HC on Restaurant Service- Validity & Double Taxation

High Court on Restaurant Service

 

HC dismisses writ, upholds constitutional validity of Sec 66E(i) of Finance Act declaring service portion in activity of supply of food and drinks as "declared services"; Article 366(29-A) of Indian Constitution does not indicate subsuming of service part in sale of food, it rather separates sale of food and drinks from service; Sec 65B(44) and Sec 66E(i) only charge service tax on service part and not on sale part, which indicate exclusion of sale element from service as interpreted by SC in Associated-Hotel and Northern Caterers cases; Rejects assessee's reliance on SC ruling in K Damodarsamy, calling it irrelevant for determining Parliament's power to levy service tax on service element in sale; However, HC shows reservation in the rule quantifying fixed sum towards service and its functioning in restaurant, vis-a-vis tax under VAT Act; 40% over which service tax is charged cannot be subject to VAT; Absent provision in VAT Act to bifurcate amount between sale and service, HC advises State Govt to frame rules / issue clarification in conformity with provisions under Finance Act to avoid double taxation on same amount; Also allows assessee to object to VAT levy on service portion of bill value before VAT Authorities  : Chattisgarh HC

Case Law on Section 50B

S. 50B applies only to a "sale" for a "monetary consideration" and not to a case of "exchange" of the undertaking for shares under a s. 391/394 scheme of arrangement

The assessee transferred its Lift Division to Tiger Elevators Pvt. Ltd under a scheme of arrangement u/s 391 & 394 of the Companies Act, 1956. The transfer of the undertaking took place in exchange of preference shares and bonds issued by Tiger Elevators as per a valuation report. The assessee claimed that the transfer was not liable to tax on capital gains on the basis that there was no "cost of acquisition" of the undertaking. The AO held that the transaction was a "slump sale" as defined in s. 2(42C) and that the gains had to be computed u/s 50B. This was upheld by the CIT (A). On appeal by the assessee to the Tribunal, the Tribunal accepted the claim of the assessee. On appeal by the department to the High Court HELD dismissing the appeal:

The definition of the term "slump sale" in s. 2(42C) means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale. In Motors & General Stores (P) Ltd 66 ITR 692 (SC) it was held that a "sale" meant a transfer for a monetary consideration and that an "exchange" would not amount to a "sale". On facts, scheme of arrangement shows that the transfer of the undertaking took place in exchange for issue of preference shares and bonds. Merely because there was quantification when bonds/preference shares were issued, does not mean that monetary consideration was determined and its discharge was only by way of issue of bonds/preference shares. In other words, this is not a case where the consideration was determined and decided by parties in terms of money but its disbursement was to be in terms of allotment or issue of bonds/preference shares. All the clauses read together and the entire Scheme of Arrangement envisages transfer of the Lift Division not for any monetary consideration. The Scheme does not refer to any monetary consideration for the transfer. The parties were agreed that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was a case of exchange and not a sale. Therefore, s. 2(42C) of the Act was inapplicable. If that was not applicable and was not attracted, then, s. 50B was also inapplicable. The judgement of the Delhi High Court inSRIE Infrastructure Finance Ltd 207 Taxman 74 (Del) is distinguishable on facts. There is no necessity to analyze the circumstances in which s. 50B was inserted in the statute book.

Supreme Court on Sale and WC

Important principles on distinction between "contract for sale of goods" and "works contract" explained

A Constitutional Bench of 5 Judges of the Supreme Court had to consider whether the law laid down by a three-Judge Bench in State of A.P. v. Kone Elevators (India) Ltd (2005) 3 SCC 389 that a contract for manufacture, supply and installation of lifts in a building is a "contract for sale of goods" and not a "works contract" is correct or not. HELD by the Constitution Bench over-ruling the three-Judge Bench judgement:

(i) In the case of a "contract for sale of goods", the entire sale consideration is taxable under the sales tax or value added tax enactments of the State legislatures. In the case of a "works contract", the consideration paid for the labour and service element has to be excluded from the total consideration received and only the balance is chargeable to sales tax or value added tax;

(ii) Four concepts have clearly emerged from the numerous judgements of the Supreme Court on the point. They are (a) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services; (b) the concept of "dominant nature test" or, for that matter, the "degree of intention test" or "overwhelming component test" for treating a contract as a works contract is not applicable; (c) the term "works contract" as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and (d) once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract;

