PROPER ACCOUNTING FOR INTEREST ON INCOME TAX REFUND IS REQUIRED TO AVOID PENALTY- Analysis of judgment of Madras high Court and related issues.
Interest u/s 244A
The assessee is entitled to claim and get refund of excess taxes paid with interest thereon under section 244A. Thus the claim of interest and right to receive it is a statutory right of the assessee. The interest u/s 244A (or any other provision of I.T. Act prior to insertion of section 244A) is paid by your own A.O., therefore it is always in his knowledge, and one should not try to avoid disclosure of the same as income. The accountants and tax return preparers should also take reasonable care to reconcile the account of TDS and other advance taxes, orders and intimations received, refund received etc. to check that tax paid and interest paid is properly adjusted, the amount of refund received against advance tax and TDS is adjusted properly and interest received on refunds is taken as income.
Practical aspects
In practice we find that many times, the returns are processed, refund is allowed but without any interest. Sometimes refund is granted and interest is calculated up to that date. However, refund is actually given to the assessee quite late. Sometimes we find that cheques are written but they are not dispatched and the cheques are sent to assessee when assessee approaches or complains about non-receipt of refund and in such circumstances though actually refund is quite late, the amount of interest is not updated. Therefore, in respect of interest receivable from the Income-tax Department mostly people account for the same on actual receipt basis. This is because in spite of assessee's right to receive a refund with interest, the assessee is not sure to the period up to which interest will be allowed and the amount on which refund will be allowed. The variation in amount of refund claimed and refund actually granted may take place for several reasons like( a) Variation in the amount of income returned and the income assessed ( b) Variation in amount of tax and interest payable (c) Variation in amount of income tax, interest, penalty etc. which the assessing officer may impose in some other years and adjust the demand against the refund receivable by the assessee. Therefore, the assessee cannot always be sure about the amount of interest receivable. Accordingly, many of assessees consider the amount of interest actually received as income.
In some cases it is noticed that the cheque for refund is sent by the A.O. however the amount of refund is not as per claim. It is lesser but no reason is given, no computation or intimation of computation has been provide- the assessee has got only cheque. In such a case it may not be possible for the assessee to ascertain whether only principal amount against some TDS certificates has been allowed and refunded or some interest has also been granted. For example suppose assessee submitted TDS certificates of Rs.80000/- and claim for refund was of Rs.40000/-. The A.O. sends only cheque of Rs.25000/- that is lesser by Rs.15000/- than amount of claim. No computation is provided. It may be that the A.O. has denied credit for some TDS certificate for Rs.15000/- and did not allow any interest. Or it may be that credit for TDS certificate is denied for Rs.20000/- and interest is allowed Rs.5000/- in respect of credit allowed. Or there may be a case that tax liability is ascertained at a higher amount. Therefore, unless the A.O. provides details, the assessee will not be in a position to ascertained, whether, any interest has been allowed or not? In such a case the assessee may approach the A.O. and obtain the intimation / calculation sheet. In case of need application for rectification and further refund of principal amount and / or interest can be made. Amount of interest actually received should be shown as income.
Failure to account for / disclose the interest actually received is really very serious - and is in nature of concealment of income:
In case the assessees do not disclose the amount of interest received from Income-tax Department, this will amount to concealment of income and the assessee should not take a risk of even mistake in this regard because the Income-tax Department had paid the interest and if it is not disclosed by the assessee, the department has its own information and can assess the income without there being any need of annual return or other information from other sources. Therefore, one must be very careful to properly account for and disclose the interest received as income.
Recent case before Madras High Court
In the case of CIT v. Thirupathy Kumar Khemka and another, [2007] 291 ITR 122(Mad), the assessee did not disclose the amount of interest in the income of a.y. 1996-97. In respect of interest u/s 244A of the Income-tax Act, 1961 granted for the assessment year 1993-94 and certain credits in a savings bank account. The assessing officer made addition for both the sums and consequently penalty u/s 271(1)(c) was also imposed for concealment of income and furnishing of inaccurate particulars of income. On appeal the Commissioner (A) confirmed the penalty in relation to addition of interest u/s 244A granted by the Department but deleted the penalty in respect of addition relating to unexplained credit in savings bank account. The order of the CIT(A) was upheld by the Tribunal.
It appears that the department did not prefer appeal in respect of penalty deleted in respect of savings bank account otherwise that appeal most probably would have been heard together with the assessee's appeal in respect of the penalty confirmed by the Tribunal in relation to Interest u/s 244A.
From the judgment reported, it appears that the department granted the interest u/s 244A. However, it is not clear whether the amount of interest was actually received by the assessee or not and what are the reasons that the entry of interest received (which was substantial amount) from income tax department was omitted or wrongly accounted for and income was also not included in computation sheet of income. The assessee has not offered any explanation for the mistake or omission in accounting and computation. The explanation offered by the assessee's counsel, as per reported judgment is:
"the explanation offered by the assessee's representative that they had no intention to conceal the above-mentioned income but the omissions were due to oversight."
Naturally this is very vague and general explanation which could not be accepted by the revenue and therefore, the penalty was levied. It appears that even before the High Court any further reason or circumstances causing mistake or omission in accounting of interest income or including the same in income statement were not pointed out. Merely pleading that there was no intention to avoid tax is not enough. The assessee could have improved his case by:
a. pointing out facts, circumstances, and reasons for omission,
b. pointing out the persons on whom assessee relied, and who failed in performing their duty in properly preparing accounts, reconciling advance tax lying in assets side, refund received, interest received etc.
c. Steps taken to properly disclose income when the mistake came to notice. At the time of hearing for assessment, what stand was taken by the assessee to rectify clerical mistake.
d. Whether the cheque for refund was received without any intimation about calculations of refund granted and interest allowed.
However, unfortunately it appears that no submission was made on the above aspects.
Therefore, in absence of any cognate reason for the omission the high Court also confirmed penalty. The high court also held that in such a case mens rea is not necessary. The fact is that an income was earned and it was not disclosed without any possible reason for failure to disclose the same.
It seems that there is some lacking in the factual position and arguments before the Tribunal and high Courts, as to the non-inclusion of substantial amount of interest amounting to Rs.10.53 lakhs in one case and Rs.7.65 lakhs in another case. It may be due to credit in wrong head - may be in the account of TDS itself because may be the refund was lower than claim of refund or the amount lying in advance tax and TDS accounts and assessee's accountant acted carelessly and credited full amount of income tax department's cheque in advance tax account, considering that it is entirely towards TDS and other taxes paid, or due to non receipt of calculation with refund voucher/ cheque. The facts are not clear, and therefore, it is up to the assessee to find out real reason for such omission and the person responsible for such omission, so that a case of appeal or review can be made out.
