Rejection of Claim U/s 197 - Whether Order appealable u/s 264?

Income tax - TDS - Does rejection of application u/s 197 amount to an 'Order' maintainable u/s 264? - YES, rejection does not lie in absolute discretion of AO - reasons must be indicated: Bombay HC THE issue before the High Court is that whether rejection of an application u/s 197 for lower TDS rate or no TDS certificate amounts to an 'order'. Whether such an 'order' as per Sec 264 is maintainable. And the answer to the first question is that the rejection of an application u/s 197 does amount to an 'Order' u/s 264, and the same is maintainable for revisionary proceedings. Facts of the case Petitioner is a consortium consisting of an Indian company and a Malaysian company - awarded a contract for the design, development, construction, commissioning, operation and maintenance of the Mumbai Monorail Project by MMRDA - petitioner is assessable as an AOP - files an application u/s 197, requesting the Revenue to deduct tax at the rate of 0.11% from the payments made to it under the contract - AO rejects the application on two grounds (i) The calculation mechanism provided in Rule 28AA fails as figures for three previous years are unavailable; and (ii) No eTDS returns were filed by the assessee The Petitioner moves the Commissioner of Income Tax (TDS), in revision under Section 264 - the Commissioner rejected the Revision Application holding that where the AO rejects an application under Section 197, no approval of the Commissioner is necessary. The Commissioner cites two reasons for the rejection. Firstly, if the benefit of a lower rate for withholding tax is not granted under Section 197 to the assessee, no hardship or prejudice would be caused to the assessee as a result of the rejection of the application because, the assessee would be entitled to get a refund of excess tax paid, if any, together with interest. The second reason is that when the Assessing Officer rejects an application under Section 197, he does not pass an ‘order’ as envisaged in Section 264 and consequently, a revision under Section 264 is not maintainable. Having heard the parties the High Court has held that, ++ it would be far fetched to accept the view that the rejection of an application must lie in the absolute discretion of the Assessing Officer or that the Assessing Officer is not bound to indicate reasons or a basis for the rejection of the application. The fact that Parliament has empowered the Board to frame Rules under subsection 2A, having due regard to the convenience of assessees and the interests of the Revenue specifying the cases and circumstances under which an application can be made and the conditions subject to which such a certificate may be granted is sufficient to indicate that the exercise of powers by the Assessing Officer is intended to be structured in accordance with the provisions of Section 197 and the Rules framed by the Board under subsection 2A. ++ The Assessing Officer cannot be heard to urge that though an assessee fulfills all the requirements which are stipulated in Rule 28AA or, as the case may be, in Rule 29B, he possesses an unguided discretion to reject the application; ++ the Assessing Officer when he rejects an application is bound to furnish reasons which would demonstrate an application of mind by him to the circumstances which are mandated both by the Statute and by the Rules to be taken into consideration; ++ the expression “order” for the purposes of Section 264 has a wide connotation. Subsection (1) of Section 264 provides that in the case of any order other than an order to which Section 263 applies, passed by an authority subordinate to him, the Commissioner may either of his own motion or on application by the assessee for revision, call for the record of any proceeding under the Act in which any such order has been passed and after making an enquiry, pass such order thereon not being an order prejudicial to the assessee as he thinks fit. Parliament has used the expression “any order”; ++ hence, any order passed by an authority subordinate to the Commissioner, other than an order to which Section 263 applies, is subject to the revisional jurisdiction under Section 264. A determination on an application under Section 197 requires an order to be passed by the Assessing Officer after application of mind. The Commissioner was, therefore, manifestly in error when he held that there was no order which would be subject to his revisional jurisdiction under Section 264; ++ The Assessing Officer in the present case, was in error in coming to the conclusion that the mechanism that is contemplated under Rule 28AA would break down in the case of the assessee on the ground that the financial statements of the assessee in the previous three years were not available. In this case, sub clause (ii) would not apply and the rate would be computed under subclause (i); ++ The failure of the assessee, if any, to file eTDS returns may result in independent consequences which are provided in law. That however, cannot justify the rejection of the application made by the assessee for the determination of withholding of tax at a lower rate on payments which are to be received by the assessee. ++ The Commissioner has rejected the application of the assessee on the ground that a revision was not maintainable under Section 264. The Commissioner also observed that in the event that the assessee has paid excess tax, it would be entitled to a refund of the tax paid together with interest and hence, no prejudice would be caused to the assessee. The entire approach of the Commissioner is, with respect, specious; ++ The Assessing Officer was required, in the first instance, to apply his mind to the fact that the conditions for the grant of a certificate under Section 197 are duly fulfilled. If those conditions are duly fulfilled, it would be impermissible for the Assessing Officer to reject the application merely on a whim and on caprice and for the Commissioner to hold that no prejudice would be caused to the assessee since tax would be refunded later together with interest. The application filed by the assessee has been rejected in a rather cavalier manner and without application of mind; ++ the Revision Application is restored to the CIT for a fresh determination.