(iii) The "dominant nature test" or "overwhelming component test" or "the degree of labour and service test" are really not applicable. If the contract is a composite one which falls under the definition of works contracts as engrafted under clause (29A)(b) of Article 366 of the Constitution, the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract;

(iv) On facts, the three-Bench judgement erred in taking the view that the major component was the equipment and that the skill and labour employed for converting the main components into the end product were only incidental. The principal logic applied, i.e., the incidental facet of labour and service is not correct because in all the cases, there is a composite contract for the purchase and installation of the lift. The price quoted is a composite one for both. Various technical aspects go into the installation of the lift. There has to be a safety device. In certain States, it is controlled by the legislative enactment and the rules. In certain States, it is not, but the fact remains that a lift is installed on certain norms and parameters keeping in view numerous factors. The installation requires considerable skill and experience. The labour and service element is obvious. The preparatory work has to be done taking into consideration as to how the lift is going to be attached to the building. The nature of the contracts clearly exposit that they are contracts for supply and installation of the lift where labour and service element is involved. Individually manufactured goods such as lift car, motors, ropes, rails, etc. are the components of the lift which are eventually installed at the site for the lift to operate in the building. In constitutional terms, it is transfer either in goods or some other form. In fact, after the goods are assembled and installed with skill and labour at the site, it becomes a permanent fixture of the building. However, if there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, which is a composite contract for supply and installation, has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel.

Sec 234E-Bombay HC Stay Order

S. 234E: High Court grants ad-interim stay against operation of notices levying fee for failure to file TDS statement

S. 234E of the Income-tax Act, 1961 inserted by the Finance Act, 2012 provides for levy of a fee of Rs. 200/- for each day's delay in filing the statement of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS). A Writ Petition to challenge the validity of s. 234E has been filed in the Bombay High Court. The Petition claims that assessees who are deducting tax at source are discharging an administrative function of the department and that they are a "honorary agent" of the department. It is stated that this obligation is onerous in nature and that there are already numerous penalties prescribed for a default. It is stated that the fee now levied by s. 234E is "exponentially harsh and burdensome" and also "deceitful, atrocious and obnoxious". It is also claimed that Parliament does not have the jurisdiction or competence to impose such a levy on tax-payers.

The Bombay High Court has, vide order dated 28.04.2014, granted ad-interim stay in terms of prayer clause (d) i.e. stayed the operation of the impugned notices levying the fee.

See also Narath Mapila LP School vs. UOI (Ker), Adithya Bizorp Solutions India vs. UOI (Kar) & Om Prakash Dhoot vs. UOI (Raj) where similar interim orders of stay have been passed. The CBDT has vide Circular No. 07/2014 dated 04.03.2014 extended the due date of filing of the TDS/TCS statement for Government deductors

Rashmikant Kundalia vs. UOI (Bombay High Court)

crossed cheque and account payee cheque

FYI - Rajmoti Industries vs. ACIT (Gujarat High Court)

S. 40A(3): There is a difference between “crossed cheque” and “account payee cheque”. Payment by crossed cheque attracts s. 40A(3) disallowance

Unpaid taxes if a Pvt Ltd company

Unpaid taxes of Private limited Company could not be recovered from its director if he was not grossly negligent in his affairs -GUJ HC- Jashvant lal Vs.ITO

Section 40(a)(ia),

IT: In view of retrospective amendment in section 40(a)(ia), deduction made in last month of financial year would be allowable, if same was deposited before filing of return under section 139(1)

[2014] 42 taxmann.com 547 (Rajasthan)

HIGH COURT OF RAJASTHAN

Commissioner of Income-tax, Udaipur
v.
Choudhary Construction Company

Sum received by retiring partner

Sum received by retiring partner towards his share capital wasn’t liable to capital gain tax
April 14, 2014[2014] 43 taxmann.com 253 (Hyderabad - Trib.)