Whether, accrued interest on refund claimed should be accounted for:
As per present provisions of section 145 the assessee can adopt either mercantile system or cash system of accounting. In case of cash basis, interest actually received will be offered to tax. However, in case of mercantile system of accounting the question arises is whether the assessee should estimate amount of interest accrued till the last day of the previous year and include it in income? In this regard we need to refer to section 145 relevant portion of which reads as follows:
Method of accounting.
145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) xxxx
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144.
The provisions of section 145 will be applicable to interest earned on income tax refund either under the head income from business or profession (if TDS is from such income) or under the head 'other sources' if refund arises from TDS on income falling under the head income from house property, income from other sources etc. Therefore, in all situations interest on income tax refunds needs to be accounted for as per accrual unless cash system of accounting is followed.
The general rule is that interest accrues from day to day. However, can we say that in case of refund on excess income tax paid, this rule will not apply? Can we say that interest on income tax refund is dependent on several factors and conclusion of the order by the A.O. Therefore before that there is no accrual of income?
Applying the general rule, and particularly in view of judgment of Madras High Court ,discussed in this write-up, it will be safer to calculate interest receivable as per law based on claim for refund made and account for the same as income to avoid chances of addition being made by the A.O and penalty for non discloser of interest on income tax refund claimed.
Contingencies:
There are several contingencies in respect of refund and interest like the A.O. may disallow interest even on some flimsy grounds which assessee cannot perceive, additions and disallowance can be made, even on flimsy grounds - which are usual in case of scrutiny assessment, AO may reject some TDS certificates even on flimsy grounds or without giving any reason, the A.O. may not at all allow interest ( this is general practice particularly in small refunds because the I.T. Department is almost sure that for small amount of interest the assessee would not start proceedings.
In view of contingencies, in case a policy to account for interest on income tax refund on receipt basis is adopted, then a disclosure should be made.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 15, 2008
Friday, July 11, 2008
DECLARATION UNDER SECTION 58A
CARE REQUIRED IN MAKING DECLARATION UNDER SECTION 58A OF THE COMPANIES ACT, 1956 TO AVOID ADDITION UNDER SECTION 68 OF THE INCOME TAX ACT.
Declaration under section 58A of the Companies Act, 1956:
Section 58A of the Companies Act, 1956 governs acceptance of deposits by companies. Some deposits are exempted, subject to declaration as to own funds. In this write-up we are concerned with declaration made by a depositor who is in case of private company
a) Any Director of private company,
b) Any relative of a Director of private company, (recently added)
c) Any member of the company, ('member' substituted for 'shareholder')
And in case of a limited company is a Director of the company at the time of making the deposit with the company.
The deposits of money made by such persons with the company are not considered as a public deposit, if it is out of own funds and not from borrowing. This is vide exemption granted vide Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Amendment Rules, 2004 which was recently amended vide Notification dated 12.3.2004 (2004) 120 Company Cases 79 (St.). Vide this amendment; the scope of eligible persons has been extended to a relative of Director of private limited companies. And restriction has been made so as to entitle only 'members', as against any 'shareholder' to be an eligible person in case of private company who can make deposit out of own funds without attracting restrictions applicable to public deposits.
DECLARATION NECESSARY FOR EXEMPTION:
The condition for exemption from being treated is that the eligible person being the director, relative of the director or a member, as the case may be, give declaration in writing, at the time of making deposit to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting (loan or deposit of money) from others.
The restriction is on accepting or borrowing money from others, therefore, money withdrawn from capital account of proprietary concern or partnership firm will not be money received from others hence can be given to the company with a declaration. However, suppose the proprietary concern or partnership firm has already used capital contributions for business purposes, and on the day of withdrawal by the proprietor or the partner the concern borrow money from others, then inference may be drawn that the money deposited by the director, relative of director or member is out of borrowed funds and the proprietary concern or the firm has been used as a tool or conduit to give impression that the money belongs to the depositor.
Similarly money withdrawn from bank account on overdraft facility against fixed deposit made by director, relative of director or member as the case may be cannot be considered as own money as it has been borrowed from the bank against over draft facility. The transaction of making fixed deposit and obtaining loan by way of over draft facility being two different transactions.
Section 68 of the Income-tax Act, 1961:
As per section 68, any sum found credited in the books of account of the assessee can be deemed to be income if the assessee is unable to explain the source and nature of the same satisfactorily. Being well known popular provision, an elaborate discussion is not made for sake of brevity. To establish that any sum found credited in the books of account and credited, as a loan, advance, deposit, or gift from any person is not income, the assessee is required to establish the source and nature of the sum so found credited. For that purpose not only the identity but also capability of the person who made such loan, deposit, advance, or gift is also required to be established to the satisfaction of the Assessing Officer.
A WRONG DECLARATION MAY ATTRACT SECTION 68 OF I.T.ACT:
Suppose, by mistake a declaration as to own fund has been made by the director, relative of director or member, as the case may be then such declaration may go against the assessee and the borrowing may be deemed as income- For instance in case the Assessing Officer of the director, relative or member as the case may be, comes to know that a declaration as to 'own fund' has been given to the company or the company has not treated the amount as public deposit, leading to an inference of own fund, or he obtain copy of declaration and then on scrutiny of books of account he find that the money has been given out of borrowed funds by the director, relative or member. The A.O. may draw the conclusion that the amount of deposit is out of undisclosed income of the declarant and therefore the borrowings shown in his books of account are bogus or the lenders are just name lenders and therefore he may treat the amount of those borrowings as undisclosed cash credit and treat the same as income under Section 68 of the Income Tax Act, 1961 because the assessee himself has admitted or declared that he made deposit out of 'own fund.
Besides such addition under section 68 of the Income-tax Act, 1961 the exempted deposit shall no longer be an exempted one, but will be treated as public deposit. Therefore, the purpose of declaration will fail, and may lead to violation of deposit Rules and the declarant, the company, and any officer including director may be liable to penalty and prosecution under The Companies Act, read with relevant rules for making false declaration, violating deposit rules etc.
