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Rulings Impacted by Finance Bill 2017

February 16, 2017[2017] 78 173 (Article)
1. Taxability in case of Joint Development Agreement
Proposed amendment It has been proposed to insert a new sub-section (5A) in Section 45, which would provide that capital gain in case of Joint Development Agreements shall be taxable in the hands of an individual or HUF in the previous year in which certificate of completion for the whole or part of the project is issued by the competent authority. The deferment of tax shall not be allowed if owner transfers his share in the project on or before the date of issue of said certificate of completion.
Judicial Rulings


Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003] 129 Taxman 497 (Bom.)

The Development Agreement does not transfer the interest in the property to the developer in general law and, therefore, section 2(47)(v) had been enacted. In such cases, even entering into such a contract could amount to transfer from the date of the agreement itself.

In numerous matters the Assessing Officer and the department generally proceed on the basis of substantial compliance of the contract. Such interpretation would result in anomaly because what is substantial compliance would differ from officer to officer.

Jasbir Singh Sarkaria, In re [2007] 164 Taxman 108 (AAR - New Delhi)

Once it is held that transaction of nature referred to in sub-clause (v) of section 2(47) has taken place on a particular date, actual date of taking physical possession need not be probed into. It is enough if transferee has, by virtue of that transaction, a right to enter upon and exercise acts of possession effectively.

Dnyaneshwar N. Mulik v. Asstt. CIT[2006] 152 Taxman 25 (Mag.) (Pune)

Transfer did take place within meaning of Section 2(47)(v) where assessee had entered into an agreement with builder for development of land, signed a general power of attorney in favour of builder and gave possession of property to builder.

Ms. K. Radhika v. DY. CIT [2011] 13 92/47 SOT 180 (URO) (Hyd.)

Transfer under Section 2(47)(v) triggers only when there is willingness of transferee (i.e., developer) to perform its obligations as required by Section 53A of the Transfer of Property Act.

2. No Notional income for house property held as stock-in-trade
Proposed amendment As per the existing provisions assessee is liable to pay tax on deemed annual value of house property lying vacant. Such concept of deemed annual value is applicable even for house property held as stock-in-trade.

This provision was creating practical difficulties for real estate developers as they were forced to pay tax on notional income for unsold flats. Now some relief is proposed for the real estate developers who are holding residential units as stock-in-trade. The annual value of such house property (if not let out during the year) shall be deemed to be nil for a period of up to one year from the end of the financial year in which certificate of completion of construction is obtained from the competent authority.

Judicial Rulings


CIT v. Ansal Housing & Construction [2016] 72 254/241 Taxman 418 (Delhi)

Assessee, engaged in business of construction of house property, would be liable to pay tax on ALV of flats lying unsold during year.

CIT v. Sane & Doshi Enterprises [2015] 58 111/232 Taxman 452 (Bom.)

Rental income received from unsold portion of property constructed by assessee, a real estate developer, was assessable as income from house property.

3. Taxability of income from NPAs on receipt basis
Proposed Amendment As per existing provisions of section 43D, interest income on NPAs received by certain institutions or banks is chargeable to tax in the previous year in which it is credited to P/L account or in the year in which it is actually received, whichever is earlier. This option is not currently allowed to co-operative banks. Therefore, it is proposed to amend section 43D of the Act so as to provide similar exception from accrual system of accounting to the co-operative banks (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) as well.
Judicial Rulings


Nanded District Central Co-Operative Bank Ltd. v. Dy. CIT [2015] 57 422/68 SOT 329 (URO) (Pune - Trib.)

Asstt. CIT v. Solapur Siddheshwar Sahakari Bank Ltd. [2015] 57 183 (Pune - Trib.)

Asstt. CIT v. Osmanabad Janta Sah. Bank Ltd. [2013] 32 229 (Pune - Trib.)

Pr. CIT v. Shri Mahila Sewa Sahakari Bank Ltd. [2016] 72 117/242 Taxman 60 (Guj.)

In all these cases revenue contended that provisions of section 43D which provide that interest income relatable to NPAs shall be charged to tax in year in which it is credited or received by assessee, whichever is earlier, was not applicable to assessee, since assessee was not a scheduled bank or any other entity prescribed in section 43D.

