taxpayer cannot be considered to be engaged in ‘manufacture of new articles or things’ as no manufacturing process was undertaken by such machines. The Revenue Authorities relied on the decisions of other HCs on the similar issue. On the other hand, the taxpayer resisted the submissions of the Revenue Authorities on the basis of decisions of the HCs which had held the hospitals and diagnostic centres to be manufacturing goods and therefore, industrial undertakings. Further, the taxpayer contended that in a diagnostic centre, unexposed films are processed by a specialised activity and the resultant production of exposed films with imprints of the patient certainly amounts to processing of goods and thus, should be eligible for deduction under section 80IA of the Act. Ruling in favour of the Revenue Authorities, the HC observed that ‘manufacture or production of an article or thing or their processing’ is an important condition for claiming deduction under section 80IA of the Act. In the case of a diagnostic centre, it is a service which is provided and no processing is involved as there is no change in the article – the film is the medium in which what is recorded is made available to a doctor for interpretation and the same can easily be given on other media like pen drive, email etc. On the basis of these observations, it held that the facilities provided by a diagnostic centre do not result in ‘manufacture or production of articles or things or their processing’ and accordingly, the deduction under section 80IA of the Act would not be allowable on the diagnostic centres. CIT v Dewan Chand Satyapal (ITA No 87 of 2003, 1411 and 1541 of 2006) (Delhi HC) Snippet Andhra Pradesh HC stays Special Bench ruling in the case of Merilyn Shipping The Andhra Pradesh HC directs interim suspension of ITAT Special Bench ruling in the case of Merilyn Shipping wherein it was held that disallowance under section 40(a)(ia) of the Act is applicable only where amount remained unpaid at the end of the year without withholding of tax. Source: www.taxindiaonline.com ITAT Section 14A disallowance not applicable on exempt income which is incidental The taxpayer was engaged in the business of exporting goods and dealing in shares and securities. Since one of the main businesses of the taxpayer was dealing in shares and securities, holding a certain number of shares was a precondition for the taxpayer to trade in large volumes in Futures and Options (“F&O”). For the AY 2008- 09, the taxpayer had claimed exemption for dividend income and made a suo moto disallowance of expenses relatable to dividend income at the rate of 1 percent of the dividend received. During the course of the assessment proceedings, the AO made a disallowance of interest and other expenditure under section 14A of the Act read with Rule 8D of the Rules. On appeal, the CIT(A) relied on the decision of Special Bench of the ITAT in the case of Daga Capital Management Services Private Limited, wherein it was held that section 14A of the Act does not make any distinction between incidental and main income and is attracted even in case of income not forming part of total income, like dividend income in respect of shares held as stock-in-trade is incidental to the main income from trading in shares, and upheld the disallowance made by the AO.
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