S. 56(2)(vii) does not apply to bonus & rights shares offered

Sudhir Menon HUF vs. ACIT (ITAT Mumbai)
March 17th, 2014
S. 56(2)(vii) does not apply to bonus & rights shares offered on a proportionate basis even if the offer price is less than the FMV of the shares

Case Law on Gold to Daughter

IN THE INCOME TAX APP ELLATE TRIBUNAL,

KOLKATA 'B' BENCH, KOLKATA

Coram : Shri Abraham P. George (Accountant Member)

and Shri George Mathan (Judicial Member)

I.T .A. No. : 1400/Kol./ 2011

Assessment year : 2007-2008

Shri Harish Kumar Manikant Goda Vs Income Tax Officer

Appearances by:

Shri Subash Agarwal, Advocate, for the assessee

Shri P.B. Pramanick, JCIT, Sr. D.R, for the Department

Date of concluding the hearing : February 14, 2014

Date of pronouncing the order : February 19, 2014

ORDER

Per Abraham P. Geroge :

1. In this appeal, assessee assails an addition of Rs.3,62,100/- which was scaled down by ld. Commissioner of Income Tax (Appeals)-XIX, Kolkata to Rs.2,68,150/-.

2. Facts apropos are that assessee is an individual , had filed his return for the impugned assessment year declaring income of Rs.1,69,635/-. It seems that return was originally subject only to a processing under section 143(1) of the Act. The assessment was reopened under section 147 of the Act. Reason for reopening is not available in the assessment order. During the course of reassessment proceedings, Assessing Officer based on certain documents came to a finding that jewellery worth Rs.5.5 lakhs was handed over by the assessee to the in-laws of his daughter. As per Assessing Officer, said jewellery was not shown in assessee's balance- sheet. No return of wealth was filed by the assessee. According to the Assessing Officer, the maximum gold jewellery that can be possessed by a married man, who has not filed any wealth-tax return, can be only 200 grams. Taking per gram rate of Rs.939.5, Assessing Officer reached a figure of Rs.1,87,900/-, as the maximum value of gold jewellery that can be possessed by the assessee. The difference of Rs.3,62,100/- was added as unaccounted income.

3. In its appeal before ld. CIT(A ppeals), argument of the assessee was that only 400 grams of jewellery was handed over to the in-laws of his daughter at the time of marriage and on various occasions. As per the assessee, such jewellery was purchased over a large number of years out of savings. Assessee further submitted that there were regular withdrawals made by him from his accounts and, therefore, surplus money was available with him for purchasing small quantities of gold ornaments over a long period of time. As per the assessee, the total amount spent by him for the marriage of his daughter was Rs.12.32 lakhs and the jewellery given to the in-laws of his daughter was only 400 grams.

4. Ld. CIT(Appeals) partly accepted the claim of assessee. According to him, withdrawals were made by the assessee over a number of years from his accounts and, therefore, the cl aim that some of jewellery was purchased in the earlier years out of savings, could not be brushed aside.

He was of the opinion that credit to the extent of 300 grams of jewellery coul d be allowed to the assessee. He, therefore, held that at the rate of Rs.939.5 per gram the maximum value of jewellery that could be held by the assessee was only Rs.2,81,850/-. He, therefore, directed the Assessing Officer to restrict the addition to Rs.2,68,150/-.

5. Now before us, l d. A.R. strongly assailing the order of ld. CIT(Appeals) submitted that 400 grams of jewellery was not a huge holding and not something which was not achievable for a common man.

According to him, reopening of assessment was based on complaint given by the son-in-law of the assessee who was trying for a divorce from assessee's daughter. As per l d. A.R. when withdrawals were found sufficient for more than 400 grams, ld. CIT(A ppeals) erred in coming to a conclusion that assessee could at the best hold onl y 300 grams of jewellery.

6. Per contra, ld. D.R. supported the order of ld. CIT(Appeals).

7. We have heard the rival contentions and perused the material available on record. Ld. CIT(Appeals) has not disputed the claim of assessee that he was having drawings from his accounts in the earlier years. Admittedly assessee was having only 400 grams of jewellery, which was given by him to the in-laws of his daughter at the time of marriage.

Assessee who was regularl y filing return of income claimed that he had acquired such jewellery over a number of years. Since he was having a daughter to marry off, this is not an unbelievable version. Endeavour of every Indian is to accumulate some jewellery which can be used at the time of marriage of his/her daughter. At the best, assessee can only be considered as a doting father. It is not required for an assessee to file personal balance-sheet along with the return of income. Hence, the question of jewellery not appearing in the balance-sheet, in our opinion, is irrelevant. The reopening, as well as assessment, in our opinion, was an aftermath of family disputes between the daughter of the assesese and her husband. This is not a case where undisclosed income or unaccounted income could have been assessed. The addition made is deleted in full.

8. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 19th day of February, 2014.

Case Law on Reverse Charge

Service Tax - Reverse Charge liability paid by Service Provider, should not be demanded again from Service Recipient

We are sharing with you an important judgement of the Hon’ble Mumbai CESTAT, in the case of Umasons Auto Compo Pvt. Ltd. Vs. Commissioner of Central Excise & Customs, Aurangabad [2014 - TIOL – 126 – CESTAT - MUM] on following issue:

Issue:

Whether Service Tax can be demanded again from the Service Recipient under reverse charge, where the same has been paid by the Service Provider and accepted by the Department?

Facts & Background:

M/s Umasons Auto Compo Pvt. Ltd. (“the Appellant” or “the assessee”) was receiving Goods Transport Agency (“GTA”) service from GTA service provider for which they were paying Service Tax to the provider of GTA service. The provider of GTA service deposited the amount of Service Tax to the Department, which was duly accepted by them. Subsequently, the Appellant has availed Cenvat credit of the amount of Service Tax so paid to the provider of GTA service.

The Assessing Officer raised demand for Service Tax on GTA services availed by the Appellant on the ground that in respect of GTA services, service recipient (i.e. the Appellant) is liable to pay Service Tax in terms of Section 68(2) of the Finance Act, 1994 (“the Finance Act”), and if the same has been paid by the service provider, recipient can seek refund of the same. The assessee preferred an appeal before the Commissioner of Customs & Central Excise (Appeals), Aurangabad who has upheld the Adjudication order and confirmed the demand. Hence the Appellant preferred an appeal before the Hon’ble Mumbai CESTAT.

Held:

It is held by the Hon’ble CESTAT that once the amount of Service Tax is accepted by the Revenue from the provider of GTA service, it cannot be demanded again from the recipient of the GTA service.

Therefore, the Hon’ble CESTAT rejected the contention of the Department and decided the case in favour of the Appellant

Regards,

VMVSR                                                                                                               BIMAL JAIN       

Three Important Judgements On Capital Gains Transfer, Transfer Pricing And Coercive Recovery Of Taxes

The following important judgements are available for download at itatonline.org.

CIT vs. Sadia Shaikh (Bombay High Court At Goa)

S. 2(47)(v): Mere execution of a development agreement is not a “transfer” if possession as per s. 53A of the Transfer of Property Act is not given

Though the development agreement was executed in AY 2003-04, the possession as contemplated in Section 53A of the Transfer of Property Act was in fact not handed over by the assessee to the developer. The agreement only permitted the development to be carried out by the said developer. The entire control over the property was in fact with the assessee inasmuch as the licence to construct the property was also in the name of the assessee and the occupancy certificate was also given to the assessee. Therefore the execution of the agreement could not amount to transfer as contemplated under Section 53A of the Transfer of Property Act. The agreement was subsequently specifically modified and the assessee was liable to pay the capital gain as per the last agreement i.e. for assessment year 2008-09.

See also General Glass 108 TTJ 854 (Mum) & Fibars Infratech (ITAT Hyd) where Chaturbhuj Dwarakadas Kapadia 260 ITR 491 (Bom) is explained/ distinguished. Contrast with Charanjit Singh Atwal (ITAT Chd)

ACIT vs. Casio India Co Pvt Ltd (ITAT Delhi)

Transfer Pricing: Argument, based on BMW, that the AMP adjustment law laid down in L. G. Electronics (SB) does not apply to a full-risk distributor in not correct

