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Notional Interest not to be considered while computing transfer price – ITAT

Commercial transactions between the different parts of the multinational groups may not be subject to the same market forces shaping relations between the two independent firms. One party transfers to another goods or services, for a price. That price is known as “transfer price”. This may be arbitrary and dictated, with no relation to cost and added value, diverge from the market forces.

Transfer price is, thus, a price which represents the value of goods or services between independently operating units of an organisation. But, the expression “transfer pricing” generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises.

It refers to the value attached to transfers of goods, services and technology between related entities. It also refers to the value attached to transfers between unrelated parties which are controlled by a common entity.

“Arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Let us refer to the case of Motherson Sumi Infotech & Designs Ltd. Vs DCIT (ITAT Delhi) whereappeal filed by assessee was against order of DCIT passed under section 143(3) of the Income-tax Act, 1961. The issue raised in the present appeal was against the transfer pricing adjustment made on account of international transaction of rendering Software Development Services to the AEs.

Facts of the Case

The assessee was engaged in providing customized Software Development Services to the customer of its Associated Enterprises (AE) and was compensated at cost + 10% for rendering the said services.
During the year under consideration, the assessee had undertaken few international transactions with its AE, which were reported in its TP study report.

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The assessee had selected Transactional Net Margin Method (TNMM) to benchmark its international transactions with Profit Level Indicator (PLI) at 10.01%.
The assessee selected 16 companies as functionally comparable, whose mean margins worked to 13.08%. The assessee thus in the TP study report pointed out that its international transaction were at Arm’s Length Price.

The Assessing Officer (AO) made reference under section 92CA(1) to the TPO to benchmark Arm’s Length Price of the international transaction of provision of Software Development Services by the assessee to its AE.
The TPO noted certain defects in the transfer pricing study report and also the application of average margin of 3 years by the assessee.
He also revised the filters to be applied and show caused assessee with a fresh list of comparables of 18 companies, whose mean margin worked out to 22.32%.
The TPO in the order passed under section 92CA(3) also proposed an adjustment on account of interest on receivables from AE.

Proceedings of Dispute Resolution Panel (DRP)

The assessee filed objection before the DRP, which in turn directed exclusion of two concerns i.e. Infosys Ltd. and eZest Solutions Ltd. and inclusion of Think Soft Global Services Ltd.
The DRP also directed that working capital adjustment is to be allowed.
The DRP directed application of LIBOR rates instead of SBI PLR lending rates for the adjustment to be made on account of interest on Receivable.
Consequent to the directions of DRP, the AO/TPO drew up final list of comparable totaling 17, whose mean margins worked to 19.04%.
The AO/TPO also reworked the adjustment to be made on account of interest on Receivables.
The AO passed the consequent order making upward adjustment against which the assessee appealed before the Income Tax Appellate Tribunal (ITAT)

Observation of the ITAT on the issue of adjustment of international transaction of provisions of Software Development Services by the assessee to its AE

The assessee was engaged in provision of Software Development Services to its AE. For benchmarking the international transaction, TNMM was applied.

The assessee wanted to be exclude M/s. Acropetal Technologies Limited from the list of comparables.

Assessee pointed out that the said concern failed employee cost/sale filter. The concern was providing the services onsite.
Attention was brought to the fact that expenditure on onsite development incurred on technical sub-contractor was debited. The said technical sub-contractors could not be the employees of the concern.
Revenue pointed out that the assessee was providing array of services, which included Software Development Services and Infra Management Services.
He further stated that the assessee was delivering end to end solutions. The assessee was providing variety of services and there was whole range of services.
His contention was that while applying TNMM method exact matching concerns would not be available and TPO selected companies keeping in mind comparability margin of 75%.
ITAT was of the view that where TNMM method is applied, it took care of certain marginal differences between the functioning of the tested party and the finally selected comparables.

However, if the module of working was different, then such a concern could not be held to be functionally comparable and cannot be selected in the final list of comparables.
The assessee was engaged in provision of Software Development Services to its AE which it provided offsite.
On the other hand M/s. Acropetal Technologies Limited was providing onsite services and had booked the expenditure on account of technical sub-contractors under the head onsite development.
It failed the employee/sales filter applied for benchmarking. Accordingly, ITAT directed the AO/TPO to exclude the margins of M/s. Acropetal Technologies Limited from the final list of comparables.

The assessee wanted to be exclude E-Infochips Limited from the list of comparables.

The objection against its inclusion by the assessee was that the said concern failed services revenue filter. He pointed out that the said filter was 75%.
Referring to the order of the TPO, the assessee pointed out that TPO himself had applied the filter of 75% and if a concern fails the said filter, then the same had to be excluded.
Assessee referred to the order of TPO and pointed out that the TPO had wrongly observed that services filter in case of the said concern was 74%.
Revenue objected to the submissions of the assessee and pointed out that the same came to 84.93%. He pointed out that 74% was wrongly mentioned.
The issue raised before ITAT was whether a concern which failed service revenue filter applied by the TPO, can be excluded from final list of comparable?
In view of the dis-similarity in the figures proposed by the AO / TPO, the assessee and the Revenue, ITAT remitted this issue to the file of AO / TPO to verify the stand of the assessee and in case it failed to service revenue filter, which was proposed by the TPO himself then the said concern would be excluded from the final list of comparable.

The next concern which the assessee wanted to exclude was Persistent Systems Limited.

The assessee pointed out that the said concern was functionally dis-similar to the assessee by referring to the nature of services provided by the concern and also stated that the segmental were unavailable and even it owned IPFs.
Revenue however referred to the order of the ITAT in assessee’s own case, relating to assessment year 2007-08 and pointed out that the said concern was held to be functionally similar to the assessee.
Assessee pointed out that the issue was decided against the assessee by the Tribunal. ITAT found no merit in the plea of the assessee and Persistent Systems Limited was included in the final list of comparable.

The next concern which the assessee wanted to be excluded was Wipro Technology Services Limited

Assessee pointed out that it was a concern with huge brand value and also failed RPT filter.
ITAT found merit in the plea of the assessee that the concern having such huge brand value and owning intangibles cannot be compared with the concern providing BPO services.