Is Caste Based Census 2011 acceptable?

With an uproar at the centre as to whether the demand for caste based census in 2011 is tenable, the recent judgement of Madrass HC came as relief.

IN A development that could provide legitimacy to the demand for caste-based census, the Madras High Court has issued a fresh direction to the Centre to conduct caste-wise enumeration in the country.

Allowing a PIL by lawyer R Krishnamoorthy, a division bench directed the Census Commissioner to take all steps to hold caste-wise enumeration. The bench comprising acting chief justice Elipe Dharma Rao and justice T S Sivagnanam said the relief sought by the petitioner had already been answered in the affirmative by the court in an earlier verdict on a writ petition.

In its October 2009 judgement, the court had noted that after 1931 there had never been any caste-wise enumeration or tabulation. “When there cannot be any dispute that there is an increase in the population of Scheduled Castes/Scheduled Tribes and Other Backward Classes manifold after 1931, the percentage of reservation fixed on the basis of population in 1931 has to be proportionately increased by conducting caste-wise census,” it had then held.

In the 2009 order, the court had asked the central government to conduct a fresh castewise census “at the earliest and in a time-bound manner” to help achieve “the goal of social justice in its true sense”. Justice Elipe Dharma Rao, who was part of the division bench that issued the order, had said that such an exercise would be in the interest of the weaker sections.

According to the bench, a caste-wise enumeration has become important as various state governments have introduced new categories — OBCs and MBCs — in the “reserved” category. “Given this backdrop, the percentage of reservation for various categories based on 1931 population figure is unfair. Quota should be proportionately increased by conducting a fresh caste-wise census,” the court said.

Incidentally, the Supreme Court had, in last April, rejected the Tamil Nadu-based PMK’s demand for castebased census. The court felt that such an exercise could “cause immense strife”.

 

Mr. Amitabh Bachhan has strongly opposed the caste based census and reiterated that if the officials asked him a question regarding his caste, he would reply saying as Indian. The veteran actor cited that all the spouses of his family members belongs to different caste and community.

 

Consensual sex sans adultery no offence

Consensual heterosexual relation between adults, including pre-marital sex, is no offence except in cases where the partners are liable to be charged for “adultery”, ruled the Supreme Court. It said the courts attach a lot of importance to personal autonomy and a person indulging in an immoral act need not necessarily be a culprit in the eyes of law. “Morality and criminality are non-co-extensive,” said a bench of CJI K G Balakrishnan and Justices Deepak Verma and B S Chauhan on Wednesday.


The SC said in the present social milieu, some view premarital sex as an attack on the centrality of marriage while a significant number see nothing wrong in it. This conflict of opinion on morality did not make pre-marital sex an offence, it ruled. “Notions of social morality are inherently subjective and criminal law cannot be used as a means to unduly interfere with the domain of personal autonomy,” it said. This clear finding and the judicial logic supporting it got substantial space in the SC’s judgment on Wednesday quashing 23 complaint cases against actress Khushboo, who was harassed through litigation for her remarks on prevalence of pre-marital sex in cities.

Justice Chauhan, writing the 41-page judgment for the bench, said, “While it is true that the mainstream view in our society is that sexual contact should take place only between marital partners, there is no statutory offence that takes place when adults willingly engage in sexual relations outside the marital setting, with the exception of ‘adultery’ as defined under Section 497 of the IPC.”

Section 497 provides, “Whoever has sexual intercourse with a person who is and whom he knows or has reason to believe to be the wife of another man, without the consent or connivance of that man, such sexual intercourse not amounting to the offence of rape, is guilty of the offence of adultery, and shall be punished with imprisonment of either description for a term which may extend to five years, or with fine, or with both. In such case, the wife shall be punishable as an abettor.

