Third Member, ITAT, Resolves Controversy On S. 14A + Rule 8D Disallowance For Shares Held As Stock-in-trade

D. H. Securities Pvt. Ltd vs. DCIT (ITAT Mumbai) (Third Member)

S. 14A & Rule 8D disallowance applies to tax-free securities held as stock-in-trade


The assessee claimed that as it was engaged in the business of trading in shares, its main object is to earn profit on purchase and sale of shares and not to earn dividend income from such shares. It claimed that the accrual of tax-free dividend on such shares was merely incidental to the holding of shares as stock-in-trade and that no disallowance could be made u/s 14A and Rule 8D. It also claimed that though the assessee had not incurred any direct or indirect expenditure to earn the said dividend, the AO had made the disallowance on a presumptive basis. The Division Bench referred the dispute to a Third Member in view of the difference of opinion between the Benches. Before the Third Member, the assessee relied on CCI Ltd 71 DTR (Kar) 141 , India Advantage Securities, Yatish Trading etc in which the law had been laid down that s. 14A & Rule 8D does not apply to securities held as stock-in-trade. The department relied on Godrej & Boyce Manufaturing Co 328 ITR 81 (Bom) (where it was held that Rule 8D is mandatory) and Daga Capital 117 ITD 169 (Mum) (SB) (where it was held that s. 14A applies to stock-in-trade). HELD by the Third Member:

It is accepted by both parties that the assessee is a dealer in shares and that the shares were held by it as stock-in-trade. The issue under appeal is squarely covered by the principles laid down in Godrej & Boyce, Dhanuka & Sons 339 ITR 319 (Cal), American Express Bank and Damani Estates & Finance in which the issue has been elaborately considered. The argument that the judgement of the Karnataka High Court in CCI Ltd is the solitary High Court judgement on the point and it should be followed is not correct because the issue has also been considered by the Calcutta High Court in Dhanuka & Sons. Also, while CCI Ltd has not considered the jurisdictional High Court judgement in Godrej & Boyce, Dhanuka & Sons has duly considered Godrej & Boyce in taking the view that s. 14A/ Rule 8D applies to shares held as stock-in-trade. Accordingly, disallowance u/s 14A can be made in conformity with law even where dividend income has been earned on shares held as stock-in-trade.

Sec. 271(1)(c) Penalty: Law On Discharge Of Onus In View Of SC Verdict In MAK Data Explained

CIT vs. M/s. Gem Granites (Karnataka) (Madras High Court)

 

S. 271(1)(c) penalty cannot be levied if the assessee discharges the primary burden by a cogent explanation and the AO is unable to rebut it. MAK Data (SC) explained

Pursuant to a search conducted u/s 132 it was revealed that the assessee had “on-money” transactions in real estate dealings. The assessee accepted the “on-money” but claimed that it was taxable only on completion of the projects under the ‘completed contract method‘. The assessee’s claim was rejected by all the authorities including the High Court. In the s. 271(1)(c) penalty proceedings, the assessee claimed that there was a mistake in the entries regarding the sale of flats to J.B. Exports in as much as the rate at which the property was shown as sold to the said party was much higher than the rate at which the property was sold to other parties. The AO and CIT(A) rejected the claim but the Tribunal accepted it on the basis that the huge difference in the rate of sale of the flat recorded in other cases and in the case of J.B. Exports supported the assessee’s contention that there may be a mistake in recording the rate. It held that as the department had failed to prove concealment without any doubt, penalty could not be imposed. On appeal by the department to the High Court, HELD dismissing the appeal:

Merely because the assessment proceedings have been confirmed does not automatically mean that penalty u/s 271(1)(c) is justified. Unless the case is strictly covered by s. 271(1)(c), penalty cannot be invoked. For sustaining penalty, the bona fide explanation of the assessee must be looked at so that the contumacious conduct of the assessee for the purpose of sustaining the penalty would be taken as condition that is the main requirement u/s 271(1)(c). In Mak Data P. Ltd vs. CIT the Supreme Court held that when a difference is noticed by the AO between the reported and assessed income, the Explanation to Section 271(1) raises a presumption of concealment and the burden is on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the Explanation has been discharged by the assessee, the onus shifts on the Revenue to show that the amount in question constituted undisclosed income. On facts, the onus cast upon the assessee has been discharged by giving a cogent and reliable explanation. If the department did not agree with the explanation, the onus was on the department to prove that there was concealment of particulars of income or furnishing inaccurate particulars of income. Such onus has not been discharged by the department and so the Tribunal’s finding cannot be interfered with (Dharmendra Textiles Processors 306 ITR 277 (SC) & Reliance Petroproducts 322 ITR 158 (SC) referred)