CONCLUSION
Care should be taken while giving declaration as to own fund and it should not be taken in a mechanical and routine manner without verifying the exact position in the books of accounts of the declarant. As the case of deposits received by company will be generally in house transaction related with director, relative or member, it would always be advisable to reconfirm from the director, relative or member (in practice from their accountant) to recheck the personal cash book and ensure that the declaration is correct.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 13, 2008
Declaration under section 58A of the Companies Act, 1956:
Section 58A of the Companies Act, 1956 governs acceptance of deposits by companies. Some deposits are exempted, subject to declaration as to own funds. In this write-up we are concerned with declaration made by a depositor who is in case of private company
a) Any Director of private company,
b) Any relative of a Director of private company, (recently added)
c) Any member of the company, ('member' substituted for 'shareholder')
And in case of a limited company is a Director of the company at the time of making the deposit with the company.
The deposits of money made by such persons with the company are not considered as a public deposit, if it is out of own funds and not from borrowing. This is vide exemption granted vide Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Amendment Rules, 2004 which was recently amended vide Notification dated 12.3.2004 (2004) 120 Company Cases 79 (St.). Vide this amendment; the scope of eligible persons has been extended to a relative of Director of private limited companies. And restriction has been made so as to entitle only 'members', as against any 'shareholder' to be an eligible person in case of private company who can make deposit out of own funds without attracting restrictions applicable to public deposits.
DECLARATION NECESSARY FOR EXEMPTION:
The condition for exemption from being treated is that the eligible person being the director, relative of the director or a member, as the case may be, give declaration in writing, at the time of making deposit to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting (loan or deposit of money) from others.
The restriction is on accepting or borrowing money from others, therefore, money withdrawn from capital account of proprietary concern or partnership firm will not be money received from others hence can be given to the company with a declaration. However, suppose the proprietary concern or partnership firm has already used capital contributions for business purposes, and on the day of withdrawal by the proprietor or the partner the concern borrow money from others, then inference may be drawn that the money deposited by the director, relative of director or member is out of borrowed funds and the proprietary concern or the firm has been used as a tool or conduit to give impression that the money belongs to the depositor.
Similarly money withdrawn from bank account on overdraft facility against fixed deposit made by director, relative of director or member as the case may be cannot be considered as own money as it has been borrowed from the bank against over draft facility. The transaction of making fixed deposit and obtaining loan by way of over draft facility being two different transactions.
Section 68 of the Income-tax Act, 1961:
As per section 68, any sum found credited in the books of account of the assessee can be deemed to be income if the assessee is unable to explain the source and nature of the same satisfactorily. Being well known popular provision, an elaborate discussion is not made for sake of brevity. To establish that any sum found credited in the books of account and credited, as a loan, advance, deposit, or gift from any person is not income, the assessee is required to establish the source and nature of the sum so found credited. For that purpose not only the identity but also capability of the person who made such loan, deposit, advance, or gift is also required to be established to the satisfaction of the Assessing Officer.
A WRONG DECLARATION MAY ATTRACT SECTION 68 OF I.T.ACT:
Suppose, by mistake a declaration as to own fund has been made by the director, relative of director or member, as the case may be then such declaration may go against the assessee and the borrowing may be deemed as income- For instance in case the Assessing Officer of the director, relative or member as the case may be, comes to know that a declaration as to 'own fund' has been given to the company or the company has not treated the amount as public deposit, leading to an inference of own fund, or he obtain copy of declaration and then on scrutiny of books of account he find that the money has been given out of borrowed funds by the director, relative or member. The A.O. may draw the conclusion that the amount of deposit is out of undisclosed income of the declarant and therefore the borrowings shown in his books of account are bogus or the lenders are just name lenders and therefore he may treat the amount of those borrowings as undisclosed cash credit and treat the same as income under Section 68 of the Income Tax Act, 1961 because the assessee himself has admitted or declared that he made deposit out of 'own fund.
Besides such addition under section 68 of the Income-tax Act, 1961 the exempted deposit shall no longer be an exempted one, but will be treated as public deposit. Therefore, the purpose of declaration will fail, and may lead to violation of deposit Rules and the declarant, the company, and any officer including director may be liable to penalty and prosecution under The Companies Act, read with relevant rules for making false declaration, violating deposit rules etc.
CONCLUSION
Care should be taken while giving declaration as to own fund and it should not be taken in a mechanical and routine manner without verifying the exact position in the books of accounts of the declarant. As the case of deposits received by company will be generally in house transaction related with director, relative or member, it would always be advisable to reconfirm from the director, relative or member (in practice from their accountant) to recheck the personal cash book and ensure that the declaration is correct.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 13, 2008
RATE OF DEPRECIATION ON ELECTRIC GENERATORS
RATE OF DEPRECIATION ON ELECTRIC GENERATORS- different ruling due to different contentions raised before Rajasthan and Gujarat high Courts.
I Conventional. Electric Generators:
Generally electric generators used to generate electricity by using conventional fuels such as coal, diesel, petrol, gas, firewood, etc are considered as falling within the general category of plant and machinery and depreciation applicable at general rate is claimed and allowed.
For generators, which use non-conventional fuels , municipal waste and agricultural waste or generators which harnesses solar power and wind power to generates electricity is treated as eligible for higher depreciation under special catagories. Earlier, for renewable energy devices higher rate was @ 30% , it was raised to 100% and now it has been reduced to 80% w.e.f. 01.04.03.
Honorable Rajasthan High Court has HELD that higher depreciation will be allowable on electric generator even if it does not run on wind energy - CIT V Agarwal Transformers P. Ltd. (2002) 258 ITR 251 (Raj). The High court held that the condition of running on wind was not attached to generator but only to pumps. The judgment has been followed in CIT V Abressive India, (2003) 133 Taxman 389 (Raj).
It appears that the above judgments of Rajasthan High Court have been accepted by the revenue, as there is no news about SLP filed.
In CIT Vs. Anang Polyfil Pvt. Ltd. (2004) 267 ITR 266 (Gujarat) it was held that diesel generator are not entitled to higher depreciation. However the judgment was rendered without consideration of the ratio laid down by Rajasthan High Court or on consideration of rule of interpretation as used and applied by Rajasthan High Court in Agarwal Transformers P. Ltd.
