No deemed dividend if shareholding of a common shareholder is less than 20%

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IN THE ITAT MUMBAI BENCH ‘A’

Income-tax Officer-2(1)(1)

v.

Anand Rathi Direct India (P.) Ltd.

IT APPEAL NO. 2556 (MUM.) OF 2010

[ASSESSMENT YEAR 2006-07]

MAY 4, 2012

The Assessing Officer had considered that a common shareholder ‘P’ has substantial shareholding of more than 10 per cent. While analyzing substantial interest, the Assessing Officer has only considered Explanation 3 with reference to a person having beneficial interest entitled to not less than 20 per cent of income of such concern so as to attract provisions of section 2(22)(e). However, the Assessing Officer has not examined definition given in section 2(32) with reference to company which has a substantial interest in company, wherein it was specifically mentioned of carrying not less than 20 per cent of voting power. Admittedly, ‘P’ has less than 20 per cent shareholding in both companies, i.e., assessee as well as ‘A’. Therefore, reasoning given by Assessing Officer of a common shareholding by ‘P’ does not hold good. Further, it is an admitted fact that assessee is not owning any share in ‘A’ and provisions of section 2(22)(e) do not apply unless assessee is a shareholder in the company. For both the reasons, the order passed by the Commissioner (Appeals) was to be upheld.

The assessee shows turnover of direct purchase and sale in the books of account whereas in F & D segment, arbitrage, auctions, etc., only net amounts are accounted while sales was paid on value of transaction. Therefore, reconciling the turnover on the basis of sales is, if not impossible, virtually cumbersome considering the nature of the business, turnover involved and different rates of sales paid for different transactions. On certain transactions in F & AO there is no sales on purchase amounts but only on sale amounts. Therefore, the Assessing Officer’s exercise of asking the assessee to reconcile turnover, may be valid according to law but not practical considering that all the gross amounts are not accounted for in the books of account of the assessee and assessee to a large extent filed Form No. 10DB explaining various turnovers undertaken by the company. The books of account cannot be rejected simply because the assessee failed to reconcile the turnover to the satisfaction of the Assessing Officer. There is no allegation that the assessee was indulging in any transactions outside the books and outside the stock exchange. The books of account were also audited. Scrutiny assessments were completed in all earlier years without rejecting books of account. Considering the explanation given by the assessee and turnover reconciliation placed on record, the Commissioner (Appeals) was correct in rejecting Assessing Officer’s action.

S. 54 Exemption available on capital gain from sale of multiple house invested in a new house

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IN THE ITAT MUMBAI BENCH ‘A’

Deputy Commissioner of Income-tax

v.

Ranjit Vithaldas

IT APPEAL NO. 7443 (MUM.) OF 2002

[ASSESSMENT YEAR 1998-99]

JUNE 22, 2012

Whether the exemption u/s 54 will be available, in case, capital gain arising from sale of more than one residential house, is invested in one residential house. The ld. counsel appearing for the assessee argued that there was no restriction under section 54 that capital gain arising from two residential houses cannot be invested in one residential house. We find substance in the argument advanced by the Id. counsel for the assessee. No rulings have been brought on record by the ld. DR to show that the capital gain arising from sale of more than one residential houses cannot be invested in one residential house. The provisions of section 54 as pointed out earlier apply to transfer of any number of residential houses by the assessee provided the capital gain arising therefrom is invested in a residential house. The exemption u/s 54 is available if capital gain arising from transfer of a residential house is invested in a new residential house within the prescribed time limit. Thus there is an inbuilt restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential houses cannot be invested in one residential house. In case, capital gain arising from sale of more than one residential houses is invested in one residential house, the condition that capital gain from sale of a residential house should be invested in a new residential house gets fulfilled in each case individually because the capital gain arising from sale of each residential house has been invested in a residential house. Therefore, even if two flats are sold in two different years, and the capital gain of both the flats is invested in one residential house, exemption u/s 54 will be available in case of sale of each flat provided the time limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.

Set-off not claimed in return can be claimed during assessment

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IN THE ITAT HYDERABAD BENCH ‘A’

Smt. Girija Reddy

v.

Income-tax Officer

IT Appeal No. 297 (Hyd.) of 2012

SA No. 56 (Hyd.) of 2012

[Assessment year 2008-09]