However, it was held that revenue was not justified in holding that provisions of section 43Dwere not applicable to assessee, since assessee was not a scheduled bank or any other entity prescribed in section 43D.

4. Income from transfer of Carbon Credits to be taxed at 10%
Proposed amendment Conflicting decisions have been given by the various courts on the issue as to whether income from transfer of carbon credit is a revenue receipt or capital receipt. To stop any further litigation, a new section 115BBG is proposed to be inserted to provide that any income from transfer of carbon credit shall be taxable at the concessional rate of 10% (plus applicable surcharge and cess). No expenditure or allowance shall be allowed from such income.
Judicial Rulings


CIT v. Subhash Kabini Power Corporation Ltd. [2016] 69 394/240 Taxman 514 (Kar.)

Since carbon credit was generated out of environmental concerns and it was not having character of trading activity, receipt from sale of carbon credit was capital receipt and not business income.

CIT v. My Home Power Ltd. [2014] 46 314/225 Taxman 8 (Mag.) (AP).

The Tribunal had rightly held carbon credit not being an offshoot of business but an offshoot of environmental concern, amount received on their transfer had no element of profit or gain, thus, profit that arose on its transfer was not taxable.

DY. CIT v. Kalpataru Power Transmission Ltd. [2016] 68 237/[2017] 162 ITD 18 (Ahm. - Trib.)

Amount received on transfer of Carbon credits would be capital receipt as same did not have an element of profit or gain.


Apollo Tyres Ltd. v. Asstt. CIT [2014] 47 416/149 ITD 756 (Cochin - Trib.)

Income on sale of carbon credit which is admittedly a benefit arising out of business of assessee, would fall within definition of 'income' under section 2(24)(vd) and, thus, it is chargeable to tax.

5. Processing of return is mandatory before scrutiny assessment
Proposed amendment As per Section 143(1D) processing of return shall not be necessary in case a notice is issued under section 143(2) for scrutiny assessment. Amendment to said section brought by Finance Act, 2016 provides that with effect from AY 2017-18, processing of return under section 143(1) is to be done before passing of assessment order.

It has been proposed that this provision shall cease to apply in respect of returns furnished for the assessment year 2017-18 and onwards. Resultantly, it would be necessary to process a return of income before expiry of one year from the end of the financial year in which the return was made. This amendment is made with a view to address the grievance of assessees that refunds were getting delayed even in genuine cases where cases were selected routinely for scrutiny assessment. To address the concern of recovery of revenue in doubtful cases, the Finance Bill has proposed to insert a new Section 241A. It authorizes the Assessing Officer to withhold the payment of refund amount, if such grant of refund may adversely affect the recovery of revenue.

Judicial Rulings


Aegis Ltd. v. Union of India [2017] 77 5 (Bom.)

Where assessee having challenged constitutional validity of section 143(1D), submitted in writ proceedings that it would not resort to its constitutional challenge in case court issued directions for processing of its refund application, departmental authorities were to be directed to process assessee's application as expeditiously as possible.

Group M. Media India (P.) Ltd. v. Union Of India [2017] 77 106 (Bom.)

Even where return was filed and scrutiny notice was issued, return should be processed and refund be granted at earliest; same is not to be lingered on till expiry of one year from end of financial year in which return is furnished.


Tata Tele-services Ltd. v. CBDT [2016] 69 226/240 Taxman 182 (Delhi)

Deputy Commissioner denied refund to assessee for reason that case was pending scrutiny and that in light of section 143(ID) and Instructions of CBDT, refund could not be processed for said assessment years.

The Delhi HC held that real effect of Instruction No. 1 of 2015, dated 13-1-2015 issued by CBDT in purported exercise of its power under section 119 being relied upon by Department to deny refund, was to curtail discretion of AO by 'preventing' him from processing return, where notice had been issued to assessee under section 143(2).

Further, it added that impugned instruction issued by CBDT could not have been relied upon by department to deny refunds to assessee in whose cases notices for scrutiny assessment under section 143(2) had been issued.