II.The relevant entries in Appendix to I.T. Rules:
Old Appendix (up to A.Y. 1987-88):
III. Machinery and plant:
(ii) Special rates
D.(10A) Renewable energy devices, being--
(i) Flat plate solar collectors;
(ii) Concentrating and pipe type solar collectors;
(iii) Solar cookers;
(iv) Solar water heaters and systems;
(v) Air/gas/fluid heating systems;
(vi) Solar crop driers and systems;
(vii) Solar Refrigeration, cold storages air conditioning systems;
(viii) Solar steels and desalination systems;
(ix) Solar power generating systems;
(x) Solar pumps based on solar thermal and solar photovoltaic conversion;
(xi) Solar photovoltaic modules and panels for water pumping and other applications;
(xii) Wind mills and any specially designed devices which run on wind mills
(xiii) Any special devices including electric electric generators
and pumps running on wind energy . . . . .. 30%
(xiv) Biogas plants and biogas engines;
(xv) Electrically operated vehicles including battery powered or fuel-cell powered vehicles;
(xvi) Agricultural and municipal waste conversion devices producing energy;
(xvii) Equipment for utilizing ocean waves and thermal energy;
(xviii) Machinery and plant used on the manufacture of any of the above such items"
New Appendix ( from A.Y. 1988-89 to A.Y.2002-03) :
(Only entry relating to generator is reproduced)
III. Machinery and Plant
3(iii).Energy saving devices, being --
G. Other equipments:
(xiii) Renewal energy devices being--
(m) Any special devices including electric generators and
pumps running on wind energy 100%
Latest Appendix w.e.f.. 01.04.2003 - see { (2002) 124 Taxman 39 }:
(Only entry relating to generator is reproduced)
III. Machinery and plant.
(3)
(8)
(ix) Energy saving devices, being--
(m) Any special devices including electric generators and pumps
running on wind energy 80%
A reading of the above entries shows that all along special rate has been prescribed, and it is under the category of renewal power saving special devices.. The word any special device has been used for including various equipment like electrical generator and pumps running on wind energy. That it appears that this entry may be treated as an inclusive entry in which first condition is that the item should be a machinery and plant secondly it should be energy saving device thirdly it should be a special device fourthly it may be an electric generator or pumps running on wind energy.
RUNNING ON WIND ENERGY - WHETHER A CONDITION:
It appears that the requirement of running on wind energy is attached only in relation to pumps and not in relation to electric generators. This is because electrical generator and pumps are two different types of equipments. If an electrical generator is an energy saving device and is also a special device it may be eligible for higher depreciation irrespective of the fuel or other form of power being used to run the generator. Thus a diesel generating set or petrol generating set or coal based generating set may also be eligible for higher depreciation, if it is a special device and is a renewal energy saving device. The judgment of the Rajasthan High Court supports this view.
General understanding about the entry :
It appears that generally general electric generators are not treated as renewal energy devices. Furthermore, general perception about the above entry is that electric generator should be run on wind energy to be eligible for higher depreciation.
Cases before Gujarat High Court:
A. In CIT Vs. Anang Polyfil Pvt. Ltd. (2004) 267 ITR 266 (Gujarat). The Hon'ble High Court considered various entries and particularly the item relating to electric generators the court considered that a bare perusal of the aforesaid item clearly indicates that the higher rate of 30% depreciation is allowed on renewable energy devices as specified in the sub items of item No.10A. Sub-item (i) to (xi) refer to equipments for generating solar energy, sub-item (xii) and (xiii) refers to wind energy. Sub-item (xiv ) refers to biogas energy. Sub item (xv) refers to electrically operated vehicles which do not consume conventional fuel like petrol or diesel. Sub tem (xvi) also refer to energy produced by conversion of agricultural for municipal wastes. Sub-item (xvii) refers to energy generated by utilizing ocean waves and sub-item (xviii) refers to machinery and plants used for manufacture of the above sub-items. Accordingly, all the sub-items only refer to renewable energy devices i.e. devices for generating non conventional energy.
In relation to sub-item (xiii) court noted that it would need some explanations on reading of this item at first blush it may appear that this sub-item includes electric generators and, therefore, diesel sets for generating electrical energy may fall under this item. However, court held that on proper scrutiny it would appear that what is contemplated is electric generators running on wind energy and pumps running on wind energy. Therefore the High Court held that generators running on diesel would not fall under the above item.
Therefore in view of Gujarat High Court, the condition of running on wind is attached to generators also.
In case of CIT -vs- Transpek Industries Ltd (2004) 265 ITR 493 (Guj) the Assessing Officer allowed 10% depreciation as against the assessee's claim @ 15%. In this case the Tribunal categorically recorded that such machinery namely, diesel generating set, was entitled to depreciation @ 30% as held by the Tribunal in some other cases.
However, the assessee was allowed depreciation @ 15% in earlier years as well as subsequent years. Therefore, the Tribunal allowed depreciation @ 15%. In view of these facts the High Court held that the Tribunal was justified in allowing depreciation @ 15%. Observations of the Tribunal and the high court in this case were not considered by the court in the case of Alang Polyfill (Supra.)
Case before the Rajasthan High Court:
In the case of Agarwal Transformers P.Ltd the Tribunal allowed higher depreciation @ 30% on the reasoning that generator is a renewable energy device. However, the high court, by applying rule of "EJUSDEM GENERIS" held that electric generator by itself generate electricity, and therefore, do not fall into category of renewal energy devices.
However, honorable high court allowed higher depreciation by applying principles of interpratation - "NOSCITOR A SOCIIS" and held that `electric generator' is different from `pump run on wind energy, which falls within the renewable energy devices. The court also held that it is erroneous to say that the condition 'run on wind energy' is also attached to electric generators. Even grammatically neither, nor the word 'both' is used after the word 'pump' in the relevant entry and this also clarifies that the condition 'running on wind energy' is only attached to the word 'pumps' and not to electric generators.
The court also considered that on further reading of the entry it is found that it is inclusive, it refers to two different items namely, electric generators and secondly pumps run on wind energy. Therefore, the court held that electric generator clearly falls under the category of renewal energy devices and the Tribunal has rightly allowed the depreciation @ 30% on basis of item 10A, clause (xiii) of Appendix I.
A BENEFICIAL INTERPRATION:
The Rajasthan high court has indeed taken a very liberal approach and beneficial interpratation has been rendered. This is likely to promote industry of electric generators and also promote people to have own electric generators.
Doubts and controversies:
However, doubts that arise are that (a) as per heading of entry no. (xiii) or subsequently re numbered entries the item falling in to this category must be a `renewal energy device', the Rajasthan High court has noted that electric generator is not a renewal energy device but still it falls into that category as per the entry. Therefore, the Revenue may take the view that the primary condition of being a renewable energy device has not been satisfied and the purpose of higher depreciation was to promote electricity generation by using wind energy is not served . However, in this case the difference was meager 30% allowed by the high court as against 20% allowed by the A.O. and amount may not also be significant Therefore, it is likely that the Revenue may not appeal against the judgement of the Rajasthan high court thus it may attain finality.