The assessee was also aggrieved by the inclusion of Sasken Communication Technologies Limited

The claim of the assessee was that the said concern was functionally dis-similar as it is developing mobile enterprise applications etc.
The said concern was rendering variety of services; however, the segmental details were not available. Revenue said that the assessee was also providing whole range of services and the product revenue was 10%. Further TPO had applied filter of 75%.
ITAT was of the view that first step which had to be seen was functional comparability. The concerns were providing variety of services and application of service filter of 75% would come in the next point of comparability.
M/s Sasken Communication Technologies Limited was developing mobile enterprise applications and solutions across various mobile platforms which was clearly mentioned in the annual report of the said concern.
The assessee on the other hand was only providing Software Development Services to its AE.
Hence the concern Sasken Communication Technologies Limited was not functionally comparables to the assessee and same needs to be excluded from the final list of comparable.

The last concern which the assessee wanted to exclude from the list of comparables was Thirdware Solutions Limited

The TPO had compared the margins of the assessee with segmental details of the said concern.
The objection of the assessee was that the said concern was functionally different and it was engaged in various activities.
Revenue on the other hand stressed that the segmental details of the said concern were being applied and hence there was no merit in the plea of the assessee.
ITAT noted that the assessee was engaged in the provisions of Software Development Services to its AE and hence the concern engaged in similar activity should be picked up for comparable.
ITAT found that the said concern was engaged in implementation and consulting services of software and business intelligence.
It had also declared Revenue from sale of license, Software Services, export from SEZ and STPI. However, the segmental details were not available and the same was to be excluded from the final list of comparable.

The next issue raised was against the transfer pricing adjustment made on account of interest due on receivables outstanding

The case of the Revenue was that as the assessee had not received the amount due from the AEs, within the stipulated period then interest adjustment needed to be made on account of interest due on Receivables, as this was an International Transaction.
The case of the assessee on the other hand was that on such outstandings from both AE and non AEs, no interest was charged by the assessee and this was not an international transaction and hence no adjustment was to be made.
The said issue stood covered in favour of the assessee by the decision of the Tribunal in M/s. Global Logic India Ltd. The Tribunal relied on the decision of Delhi High Court in Pr. CIT-V vs Kusum Health Care Pvt. Ltd. and held that no adjustment was to be made on account of notional interest on receivables by relying upon section 92B by treating the continued debt balance as an international transaction.
Moreover when the taxpayer is debt free company, there was no question of charging any interest on Receivables.
The assessee during the year under consideration had not availed any loan from AEs or unrelated third parties and was not incurring any interest cost.
Further, there was similar delay in receipt of receivables from others and the assessee was not charging any interest on delay in receipt of receivables against services rendered to unrelated third parties.
ITAT found no merit in making any adjustment on account of interest due on receivables from its AE.

Basically, if any assessee does not avail any loan from AEs or unrelated third parties and is not incurring any interest cost and as is not charging any interest on delay in receipt of receivables against services rendered to unrelated third parties, no adjustment is to be made on account of interest due on receivables

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September, 12
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Benefit from scrapped flat deal is taxable as capital gains – Mumbai ITAT

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

Let us refer to the case of Mukesh Sohanraj Vardhan, Mumbai vs Income Tax Officer (2020) (Mumbai ITAT) where an appeal filed by the assessee directed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] on the ground that the CIT(A) had wrongly denied exemption under Section 54 of the Income Tax Act and consequently adding LTCG and treating the same as “Income from Other Sources”

Facts of the Case and Assessment Proceedings:-

During 2005, the appellant had acquired a flat for a total consideration of Rs.30,00,000 from M/s Vardhaman Estate Corporation (Builder).
The said Builder had issued an allotment letter stating therein the terms and conditions for sale of the said flat to the appellant.
At the time of the allotment letter issued by the said builder, the appellant had paid earnest money of Rs.10,00,000 and Rs.20,00,000 towards purchase of the said flat.
Thereafter in 2011, the appellant cancelled the booking of the aforesaid flat and treated the same as a sale for a total consideration of Rs.48,75,000.
He invested Rs.75,53,469 in purchase of new flat, claiming exemption u/s 54, after availing indexation benefit for cost of the flat paid in installments.
During the course of assessment proceedings, the Assessing Officer (AO) asked the appellant to explain why the benefit received on cancellation of deal with the builder should not be treated as income from other sources, instead of long term capital gains, as no purchase as well as sale agreement has been entered into by the assessee with the builder.

In response to it, the appellant explained to the AO that a capital asset in the form of interest in the flat came into existence by virtue of allotment letter issued by the builders, when payment was made
However, the AO was not convinced with the above explanation of the assessee and came to a finding that the gain which the appellant received from the builder on cancellation of deal has resulted in benefit of compensation of Rs.18,75,000 and the same was nothing but income from other sources.
Further on analysis of the bank account of the appellant, the AO noticed that the assessee had actually received from the builder total amount of Rs.52,75,000.
Thus the AO brought to tax Rs.22,75,000 (Rs.52,75,000 – Rs.30,00,000) on account of benefit of compensation received by the appellant from the builder in respect of the property under the head “Income from other sources”.

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Proceedings of CIT(A)

Aggrieved by the order of the AO, the appellant filed an appeal before the CIT(A).

The CIT(A) observed that the allotment letter cannot be called as an allotment letter as:-

the same is a plain letter with no details of commencement certificate issued by the Municipal Corporation
the land details are not recorded
authenticity of address of builder not established – telephone number/PAN/Registration Number etc. not recorded in the document
paragraph 3 of the allotment letter spells out certain conditions, it is not met which includes execution of agreement
in the course of hearing details of such agreement arising out of paragraph 3 of the purported allotment letter was sought to which it was stated as not available
the details of flat (area, amenities, specifications etc. are not recorded, (vii) the total sum payable is not mentioned
the document is not registered; there is no registration of any allotment agreement at any time
the assessee has not signed the purported letter of allotment
it is the assessee who signed in his capacity as partner of the builder firm.

Thus the CIT(A) arrived at a finding that the incomplete, non- registered “letter of allotment” cannot be treated as an “allotment letter” for deciding ownership of capital assets. Further, it was observed that the above documentary evidence did not establish ownership of capital assets and hence the question of assessment of capital gains did not arise.