May 25, 2012

Brief facts of the issue are that during the scrutiny proceedings, the assessee had filed a letter before the Assessing Officer claiming that she had incurred short term capital loss of Rs. 97,07,329 from her investments in SBI Mutual Funds during the year. Letters from SBI Fund Management P. Ltd. in this regard were also filed. Though the Assessing Officer noted that the claim was in order as per section 74 of the Act, he noted that such loss had not been claimed in the return of income. Accordingly, he held that in view of the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323/57 Taxman 1, the assessee’s claim was not allowable. During the appellate proceedings, the representative of the assessee submitted that set off for the short term capital loss arising from investments in SBI Mutual Funds should have also been given. He averred that the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (supra) was in a different context and not on the similar facts. In instant case, the Assessing Officer had proposed to tax the amount as capital gains, as against the assessee’s claim that the same is not taxable. Accordingly, having recorded the fact that the assessee otherwise qualified for such set off, the set off should not have been disallowed on the ground that the same was not claimed in the return of income. He maintained that the assessee was well within her right to make claims during the assessment proceedings and it does not amount to filing revised computation. In this regard he referred to the decision of the Hon’ble Ahmedabad ITAT in the case of Kisan Discretionary Family Trust v. Asstt. CIT [2008] 113 TTJ (Ahd.) 918, which was rendered after the decision of the Hon’ble Apex court in the case of Goetze India Ltd. (supra). He further claimed that even otherwise the said decision of the Hon’ble Supreme Court restricts itself only to the powers of the Assessing Officer and not of the CIT (appeals). As the ground was not considered by the CIT(A), the assessee is in appeal before us.

Wealth Tax – To claim exemption of SOP, stay in house not mandatory

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IN THE ITAT MUMBAI BENCH ‘WT’

Ramesh D Hariani

v.

Wealth Tax Officer

WT APPEAL NO. 41 (MUM.) OF 2009

[ASSESSMENT YEAR 2001-02]

MAY 11, 2012

Rule 3 of Schedule III enumerates the basis and method of valuation by applying the multiple of net maintainable rent for the immovable property. Second proviso to rule 3 of Schedule III is exception to the general rule of valuation, if the property is acquired or constructed after 31-3-1974 and if the value so arrived at is less than the cost of the acquisition or cost of construction, as increased by cost of any improvement, then the cost of acquisition or cost of construction, as the case may be, along with the cost of improvement shall be taken to the value of the property. But in case of one house belonging to the assessee and is exclusively used by the assessee for his own residential purposes throughout the relevant year ending immediately preceding the valuation date, the second proviso shall not apply as stipulated by third proviso. Thus, the authorities below have proceeded and decided the issue on the premises that the assessee should have stayed in the house in question for taking the benefit of third proviso to rule 3 of Schedule III.

It is pertinent to note that the third proviso to rule 3 of Schedule III specifically used the term one house belonging to the assessee, which mean that in case of more than one house belonging to the assessee and exclusively used by the assessee for his own residential purpose, the benefit of third proviso can be availed only in respect of one house. This aspect has been further clarified by fourth proviso to rule 3, which clearly stipulates that where more than one house belonging to the assessee is exclusively used by the assessee for residential purposes, third proviso shall be applied only in respect of one such house at the option of the assessee.

Thus, the language of the third proviso and fourth proviso to rule 3 of Schedule III makes it clear that there may be more than one house and in that case the assessee may not stay in all the house, but still the benefit of third proviso is available to the assessee at his option to one of such house and no inference can be made from the third proviso to rule 3 that staying in the house is a mandatory condition. Otherwise, fourth proviso would become meaningless/otiose.

The Madras High Court dealing with the similar issue in the case of CWT v. Smt. Muthu Zulaikha [2000] 245 ITR 800/[2001] 115 Taxman 185 (FB) has clarified that residential purpose means, it should not be used for commercial or non-residential purpose and it should be used exclusively for residential purpose. What is required is that the house should have been exclusively used by the assessee for residential purpose and should not have been let out for rent or used for any commercial or non-residential purpose. It has also been clarified that the right of the property alone will play a role. What is to be seen is the intention of the assessee to live in the house and not actually occupied or staying in the house. In the instant case, the property in question is residential house, which has not been let out or used for the purpose other than residential. Therefore, even though the assessee did not stay in the house so long, this house is exclusively for residential purpose. Therefore, the conditions as enumerated in the third proviso to rule 3 are satisfied.

Excise Dues of company cannot be recovered from its directors or shareholders

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HIGH COURT OF BOMBAY

Vandana Bidyut Chaterjee

v.