The differences between views of courts are also now coming to light. However, when two views are possible, the view beneficial to the assessee should be adopted.
There should not be serious dispute for rate of depreciation:
Generally depreciation is to be allowed over a period of two or more assessment years. Even in case of items eligible for 100% depreciation many times depreciation is spread over two years because in the first year assets is used for less than 180 days. Depreciation at higher rate is allowed with specific purpose in mind. Therefore, when over a period of time entire cost is intended to be allowed, then there is no purpose served merely by extending the period over which allowance is to be allowed. Considering liberal approach adopted for depreciation allowance, the revenue should not indulge in litigation.
Litigation may be harmful to the revenue:
In cases like the case of generator when most of assesses claim normal depreciation, litigation by revenue in few cases can be harmful to the revenue. Besides costs involved in litigation, the litigation can be detrimental to the revenue for other reasons also. When a beneficial judgment is published, the other assesses who did not claim similar relief are also made aware and they also start claiming additional relief based on liberal approach shown by courts in allowing relief. If a relief is allowed and it does not get publicity, few assesses will claim such relief. However, when the matter comes to public knowledge, more and more assesses would start claiming such relief. Keeping this in mind, it is advisable for the revenue not to indulge in litigation where, generally assesses are not claming such relief.
More care in drafting is required:
Considering the different views taken by two high courts on the issue and possibility of higher depreciation being allowed by applying the rule of interpretation, it appears that the matter will involve more controversies and other courts may take different views. Therefore finality will be only after the judgment of the Supreme Court. It would be better to be more careful in future while drafting of the provisions of the Income Tax Act and Rules so as to avoid this type of controversies.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA. Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 13, 2008
I Conventional. Electric Generators:
Generally electric generators used to generate electricity by using conventional fuels such as coal, diesel, petrol, gas, firewood, etc are considered as falling within the general category of plant and machinery and depreciation applicable at general rate is claimed and allowed.
For generators, which use non-conventional fuels , municipal waste and agricultural waste or generators which harnesses solar power and wind power to generates electricity is treated as eligible for higher depreciation under special catagories. Earlier, for renewable energy devices higher rate was @ 30% , it was raised to 100% and now it has been reduced to 80% w.e.f. 01.04.03.
Honorable Rajasthan High Court has HELD that higher depreciation will be allowable on electric generator even if it does not run on wind energy - CIT V Agarwal Transformers P. Ltd. (2002) 258 ITR 251 (Raj). The High court held that the condition of running on wind was not attached to generator but only to pumps. The judgment has been followed in CIT V Abressive India, (2003) 133 Taxman 389 (Raj).
It appears that the above judgments of Rajasthan High Court have been accepted by the revenue, as there is no news about SLP filed.
In CIT Vs. Anang Polyfil Pvt. Ltd. (2004) 267 ITR 266 (Gujarat) it was held that diesel generator are not entitled to higher depreciation. However the judgment was rendered without consideration of the ratio laid down by Rajasthan High Court or on consideration of rule of interpretation as used and applied by Rajasthan High Court in Agarwal Transformers P. Ltd.
II.The relevant entries in Appendix to I.T. Rules:
Old Appendix (up to A.Y. 1987-88):
III. Machinery and plant:
(ii) Special rates
D.(10A) Renewable energy devices, being--
(i) Flat plate solar collectors;
(ii) Concentrating and pipe type solar collectors;
(iii) Solar cookers;
(iv) Solar water heaters and systems;
(v) Air/gas/fluid heating systems;
(vi) Solar crop driers and systems;
(vii) Solar Refrigeration, cold storages air conditioning systems;
(viii) Solar steels and desalination systems;
(ix) Solar power generating systems;
(x) Solar pumps based on solar thermal and solar photovoltaic conversion;
(xi) Solar photovoltaic modules and panels for water pumping and other applications;
(xii) Wind mills and any specially designed devices which run on wind mills
(xiii) Any special devices including electric electric generators
and pumps running on wind energy . . . . .. 30%
(xiv) Biogas plants and biogas engines;
(xv) Electrically operated vehicles including battery powered or fuel-cell powered vehicles;
(xvi) Agricultural and municipal waste conversion devices producing energy;
(xvii) Equipment for utilizing ocean waves and thermal energy;
(xviii) Machinery and plant used on the manufacture of any of the above such items"
New Appendix ( from A.Y. 1988-89 to A.Y.2002-03) :
(Only entry relating to generator is reproduced)
III. Machinery and Plant
3(iii).Energy saving devices, being --
G. Other equipments:
(xiii) Renewal energy devices being--
(m) Any special devices including electric generators and
pumps running on wind energy 100%
Latest Appendix w.e.f.. 01.04.2003 - see { (2002) 124 Taxman 39 }:
(Only entry relating to generator is reproduced)
III. Machinery and plant.
(3)
(8)
(ix) Energy saving devices, being--
(m) Any special devices including electric generators and pumps
running on wind energy 80%
A reading of the above entries shows that all along special rate has been prescribed, and it is under the category of renewal power saving special devices.. The word any special device has been used for including various equipment like electrical generator and pumps running on wind energy. That it appears that this entry may be treated as an inclusive entry in which first condition is that the item should be a machinery and plant secondly it should be energy saving device thirdly it should be a special device fourthly it may be an electric generator or pumps running on wind energy.
RUNNING ON WIND ENERGY - WHETHER A CONDITION:
It appears that the requirement of running on wind energy is attached only in relation to pumps and not in relation to electric generators. This is because electrical generator and pumps are two different types of equipments. If an electrical generator is an energy saving device and is also a special device it may be eligible for higher depreciation irrespective of the fuel or other form of power being used to run the generator. Thus a diesel generating set or petrol generating set or coal based generating set may also be eligible for higher depreciation, if it is a special device and is a renewal energy saving device. The judgment of the Rajasthan High Court supports this view.
General understanding about the entry :
It appears that generally general electric generators are not treated as renewal energy devices. Furthermore, general perception about the above entry is that electric generator should be run on wind energy to be eligible for higher depreciation.