S. 132B(4)(b)/ 240/ 244A: Assessee is entitled to interest on cash appropriated during search even if refund is directed in appeal proceedings

Chironjilal Sharma HUF vs. UOI (Supreme Court)

Pursuant to a search conducted u/s 132, cash of Rs. 2.35 lakhs was recovered. The AO passed an order u/s 132(5) in which he calculated the tax liability and appropriated the seized cash. An assessment order was also passed to the same effect. The AO’s order was finally set-aside by the Tribunal and it became final. Consequently, the assessee was refunded the amount of Rs. 2.35 lakhs with interest from 4.3.1994 (date of last of the regular assessments by the AO) until the date of refund. The assessee claimed that he is entitled to interest u/s 132B(4)(b) of the Act for the period from the expiry of period of six months from the date of order u/s 132(5) to the date of regular assessment order. In other words, as the order u/s 132(5) was passed on 31.5.1990, six months expired on 30.11.1990 and the last of the regular assessments was done on 4.3.1994, the assessee claimed interest u/s 132B(4)(b) from 1.12.1990 to 4.3.1994. HELD by the Supreme Court:

The department’s argument that the refund of excess amount is governed by s. 240 and that s. 132B(4)(b) has no application is not acceptable. S. 132B(4)(b) deals with pre-assessment period and there is no conflict between this provision and s. 240 or for that matter s. 244(A). The former deals with pre-assessment period in the matters of search and seizure and the later deals with post assessment period as per the order in appeal. The department’s view is not right on the plain reading of s. 132B(4)(b) and the assessee is entitled to simple interest at the rate of 15% per annum u/s 132B(4)(b) from 1.12.1990 to 4.3.1994. The interest shall be paid within two months from today.

BUDGET HIGHLIGHTS 2013

The King’s Speech

Hinting towards global economic slowdown of growth rate of 3.2%; the FM cited towards a tough Budget. On the contrary he also mentioned that currently India is the only country behind China and Indonesia when it comes to growth rate throughout the world. And if continued to grow at projected rate, only China will grow faster than India.

The FM brought up his biggest concern of Current Account Deficit i.e. the difference between the income and expenditure of the country. This is mainly because of heavy imports of oil, coal and love for gold. And the only way to counter this deficit is to attract foreign investment via FII, FDI or ECB (External Commercial Borrowings).  Thus he highlighted on the aspect of good governance stating that “Doing business in India must be seen as easy, friendly and mutually beneficial.” Investment is done only when there is lack of doubt and ambiguity. Thus, the FM maintained and repetitively insisted on stable tax rates, clear communication of policies and laws and avoiding hurdles of regulatory and administrative burdens.

                                FM during the allocation of budgets touched on 3 main areas which in his opinion require very high attention, and thus touching the hearts of many viz. Woman empowerment, Youth empowerment and Poor empowerment.                                                                                                                                         

Direct Taxes

·        Currently the tax to GDP ratio is 5.5% which was once 11.9% in 2007-08. Thus tax collection needs to be increased.

Corporate Taxes

Basic tax rate and education cess rate remain unchanged.

·        Surcharge

§  Domestic Companies : Surcharge at the rate of 5% whose income is more than ` 1 crore (` 10 million)

-          Surcharge at the rate of 10% whose income is more than ` 10 crore

§  Foreign Companies : Surcharge increased from 2% to 5%

§  Increase in surcharge from 5% to 10% on Dividend Distribution Tax

·        Investment Allowance

Manufacturers are encouraged to invest in Plant and Machinery. Additional 15% depreciation to company which invests more than 100 crore in P&M between 01.04.2013 to 31.03.2015

·         Loophole of avoiding dividend distribution tax by way of buy back of share blocked. TDS proposed at the rate of 20% for buy back of shares by unlisted companies

·         TDS rate on payments by way of Royalty and fees for technical services to non-residents increased from 10% to 25%.