SC Bans Narco, Lie Detector tests in criminal offences

THE Supreme Court has held that narco-analysis, polygraph and brain mapping tests on an accused are illegal. The court, however, permitted use of such techniques in criminal cases on consent and with some safeguards.



“If we were to permit the forcible administration of these techniques, it could be the first step on a very slippery-slope as far as the standards of police behaviour is concerned,” the apex court said in a significant judgement on Wednesday.


“We hold that no individual should be forcibly subjected to any of the techniques in question, whether in the context of investigation in criminal cases or otherwise. Doing so would amount to an unwarranted intrusion into personal liberty,” said a bench comprising chief justice K G Balakrishnan, Justice R V Raveendran and Justice J M Panchal.


The bench said, “our conclusion is that the results obtained through the involuntary administration of either of the impugned tests (the narcoanalysis technique, polygraph examination and BEAP test) come within the scope of `testimonial compulsion,’ thereby attracting the protective shield of Article 20(3).”


The court rejected the plea of various state governments which had said that administering these techniques on the accused does not cause any bodily harm and that the extracted information will be used only for strengthening investigation.


It was pleaded before the court that such techniques were in alternative to third degree of torture and should be permitted.


“This is a circular line of reasoning since one form of improper behaviour is sought to be replaced by another. What this will result in is that investigators will increasingly seek reliance on the impugned techniques rather than engaging in a thorough investigation.


The widespread use of `third-degree’ interrogation methods so as to speak is a separate problem and needs to be tackled through long-term solutions such as more emphasis on the protection of human rights during police training, providing adequate resources for investigators and stronger accountability measures when such abuses do take place” remarked Justice Balakrishnan writing the verdict for the bench.


“Therefore, it is our considered opinion that subjecting a person to the impugned techniques in an involuntary manner violates the prescribed boundaries of privacy. Forcible interference with a person’s mental processes is not provided for under any statute and it most certainly comes into conflict with the right a gainst self-incrimination,“ the court said in its elaborate 251 page of judgement.


“However, we do leave room for the voluntary administration of the impugned techniques in the context of criminal justice, provided that certain safeguards are in place,” the court said.


It further said, “even when the subject has given consent to undergo any of these tests, the test results by themselves cannot be admitted as evidence because the subject does not exercise conscious control over the responses during the administration of the test. However, any information or material that is subsequently discovered with the help of voluntary administered test results can be admitted, in accordance with Section 27 of the Evidence Act, 1872.”


The issue of the legality of such techniques to extract information from the accused had received considerable attention since it involves tensions between the desirability of efficient investigation and the preservation of individual liberties.

Compulsory administration of these techniques violated the indivudual rights against self incrimination. 
 
With this judgement, the high profile satyam scamster, B Ramalinga Raju will be amongst others who will escape the tests. The AP police was planing to conduct such tests on him as he was not revealing facts.

Judges Cannot dictate judgements in Part

Judges cannot do with merely dictating a portion of the judgement as such a practice would render the entire judgement invalid, the Supreme Court has said.


A judgement has to be pronounced in an open court by the judge to the shorthand writer in the form of a dictation wherever it is permissible as stipulated under Order 20, Rule 1 of the CPC (Civil Procedure Code), a bench of Justices Arijit Pasayat and P Sathasivam observed.


"The mere fact that a major portion has been dictated by the learned judge in the judgment already dictated will not by itself lead to the conclusion that the judgement had been delivered," the Apex Court observed while dismissing an appeal.

The appeal was filed by K V Rami Reddy who challenged a Madras High Court judgment which had quashed a judgment in a civil dispute after noting that the Seventh Assistant Civil Judge, Chennai had passed the same without dictating the whole text in the open court as prescribed by the CPC.

The Assistant Civil Judge committed the said irregularity while dealing with suit for specific performance filed by a woman Prema who subsequently challenged his action before the Madras High Court.

A single judge of the Madras High Court upheld Prema's argument that when a judgement was not dictated in full in the open court it was "non-est in the eye of law" (an invalid judgment) and the remitted the matter back to the said judge to hear the arguments afresh upon which Reddy appealed in the Apex Court.