Cases before Gujarat High Court:
A. In CIT Vs. Anang Polyfil Pvt. Ltd. (2004) 267 ITR 266 (Gujarat). The Hon'ble High Court considered various entries and particularly the item relating to electric generators the court considered that a bare perusal of the aforesaid item clearly indicates that the higher rate of 30% depreciation is allowed on renewable energy devices as specified in the sub items of item No.10A. Sub-item (i) to (xi) refer to equipments for generating solar energy, sub-item (xii) and (xiii) refers to wind energy. Sub-item (xiv ) refers to biogas energy. Sub item (xv) refers to electrically operated vehicles which do not consume conventional fuel like petrol or diesel. Sub tem (xvi) also refer to energy produced by conversion of agricultural for municipal wastes. Sub-item (xvii) refers to energy generated by utilizing ocean waves and sub-item (xviii) refers to machinery and plants used for manufacture of the above sub-items. Accordingly, all the sub-items only refer to renewable energy devices i.e. devices for generating non conventional energy.
In relation to sub-item (xiii) court noted that it would need some explanations on reading of this item at first blush it may appear that this sub-item includes electric generators and, therefore, diesel sets for generating electrical energy may fall under this item. However, court held that on proper scrutiny it would appear that what is contemplated is electric generators running on wind energy and pumps running on wind energy. Therefore the High Court held that generators running on diesel would not fall under the above item.
Therefore in view of Gujarat High Court, the condition of running on wind is attached to generators also.
In case of CIT -vs- Transpek Industries Ltd (2004) 265 ITR 493 (Guj) the Assessing Officer allowed 10% depreciation as against the assessee's claim @ 15%. In this case the Tribunal categorically recorded that such machinery namely, diesel generating set, was entitled to depreciation @ 30% as held by the Tribunal in some other cases.
However, the assessee was allowed depreciation @ 15% in earlier years as well as subsequent years. Therefore, the Tribunal allowed depreciation @ 15%. In view of these facts the High Court held that the Tribunal was justified in allowing depreciation @ 15%. Observations of the Tribunal and the high court in this case were not considered by the court in the case of Alang Polyfill (Supra.)
Case before the Rajasthan High Court:
In the case of Agarwal Transformers P.Ltd the Tribunal allowed higher depreciation @ 30% on the reasoning that generator is a renewable energy device. However, the high court, by applying rule of "EJUSDEM GENERIS" held that electric generator by itself generate electricity, and therefore, do not fall into category of renewal energy devices.
However, honorable high court allowed higher depreciation by applying principles of interpratation - "NOSCITOR A SOCIIS" and held that `electric generator' is different from `pump run on wind energy, which falls within the renewable energy devices. The court also held that it is erroneous to say that the condition 'run on wind energy' is also attached to electric generators. Even grammatically neither, nor the word 'both' is used after the word 'pump' in the relevant entry and this also clarifies that the condition 'running on wind energy' is only attached to the word 'pumps' and not to electric generators.
The court also considered that on further reading of the entry it is found that it is inclusive, it refers to two different items namely, electric generators and secondly pumps run on wind energy. Therefore, the court held that electric generator clearly falls under the category of renewal energy devices and the Tribunal has rightly allowed the depreciation @ 30% on basis of item 10A, clause (xiii) of Appendix I.
A BENEFICIAL INTERPRATION:
The Rajasthan high court has indeed taken a very liberal approach and beneficial interpratation has been rendered. This is likely to promote industry of electric generators and also promote people to have own electric generators.
Doubts and controversies:
However, doubts that arise are that (a) as per heading of entry no. (xiii) or subsequently re numbered entries the item falling in to this category must be a `renewal energy device', the Rajasthan High court has noted that electric generator is not a renewal energy device but still it falls into that category as per the entry. Therefore, the Revenue may take the view that the primary condition of being a renewable energy device has not been satisfied and the purpose of higher depreciation was to promote electricity generation by using wind energy is not served . However, in this case the difference was meager 30% allowed by the high court as against 20% allowed by the A.O. and amount may not also be significant Therefore, it is likely that the Revenue may not appeal against the judgement of the Rajasthan high court thus it may attain finality.
The differences between views of courts are also now coming to light. However, when two views are possible, the view beneficial to the assessee should be adopted.
There should not be serious dispute for rate of depreciation:
Generally depreciation is to be allowed over a period of two or more assessment years. Even in case of items eligible for 100% depreciation many times depreciation is spread over two years because in the first year assets is used for less than 180 days. Depreciation at higher rate is allowed with specific purpose in mind. Therefore, when over a period of time entire cost is intended to be allowed, then there is no purpose served merely by extending the period over which allowance is to be allowed. Considering liberal approach adopted for depreciation allowance, the revenue should not indulge in litigation.
Litigation may be harmful to the revenue:
In cases like the case of generator when most of assesses claim normal depreciation, litigation by revenue in few cases can be harmful to the revenue. Besides costs involved in litigation, the litigation can be detrimental to the revenue for other reasons also. When a beneficial judgment is published, the other assesses who did not claim similar relief are also made aware and they also start claiming additional relief based on liberal approach shown by courts in allowing relief. If a relief is allowed and it does not get publicity, few assesses will claim such relief. However, when the matter comes to public knowledge, more and more assesses would start claiming such relief. Keeping this in mind, it is advisable for the revenue not to indulge in litigation where, generally assesses are not claming such relief.
More care in drafting is required:
Considering the different views taken by two high courts on the issue and possibility of higher depreciation being allowed by applying the rule of interpretation, it appears that the matter will involve more controversies and other courts may take different views. Therefore finality will be only after the judgment of the Supreme Court. It would be better to be more careful in future while drafting of the provisions of the Income Tax Act and Rules so as to avoid this type of controversies.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA. Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 13, 2008
Pre-deposit- reduction of amount earlier directed
Pre-deposit- reduction of amount earlier directed - consideration of humanitarian and other grounds
Summary: While considering the amount of pre deposit the appellate authority/ court can consider all aspects including interalia merits of the case, difficulties of the appellant, balance of convenience and interest of revenue. An order passed for pre deposit has generally to be followed for admittance of the appeal. However, the appellant can appeal against such order or can file a request for reduction of amount or allowing further time. Developments during intervening period can also be grounds for seeking reduction of the amount of pre deposit directed.
Humanitarian ground and recovery of tax
There cannot be any doubt that arrear of tax are to be recovered dutifully by the revenue officers. However, sometimes humane factors have also to be considered while enforcing recovery of tax. Tax payer may be faced with several difficult situations in which he cannot pay the tax dues, some such situations in life of a person can be as follows:-
Accident and illness causing great hardship to the taxpayer.
Accident and extensive damages of business assets causing hardship to the taxpayer.
Accident and / or severe illness to the family members of tax payer causing great hardship to the taxpayer.