·         The ‘eligible date’ for power sector projects increased from 31.3.13 to  31.3.14

·         Securitisation Trust exempted from tax. Tax to be levied only at the time of distribution of income. Tax @30% for companies and @25% for Individuals/HUF

Personal Taxes

·         No changes in personal tax slabs; because even small increase in basic exemption limit will result in escape of lakhs of taxpayers from the tax net

·         Still, bare benefit is given to taxpayers who are within the tax bracket of `2 lacs to `5 lacs. These taxpayers will get a ‘tax credit’ i.e. direct reduction in tax of `2,000. The tax credit is estimated to benefit 1.8 crore taxpayers

·         Home Loan benefit :

-          First home buyers who avail home loan in FY 2013-14 up to `25 lacs will get an additional deduction of interest of `1,00,000

-          This is over and above the existing limit of `1.5 lacs

-          If the limit is not fully utilized, the balance may be carried forward in FY 2014-15

·         Surcharge is back for super rich:

Citing only 42,800 persons have reported per year income more than `1 crore recently, Surcharge to be levied at the rate of 10% on income above `1 crore.

Indirect Taxes

·         The indirect tax to GDP ratio has fallen down to 4.4% which is reason for concern for the FM. In none of the large developing countries the ratio is so low

·         Basic rates remain the same, i.e. Excise duty at 12%, Service tax at 12% and Customs duty at 10%

Custom Duty

·         Period of concession to specified parts of electric and hybrid vehicles extended to 31.3.15 to boost environment friendly vehicle manufacturing

·         Duty reduced from 7.5% to 5% on machinery used in manufacture of leather and leather goods

·         Reduced from 10% to 2% on pre-forms of precious and semi-precious stones

·         Duty on de-oiled rice bran oil cake totally withdrawn

·         Duty on set top boxes increased from 5% to 10% to boost domestic production

·         On raw silk imports, increased from 5% to 15%

·         Motor Vehicles from 75% to 100%, Motor cycles of engine capacity of 800cc or more from 60% to 75% and Yachts and similar vessels from 10% to 25%

                                 

·         Duty-free limit of import of jewellery like Gold increased to `50,000 for male passenger and `100,000 in case of female passenger

Excise Duty

·         Ships and vessels, handmade carpets, cotton fabric exempted from excise duty

·         Duty increased by 18% on cigarettes, cigars, cheroots and cigarillos

·         SUVs other than registered as taxis will now bear excise duty of 30% instead of 27%

·         Duty on Marble doubled from `30/sq.mtr to `60/sq.mtr.

·         Mobile phones pricing more than 2,000/- will now bear 6% duty

Service Tax

·         Like stated earlier in his speech the importance of stable tax regime the negative list introduced last year has not been tampered much. Only 2 services are added to the negative list viz. Vocational courses offered by institutes affiliated to State Council of Vocational Training and Testing activities relating to agri produce.

·         Service tax to be levied on all  Air conditioned restaurants unlike before

·         FM mentioned that around 17 lacs Service tax payers are registered with the Government, but only 7 lacs of them file their Returns and thus it is important to motivate such service tax payers as it is administratively not feasible to identify and collect taxes from such defaulters. Thus, the Service tax Voluntary Compliance Encouragement Scheme has been introduced where from 01.10.2007 defaulters can file their returns and pay due taxes. Interest, penalty and other consequences will be waived

·         Abatement reduced from 75% to 70% for homes/flats having carpet area of more than 2,000sqft

Other Highlights of the Budget

·         TDS at the rate of 1% on sale of immovable property above 50 lacs. Agricultural land excluded.