6. Interest on refund due to deductor
Proposed amendment As per existing Section 244A, interest is payable on the refund amount due to an assessee on account of excess payment of advance tax, TDS, TCS, etc. Currently, no interest is paid to the deductor if he inadvertently deducts and deposits the excess TDS.

Therefore, it has been proposed that, where refund is due to a deductor, he shall be entitled to receive simple interest on such refund, calculated at the rate of 0.5% per month or part of the month, for the period beginning from the date on which claim is made and ending on the date on which refund is granted. In case of an appeal, the interest shall be payable for the period beginning from the date on which tax is paid and ending on the date on which refund is granted.

Judicial Ruling


Godrej Industries Ltd. v. Dy. CIT [2006] 8 SOT 417 (Mum.)

The deductor was not eligible for interest on refund of excess TDS as interest under section 244A could be allowed only in those cases where notice of demand had been issued under section 156 and tax was paid in excess of such demand.

7. Sec. 10(38) exemption not allowed on offline acquisition of shares
Proposed It has been noticed that exemption provided under section 10(38) is being misused by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions. With a view to prevent this abuse, it is proposed to amend section 10(38) to provide that exemption under this section for income arising on transfer of equity share acquired or on after 01-10-2004 shall be available only if the acquisition of share is chargeable to STT. However, the exemption shall continue in genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company, acquisition by non-resident in accordance with FDI policy, etc.
Judicial Rulings


ITO v. Ajay Shantilal Lalwani [2012] 23 143/52 SOT 101 (URO) (Pune)

Where assessee purchases shares in physical form and transfers them to D-mat account for selling them, section 10(38) exemption cannot be denied on ground that there was delay in dematerialisation

ITO v. Smt. Aarti Mittal [2014] 41 118/149 ITD 728 (Hyd. - Trib.)

Where assessee having purchased shares in physical form, converted them in D-Mat form and thereupon sale of those shares was carried out through recognized stock exchange after paying securities transaction tax, said transactions were to be regarded as genuine in nature and, therefore, assessee's claim for exemption under section 10(38) was to be allowed.

8. Scope of Specified domestic transactions
Proposed amendment The existing provisions of section 92BA provide that any expenditures in respect of which payment is made by the assessee to persons specified under section 40A(2)(b) are covered within the ambit of Specified Domestic Transactions (SDT). In order to reduce the compliance burden of taxpayers, it has been proposed that these transactions shall be excluded from the scope of section 92BA. In other words, SDT will not be applicable where transactions are tax neutral between taxable entities and it will apply only to those companies that are claiming any tax holiday or investment linked deductions.
Judicial Rulings


Amserve Consultants Ltd v. ADIT [2016] 72 204 (Delhi - Trib.)

The Delhi ITAT held that the transaction was tax neutral because payee and payer, both were assessed at the maximum marginal rate. Under these circumstances it had to be held on facts that this payment was not made with an intention to evade tax.

Pr. CIT v. Gujarat Gas Financial Services Ltd. [2015] 60 483/233 Taxman 532 (Guj.)

The Hon'ble Gujarat HC held that where assessee-company as well as assessee's parent company, both were assessed to tax at maximum marginal rate, it could not be said that service charge was paid by assessee-company to its parent company at unreasonable rate to evade tax.

CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2008] 219 CTR 562

The Hon'ble Bombay High Court held that where revenue was not in a position to point out how assessee evaded payment of tax by alleged payment of higher commission to its sister concern, since sister concern was also paying tax at higher rate, disallowance of alleged excess commission paid to sister concern was not justified.

9. Reason to believe to conduct a search not to be disclosed
Proposed amendment To maintain confidentiality and sensitivity of proceeding of search or the requisition made under section 132A, a new Explanation is proposed to be inserted to provide that the reason to believe recorded by the Income-tax authority to initiate proceedings shall not be disclosed to any person or any authority or the Appellate Tribunal.

Such reasons, however, may have to be placed before the Court in the event belief of the authorized official is challenged, in which event the court would be entitled to examine the relevance of the reasons for the formation of the belief.