Individual taxpayer being out of job for considerable time.
Substantial loss suffered in business of taxpayer due to trade cycle, force measures, closure of business etc.
In the above circumstances and also in several other situations, it may be extremely difficult for the taxpayer to deposit tax demanded by the tax authorities. Therefore, some sort of arrangements like payment in easy installment, waiver of interest etc. are considered.
Provision of appeal is to render justice:
Opportunity of seeking redressal of grievances by way of appeal is provided for achieving and rendering justice. In case, when the tax payer is in difficult situation and he has been further burdened with demands of tax or other levies and he is forced to pay the same even for admittance of appeal, it may be impossible for the tax payer to get an opportunity to seek relief. In such situations, if the taxpayer is asked to make pre deposit for admittance of appeal, it may amount to shutting the doors of justice. Therefore, in such situations discretion needs to be exercised with sympathy and off course with caution.
Appeals requiring pre-deposit
In case under legal provisions, pre-deposit is to be made for admittance of an appeal. The Appellate Authority can also consider such type of difficulties on humanitarian grounds also and waive or reduce the requirement of pre-deposit. In such a case taking a sympathetic view for reducing the amount of pre-deposit or exempting the appellant from pre-deposit, will go a long way in administration and delivery of justice. If without considering such situations, a rigid view is taken to force the maximum amount of pre-deposit and thereby deny opportunity to appeal to the taxpayer and avail justice that will not be given in the interest of justice.
Pre-deposit amount earlier directed can also be revised:
As per usual practice and procedure the appellate authority directs the amount of pre deposit, which is to be deposited and reported on or before fixed date. In case of non- compliance, the appeal may be dismissed. In case during the period allowed for compliance the tax payer is unable to deposit the amount, or find it difficult to deposit the same or some force measure takes place causing further difficulty, the tax payer can make an application for modification of order of pre deposit.
Similarly suppose during intervening period, any co-ordinate court or authority or any higher authority or court passes order according to which the merits of the appeal are improved. In such a case also the taxpayer can make an application for reducing or waiving the amount of pre deposit. Suppose during intervening period the Supreme Court / any high court renders a judgment according to which assessee becomes entitled to relief. In such a case there would be no purpose of asking heavy amount of pre deposit from taxpayer. Therefore, the appellant can approach the court / authority to reduce or fully waive the amount of pre deposit. The authority / court can consider and revise the amount of pre deposit and other conditions for admittance of the appeal.
Recently reported decision of CESTAT:
CITY TRAVELS V. CCE, COIMBATORE [2007] 8 STJ 323 (CESTAT - Chennai):
The Hon'ble CESTAT(Chennai) had shown commendable spirit of rendering justice and providing opportunity to the appellant to appeal at a reduced amount of pre-deposit. The case is in respect of City Travels. In this case, in fact, the Tribunal has earlier directed the appellant to make a pre-deposit of Rs.5 lakhs as pre-condition for admittance of the appeal. However, subsequently, one of the bus operated by the appellant was gutted in a fire and two members of the crew died in that accident. In these circumstances, the appellant prayed for modification of the requirement of pre-deposit. The counsel of the appellant requested for reduction of the amount of pre-deposit and offered to pay the amount of Rs.1 lakh and for allowing four weeks time to pay the same. The Honorable Members agreed to the prayer and held as follows: -
" We are inclined to be humane". Accordingly, the appellants shall pre-deposit only an amount of Rs. 1 lakh (Rupees one lakh only) within 4 weeks from today. Report compliance on 18-10-2006. The stay order will stand modified to the above extent."
Commendable zeal shown by the CESTAT:
Commendable zeal shown to render justice to people in difficulty:
The Tribunal took humanitarian grounds and reduced the amount of pre-deposit earlier directed. This is highly appreciable and commendable and such orders will go a long way in administration and delivery of justice and also in improving respect and regard to appellate authorities. Suppose in this case the Tribunal took a rigid view and dismissed appeal for failure of the tax payer to deposit the amount directed to be deposited by the due date, perhaps the taxpayer would have lost chances of seeking justice.
It is hoped that the revenue authorities will not appeal against such orders, which are to promote rendering of justice even to people in difficult times.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 11, 2008
Option of assessee to avail or not to avail exemption or deduction.
GENERAL:
In some provisions relating to exemption or a deduction we find that option is given to assessee to avail exemption or deduction in any given year or years, as per prescribed provisions. For example section 10A & 10B provides for Tax exemption to certain units in free trade zones and 100% export oriented units for certain period. Detailed provisions as to eligibility, period of exemption, procedure to be followed etc are provided. There is also a provision in the nature of option to the assessee not to opt for exemption for any of the relevant years by filing a declaration. The scope of this write up is limited only in respect of assessee option to waive exemption for any year.
In some sections under the Chapter VIA, we find that in some cases deduction is allowable during certain number of consecutive years. For example, in case of some sub-section of section 80 IB. Thus in such a case the assessee has to opt for the consecutive years in which he want to avail deduction and in other years he can file declaration for not availing deduction.
The waiver of exemption is only when there is such an option is specifically provided. In case of certain other income which are exempt under section 10 in the sense that they do not form part of income at all , such option cannot be exercised. Fro example, in case of income from agricultural which is exempt u/s 10, the assessee cannot waive exemption. In case the assessee has suffered loss, he cannot claim that the exemption should not be applied to him qua agricultural loss. This is because there is no such option given in relation to exemption u/s 10 (1).
OPTION FOR NOT AVAILING EXEMPTION OR DEDUCTION:
In section 10A (8) and 10B (8) ,we find on filing a declaration the assessee can opt out the exemption. In declaration he has to declare that the provisions of the relevant section - section 10A or 10 B , as the case may be, may not be applied to him for any of the relevant assessment year. Both the sub-sections are on similar lines, having the same language, which is, reproduced below:-
Sub-section (8) of Section 10A & sub-section (8) of Section 10B:
"(8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years."
AN analysis of the above sub- section shows that:
(a) A written declaration is to be filed before the due date for furnishing of the return, This means that this is an annual exercise.
(b) the assessee has to declare that the provisions of the section may not be applied to him,
(c) on filing of such declaration the provisions of the section shall not apply to him for any of the relevant previous years.
Each assessment year is a separate unit of assessment therefore, the declaration has to be filed in respect of any particular year and not for a block of years or the initial year of exemption.
The exemption to eligible unit is automatic on satisfaction of conditions. However, the assessee has an option to waive such exemption for any year by filing a declaration.