Further, the CIT(A) held that the AO has rightly brought to tax the incremental receipt as income from other sources. Aggrieved with the order of the CIT(A), assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT)

Reference to earlier case by ITAT

Similar issue arose before the Tribunal in Ashwin S. Bhalekar (supra).
In that case, the assessee was allotted a flat vide allotment letter.
The assessee had paid advance amounting to Rs.50,00,000 on the allotment of the said flat.
By virtue of the said allotment, the assessee had acquired right to the proposed flat.
The construction of the building was yet to commence on the date of allotment.
Due to various delay in regulatory approvals, the builder could not obtain permission to construct the building upto 17th floor.
The assessee surrendered the right to receive the flats and the builder cancelled the allotment of the above flats and agreed to pay the compensation for an amount of Rs.1,10,00,000 on account of surrender of such flats.
In addition to the above, the builder transferred the initial advance of Rs.50,00,000 to the new flat in the same project which the assessee agreed to buy.
The assessee then invested the said money to acquire a flat in the same project for Rs.1,53,03,800 vide an agreement registered on 29.02.2012.
The AO did not accept the claim of the assessee and treated the compensation on surrender of flats amounting to Rs.1,10,00,000 as income from other sources.
On appeal by the assessee, the CIT(A) accepted his claim.
Appellant had relied on CBDT Circular No.471 dated 15.10.1986 where it was held that property acquired by allotment letter was considered as capital asset for the purpose of exemption from capital gains.
It was held that surrendering of allotment of flat had to be considered as a right in property which was a capital asset and any capital gain arising from that capital asset and if appellant purchases new flat then appellant is eligible for exemption u/s 54.
Therefore, the appellant was eligible for claiming of exemption u/s 54 of the Act.

AO was directed to compute the surplus amount received from surrender of flat as capital gain and also allow exemption claimed by the appellant u/s 54.
Hence, AO’s addition of Rs.1,10,00,000 is deleted and the appeal of the assessee was allowed.
Aggrieved with the order of the CIT(A), Revenue appealed before the ITAT
ITAT noted that the above narrated facts were undisputed.
The facts clearly showed that the extinguishment of assessee’s right in the proposed building known allotted vide allotment letter was actually extinguishment of any right in relation to capital asset in view of the provisions of section 47 which fell in the definition of transfer and hence, resulting in capital gain chargeable under section 45.
ITAT found that the CIT(A) had rightly deleted addition made by the AO in regard to disallowance of the claim of the assessee disallowing deduction of long term capital gain under section 54 of the Act on the premise that the compensation received is income from other sources.

The facts of the present case being identical, ITAT followed the above order of the Co-ordinate Bench and allowed the appeal. In conclusion, in an assessee books a flat and then cancels the deal with the builder and benefits by receiving a sum higher than the earnest amount paid, the excess will not be treated as a tax-free income. The excess consideration received will be taxed as capital gains.

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Reopening in case of previously completed scrutiny cannot be taken up after 4 years – ITAT

Section 147 of the Income Tax Act deals with provisions of “income escaping assessment”. Thegrounds or reasons which led to formation of the belief that income chargeable to tax has escapedassessment must have a material bearing on the question of escapement of income of the assesseefrom assessment because of his failure or omission to disclose fully and truly all material facts. Theexpression “reason to believe” does not mean a purely subjective satisfaction on the part of theIncome Tax Officer. The reason must be held in good faith. It cannot merely be a pretence.

Before making the assessment, reassessment or re-computation under section 147, the Assessing Officer should serve on the assessee a notice requiring him to furnish a return of income. However, there is atime-limit for issue of Notice for Income Escaping Assessment. Notice can be issued within 4 years from the end of relevant assessment year.If, however, the escaped income is Rs. 1,00,000 or more, notice can be issued within 6 years from the end of the relevant assessment year.Where income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment, notice can be issued within 16 years from the end of the relevant assessment year.

Let us refer to the case of HLG Memorial Hospital Pvt. Ltd. Vs ACIT (ITAT Kolkata), where the assessee challenged the reopening of assessment under Section 147 in this case as bad in law.

Facts of the Case

The assessee filed its original return of income on 15/11/2007.
The original assessment was completed u/s 143(3) on 31/12/2009.
Thereafter reasons for reopening were recorded by the Assessing Officer and notice u/s 148 of the Act, reopening the assessment was issued on 09/07/2013.

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Assessing Officer (AO) had reopened the assessment by recording the following reasons:

On scrutiny of the case file for the A.Y. 2007-08, it was observed from the schedule of depreciation that the assessee had claimed depreciation @ 40% instead of 15% on Medical devices such as USG, X-Ray and on UPS etc. which were not enlisted under the category of Life Saving medical equipments for depreciation @40% as stated in the schedule of depreciation as per the Income Tax Rules, 1962.
It was also observed that the assessee hadwrongly claimed depreciation @ 10% on Building under construction.
In the light of the above facts, it was apparent that the assessee had claimed excess depreciation which was liable for addition to the total income chargeable to income tax.
Therefore, AO had reason to believe that the above amount had escaped assessment for the A.Y. 2007-08 and therefore it was a fit case for reassessment u/s 147.

Proceedings of CIT(A) and ITAT

Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the reopening of the case by the AO under Section 147.
Aggrieved with the order of the CIT(A), assessee filed an appeal before the Income Tax Appellate Tribunal [ITAT].
However, ITAT found on a perusal of the reasons recorded, that there was no allegation that the assessee has failed to disclose truly and fully, all the material facts necessary for the assessment.

Reference to Tao Publishing (P) Ltd. v. Dy CIT (2015) by ITAT

The Bombay High Court in the case of Tao Publishing (P) Ltd. v. DyCIT (2015), held that the reasons supplied to the Petitioner did not disclose that there was any failure on the part of the Petitioner to provide all the material facts.
Therefore, this ground could not have been taken up against the Petitioner at the time of disposing of the objections.
Once that was not the basis for issuance of notice for Reassessment, it cannot be held against the Petitioner that the Petitioner had failed to make a true and full disclosure.
The Petitioner did not fail to make full and true disclosure of all material facts.
Hence, the requirement for carrying out the reassessment, after the expiry of period of four years, was not fulfilled in the present case.

Reference to Sound Casting (P) Ltd. v. Dy. CIT by ITAT

The Bombay High Court in the case of Sound Casting (P) Ltd. v. Dy. CIT held that there was no strength in the reasons which were disclosed to the assessee that there was any failure on his part to fully and truly disclose material facts necessary for assessment and therefore reopening beyond 4 years was not valid.

Reference to CIT vs. Orient Craft Ltd[2013] by ITAT

The Delhi High Court in the case of CIT vs. Orient Craft Ltd [2013] held that the reasons recorded by the AO confirmed apprehension of the HC about the harm that a less strict interpretation of the words “reason to believe” vis-à-vis an intimation issued under section 143(1) can cause to the tax regime.
There was no mention in the reasons recorded, of any tangible material which came to the possession of the AO subsequent to the issue of the intimation.
It reflected an arbitrary exercise of the power conferred under section 147.