Judicial Rulings


DGIT (Investigation) v. Spacewood Furnishers (P.) Ltd. [2015] 57 292/232 Taxman 131 (SC)

Though necessity of recording of reasons before issuing warrant of authorisation, has been repeatedly stressed upon so as to ensure accountability and responsibility in decision making process, this, by itself, would not confer on assessee a right of inspection of documents or to a communication of reasons for belief at stage of issuing of authorization.


Parma Ram Bhakar v. Dy. CIT [2013] 39 119/147 ITD 265 (Jodhpur - Trib.)

Since authorization to conduct search based on reason under section 132(1) did not exist, search became invalid.

10. Clarification in provisions of Section 10AA
Proposed amendment Section 10AA of the Act provides deduction from the total income of an assessee, in respect of profits and gains arising from Unit operating in SEZ, subject to fulfilment of certain conditions. In various cases, courts have taken a view that the deduction under Section 10AA is allowed from the total income of the undertaking and not from the total income of the assessee.

In order to remove this ambiguity, it is proposed to clarify that the deduction shall be allowed from the total income of the assessee and the deduction under section 10AA in no case shall exceed the said total income.

Judicial Rulings


CIT v. Yokogawa India Ltd. [2017] 77 41 (SC)

After amendment to section 10A by the Finance Act 2000 with effect from 1-4-2001, said section has become a provision for deduction but stage of deduction would be while computing gross total income of eligible undertaking under Chapter IV of Act and not at stage of computation of total income under Chapter VI of Act.

11. Secondary Adjustment in transfer pricing
Proposed amendment In order to align the transfer pricing provisions in line with the OECD transfer pricing guidelines and international best practices, it has been proposed to insert a new Section 92CE to provide that assessee shall be required to carry out secondary adjustment when primary adjustment has been accepted by assessee in certain situations.
Judicial Rulings


PMP Auto Components (P.) Ltd. v. Dy. CIT [2014] 50 272/66 SOT 42 (URO) (Mum. - Trib.)

The TPO treated share application money in overseas subsidiary as an international transaction and added notional interest income by re-chracterizing the share application money as a loan.

The DRP rightly held that the transfer pricing adjustment on account of the additional capital infusion had already been made and approved. Further, it added that the transfer pricing provisions in the Act do not envisage the concept of secondary transfer pricing adjustment' and as a concept' secondary adjustment' was alien to the Indian transfer pricing law.

12. Change or modifications of object by charitable institutions
Proposed Amendment The existing provisions of section 12A provide for conditions for applicability of sections 11 and 12 in relation to the benefit of exemption in respect of income of any trust or institution.

Section 12A is proposed to be amended to provide that any trust or institution availing benefit of tax exemption under section 11 should inform the CIT within 30 days if there is any change in the object clause which does not conform to the conditions of the registration

Further, return filing is proposed to be made mandatory for the trust registered under sections 12AA. Earlier, return filing was mandatory only when income of a trust before availing of exemption under section 11 exceeded the basic exemption limit.

Judicial Rulings


Board of Control for Cricket in India v. ITO [2012] 22 29/136 ITD 301 (Mum.)

Mumbai Tribunal held that when there was change in objects of assessee-society which had been granted registration under section 12A, it couldn't claim automatic benefits under sections 11 and 13 for those altered objects unless said changes were vetted by revenue authorities. Therefore, if amended memorandum and rules and regulations of assessee-society were found to be in violation of provisions of Act, Assessing Officer was not bound by registration granted earlier under section 12A and, he was free to make assessment in accordance with law.

13. No exemption for corpus donation by exempt entities to other exempt entities
Proposed Amendment A new Explanation is proposed to be inserted in section 11 to provide that any corpus donation made by a charitable institution to another charitable institution shall not be treated as application of income. Similar amendments are proposed for large religious trust, charitable trust, educational university and hospitals registered under section 10(23C).
Judicial Rulings


Tewari Charitable Trust v. DIT (Exemption) - [2014] 49 45/[2015] 153 ITD 129 (Mum. - Trib.)

In the instant case, Mumbai ITAT held that in order to obtain approval under section 80G(5), donation made by a charitable trust to other trusts/institutions amounts to application of income within meaning of section 11(1)(a).


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