Source: Economic Times

Amendments in KVAT in Budget 2010

Major Changes in Karnataka Value Added Tax Act, 2003 effective from April 1, 2010:



• VAT exemption on paddy, rice, wheat, pulses and products of rice and wheat extended for one more year from 1.4.2010.


• Tax on Masala Powder Mixtures, Macaroni, Sports Trophies, Shields and Medals, all kinds of scrap, Electric generators of less than 15 KVA, railway concrete sleepers, school bags costing up to Rs. 200, reduced from 12.5 per cent to 5 per cent.


• The minimum annual turnover limit for registration increased from Rs. 2 lakhs to Rs. 5 lakhs.


• The maximum annual turnover limit for opting for Composition Tax Payment Scheme increased from Rs.15 lakhs to Rs.25 lakhs.


• Annual turnover limit for compulsory audit of accounts of dealers increased from Rs. 40 lakhs to Rs.60 lakhs.


• Optional scheme for dealers in medicines to pay tax based on the MRP even on sale of other goods.


• Advance Ruling Mechanism for dealers to seek clarifications and advance rulings to be introduced.


• VAT rate 4 per cent increased to 5 per cent on all goods except declared goods.


• VAT rate of 12.5 per cent increased to 13.5 percent.


• VAT rate of 12.5 per cent on tobacco products increased to 15 per cent.


• Levy of VAT on tobacco products on MRP basis. and


• VAT at rate of 13 per cent on sale of motor car exceeding 5 Lakhs.


Major Changes in Luxury Tax:


• Luxury tax on hotels with daily room rents from Rs. 1,000 to Rs.2000 increased from 6 per cent to 8 per cent.


• Luxury tax on hotels with daily room rents exceeding Rs. 2,000 increased from 10 per cent to 12 per cent.


Major Changes in Entry Tax:


• Provision for collection of Entry Tax on sugar at the point of sale by sugar factories.

Depreciation - a interesting facet

Depreciation – a non cash expenditure allowed under Income Tax Act, 1961 following block concept. Under the block concept, all the assets falling within the same class and subject to same rate of depreciation are clubbed together and considered as single asset. Any alterations to the value of the block have to be strictly in accordance with the provisions of Chapter IV D of Income Tax Act, 1961.

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

1. Assessee must be owner of the asset – registered owner need not be necessary.

2. The asset must be used for the purposes of business or profession.

3. The asset must be used during the previous year.

The use of the asset during the previous year may be active use or passive [ie., kept ready for use]. I shall elaborate this topic at later part of this article.

As per the provisions of section 43(6) of the Income Tax Act, the WDV of block of assets as at start of the year has to be adjusted as follows so as to arrive at closing WDV:

• It has to be increased by actual cost [as per section 43(1)] of any asset falling within in the block acquired during the previous year.

• Thereafter, It shall be reduced by ‘moneys payable’ in respect of asset sold/discarded/demolished or destroyed during the previous year.

It has been held in Ashok Betelnut Case [mad.] that moneys payable represents gross sale consideration where as the contrary has been held in the case of Essar Shipping Limited case.

No deletion is permitted from the value of the block except when the asset is sold, discarded, demolished or destroyed. e.g., in case of theft of an asset, no deletion is permitted from the block of asset since the asset is neither sold nor demolished nor destroyed nor discarded.

• Further, scrap value, if any of any asset has to be reduced.

The question of deduction of scrap value from the block arises only when the asset is not sold.

Now lets analyse a interesting concept arising in relation to claiming of depreciation. In earlier part of this article, I have laid down the essential for claiming depreciation. One of the requirements was that asset must be used during the previous year. For the purposes of Income Tax Act, a previous year is a distinct unit. In case an asset is discarded by the business but not sold, section 43(6) permits the scrap value of the asset to be reduced from the block in the previous year in which such asset is discarded. The assessee is entitled to claim depreciation on the residual value of such discarded asset [ie., Opening WDV of such asset less scrap value] even though such discarded asset is not used for the purposes of business or profession in such year and subsequent years.