Reference to Haryana Acrylic Manufacturing Co. v. Commissioner of Income-Tax by ITAT

The Delhi High Court in the case of Haryana Acrylic Manufacturing Co. v. Commissioner of Income-Tax [2009] held that the proviso to section 147, carved out an exception from the main provisions of section 147.
If a case were to fall within the proviso, whether or not it was covered under the main provisions of section 147 would not be material.
Once the exception carved out by the proviso came into play, the case would fall outside the ambit of section 147.
Examining the proviso, Delhi HC found that no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year if the following conditions are satisfied:
an assessment under section 143(3) or section 147 has been made for the relevant assessment year; and
unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee:
to make a return under section 139 or in response to a notice issued under section 142 or section 148; or
to disclose fully and truly all material facts necessary for his assessment for that assessment year.
Condition (a) was satisfied as the original assessment was completed under section 143(3).
Condition (b) deals with a special kind of escapement of income chargeable to tax.
The escapement must arise out of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under section 142 or section 148.This was not the case here because the petitioner did file the return.

Since there was no failure to make the return, the escapement of income cannot be attributed to such failure.
That wasleft with the escapement of income chargeable to tax which arose out of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year.
If it is was found that the petitioner had disclosed fully and truly all material facts necessary for its assessment, then no action under section 147 could have been taken after the 4-year period indicated above.
In the reasons supplied to the petitioner, there was no mention, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of that failure there was an escapement of income chargeable to tax.
Merely having a reason to believe that income had escaped assessment, is not sufficient to reopen assessments beyond the 4-year period.
The escapement of income from assessment must also be occasioned by the failure on the part of the assessee to disclose material facts, fully and truly.
This is a necessary condition for overcoming the bar set up by the proviso to section 147. If this condition is not satisfied, no action under section 147 could be taken.
Thus, HC held that the notice dated under section 148 based on the recorded reasons as supplied to the petitioner as well as the consequent order were without jurisdiction as no action under section 147 could be taken beyond the 4-year period in the circumstances narrated above.

Observations of the ITAT in the present case

Applying the propositions laid down in the above case law to the facts to this case, ITAT held that the re-opening of the assessment proceedings was not valid that there was not even a mention in the reasons recorded for the reopening of the assessment that there was a failure on the part of the assessee to disclose fully and truly all the necessary material facts required for assessment in view of the 1^stproviso to Section 147.
In this case no tangible materials came to the possession of the AO subsequent to the Assessment Order u/s 143(3).
Re-opening was done based on the same material and record and hence was bad in law and thus the appeal of the asseessee was allowed and the assessment under Section 147 was quashed.

In conclusion, one needs to remember that the re-opening of assessment under Section 147 is bad in law if it does not fulfil the requirement of the Proviso to Section 147 of the Act and if no tangible material has come to the possession of the Assessing Officer.

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September, 10
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Income Tax, Income Tax Circular Notification
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ITAT deletes addition for share premium as Assessee established identity, genuineness & creditworthiness of investor

According to Section 56(1) of the Income Tax Act, 1962, income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the other heads.

According to Section 56(viib) of the Income Tax Act, 1962, where a company, not being a company in which the public are substantially interested, receives in any previous year, from any resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to the head “Income from other sources”

However, this clause shall not apply where the consideration for issue of shares is received—

by a venture capital undertaking from a venture capital company or a venture capital fund; or
by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Let us refer to the case of ITO Vs M/s Heckyl Technologies Pvt.Ltd. (ITAT Mumbai) where shares were issued at premium were taxed as income from other sources under section 56(1) by the AO.

Alternate Issue raised was whether such income can be considered as disallowed under Section 68 which pertains to unexplained cash credits? According to Section 68 of the Income Tax Act,where any sum was found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

Where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless:-

the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory

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Facts of the Case

The assessee was engaged in the business of brokerage’ financial institutions and fund managers etc.
The assessee filed return of income declaring a loss. The case of the assessee was selected for scrutiny and show cause notice was duly served upon the assessee.
During the course of assessment proceedings the AO observed that the assesee had issued shares at a premium and accordingly the assessee was asked to clarify the share premium received.
The assessee replied by filing various explanation from time to time. A reference was made to the United Kingdom tax authorities from where the major funds were received in books of Seed Fund 2 International Mauritius (SFM)

The AO noted that the shareholders of Mauritius based company had contributed the capital as equity funds and out of that; partial funds were transferred from Seed Fund 2 International to the assessee company.
The assessee company in turn had allotted the Redeemable Preference Share as Compulsorily Convertible Preference Share (CCPS) of face value Rs. 10 each.
Upon allotment of shares’ the share premium was immediately transferred to Reserve and surplus.

Contention of Assessing Officer (AO)

The AO was not satisfied with the genuineness of the transactions and was of the view that such types of private equities share premiums were nothing but the profits in the hands of the company and liable to be taxed as income from other sources under section 56(1).
Accordingly’ the same was added u/s 56(1) as income from other sources.
AO also recorded that the said sum may be added u/s 68 as assessee had failed to prove the genuineness and creditworthiness of the investors.
The share premium credited through reserve and surplus account was added as unexplained cash credit u/s 68.
Aggrieved with the order of the AO, assessee filed an appeal before the Commissioner of Income Tax (Appeals)

Observations of CIT(A) on references made by AO

The AO had mentioned in his order that he had made two references to the tax authorities in Mauritius and the UK.
These references were made under section 90 (pertains to Agreement with foreign countries or specified territories under Double Taxation Relief) and had been accordingly made through the Competent Authority.
However, there was no mention of either the details of the exact reference made to either country or the receipt of any information or the results of the Investigation of the AO subsequent to the obtaining of the said information.
It was clear from the order under appeal that the appellant had not been challenged with any information obtained under section 90.
In these circumstances, CIT(A) found merit in the argument of the assessee that nothing had been found against the appellant as a result of the exercise of the powers available to the AO under section 90 of the Act.

Observations of CIT(A) on contention of AO that the allotment was done before the date the funds were received and before the date of allotment as given to the RBI

It was not clear as to how the AO reached this conclusion, as there was no material available to substantiate this finding.
Even if it was true, there was no scope for contemplating an addition either under section 56 or under section 68 on the basis of such discrepancies.
The AO has himself mentioned in his order that the reason for distorting the date of allotment given to the RBI was to escape the penal provisions of FEMA.
However alleged fudging of dates would not be of any effect under the Income Tax Act.