In LG Electronics India Pvt. Ltd. vs. ACIT 2013 152 TTJ (Del) (SB) 273 the Special Bench held by majority that incurring of AMP expenses towards promotion of brand, legally owned by the foreign AE, constitutes a `transaction’. The contention that no disallowance could be made out of AMP expenses by benchmarking them separately when the overall net profit rate declared by the assessee was higher than other comparable cases also came to be specifically rejected by the special bench. Resultantly, the transfer pricing adjustment in relation to such AMP expenses was held to be sustainable in principle. In the eventual order, the Special Bench restored the matter to the file of the AO/TPO for fresh determination of Transfer Pricing Adjustment in relation to AMP expenses. In order to enable the determination of correct ALP of AMP expenses, the Tribunal listed out 14 parameters in Para 17.4 of its order which should be examined by the AO/TPO before reaching the final conclusion about the warrant for a TP Adjustment on this score. It is relevant to note that there were 22 interveners in this case, some of which were distributors, while others were licensed manufacturers. While setting out 14 parameters, the Special Bench has held vide first parameter that the AO/TPO should ascertain as to whether the Indian AE is simply a distributor or is holding a manufacturing license from its Foreign AE. The second parameter talks of examining as to whether or not the Indian AE is a full fledge manufacturer and whether it is selling the goods purchased from the Foreign AE as such or is making some value addition to the goods purchased from its Foreign AE before selling it to customers. Thus there is not even a slightest doubt that the special bench order not only applies to a `Manufacturer’, but also extends to a distributor, whether he is a bearing full risk or least risk. Thus, such tests are applicable with full vigor to the extent applicable, to the distributors. There is nothing in the special bench order which restricts its operation only to the `Manufacturers’.

The argument, based on BMW India Pvt. Ltd. vs. ACIT (Del) that as the assessee was a full fledged distributor and as such the benefit of AMP expenses did not spill over to the foreign AE is not acceptable because the Special Bench order in LG Electronics is applicable with full force on all the classes of the assessees, whether they are licensed manufacturers or distributors. The Bench in BMW did not have any occasion to bestow its attention to the correctness of the application by the TPO of the aforesaid parameters laid down in the special bench order as these were naturally not considered by the Officer since he passed his order much before the advent of the special bench order. There is no prize for guessing that Special Bench order has more force and binding effect over the Division Bench order on the same issue.

Dishnet Wireless Limited vs. ACIT (Madras High Court)

S. 220: AO cannot exercise coercive measures to recove tax during the period available for filing an appeal

Against the assessment order, further appeal lies to the Income Tax Appellate Tribunal u/s 253 of the Act and the time for moving the Tribunal is 60 days from the date of receipt of a copy of the order. As the appellate remedy is available to the petitioner, it could be accepted and the authority may thereafter proceed with the matter. However, in the absence of any legal impediment, the respondents have intimated recovery proceedings against the petitioner, when there is reasonable time for him to prefer an appeal. In view of the above, respondents are directed to not to take any coercive steps for recovery against the petitioner, till the appeal time is exhausted. Thereafter, the respondents are at liberty to act in accordance with law for recovery of the amount as per the order of the appellate authority.

See also Treatise On The Law & Practice Of Stay & Recovery and MHADA (ITAT Mum)

Supreme Court on Sec 271(1)(c)

Voluntary disclosure does not release assessee from mischief of penal proceedings under section 271(1)(c)

UPREME COURT OF INDIA

MAK Data (P.) Ltd.

v.

Commissioner of Income-tax – II

OCTOBER  30, 2013 

Under Explanation 1 to s. 271(1)(c), voluntary disclosure of concealed income does not absolve assessee of s. 271(1)(c) penalty if the assessee fails to offer an explanation which is bona fide and proves that all the material facts have been disclosed

The assessee filed a return of income for AY 2004-05 declaring an income of Rs.16 lakhs. During the course of the assessment proceedings, the AO noticed certain documents comprising of share application forms, bank statements, blank share transfer deeds etc had been impounded in the course of s. 133A survey proceedings conducted in the case of the assessee's. The AO sought specific information regarding the documents from the assessee. In reply to the show-cause notice, the assessee made an offer to surrender Rs.40.74 lakhs with a view to avoid litigation and buy peace and to make an amicable settlement of the dispute. The AO assessed the said sum of Rs.40.74 lakhs to tax and levied penalty u/s 271(1)(c) for concealment of income and not furnishing true particulars. This was upheld by the CIT(A) though the Tribunal reversed it on the ground that the surrender was without admitting any concealment. On appeal by the department, the High Court (87 DTR 172 (Del)) reversed the Tribunal on the ground that as there was absolutely no explanation by the assessee for the concealed income of Rs.40.74 lakhs, the first part of clause (A) of Explanation 1 to s. 271(1)(c) is attracted. On appeal by the assessee to the Supreme Court HELD dismissing the appeal:

(i) The Tribunal has not properly understood or appreciated the scope of Explanation 1 to s. 271(1)(c). The AO shall not be carried away by the plea of the assessee like "voluntary disclosure", "buy peace", "avoid litigation", "amicable settlement", etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to s. 271(1) raises a presumption of concealment, when a difference is noticed by the AO, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise;

 
(ii) The assessee has only stated that he had surrendered the additional sum of Rs.40.74 lakhs with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department. The statute does not recognize those types of defences under Explanation 1 to s. 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty;

(iii) On facts, the surrender of income is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee. In that situation, it cannot be said that the surrender of income was voluntary. AO during the course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements etc have been impounded in the course of survey proceedings u/s 133A conducted in the case of the assessee's sister concern. The survey was conducted more than 10 months before the assessee filed its return of income. Had it been the intention of the assessee to make full and true disclosure of its income, it would have filed the return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. Consequently, it is clear that the assessee had no intention to declare its true income;

(iv) It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. The AO has recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and is liable for penalty proceedings u/s 271 read with s. 274 of the Act;

 
(v) The AO has to satisfy himself whether penalty proceedings be initiated or not during the course of the assessment proceedings. He is not required to record his satisfaction in a particular manner or reduce it into writing. The scope of s. 271(1)(c) has also been elaborately discussed by the Supreme Court in UOI vs. Dharmendra Textile Processors 306 ITR 277 (SC) and CIT vs. Atul Mohan Bindal 317 ITR 1 (SC). The principle laid down by this Court has been correctly followed by the Revenue and there is no illegality in the department initiating penalty proceedings in the instant case.

VCES Case Law

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CASE LAW ON VCES 2013

We are pleased to share with you the following tax alert:

Bombay High Court in the case of M/s. Verchaska Infotech private Ltd. vs. Union of India and ors. (WRIT PETITION NO.9920 OF 2013) has given a judgement on declaration made under VCES.

Background:
In this case the petitioner has challenged the notice dated 1 October 2013 issued by the Superintendent, Group X, Anti Evasion, Service Tax II, Mumbai (respondent No.2) under Section 87(b) of the Finance Act 1994. By the impugned notice dated 1 October 2013, the respondent No.2 has directed the petitioner bankers viz. Respondent Nos 5 to 8 banks not to allow any withdrawal from the account of the petitioner to the extent of Rs.1.22 crores as the same is due to the revenue from the petitioner.

Petitioner Contention

The petitioner has contested that part of the period i.e. April 2012 to Dec 2012 is covered by VCES 2013 and that they have already applied for the same on 10.10.2013 and thus 50% of the demand for that period is payable by 31^st December 2013.

Respondent Contention:

The Respondent department on the other hand has contested that the petitioner has made application under the Scheme on10 October 2013 and therefore, respondent would take a decision thereon by 10 November 2013. However, it is contended that till the petitioner's application is accepted, it cannot be exempted from its liability to pay the amount of the service tax which has admittedly not been paid. It is submitted that the petitioner has collected the service tax from its customers though the petitioner claims the benefit of Rs.60,40,684/as cenvat credit the same is subject to verification by the revenue.

Observation of the HC

The Hon'ble High Court while noting the above contentions has directed the petitioner to deposit Rs. 8 lacs being 50% of the amount payable by 31^st December 2013. The High Court also for the time being allowed the contention of the petitioner that they had a total amount of Rs. 60.40 lac as cenvat credit. The High Court also directed the petitioner to file an undertaking with the department that they would be discharging the service tax liability from the month of September 2013 onwards in accordance with law. Thus, both the above observations of the Court being fulfilled, the order for releasing the attachment of bank account would be operational. The Court also made it clear that this order would be valid only till a decision is taken on the application of settlement under VCES 2013.          

The copy of the order is attached for your ready reference..

Regards,

CA. VMV S RAO

 SOURCE

CA Ankit Kanodia|Partner - Tax & Regulatory

S.K.Kanodia & Associates|Chartered Accountants

39A, Jorapukur Square Lane(Behind Girish Park),

Room # 202, Kolkata- 700006, WB, INDIA.