Union of India

Writ Petition No. 165 of 2012

February 13, 2012

It is an undisputed position that duty and penalty are arrears of the company. It was the company that was the person engaged in manufacture of goods and registered as manufacturer under section 6 of the said Act and therefore obliged to pay excise duty. Further under the Act and the Rules, the person liable to pay duty is the person who manufactures the goods in terms of rule 7 of the erstwhile Central Excise Rules, 1944 and rule 4 of the Central Excise Rules, 2002, as now existing. Therefore the obligation to pay duty is on the company. The affidavit in reply dated February 2, 2011, filed by the respondents states that the arrears being Rs. 71,68,243 as excise duty and Rs. 25,000 as penalty are dues of the company. Therefore in terms of section 142 of the Customs Act, 1962, as made applicable to the Central Excise Act, 1944, by virtue of a notification issued under section 12 of the Central Excise Act, 1944, the Central Government can recover sums due to it from the person who has not paid its dues. It is under section 142 read with section 156 of the Customs Act, 1962, that the Recovery Rules, 1995, have been framed. In terms of the Recovery Rules, 1995, the amounts which can be recovered are only those belonging to a defaulter. A defaulter is defined under the Recovery Rules, 1995, as any person from whom Government dues are recoverable. It is an undisputed position that in this case that the dues/arrears of excise duty and penalty are that of the company. Therefore the recovery proceedings under the Recovery Rules, 1995, can be taken only against the company, as it alone is the defaulter. There is no provision to recover the arrears of the company from its directors and/or shareholders under the said Act. The arrears of dues belonging to a limited company are recoverable only from the limited company concerned which is an independent entity in law, particularly so, as it obtains a separate registration under the Act. Therefore in terms of the Recovery Rules, 1995, the dues can be recovered only from the limited company. There is no provision in the said Act as is found under section 179 of the Income-tax Act, 1961, or under section 18 of the Central Sales Tax Act, 1956, where the dues of a private limited company can be recovered from its directors when the private limited company is under liquidation, in specific circumstances. It is a well-settled position in law that a company incorporated under the Companies Act, 1956, is a separate person having a distinct independent identity, independent from its shareholders and directors. Consequently, the dues of the company cannot be recovered from the directors and/or individual share-holder of the company. Further, it is pertinent to note that it is not the case of the respondents that they are seeking to lift the corporate veil of the said company to establish that the said company was a mere shell and being utilised to defraud the Revenue of its legitimate dues. Further the case of lifting the corporate veil, if any, was to be made out at the time notices of demand were issued to the said company by making the directors/share-holders liable to pay the dues and the same being confirmed by the authorities under the said Act. Once it is an admitted position between the parties that the arrears of duty and penalty are those of the said company then the notices issued under the Recovery Rules, 1995, to its former director the late Balram P. Mukherjee and his daughter the petitioner herein to whom the said property has been gifted, are completely without jurisdiction. We are fortified in the view taken by us by two decisions of the Division Bench of this hon’ble court in Sunil Parmeshwar Mittal’s case (supra) and Satish D. Sanghavi’s case (supra) where on similar facts it has been held that arrears of duty payable by a limited company cannot be recovered from its director. Further, the reliance of the respondents upon an agreement dated March 21, 2000, between Kapoor family and the Mukherjee brothers whereby all the shareholding of Kapoor family in the said company was transferred to Mukherjee brothers and under which the Mukherjee brothers accepted their responsibility to discharge the Central Excise liability in support of its case that the dues of the said company can be recovered from the late Balram P. Mukherjee and/or his estate is not sustainable.

Share transferred by promoters before listing not eligible for exemption U/s. 10(38)

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HIGH COURT OF DELHI

Uday Punj

v.

Commissioner of Income-tax

IT APPEAL NO. 183 OF 2012

JULY 9, 2012

Yet another issue involved in this appeal is as to whether the capital gain tax, in this case, would be leviable at the normal rate of 20% or at the rate of 10%. Admittedly, capital gain tax at the rate of 10% was payable only in case of ‘listed securities’. Since, these shares had been transferred to the applicants in the public offer, by 5.1.2006 before they were actually listed on the stock exchanges on 6.1.2006, they were not ‘listed securities’ at the time of sale by the appellant and consequently, the transaction would not be eligible for payment of capital gain tax at the lower rate of 10%.

TDS on amount paid to agent of foreign airlines u/s. 194C or u/s.195?

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IN THE ITAT KOLKATA BENCH ‘B’

Taj Leather Works

v.

Assistant Commissioner of Income-tax, Circle-32, Kolkata

IT APPEAL NOs. 1686 AND 1687 (KOL.) OF 2011

[ASSESSMENT YEARs 2007-08 AND 2008-09]

MAY 31, 2012

It is an admitted position that the air freight is paid to the agents on the actual basis and that the bills and air freight documents have been directly issued by the foreign airlines. The agents, while accepting payments for air freight components, have acted merely as agents of the respective airlines and have not received the air freight payments in their own right. In copies of airway bills, the name of these agents is shown as ‘Issuing carrier’s agent, further the agent’s code is given as ‘Agent’s IATA code’. There is thus enough material to demonstrate that the persons having received money for the air freight have received the same in their capacity as ‘issuing carrier’s agent’, i.e., agent of the airline concerned. The air freight payment is thus made to the foreign airlines, though through the agents. Therefore, the payments cannot be said to have been made to a resident company. Accordingly, the provisions of section 194C do not come into play.

As for the stand that the assessee should have moved the application under section 195(2) in case of payments to non-residents and assessee’s failure to do so is to be visited with consequences for non deduction of tax at source, the law is now settled by the Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234; wherein it has been held that ‘where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof’.

It is not even the revenue’s case that the amounts paid to foreign airlines, on account of air freight payments, are taxable in India. It is only elementary that a tax deduction at source under section 195 is only a vicarious liability inasmuch as when recipients of income, i.e., the airlines concerned, have no primary liability to pay tax, there cannot be any vicarious liability to deduct tax from payments in which such income is embedded.

Therefore, the assessee did not have any obligations to deduct tax at source either under section 194C or under section 195 from payments made to the foreign airlines for air freight. In this view of the matter, the impugned disallowances under section 40(a)(ia) are devoid of any merits, nor can these disallowances be made under section 40(a)(i) either as alternatively suggested by the authorities below. Therefore, the impugned disallowances were liable to be deleted.