In case of CIT v. Yamaha Motor India Private Limited (2009) 226 CTR (Del) 304, the assessee claimed depreciation on discarded assets which were written off during the previous year. The AO disallowed the claim on the ground that the assets were not used for the purposes of business during the previous year. It was held that that the term ‘used’ appearing in section 32(1) comprise of both active use and passive use. Further, the expression ‘used for the purposes of business’ used in section 32(1) has to be read harmoniously with the term “discarded” meaning thereby that the assessee is entitled to claim depreciation as far as discarded asset is concerned if the asset has been used for the purposes of business in earlier years. Adopting a realistic approach and harmonious construction, the expression ‘used for the purposes of business’ appearing in section 32 when used in respect of discarded asset would mean that the use in the business need not necessarily be in the relevant previous year but in earlier previous years. Any other interpretation would lead to an incongruous situation because on the one hand the depreciation is allowed on discarded asset after allowing inter alia adjustment for scrap value, yet, on the other hand use would be required of the discarded machinery which use is not possible.

To conclude, the decision of the delhi high court is logical considering the existing provisions of the Act as regards allowability of depreciation on discarded asset. Either the Act must permit the residual value of the discarded asset to be written off completely in the year in which the asset is discarded or the interpretation adopted in the aforesaid judgement has to be accepted.

Concept of Deemed Dividend

Deeming fiction – a fiction resorted to by parliament for defying the law of literal interpretation. Whether it be Central Excise Act, 1944 [concept of deemed manufacture u/s 2(f)(iii)] or Income Tax Act, 1961 [concept of deemed dividend u/s 2(22)(e)], the weapon of deemed concept is adopted either for plugging the loopholes in the Act, or to depart from the natural and ordinary meaning of a so called ‘revenue yielding’ term used in the Act so that the government is not deprived of the revenue from any alluring activity which cannot be other wise brought into the tax net in ordinary sense.

Everything said and done, whenever the law infuses the deemed concept in any provision of law, the same shall be subject to rule of strict construction.

Section 2(22)(e) is one such deeming provision which covers within its ambit the receipt of certain securities or money from a closely held company under certain situation and subject to fulfilment of certain conditions and subject to certain exceptions.

As per clause (e) of section 2(22), any payment made by a closely held company by way of loans or advance shall be deemed to be dividend taxable u/s 56 provided the following conditions are satisfied:

• Payment is made to a shareholder having substantial interest [i.e., holding >10%] of voting power in the company and is beneficial holder of equity shares; and/or

• Payment is made to a concern in which aforesaid substantial shareholder is a member or partner and in which he has substantial interest [i.e., holding or owning >20%]; and/or

• Payment is made on behalf of or for the individual benefit of such substantial shareholder; and

• The company must possess accumulated profits.

The exceptions to the same is discussed in later part of this article.

Now, lets discuss some intricate queries arising out of the aforesaid definition.

Q 1. What kinds of advances are covered within the scope of section 2(22)(e)?

It has been held by Rajasthan High Court in re CIT v. Raj Kumar (2009) 23 DTR (Del) 304 that the word ‘advance’ has to be read in conjunction with the word ‘loan’ i.e., a payment shall be construed as a loan or advance if it involves following attributes–

• Positive act of lending coupled with acceptance by the other side of the money as a loan;

• Generally carries interest

• Obligation of repayment is inherent.

Considering the rule of construction viz., noscitur a sociis and keeping in view the intent of introducing the provisions [i.e., to plug the evasion of tax by payment of dividends in the guise of loans & advances to the principal shareholders], any advance which does not carry with it the obligation of repayment cannot fall within the four corners of the deeming provision. Consequently, trade advances made in then ordinary course of business that are adjusted against supply of goods/services do not fall within the ambit of section 2(22)(e).

Q 2. In whose hands will the payment deemed to be dividend if the loans or advances are made to concern or person on behalf of or for the benefit of substantial shareholder?

It is general principle that a payment can be taxed as dividend only in the hands of a shareholder. The same cannot be taxed as such in the hands of a non shareholder. This view has been reiterated by Rajasthan High Court in re CIT v. Hotel Hilltop (2008) 217 CTR (Raj.) 527 wherein it was held that the essential requirement of section 2(22)(e) is that payment should be made on behalf of or for the individual benefit of substantial shareholder. Thus, the provision is intended to attract the liability of tax on the person on whose behalf or for whose benefit the amount is paid by the company.

