Service Tax, VAT CST update

Service Tax : Even long-term leases of 99 years by state industrial development authorities amount to 'lease' and are liable to service tax under Renting of Immovable Property Services

VAT/CST :

Composite contract of manufacture, supply and installation of lifts in building (involving civil construction) amounts to works contract; however, if there are two contracts of purchase of components of lift from a dealer and separate contract for installation, same would be 'sale' and 'labour and service' respectively.

No depreciations to owner on assets given on lease if loan transaction was disguised as sale and lease back transaction

Assessee was not entitled to claim depreciation on asset which was purchased from Gujarat State Electricity Board and same was immediately leased back to it, since the transaction was a sham transaction

Facts:

a) The assessee had purchased energy meters of different makes for a consideration of Rs. 4.99 crores from Gujarat State Electricity Board (GEB) and these meters (assets) were then immediately leased back to GEB vide a lease agreement;

b) It accordingly claimed depreciation on the said meters under proviso to section 32(1). The Assessing Officer (‘AO’) disallowed the depreciation claim of assessee by holding that the alleged lease transaction was in reality a transaction of finance. On appeal, the CIT (A) upheld the order of AO.

The Tribunal held in favour of revenue as under:

1) The assessee’s contention that transaction was with a State Government and it would be highly improper to impute any collusiveness or colourable nature of the transaction without any concrete evidence was misconceived;

2) The facts on the file itself spoke that the transaction in question was a colourable device with the twin purposes of financing the GEB and at the same time making such an arrangement to enable the financer to claim depreciation on the assets and in lieu thereof to pay reduced rate of interest to the financer in proportion to the value of benefit availed by the financer, for which it otherwise was not entitled to;

3) A perusal of section 23 of the Indian Contract Act, 1872 reveals beyond doubt that even if the consideration or object of an agreement may not be expressly forbidden by law, but if it is of such a nature that, if permitted, it would defeat the provisions of law, the same will not be lawful;

4) It is always the goods or the assets itself which are the primary subject of a valid transfer, not the incidental benefits, which automatically pass on to the transferee with the transferred asset;

5) In the case in hand, only the incidental tax benefits were intended to be transferred without any intention to transfer the asset itself. Thus, whole of the effort had been made to transfer the right to claim depreciation on the assets to the assessee for the purpose of the Income-tax Act, but not the assets itself. Therefore, the Assessing Officer had rightly disallowed depreciation on electric meters - HATHWAY INVESTMENTS (P.) LTD. V. ACIT (2013) 38 taxmann.com 389 (Mumbai - Trib.)

Converting a leasehold property into a freehold property improves title of asset; holding period reckoned from date of lease

SHORT TERM CAPITAL GAIN VS LONG TERM CAPITAL GAIN

 

Conversion of rights of lessee in property from leasehold right into freehold right only results in improvement of his or her rights over property and it would not have any effect on taxability of gain from such property, which is related to period over which property is held

Facts:

a) The assessee purchased a property on leasehold basis in year 1984. She got said property converted into freehold property in year 2004 and thereupon sold it. The capital gain arising therefrom was declared by assessee as long-term capital gain (‘LTCG’);

b) The Assessing Officer held that since the property was acquired by converting the leasehold right into freehold right and was sold within three years, gain arising thereform was taxable as short-term capital gain;

c) On appeal, the CIT(A) held that capital gain arising from sale of such property was to be taxed as LTCG. Further, the Tribunal upheld the order of the CIT (A). The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) The difference between the 'short-term capital asset' and 'long-term capital asset' was the period over which the property had been held by the assessee and not the nature of title over the property;

2) The conversion of the rights of the lessee in the property from having leasehold right into freehold right was only by way of improvement of her rights over the property and it would not have any effect on the taxability of gain arising from such property, which was related to the period over which the property was held by assessee;

3) In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on 31.3.2004, (i.e. after holding it for more than three years) after the leasehold rights were converted into freehold rights on the same property which was in her possession. Thus, gain arising from such property would be taxable as LTCG - CIT V. SMT. RAMA RANI KALIA (2013) 38 taxmann.com 176 (Allahabad)

Payment for lease is different from ‘for obtaining a lease’; only former is subject to sec. 194-I TDS, says ITAT

Payment of lease premium for allotment of plot of land is not liable to TDS liability under section 194-I

In the instant case, the assessee-realtors took a plot of land from MMRD Ltd. and made payment of lease premium for allotment of a plot. It also paid for additional FSI. The AO held that the assessee was required to deduct tax under section 194-I in respect of the aforesaid payment to MMRD. According to him, the assessee had not complied with the provisions of section 194-I, it had committed default within the meaning of section 201(1) and, therefore, the assessee was to be treated as assessee-in-default. On appeal by the assessee, the CIT (A) reversed the findings of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) From lease deed it was clear that the premium was not paid under a lease but was paid as a price for obtaining the lease, hence, it preceded the grant of lease;

2) Therefore, it couldn’t be equated with the rent which was paid periodically. Thus, the assessee had made payment to MMRD under development control for acquiring leasehold land and additional built-up area. The case of CIT v. Khimline Pumps Ltd. (2002) 125 Taxman 104 (Bom.) was squarely and directly applicable to the facts of the case wherein the jurisdictional High Court had held that payment for acquiring leasehold land was a capital expenditure;

3) Considering the facts in totality - in the light of the judicial decisions vis-à-vis provisions of section 194-I, definition of rent as provided under the said provision, there was no reason to tamper or interefere with the findings of the CIT (A) – ITO(TDS) V. WADHWA & ASSOCIATES REALTORS (P.) LTD (2013) 36 taxmann.com 526 (Mumbai - Trib.)