·         India’s first of women, by women, for women Public Sector Bank to be opened

·         Nirbhaya Fund to be setup for women safety and empowerment

·         Small and Micro Enterprises (SMEs) to get extended benefit for 3 years even after reaching at higher category

·         Commodity Transaction Tax (CTT) introduced on non-agri products at the rate of 0.01%

·         Transfer Pricing safe harbor rules to be declared in near future

·         General Anti Avoidance Rule (GAAR) postponed to April 2016 in modified version assured of preserving its basic purpose

·         Direct Tax Code (DTC) based on Best International Practice to be introduced soon

·         Goods and Service Tax (GST) to be implemented soon hoping for unanimous consent of State Governments

Quotable Quotes

·         “Hope inspires courage.”  In light of convergence to GST with support of State Finance Ministers

·         “Any economist will tell us what India can become. We are the tenth largest economy in the world. We can become the eighth, or perhaps the seventh largest by 2017. By 2025, we could become a $ 5 trillion economy, and among the top five in the world. What we will become depends on us and on the choices that we make. Swami Vivekananda, whose 150th birth anniversary we celebrate this year, told the people: “All the strength and succour you want is within yourself. Therefore, make your own future.”

·         What clearly eye discerns as right, with steadfast will And mind unslumbering, that should man fulfill

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Income Tax Rates in India for FY 2013-14 i.e. Assessment Year (AY) 2014-15 and TAX CALCULATOR

Income Tax Rates applicable for Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI) in India is as under:

Assessment Year 2014-15, Relevant to Financial Year 2013-14 

For Individuals below 60 years age (including Woman Assessees):

Income	Tax Rate
Upto 200,000	Nil
200,000 to 500,000	10% of the amount exceeding 200,000
500,000 to 1,000,000	Rs.30,000 + 20% of the amount exceeding 500,000
1,000,000 & above	Rs.130,000 + 30% of the amount exceeding 1,000,000

 For Individuals aged 60 years and above but below 80 years (Senior Citizen):

Income	Tax Rate
Upto 250,000	Nil
250,000 to 500,000	10% of the amount exceeding 250,000
500,000 to 1,000,000	Rs.25,000 + 20% of the amount exceeding 500,000
1,000,000 & above	Rs.125,000 + 30% of the amount exceeding 1,000,000

 
For Individuals aged 80 years and above (Very Senior Citizen):

Income	Tax Rate
Upto 500,000	Nil
500,000 to 1,000,000	20% of the amount exceeding 500,000
1,000,000 & above	Rs.100,000 + 30% of the amount exceeding 1,000,000

 
Tax Credit: Rs. 2,000 for every person whose income doesn’t exceed Rs. 500,000. (i..e Rs.2,000/- tax will be reduced from the tax liability. It means if originally the tax was Rs. 30,000/-, then it would be reduced by Rs.2,000/-, the net tax liability being Rs.28,000/-)

Surcharge on Income Tax: 10% of the Income Tax payable, in case the total taxable income exceeds Rs.10,000,000. Surcharge shall not exceed the amount of income that exceeds Rs.10,000,000.

Education Cess: 3% of Income Tax plus Surcharge (Education cess @2% and Secondary and Higher Secondary Education cess @1%)

SLABS FOR BUSINESS

The following Income Tax Slab Rates shall be applicable for the Assessment Year 2014-15 i.e Previous Year 2013-14. Education Cess @ 2% and SHEC @1% shall be levied on the Income Tax so computed.

1. For Co-operative Society

Income Tax Slabs	Income Tax Rates
Where the Total Income does not exceed Rs. 10,000	10% of the Income
Where the Total Income exceeds Rs. 10,000 but does not exceed Rs. 20,000	20% of the Amount by which it exceeds Rs. 10,000
Where the Total Income exceeds Rs. 20,000	30% of the Amount by which it exceeds Rs. 20,000

2. For Firms, Local Authority and Domestic Company

Income Tax Slabs Rates wont apply in this case and Tax @ 30% flat shall be computed on the Total Income. Surcharge shall not be levied on Income of Firms and Local Authorities but shall be levied on the Total Income Tax of Domestic Companies @ 5% provided that the Total Income of the Domestic Company exceeds Rs. 1 Crore (i.e. Rs. 10 millions)

TAX CALCULATOR: http://law.incometaxindia.gov.in/DIT/Xtras/taxcalc.aspx

ITAT Upset At Roughneck Recovery Measures Of Assessing Officer

AO’s action of recovering outstanding taxes without affording reasonable time to take remedial steps is a misuse of powers and a gross violation of the directions laid down by the Courts. AO has to refund the taxes recovered