In re CIT v. Bhaumik Colour P. Ltd (2009), the special bench of Mumbai tribunal held that the inclusive definition of section 2(22)(e) enlarges the scope of the term dividend by including loans & advances. The legal fiction created by the said section is operative only so long as the deemed dividend is taxed in the hands of the shareholder. If the legal fiction is extended to loans & advance to a non shareholder, the very term ‘dividend’ will lose its identity.

One of the exceptions to section 2(22)(e) is that dividend shall not include any dividend paid by the company which is set off by the company against the whole or any part of the sum previously paid by it and treated as dividend within the meaning of sub clause (e) to the extent it is so set off.

In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provision, further, contemplate that deemed dividend be taxed in the hands of shareholder only.

Q 3. One of the exceptions to section 2(22)(e) is that dividend shall not include any loans or advance made to a shareholder or the said concern by the company in the ordinary course of its business, where lending money is substantial part of the business of the company. Elaborate?

The term ‘substantial’ appearing in the aforesaid exception is not defined. But the same is defined in explanation 3(b) to section 2(22)(e) as not less than 20% of the income of such concern. Following the judgement of supreme court in CIT v. Venkateshwara Hatcheries (237 ITR 174) wherein it was held that the definition in one section can be used for understanding the meaning of the word in another section if the context justifies it, it can be concluded the definition of term ‘substantial’ used in the aforesaid section means 20% or more of the income of a concern.

Thus, if the income from money lending is 20% or more of the total income of the closely held company and the turnover of the loan funds to total funds of the company is above 20%, any loans or advance made by the said company to its principal shareholder cannot be deemed to be dividend. The same was upheld by Delhi Tribunal in Mrs. Rekha Modi v. ITO (2007) (13 SOT 512) and the same was not further challenged by the revenue.

Further, in deciding whether the company is engaged in money lending business, factual position only for the relevant previous year in question has to be considered i.e., the year in which the loan or advance has been given to principal shareholder holding 10% or more of voting power. The same has been upheld in the aforesaid judgement of the tribunal.

INTRODUCTION:

The concept of CENVAT credit was introduced with an intention to avoid cascading effect of taxes. The Central Value Added Tax [CENVAT] allows the credit of the duty paid on the inputs and capital goods and service tax paid on input services, which is to be utilized for the payment of excise duty on final products or service tax on output services.

FEATURES:

• No one-to-one correlation required between input/input services and final product/output service.

• Excise duty and Additional duty of customs paid on Inputs and capital goods and service tax paid on Input services used in or in relation to the manufacture of final product or rendering output service are eligible for credit.

• No credit shall be allowed in respect of Basic Customs duty paid on inputs or capital goods.

• No credit shall be allowed if the final product or out put service are wholly exempted.

• CENVAT credit shall be allowed only on the basis of specified duty paying documents.

• Credit of excise duty shall be allowed only on receipt of inputs and/or capital goods in the premises of manufacturer or provider of output service irrespective of the fact whether payment is made or not.

• Credit of service tax on input services shall be allowed only on making of payment to service provider.

• Credit of duty paid on capital goods shall be allowed to the extent of 50% in the year of receipt of capital goods and balance in subsequent years subject to the availability of possession of said capital goods. However, the duty component shall be allowed as credit in the subsequent year(s) if the capital goods are in the nature of tools, dies, jigs, etc irrespective of the possession of the said capital goods in such years.

DEFINITION AND ANALYSIS OF DEFINITION OF INPUT SERVICE:

 

As per section 2(l) of CENVAT Credit Rules, 2004, the term “Input Service” means any service:

a. used by the provider of taxable service for providing output service.

b. Used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal.

and includes:

a. services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises

b. services relating to advertisement, sales promotion, market research, storage up to the place of removal, procurement of inputs.

c. Services used in relation to inward transportation of inputs and capital goods and outward transportation up to the place of removal.

d. Activities relating to business such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security.

 

The term “Input Service” is broadly in two parts – first i.e., main part and second i.e., inclusive part. First part of the definition is restrictive in scope and covers all services directly or indirectly used in providing output service or used in relation to manufacture or clearance of final products. However, second part of the definition expands the scope much beyond the coverage of first part.

The general rule to be applied while deciding on the eligibility of credit of tax paid on a particular service is:

“I am eligible to take credit unless someone reasonably proves as to why I shouldn’t take it”.