Observations of CIT(A) on contention of AO that the receipt by the appellant was from entities which were neither venture capital companies nor venture capital funds

AO’s argument was that SFM was neither a venture capital company nor a venture capital fund in terms of section 10(23FB) of the Act.
According to section 56(2)(viib), any consideration for issue of shares exceeding the face value of such shares has to be charged to tax, unless the consideration has been received from a venture capital company or a venture capital fund.
The said provision of section 56(2)(viib) had been inserted by the Finance Act 2012 with effect from 1st April 2013.
As such, it would be / applicable only from AY 2013-14 onwards, while the AY under consideration was AY 2012-13.
According to CIT(A), the AO had no basis for invoking the provisions of section 56(2)(viib) of the Act.

Observations of CIT(A) on the fact that the AO had invoked the provisions of section 68

AO had given the details furnished by the appellant viz. copy of account of the investor-company along with its name and addresses.
However, according to the AO, the genuineness and creditworthiness of the investor had not been addressed. In this context, CIT(A) referred the documentation filed by the appellant.
Assessee had filed a copy of the PAN card of SFM along with a copy of the first page of its relevant return of income.
It had also filed audited financial statements of SFM. As per the Statement of Financial Position (roughly equated with the balance sheet), while the total assets of SFM were US$ 17.93 million, its total liabilities were only US$ 0.012 million, placing its net asset base at US$ 17.92 million.
At an exchange rate of Rs. 67 per USD, this would amount to net assets of over Rs 120 crores.
The investment of the said Fund in the appellant-company of Rs. 2.49 crores was a little over 2% of its net assets.
The appellant has also furnished copies of the Certificate of Incorporation issued by the Registrar of Companies of Mauritius, the Business License issued by the Financial Services Commission of Mauritius and the Tax Residency Certificate issued by the Mauritius Revenue Authority, the last document having been submitted for two Mauritian financial years.

The appellant also submitted its documentation filed with the RBI (form FCGPR). It also filed a copy of the acknowledgment of the said FC-GPR.
It then filed a copy of the bank account of SFM highlighting the deposit of monies which were eventually transferred to the appellant.
It also filed a copy of its bank account maintained with State Bank of India to demonstrate the inflow of funds from Mauritius.
After careful consideration of all these documents, CIT(A) was of the opinion that appellant had more than satisfactorily acquitted itself when it comes to establishing all the three crucial components required to be validated under section 68 of the Act viz identity, genuineness and creditworthiness of the investor.

Reference to older cases by CIT(A)

The Supreme Court also had occasion to go into the legality of this matter in the case of CIT v. Allahabad Bank Ltd. It was held that the share premium account had to be included in the paid-up capital account, thus leading to it being treated on a par with the paid-up capital.
In the case of CIT v. Standard Vacuum Oil Co, it was held that premium realized on issue of shares was not in the nature of a revenue receipt and is hence not chargeable to tax.
The Bombay High Court too had occasion to go into this matter in its decision rendered in the case of Vodafone India Services (P) Ltd. It had held that the amounts received on issue of share capital including the premium – are undoubtedly on the capital account.

Thus, the Revenue was stopped from charging the said premium to tax in the absence of any explicit legislative sanction. The appellant-company was far from being a non company or a zero balance one. It was in possession of assets far in excess of the premium charged even on the day of the charge of such premium. In these circumstances, there would be all the more reason for not charging to tax the share premium collected by the appellant.

Therefore in the appellate proceedings the CIT(A) allowed the appeal of the assessee. Aggrieved with the order of the CIT(A), Revenue appealed before Income Tax Appellate Tribunal (ITAT)

Proceedings of ITAT

The assessee had entered into a share purchase agreement with Seed fund 2′ International and Seed fund 2 ‘India for purchases of shares.
The Appellant Company submitted that in light of the background of Seed fund 2′ International’ Mauritius’ the funds in form of share capital received by the appellant company from Seed fund2 International’ Mauritius stood fully explained.
Further the above investment done by the investor was being reflected in their audited accounts.
In fact the investment made by SeedFund2 International in the appellant company was a Scheme floated by the Indian Seed Investment Trust which was a Trust based in India and also registered with SEBI as Venture Capital Fund.

The Certificate of approval by SEBI was submitted to the AO. As stated by the assessee SEEDFUND2 India has filed its Return of Income for A.Y. 2012-13. The Return of Income, copy of computation and acknowledgement of Returns filed were submitted by the appellant company.
The investments in the appellant company were being reflected in the audited balance submitted to the AO during the course of hearing.
Seed Fund 2 India Ltd was registered under SEBI as Venture Capital Fund Category.
The CIT(A) had passed a very reasoned and speaking order justifying the deletion of additions by dealing with all the issues as raised by the revenue
ITAT did not find any defect legal or otherwise in the order of the CIT(A) and hence the conclusion drawn by the CIT(A) was affirmed
The appeal of the Revenue was dismissed by ITAT.

As the explanation provided by the assessee proving the identity, genuineness & creditworthiness of investor was found to be satisfactory to the CIT(A) and ITAT share premium was not added to the income of the assessee under Section 68 and 56.

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September, 10
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Income Tax, Income Tax Circular Notification
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ITAT explains Interest on Income Tax Refund under section 244A

The provisions of Section 244A pertains to Interest on refunds under the Income Tax Act. According to Section 244A(1), where refund of any amount becomes due to the assessee under this Act, he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner:-

where the refund is out of any tax [collected at source under section 206C] paid by way of advance tax or treated as paid under section 199, during the financial year immediately preceding the AY, such interest shall be calculated at 0.5% for every month or part of a month comprised in the period from the 1st day of April of the AY to the date on which the refund is granted. No interest shall be payable if the amount of refund is less than 10% of the tax as determined on regular assessment
in any other case, such interest shall be calculated at 0.5% for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted

According to Section 244A(2), if the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Chief Commissioner or Commissioner whose decision thereon shall be final.

According to Section 244A(3), where, as a result of an order under section 143(3), section 144, section 147, section 154, section 155, section 250, section 254, section 260, section 262, section 263, section 264 or an order of the Settlement Commission under section 245D(4), the amount on which interest was payable under sub-section (1) has been increased or reduced, as the case may be, the interest shall be increased or reduced accordingly, and in a case where the interest is reduced, the AO shall serve on the assessee a notice of demand in the prescribed form specifying the amount of the excess interest paid and requiring him to pay such amount; and such notice of demand shall be deemed to be a notice under section 156 and the provisions of this Act shall apply accordingly.

Let us refer to the case of Maruti Suzuki India Ltd Vs CIT (Appeals) (ITAT Delhi) where the issue under consideration was that AO did not allow interest u/s 244A(1)(a) on the grounds that the refund was less than 10% of the tax determined u/s 254.