L & T-Supreme Court Case

L&T judgment opens a Pandora's box

Early implementation of Goods and Services Tax can help do away with uncertainty of tax costs for the real estate sector

Recently, the larger Bench of the apex court in the case of L&T vs state of Karnataka, held that any agreement to sell immovable property entered into prior to construction would fall within the purview of the term 'works contract', allowing state governments the power to levy value-added tax (VAT) on such contracts.

This issue has been a hot debate since the Raheja Development apex court judgment in 2005, which was with respect to real estate transaction structures in south India, wherein the sale of land was separate from the sale of flats unlike in most other parts of India.

The issue was also hotly contested in recent years by the real estate sector in Maharashtra, and in 2012, the Bombay High Court ruled that such real estate transactions wherein an agreement to sell immovable property was entered into prior to construction is subject to levy of VAT as 'works contract'. In fact, in recent months, states like Haryana have sought to issue trade notices to bring under purview such agreements to sell immovable property, entered into prior to construction within the purview of VAT as 'works contract'.

The L&T judgment has considered both the above judgments in arriving at the conclusion that states have the power to levy VAT on such transactions as 'works contracts'.

In the facts of this case, the main object/substance of the tripartite agreement was to sell and convey fraction of land with a fully constructed apartment. At no point was the construction for and on behalf of the purchaser, the apartment was to be sold as an apartment and not as an aggregate of its component parts. Even in the Bombay High Court case of MCHI, the agreement for sale is an agreement to transfer immovable property with no element of works contract.

Facts and well settled arguments such as even if there is a construction activity undertaken by a developer, he does not construct on behalf of the apartment owner; the owner of the apartment has no say in conceptualising the project or any control; that the ownership of materials used in construction in such cases remain with developer; and, that the accretion to the goods happens in the hand of the developer, allude to the fact that such an activity cannot be treated as a works contract. The fact and settled arguments that in a conventional sale, property of goods gets transferred as intended by the parties while in a works contract property in goods are transferred through accretion, have all been negated in coming to the conclusion by the apex court.

The apex court observes that though the ultimate transaction between parties may be a sale of flat, it cannot be said that characteristics of works contract are not involved in such a transaction. Hence, when a contract comprises both - a works contract and transfer of immovable property - it does not denude it of its character of 'works contract' and that Article 366(29-A)(b)) contemplates situations where goods may not be transferred in the form of goods, but maybe transferred in some other form which can even be in the form of immovable property.

This apex court judgment would be a matter of intense debate for years and will have wide implications on real estate transactions across states. The judgment is a challenge for the real estate industry and would bring about a plethora of complications on the ground for an industry already reeling from a slowdown and high interest rates.

The judgment will result in VAT authorities looking for recoveries from the industry within applicable limitation period. Further, this judgment is likely to trigger new valuation issues as the court has held that only the value addition made post-execution of an 'agreement to sell' an under construction flat would be subject to levy of VAT giving rise to practical difficulties in implementing at the ground level. Like in the case of Maharashtra, a practical solution can be a composition scheme with lower tax incidence of one per cent, though this judgment can embolden states to fix higher composition rates. Further, in situations where possession has been handed over by the developers against full and final settlements, the taxes may have to borne by the developer. This highlights the challenges of a long-drawn process of litigation in the country, which can produce outcomes creating a huge amount of uncertainty of tax costs for the industry, which may not be possible to recover.

Now a sale of an apartment would suffer stamp duty and VAT, both levied by state along with service tax levied by the Centre, making such apartments more expensive. The early implementation of the goods and service tax can be the only solution to such multiplicity of taxes and we hope the polity at large is seized of its importance.

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TDS Credit must be given even if TDS Certificate is not available/ entry is not shown in Form26AS

TDS Credit must be given even if TDS Certificate is not available/ entry is not shown in Form26AS

Citicorp Finance (India) Ltd vs. ACIT (ITAT Mumbai)

The assessee claimed credit for TDS which was denied by the AO on the ground that the claim did not match the entries shown in Form No. 26AS and that there was a discrepancy. On appeal, the CIT(A) held that the assessee would be entitled to credit to the extent shown in the computer system of the department. On further appeal by the assessee to the Tribunal HELD:

The AO is not justified in denying credit for TDS on the ground that the TDS is not reflected in the computer generated Form 26AS. In Yashpal Sahwney 293 ITR 539 the Bombay High Court has noted the difficulty faced by taxpayers in the matter of credit of TDS and held that even if the deductor had not issued a TDS certificate, still the claim of the assessee has to be considered on the basis of the evidence produced for deduction of tax at source. The Revenue is empowered to recover tax from the person responsible if he had not deducted tax at source or after deducting failed to deposit with Central Government. The Delhi High Court has in Court On Its Own Motion Vs. CIT 352 ITR 273 directed the department to ensure that credit is given to the assessee even where the deductor had failed to upload the correct details in Form 26AS on the basis of evidence produced before the department. Therefore, the department is required to give credit for TDS once valid TDS certificate had been produced or even where the deductor had not issued TDS certificates on the basis of evidence produced by assessee regarding deduction of tax at source and on the basis of indemnity bond.

Case Law on Sec 40(a)(ia)

 Dear Members,

The following important judgement is available for download at itatonline.org.

CIT vs. Vector Shipping Services (P) Ltd (Allahabad High Court)

S. 40(a)(ia) disallowance applies only to amounts "payable" as of 31st March and not to amounts already "paid" during the year. Merilyn Shipping (SB) approved

The assessee engaged Mercator Lines Ltd to perform ship management work on behalf of the assessee for which it paid an amount of Rs. 1.17 crore. The assessee claimed that the amount paid by it to Mercator was a 'reimbursement of salaries' and that as Mercator had deducted TDS on the payments made by it to the employees, the assessee was not required to deduct TDS. The AO disagreed and disallowed the entire payment u/s 40(a)(ia). The Tribunal upheld the assessee's claim and held that no TDS was required to be deducted on a reimbursement. It also relied on Merilyn Shipping and Transport Ltd 136 ITD 23 (SB) where it was held that s. 40(a)(ia) applied only to amounts that were "payable" as at the end of the year and not to amounts that had already been "paid" during the year. On appeal by the department, HELD dismissing the appeal:

The revenue cannot take any benefit from the observations made by the Special Bench of the Tribunal in Merilyn Shipping and Transport Ltd 136 ITD 23 (SB) to the effect that s. 40 (a) (ia) was introduced by the Finance Act, 2004 w.e.f. 1.4.2005 with a view to augment the revenue through the mechanism of tax deduction at source. S. 40(a)(ia) was brought on the statute to disallow the claim of even genuine and admissible expenses of the assessee under the head 'Income from Business and Profession' in case the assessee does not deduct TDS on such expenses. The default in deduction of TDS would result in disallowance of expenditure on which such TDS was deductible. On facts, tax was deducted as TDS from the salaries of the employees paid by Mercator Lines and the circumstances in which such salaries were paid by Mercator Lines for the assessee were sufficiently explained. It is to be noted that for disallowing expenses from business and profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year.

Contrast with the view in Crescent Export Syndicate (Cal) & Sikandarkhan N. Tunvar (Guj). But see Vegetable Products 88 ITR 192 (SC) where it was held that in the case of doubt the view in favour of the assessee should be followed

For determining the total income of an Indian branch

For determining the total income of an Indian branch receipt arising on account of commercial services rendered by it to American head office to be considered. [Wellinx inc. v/s ADIT (international taxation) (2013) 35 taxmann.com 420 (Hyderabad - Tribunal)].

Prepayment charges for closure of loan account allowed

Prepayment charges for closure of loan account which was taken for acquisition of property are allowable under section 24(b) of the Income Tax Act. [Windermere properties (Pvt.) limited v/s DY. CIT [2013]34 taxmann.com 109(Mumbai-Tribunal)].

Rent received from renting of flats held as stock-in-trade

Rent received from renting of flats held as stock-in-trade shall be taxable under the head "House Property".[The High Court of Delhi at New Delhi- New Delhi Hotels Limited versus ACIT].

Similar to the case Azimganj Estate (P.) Ltd. v. CIT (2012) 206 Taxman 308 (Cal.).....On this issue, the Calcutta High Court held that the rental income from the unsold flats of a builder shall be taxable as “income from house property” as provided under section 22 and since it specifically falls under this head, it cannot be taxed under the head “Profit and gains from business or profession”. Therefore, the assessee would be entitled to claim statutory deduction of 30% from such rental income as per section 24. The fact that the said flats have been claimed as not chargeable to wealth-tax, treating the same as stock-in-trade, will not affect the computation of income under the Income-tax Act, 1961