The inclusive part of the definition widens the scope given by exhaustive definition of the first part. It has been held by 3 member large bench of CESTAT – Bangalore in ABB Limited case that each of the above list is an independent benefit/concession. Each item in the list has to be read individually and if any service fits into the scope of any item above, the same shall be treated as input service notwithstanding the conditions mentioned in other items of the list.

WHETHER OUTWARD TRANSPORTATION UPTO CUSTOMER PLACE CAN BE DEEMED AS INPUT SERVICE?

The issue arises since the definition of input service specifically includes outward transportation up to the place of removal. However, It has been held by larger bench of Bangalore tribunal that all the items in the inclusive definition are distinct and are to be read accordingly. The Item (d) above uses the term “activities relating to business”. There is no further restriction that activities relating to business should be relating to only main activities or essential activities of the business. Therefore, the definition of “Input Service” has to be interpreted in the light of requirements of the business and cannot be read restrictively so as to confine only up to the place of removal. All the services relating to business will qualify as input service.

However, in the case of Gujarat Ambuja Cements Limited, the tribunal held that outward transportation of goods is not an input service and, therefore, not eligible for credit. Credit beyond the point of removal of goods would be contrary to the scheme of Cenvat Credit Rules, 2004.

Since there is anamoly over the interpretation of the scope of definition of input service, it is necessary to ensure that the outward transportation service is prima facie classified as input service. Following conditions are to be satisfied before classifying outward freight as input service:

• Goods are sold on FOB basis.

• Ownership of goods remain with the seller till delivery at customer’s doorstep.

• Transit insurance is borne by the assessee.

• Property in goods is not transferred till the delivery at doorsteps of the customer.

• Cost of transport is included in the assessable value of the goods.

SECTION 43(6) V. SECTION 45(1A)

Taxability of a receipt is governed by section 2(24) of the Income Tax Act (hereinafter referred to as “Act”) which define the term “Income”. In ordinary parlance, the term income connotes a receipt arising regularly or with some sort of expected regularity. It is well accepted principle that a capital receipt shall not come under the net of Income tax unless otherwise specifically provided in the Act. Section 45 of the Income Tax Act is an enabling provision which enables taxation of capital gains. If a capital receipt fails to satisfy the conditions of section 45 r. w. 48 [held in re B C Srinivas shetty] of the Act, the same cannot be subject to taxation.

I shall try to focus the provisions of section 45(1A) which was enacted to nullify the judgement of Supreme Court in Re Vania Silk Mills Private Limited [1991]. As per the provisions of section 45, a capital receipt shall be subject to taxation only if the same has arisen pursuant of “transfer” of a capital asset. The term ‘Transfer’ has been defined in a inclusive manner in section 2(47) which, inter alia, includes extinguishment of rights in an asset. In the case mentioned supra, the Supreme Court held that capital gains arising on destruction of asset shall not be subject to taxation since the destruction of asset does not amount to transfer.

To nullify the aforesaid judgement, sub section (1A) of section 45 was introduced which provided for the taxation of capital gains arising pursuant to receipt of insurance compensation subject to satisfaction of following two conditions:

1. Compensation is received because of ‘damage’ to or ‘destruction’ of any capital asset.

2. the damage or destruction is a result of four categories of circumstances:

a. flood, typhoon, hurricane cyclone, earthquake or any other convulsion of nature; or

b. riot or civil disturbance; or

c. accidental fire explosion; or

d. action by an enemy or action taken in combating an enemy.

The insurance compensation received shall be treated as a capital receipt and, consequently, shall not be subject to taxation if aforesaid conditions are not satisfied, e.g., theft of a machinery or destruction of machinery on account of road accident. In case of theft of machinery, there is no damage or destruction of property and, therefore, the first condition mentioned supra itself fails. Further, in order to hold a transaction as ‘transfer’, there must be indentified transferor and transferee which is not possible in case of theft.

In case of road accident, though the asset is destroyed, the reason for destruction being other than those mentioned in condition two supra. The compensation received, in these cases, will, therefore, have to be dealt with as per the judgement in re vania silk mill case.

The objective of this article is to demonstrate the impact of following cases in determining WDV of block of assets.