Facts of the Case:-

The assessee was entitled to total income tax refund of Rs.201,37,93,163 (Rs.14,59,79,228 + Rs. 186,78,13,935).
However, the Assessing Officer (AO) omitted to calculate and allow interest under section 244A on the amount of refund of Rs.14,59,79,228
The tax paid by the assessee of Rs.186.78 crore against the demand raised by the revenue by the way of assessment was refunded by the assessee along with interest.
The AO did not allow interest u/s 244A(1)(a) on the amount of Rs.14.59 crores on the grounds that the refund was less than 10% of the tax determined u/s 254
The CIT(A) confirmed the order of the AO on the grounds that, to give effect to the provisions of Section 244A(3), the assessee had to mandatorily cross the limitations imposed u/s 244A(1)(a).

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Observations of ITAT on difference between clause (a) and (b) of Section 244A

Section 244A(1)(a) deals with interest where refund is out of TDS or by way of advance tax.
The proviso under sub-Section (a) has to be read with regard to sub-Section (a) and applies to sub-Section (a) only. Sub-Section (b) does not portray any such condition.
Hence, it has to be read that the provision restricts the interest on amount, if the refund is less than 10% of the tax as determined and is applicable only to the advance tax paid u/s 206 or u/s 115WJ.
The CIT(A) treated the entire amount of Rs.14.60 crore for the purpose of Section 244A(1)(a) and treated it as prepaid taxes. This is exactly where the CIT(A) read the provisions wrongly.
The prepaid taxes consist of TDS, advance tax. The provisions of self-assessment tax are governed by Section 140A which was not covered by the provision u/s 244A(1)(a).
Self-assessment tax which is payable on the basis of return does not constitute part of prepaid taxes.
It is clear from the provision of Section 244A that the self-assessment tax does not form a part of the restriction as self-assessment tax falls under Section 244A(1)(b).
The starting of Section 244A(1)(b), reads “in any other case”. Here “in any other case” signifies refund out of any tax paid, other than u/s 115WJ or collected at source u/s 206 or paid by the way of advance tax which treated as paid u/s 199 which have been duly mentioned u/s 244A(1)(a).
The difference between sub-Section (a) and (b) is with regard to the method of computation of interest on the refund.

Observations of ITAT on the contention of the assessee that provisions of Section 244A(3) were applicable and hence Section 244A(1)(a) was not applicable to the instant case

The assessee argued that the provisions of Section 244A(3) applied to the cases where the refund arose out of the order of the Tribunal but not out of the Section 143(1) or 143(3) and hence, the provisions of Section 244A(1)(a) were not applicable to the instant case.
Section 244A(3) states the procedure to be followed while computing the interest in accordance with the Section 244A(1).
The sub-Section (3) gives equal treatment to the refund arising out of the orders namely, order u/s 115WE(3), order u/s 115WF, order u/s 115WG, order u/s 143(3), order u/s 144, order u/s 147, order u/s 155, order u/s 250, order u/s 254, order u/s 260, order u/s 262, order u/s 263, order u/s 264, order u/s 245D(4).
It directs the revenue authorities to recompute the interest payable and to notify the assessee with a demand notice in case there is any increase in the interest payable by the assessee owing to such order.
This is a procedural section to give effect to the orders passed by various authorities by the revenue.
By this section, the revenue is directed to re-compute the tax due consequent to the passing of any further orders which will have an effect on the tax determined u/s 143(1) in the case of non-scrutiny cases and u/s 143(3) in the case of regular assessment. Thus, Section 244A(3) is a re-computational purvey under the Income Tax Act.
Section 244A(1)(a) deals with the refund determined u/s 143(1) or Section 143(3).
The orders u/s 147, Sec. 154, Sec. 155 or Sec. 254, Sec. 255, Sec. 260, Sec.262, Sec. 263, Sec. 264, Sec. 245D(4) effectively directed to recompute the refund determined u/s 143(1) or Sec. 143(3) and to pre-determine the quantum of the refund of the amount due afresh.
Thus after receipt of the order under these sections, the tax payable/refund payable would be re-computed as provided u/s 244A(1).
Consequently, the interest is determined as provided in the clause (a) i.e. from the first day of April and/or clause (b) i.e. from the date of payment of tax to Section 244A(1) as applicable. The sub-Section (3) doesn’t in any way nullify the provision below clause (a) to Section 244A (1).

According to the above discussion it can be concluded that:-

When refund is of any advance tax paid or TDS or TCS – The interest is payable at the rate of 0.5% per month or part of the month of refund.
No interest is payable if the excess payment is less than 10% of the tax determined on regular assessment or u/s 143(1).
When refund is of tax other than advance tax paid or TDS or TCS, the interest is payable at the rate of 0.5% per month or part of the month of refund.

In the instant case, the question before ITAT was whether no interest shall be payable on the amount of refund is less than 10% tax determined, if the refund is out of tax paid u/s 206/207/199.

Vide the provisions to Section 244A(1)(a), the legislature clearly laid down that in case the refund arose out of the prepaid taxes such as TCS/TDS/Advance Tax is less than 10% of the tax no interest is allowable. The statute is to be read as a whole in its content. It is unambiguous, straight, effective and workable.
If the language of the statute is clear and unambiguous, words must be understood in their plain meaning. The wordings of the Act must be construed according to its literal and grammatical meaning, whatever the result may be.
It is not permissible to construe any provision of a statute, much less a taxing provision, by reading into it more words than its contains.
Hence, ITAT held that the proviso to Clause (a) of Sub-Section (1) of Section 244A was applicable and had to be considered for computational purpose of the interest computable for the refund payable u/s 244A(1)(a).

The next question before the ITAT was whether interest was payable on the self-assessment tax paid by the assessee or not

ITAT referred the judgment of Jurisdictional High Court in the case of CIT Vs Sutlej Industries Ltd wherein the High Court held that where self-assessment tax paid by the assessee u/s 140A is refunded, the assessee should be entitled to interest thereon. The High Court held that the self-assessment tax falls within the expression “refund of any amount”. The computation of simple interest on self-assessment tax has to be in terms of Section 244A(1)(b), i.e., from the date of payment of such amount up to the date on which refund is actually granted.
Even otherwise, it is a law that wherever the assessee was entitled to refund, there was a statutory liability on the Revenue is to pay the interest on such refund on general principles.
The High Court of Kolkata in the case of Birla Corporation Ltd. held that clause (1)(b) of Section 244A is residual in nature which prescribes interest on refund from the date of payment of tax in cases which are not covered by Section 244A(1)(a). Necessarily, it will cover interest on refund of excess self-assessment tax paid by the assessee. The proviso to section 244A (1)(a) would have no application as the tax paid was self-assessment tax u/s 140A. Hence according to mandate of section 244A(1)(b), interest is payable on refund of excess self assessment tax, from the date of payment of such tax to the date when the refund is granted.