The assessee received the order of the CIT(A) on 16.11.2013. It filed an appeal before the Tribunal on 18.11.2013 which was the next working day. The assessee also filed an application before the Tribunal requesting stay of demand. The said application was fixed for hearing on 22.11.2013. However, the AO, without awaiting the outcome of the stay application, attached the assessee’s bank account u/s 226(3) on 18.11.2013 and withdrew Rs. 159.84 crore. The assessee argued before the Tribunal that the coercive action of the AO was wrong because (i) the AO had taken coercive action before the expiry of time of filing the appeal against the order of the CIT(A), (ii) the action was taken even prior to the disposal of the stay application by the Tribunal and (iii) no prior notice was given to the assessee before taking the recovery action u/s 226(3). HELD by the Tribunal:

The action of the AO in recovering the outstanding without affording the assessee minimum reasonable time to take remedial steps is a misuse of powers and a gross violation of the directions laid down by the Courts as well as the basic rule of law and principles of natural justice. Accordingly, we direct the Revenue to refund the entire amount of Rs. 159.84 crore to the assessee within 10 days from the receipt of this order (Mahindra & Mahindra Ltd UOI 59 ELT 505, Mahindra & Mahindra W.P. 2164/2007, UTI Mutual Fund 345 ITR 71 (Bom), RPG Enterprises 251 ITR 20 (Mum) & MSEB 81 ITD 299 (Mum) followed)

Sec. 37(1): Expenditure on acquiring master copy of software subject to obsolescence is deductible as revenue expenditure

Oracle India Pvt. Ltd vs. CIT (Delhi High Court)

The assessee entered into a license agreement with Oracle Corp under which it acquired a non-exclusive & non-assignable right to duplicate software products which were owned by Oracle Corp and to sub-license the same to parties in India. The assessee paid recurring royalty of 30% for the said right. In addition to the royalty, the assessee periodically paid an amount towards “*expenditure on import of software master copy*”. The said master copy was used to replicate the software. The assessee claimed that the said master copies were versions of Oracle’s new product offerings which had very accelerated obsolescence and that at any point of time it was not possible to say whether the version will be current for one day or one month. The AO allowed a deduction for the recurring royalty but held that the expenditure for acquiring the software master copy was capital
expenditure. On appeal, the CIT(A) reversed the AO on the ground that owing to obsolescence, there was no enduring benefit as there were frequent corrections and up-gradation of the software. On appeal by the department, the Tribunal reversed the CIT(A) and held that the expenditure was capital
in nature on the ground that the master copy was an asset of enduring benefit. On appeal by the assessee, HELD reversing the Tribunal:

The assessee’s claim that the master copies had high accelerated obsolescence and that even at the point of time of import it was difficult to say whether the version would be replaced by a new or updated version after one day or a month had not been disproved. Also the facts showed that there were periodical imports of the master copies and that the average price per copy was minimal. This was not a case where the master copies contained operating or system software, which normally did not require frequent up-gradation or changes. It is also not the case of an assessee which is the end user of software. It is a case where the assessee is required to repeatedly pay for the master copy media in view of frequent newer or updated versions of the application software from time to time.
Once newer or better version of the application software is available, the earlier version is not saleable and does not have any market value for the seller i.e. the assessee. Also, as per the “*matching concept*” in accountancy, while determining whether expenditure is capital or revenue in
nature, the question whether the expenditure would create an asset which is of value in further assessment periods and should be amortised (i.e. depreciated) as long as it has value (subject to the statutory provisions) requires to be considered. If the expenditure does lead to creation of an asset but of a limited or short life, it has to be treated as a liability and not as a fixed asset. The said expenditure cannot be valued for price for future financial years (*Oracle Software
<http://itatonline.org/archives/index.php/cit-vs-oracle-software-india-supreme-court-copying-software-onto-blank-discs-is-manufacture-for-s-80-ia/>*320 ITR 546 (SC), *Ashahi India Safety Glass <http://itatonline.org/archives/index.php/cit-vs-asahi-india-safety-glass-ltd-delhi-high-court-expenditure-on-application-software-is-revenue-in-nature/>*346 ITR 329 (Del), *G.E. Capital Services* 300 ITR 420 (Del), *O.K. Play* 346 ITR 57 (P&H), *IAEC Pumps* 232 ITR 316 (SC) referred)