CASE 1: DAMAGE TO AN ASSET – INSURANCE COMPENSATION RECEIVED:

In case of any expenditure incurred to restore the asset to its working condition, the normally accepted principle is that the expenditure is revenue in nature since it does not increase the performance of the asset beyond the previously assessed standard of performance. If any insurance money is received as a re imbursement for such expenditure incurred, the normal accounting practice followed by many is to reduce the expenditure incurred by the amount so received and to debit/credit the profit/loss account with the balance.

What should have been the treatment of such compensation received for the purposes of Income Tax Act?

Damage to an asset may tantamount to extinguishment of rights [in part] in the asset thereby resulting in transfer as contemplated in section 45(1A). But, how shall the cost of the asset transferred be arrived at u/s 48 especially when the asset is restored to working condition after carrying out necessary current repairs. It is judicially accepted [e.g., in re B C Srinivas Shetty case (SC)] that provisions of section 45 has to be read with section 48 and if the latter fails for any reason, the charging section itself fails. The Assessing officer is not allowed to make conjectures or surmises for the purposes of arriving at the cost of the asset transferred. The taxability of such receipt is a ‘?’ requiring solution.

As far as depreciable asset is concerned, the taxability of the same has to be arrived based on the provisions of section 50 r. w. section 43(6). If the insurance compensation so received exceeds the WDV of the block of the said asset, section 50 shall come into motion resulting in short term capital gain. If the compensation is less than the WDV of the block, it is undisputed that the compensation so received is a capital receipt not subject to taxation.

The next question that arises is whether the said insurance money so received can be reduced from the block of assets. The answer is ‘No’. Section 43(6) enables deletion of value from the block only if the asset, whether in whole or in part, is ‘sold or discarded or demolished or destroyed’. It is not applicable where the assets are merely damaged and by repairing the damage is restored to working condition. Thus, the insurance money is not taken in consideration while computing the WDV of block irrespective of fact whether any expenditure is incurred for restoration or the expenditure so incurred exceeds the insurance money.

Now what shall happen to the expenditure incurred? As discussed supra, the said expenditure is revenue in nature. In my opinion, the assessee can claim the same as deduction although the same would amount availment of double benefit by the assessee.

One can always argue the possibility of section 41 being attracted in case of insurance money received to recompense the expenditure incurred on restoration of machinery.

CASE 2: THEFT OF PROPERTY – COMPENSATION RECEIVED:

In case of theft of property, there is no question of destruction of asset involved as it is known that asset is in existence though not in the possession of the assessee. Hence, section 45(1A) fails. If the judgement of vania silk mills is applied, the insurance compensation so received shall be treated as capital receipt not subject to taxation.

In case of depreciable assets, no deletion is required to be made from the block of assets since theft do not fit under any of the situation contemplated in section 43(6), i.e., neither the asset is sold nor discarded nor demolished nor destroyed. The assessee is allowed to claim depreciation on the block provided the block do not cease to exist on happening of theft – else the provision of section 50 shall come into operation.

A question may, however, loiter in mind that doesn’t theft results in extinguishment of rights of the assessee in the said asset? If yes, the provision of section 45 would apply. Next question that arises is that if the compensation is not received in the same previous year in which theft has taken place, how will the computation of capital gains for the purposes of section 45 be made in the assessment for said previous year?

Disregarding these anomalies, the assessee can move forward to claim the benefit of judgement made in vania silks mill case because the provisions of section 45(1A) failed to nullify the said judgement in its entirety.

CASE 3: DESTRUCTION OF A ASSET IN ROAD ACCIDENT:

In case of destruction of asset in a road accident, the provisions of section 45(1A) shall not apply since the destruction took place in circumstances other than those mentioned in condition 2 mentioned supra. Applying the rationale of the judgement of vania silks mill case, the aforesaid receipt shall be treated as capital receipt not subject to taxation.

If the asset so destroyed is a depreciable asset, then the insurance money so received shall be reduced from the WDV of the block of the assets since the conditions mentioned in the provisions of section 43(6) are satisfied. However, if the insurance compensation exceeds the WDV of the block, then the excess shall not be subject to taxation. Similarly, if the block ceases to exist pursuant to such destruction, the excess compensation shall not be subject to taxation u/s 50 r.w. section 45(1A) for reasons mentioned supra. In this case also, the anomalies enumerated above shall arise.

The aforesaid interpretation/treatment/opinion is arrived at based on my knowledge and understanding of law and judicial pronouncements. I welcome the comments of readers on the aforesaid issue.