Similarly, the High Court of Bombay in the case of Stockholding Corporation of India Vs. CIT elaborately dealt with the question of interest on refund of excess self assessment tax and held that where the self-assessment tax paid by the assessee u/s. 140A is refunded, the assessee should be, entitled to interest thereon since the self assessment tax falls within the expression “refund of any amount”.
Section 244A does not deny payment of interest in case of refund of amount paid under Section 140A. On the contrary, Clause (b) being a residuary clause necessarily includes payment made u/s. 140A.
Since, there is no proviso attached to sub-Clause (b), the restriction of 10% is not applicable for calculation of interest for the refund arising out of payment of self-assessment tax.
The self-assessment tax under the ambit of tax u/s 244A(1)(b). The assessee is eligible for interest on the complete amount of the refund arising out of self-assessment tax. Whatever the money received by the department in excess is ought to be refunded ex-aequo et bono.

In conclusion the ITAT held that:-

Where refund of any amount becomes due denotes refund arising out of
- advance tax u/s 207
- TCS u/s 206
- TDS u/s 195
- All credits u/s 199
- Taxes paid as specified u/s 156 and
- Self-assessment tax
Before 01.06.2016, no interest would be paid if the amount of refund is less than 10% of the taxes determined in case the refund is out of the taxes paid other than self-assessment tax.
Before 01.06.2016, in the case of refund arising out of self-assessment tax, interest would be calculated on the entire self-assessment tax refunded from the date of payment of S.A. tax.
After 01.06.2016, no interest would be paid if the amount of refund is less than 10% of the taxes determined whether it is u/s 140, u/s 156, u/s 195, u/s 199, u/s 206 and u/s 207.
Where refund of “any amount” [244A(1)] due indicates the refund of taxes paid by the assessee.
Where refund of “any amount” [244A(1)] is due, the assessee is entitled to simple interest. The simple interest would be calculated at the prescribed percentage after determining the refund due and paid along with the principle.
Even, “a single day” should be considered as a part of the month for the purpose of computation of interest.

Therefore, the AO was directed to pay interest on the refund eligible in accordance with the proviso to Section 244A(1)(a) with regard to the advance tax paid. With regard to the self-assessment tax paid, ITAT held that the assessee was eligible for interest on the total amount of refund in accordance with provision of Section 244A(1)(b) as the restriction stated in proviso to Clause (a) to Section 244A(1) was not applicable to the case.

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September, 9
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Income Tax
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Can Depreciation be Disallowable merely because Purchase of the Car is from the Personal Account?

Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer. The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful life.

While computing one’s income, the depreciation as per Income Tax Act, 1961 is allowed while the book depreciation is disallowed. This is because the Income Tax Act prescribes its own rate of depreciation.

The Income Tax Act allows depreciation on the Written down Value of the assets. The depreciation is computed on ‘Block of assets’ at the rates prescribed rates provided in the Income Tax Rules, 1962.

As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

Assessee must be owner of the asset – registered owner need not be necessary.
The asset must be used for the purposes of business or profession.
The asset must be used during the previous year.

While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assessee is required to pay taxes on such expenditures by adding it back to the net profits. There are two primary reasons for disallowance of any expenditure:

The tax amount required to be deducted on certain expenditures are not deducted while making the payment.
The expenditure does not implicitly relate to the conduct of such business or profession

Let’s refer to the case of Desh Raj Arora Vs ITO (ITAT Delhi) where the issue under consideration was whether the depreciation on car purchased by assessee can be disallowed only because the payment towards purchase of the same is made through his personal account?

Facts of the Case

The assessee is an individual carrying on the business of trading of tools and hardware etc
The assessee filed his return of income which was assessed by the Assessing Officer (AO) u/s 143 (3) of the Income Tax Act making certain additions/disallowances.
The assessee preferred appeal before the Commissioner Of Income Tax (Appeals) [CIT(A)], who confirmed the order of the AO
Aggrieved with the order of the CIT(A), assessee appealed before the Income Tax Appellate Tribunal (ITAT).

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Observations of the ITAT on the disallowance of depreciation on the car purchased by the assessee

The assessee purchased the car in his personal name. The payment of the purchase of the car was also made from his personal account.
Therefore the AO took the view that as the assessee had used this car for his personal purposes, the depreciation on purchase of the new car was disallowed.
He further noted that assessee has not debited the expenses related to the car in the profit and loss account and therefore it was used for personal purposes and not for business purposes.
The assessee preferred appeal before the CIT(A) against the above disallowance who confirmed the addition.
ITAT observed that the assessee was a proprietor of M/s Diamond Tool (India) carrying on the trading of hardware and tools.
As the assessee is an individual so naturally the assessee will purchase the car in his own name only.
Therefore, ITAT did not find any reason that assessee should not be allowed depreciation on the car, which was used for the purposes of his business.
Merely because assessee had made payment for purchase of car from his personal account did not mean that it was not the business asset of the assessee.
Further the AO had not found any expenditure debited to the profit and loss account, however it could not be said that depreciation on the asset was not allowable to the assessee.
The assessee owned an asset, which was used for the purposes of the business of the assessee.
The AO has presumed that assessee was not using motor car for his business purposes, which could not be the basis of disallowance of depreciation.
ITAT directed the AO to delete the disallowance of depreciation and accordingly the same was deleted.
Let us also refer to the other 2 additions made by the AO in this case.

Observations of the ITAT on addition on account of cash deposited in savings bank account of the appellant

The appellant explained before the AO that he had sold his old car and had purchased a new car.
The old car was sold for Rs 90,000 and the cash was deposited in the savings bank account of the appellant.
The assessee also produced two cash receipts of Rs 45,000 each against sale of the old car.
This evidence was also submitted before the CIT(A). However as the assessee had not made any application under rule 46A for admission of the additional evidence the CIT(A) did not admit it and confirmed the addition made by the AO.
ITAT carefully considered the rival contention and found that assessee has sold his old car for INR 90,000 and has also shown two cash receipts of Rs 45,000 each against the sale of old car and therefore the addition made by the lower authorities deserved to be deleted.
Merely because the assessee had not made any application under rule 46A for admission of the additional evidence the CIT(A) had not considered the above evidence and confirmed the disallowance.
ITAT did not find the confirmation of the addition by the CIT(A) in accordance with the law. Therefore ITAT directed the AO to delete the addition.

Observations of the ITAT with respect to low household withdrawal by the assessee

The addition was made by the AO noting that the assessee had shown total drawing of Rs 190,000 for the year under assessment.
From the perusal of the balance sheet, the assessee was asked to give the justification for the withdrawal.
The assessee stated that his family consisted of himself, his wife and 2 independent children having their own income.
However the AO made the addition of Rs 50,000 holding that personal and household expenses are Rs 20,000 month amounting to Rs 240,000 p.a.
The CIT(A) also confirmed the same.
ITAT found that appellant’s family consisted of 4 persons wherein the children were independent. Therefore the assessee has to bear the expenditure of self and his wife.
For this purpose the assessee had shown the total withdrawal of Rs 190,000 p.a.
Before the AO and CIT(A), assessee had stated that he was residing in a colony where the cost of livelihood was less.
ITAT did not find any reason to sustain the above addition because of the reason that no expenditure was found to have been incurred by the assessee outside the books of accounts. In view of this, ITAT directed the AO to delete the addition of RS 50,000 because of low withdrawal.

Therefore, in conclusion, merely because an assessee has made payment for purchase of car from his personal account does not mean that it is not the business asset of the assessee. Depreciation will be available if the said asset is used for business purposes.

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September, 5
0
Income Tax, Income Tax Circular Notification
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Interest on Enhanced Compensation u/s 28 of Land Acquisition Act, 1894 is Exempt u/s 10(37)

Compulsory acquisition is the power of government to acquire private rights in land without the willing consent of its owner or occupant in order to benefit society. Compensation against such acquisition is provided to the assessee by the government.

One of the most common question is with regard to the taxability of interest received on compensation or enhanced compensation. Enhanced interest is offered u/s. 28 of the Land Acquisition Act, 1894 on compulsory acquisition of agricultural land. Exemption under section 10(37) is available only on account of compulsory acquisition of urban agricultural land.

As per section 145A(b) of the Income Tax Act, any interest received by an assessee on compensation or enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

Further, as per section 56(2)(viii) of the Income Tax Act, income by way of interest received on compensation or on enhanced compensation referred to in section 145A(b) above shall be taxable under the head income from other sources in the previous year in which such interest is received.

In the case of above interest which is taxable under the head income from other sources, a deduction of a sum equal to 50% of such income shall be allowed to the assessee and no deduction shall be allowed under any other clause of section 57.

Let us refer to the case of ITO Vs Sh. Dhanender Kumar HUF (ITAT Chandigarh) where an appeal was preferred by the Revenue challenging the order of the Commissioner of Income Tax (Appeals) [CIT(A)].

The issue under consideration is whether interest received u/s. 28 of the Land Acquisition Act, 1894 on compulsory acquisition of agricultural land in the nature of compensation is exempt u/s. 10(37) or chargeable to tax under head ‘Income from Other Sources’?

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Facts of the Case

The issue involved in the present appeal related to the issue of taxability of interest received on enhanced compensation on compulsory acquisition of land u/s 28 of the Land Acquisition Act, 1894.
It was contended that the AO had held the same to be taxable u/s 56(2)(viii) read with sections 57(iv) and 145A.
The assessee had received enhanced compensation during the year along with interest on the compensation.
The assessee had treated the entire amount as being in the nature of compensation and exempt u/s 10(37) of the Act.
The assessee submitted that the interest component having been received u/s 28 of the Land Acquisition Act, was in the nature of compensation and thus eligible for exemption u/s 10(37) of the Act.

The assessee relied upon the decision of the Apex Court in the case of CIT Vs. Ghanshyam (HUF), in support of its above contention.
The AO dismissed the contention of the assessee stating that the issue of taxability of interest on enhanced compensation was now covered by the amended provisions of sections 56(2)(viii), 57(iv) and 145A of the Act, which was applicable w.e.f. AY 2010-11 and according to the same 50% of the interest received was taxable.
Accordingly, the AO subjected 50% of the interest received on enhanced compensation to tax.

Proceedings of CIT(A)

The matter was carried in appeal before the CIT(A) who found merit in the claim of the assessee.
The CIT(A) referred to the decision of the Apex Court in the case of Ghanshyam(HUF) and relying on the same held that as per the said decision, interest received u/s 28 of the Land Acquisition Act was part of the enhanced valued of land and in the nature of enhanced compensation only.
Further the CIT(A) stated that the amendment made to the Act by introducing sections 56(2)(viii), 57(iv) and 145A(b) of the Act was for the purpose of mitigating the hardships of the assessee on account of the decision of the Apex Court in the case of Ramabai Vs. CIT(1990) whereby it was held that the arrears of interest computed on the enhanced compensation was to be taxed on accrual basis.

Taxing the said interest in the year of receipt, was to be read in the context of interest received on compensation or enhanced compensation used u/s 145A(b) only and, therefore, it clearly did not refer to the interest received u/s 28 of the Land Acquisition Act, which had been held by the Apex Court to be in the nature of enhanced compensation in the case of Ghanshyam (HUF) (supra).
The CIT(A) allowed the assessee’s appeal deleting the addition made by the AO of 50% of the interest received on enhanced compensation.

Proceedings of ITAT

Aggrieved with the order of CIT(A), Revenue preferred an appeal before Income Tax Appellate Tribunal (ITAT)
Departmental Representative relied upon the order of the AO, though he fairly conceded that the issue stood decided in favour of the assessee by the ITAT in appeal for the disputed year, though in different proceedings i.e u/s 154 of the Act.
Since the issue involved in the present already stood adjudicated by the ITAT for the disputed year in favour of the assessee, though in appeal in separate proceedings, and the Revenue had not brought to the notice of the ITAT any new facts which were not there before the ITAT while deciding the earlier appeal, ITAT found that for all purposes the issue already stood examined by the ITAT.
Considering the fact that the CIT(A) has already taken note of the decision of the ITAT and applying the same, deleted the addition.

Therefore, interest u/s 28 of the Land Acquisition Act received by the appellant is in the nature of compensation and is exempt under the provision of Section 10(37) of the Income Tax Act.

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August, 28
0
Income Tax, Income Tax Circular Notification
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Income Tax ITAT

Notional Interest not to be considered while computing transfer price – ITAT