For example if the assessee has chosen to avail exemption in the first year but he wants to waive the exemption in 2nd (second) year he can file declaration before the due date for filing of the return for the second year. Again suppose in the 3rd (third) year the assessee want to avail exemption he will not file declaration for 3rd year and therefore he will avail the exemption. Again say if the assessee has availed exemption for 3rd to 5th ( third to fifth) years, and want to waive exemption in sixth year, he will have to file a declaration for the sixth year before the due date to file the return for the sixth year.
When waiver is desirable:
The assessee shall waive exemption only if it is beneficial to him. The benefit can only be derived if the assessee has suffered business loss or there remains unabsorbed depreciation or other allowances. The loss may not be carried forward, if the exemption is availed. Therefore, only in such cases would only the assessee may file a declaration that provisions of section 10A or 10B my not be applied to him for any year so that the loss , unabsorbed depreciation and other allowances can be set off against any other income for the year or business income of subsequent years etc. Thus, the provisions of exemption as well as waiver of exemption both are intended to provide a relief to the assessee. Hence the need to interpret the provisions in a manner to serve the purpose for which the provisions have been intended.
In new projects and particularly in capital intensive projects, there would be large amount of depreciation allowable under the Act in initial years. The depreciation gradually declines. In initial year there will be lesser revenue due to lower volume and lower price realization. After the business has gained goodwill and captured market share, profitability will increase. Therefore, cumulative effect of high amortization during initial years on account of depreciation and other amortizations and lower volume and price realization, a businessman can very well expect that in initial years taxable profit will be low, and in later years profitability will improve. Therefore, in initial year he may forgo the exemption and avail exemption in later eligible period. For example, suppose if exemption is allowed in any ten consecutive years out of fifteen years., then during initial few years, assessee may declare not to avail exemption or deduction and offer income from eligible unit to tax or claim carry forward of loss and depreciation etc.
'ANY OF THE RELEVANT ASSESSMENT YEARS' :
In sub-sections (8) of section 10A and 10B , contradictory words used are `any' and 'years'. The word `any' in the context can only be considered as 'one' or some but definitely not all. So far the use of plural of the word year is concerned, one can easily understand it as a year or some of the years being the year or years for which the assessee has filed declaration and opted not to avail of exemption. We may also rely on the provisions of section 13(2) of the General Clauses Act, 1897, the relevant and effective part of which reads as follows:
Gender and number.--
13. In all Central Acts and Regulations, unless there is anything repugnant in the subject or context,--
(2) words in the singular shall include the plural, and vice versa.
Therefore, it can be said ,without any doubt that the words "any of …years" as used in sub-section (8) can mean a single year - when the assessee has filed a declaration for one year only and it will have a plural meaning only when the assessee has filed declaration of more than one years.
Furthermore, the expression 'any of the relevant assessment years' as used in the sub-section (8) , together with the requirement of filing declaration before the due date, clearly imply that the declaration shall be applicable only for the particular assessment year for which a declaration has been filed and not to all of the relevant Assessment Years - that is whole of the tax holiday period. Therefore, the assessee has an option to forgo exemption in any of the year by filing declaration for that year and not all the years. Suppose the assessee has filed declaration for the first year of the tax holiday period, he will have to file declaration for the second year separately if he wants to waive the tax exemption. If no declaration is filed for the second year, the exemption provision shall be applicable and the loss if any for the second year may not be carried forward.
Meaning full interpretation is desired:
The meaning of the expression as discussed above that is ' the year for which declaration is filed', is meaningful and serves the purpose of allowing statutory tax exemption and not allowing it, if and only if, the assessee has opted not to avail the exemption for any year.
Absurdity must be avoided:
If the view that filing of declaration in any year will lead to withdrawal of exemption for all of the relevant years is applied , we find totally absurd results, for example:
Suppose an assessee has availed exemption for the first to eighth years, filed return of income claiming exemption u/s 10A or 10B for profits from eligible business, assessments have been completed including regular assessment under section 143(3) for some of the years. Now if the assessee wants to waive exemption for the ninth year, he files a declaration before the due date. It is clear that exemption provision shall not apply for the ninth year and not to all of the relevant years of tax holiday. If the view that exemption shall not apply to all of the relevant years then the result would be that income earned during 1st to 8th years should also be taxable. The assessee or the Revenue can never intend this.
Different legislative intention would require different language:
Had the intention be to waive exemption or deny it for all the years, then possibly requirement would have been to file declaration at the beginning of the tax holiday period, and the language used in sub-section (8) would have been on the following lines:
"Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, for the initial year of the relevant years , furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him for all the relevant previous years, the provisions of this section shall not apply to him for all of the relevant assessment years."
Had the intention be to waive exemption or deny for all of the subsequent years, then possibly requirement would have been to file declaration before due date for any year after the first year, and the language used in sub-section (8) would have been on the following lines:
"Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, for any of the relevant previous years furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him for the specified year and all subsequent years, the provisions of this section shall not apply to him for all of the relevant assessment years beginning from the year for which the declaration has been filed for the first time"
Thus, in view of the use of words "any of the relevant previous years, " they means any of the relevant previous year or years for which the assessee has furnished the declaration. There appears no ambiguity in this regard.
NO PRESCRIBED PROCEDURE:
There is no prescribed procedure or form for making a declaration. The assessee may make a declaration in simple language that the provision of the section may not be applied to him for any year.
DRAFT DECLARATION FORM TO THE Assessing Officer
As noted earlier there is no prescribed declaration form. Therefore, declaration can be made in a letterform conveying the intention of the assessee that he does not want to avail of the exemption for any year. The declaration can be on the following lines to be on safe side :
Name, address, and PAN of the assessee:
Name of unit for which exemption is waived:
To,
The Assessing Officer,
……
Sub: declaration under sub-section (8) of 10A/ 10B for the assessment year …
I/We, having a unit located in ….. free trade zone / a 100% Export Oriented Unit that has been granted approval by the concerned authorities and is eligible for exemption under section 10A / 10B of the Income Tax Act, 1961. However, in view of sub-section (8) to Section 10A / 10B I / we declare that the provisions of section 10A / 10B may not be applied to me/us for the Assessment Year …., for which the due date u/s 139(1) for filing of the return is ….., and we are making declaration before the due date. And therefore the loss suffered by the unit may be allowed to be setoff and/ or carried forward.
We may mention that by this declaration we are opting not to avail exemption only for the assessment year ….., and it will not affect our rights for the exemption already availed in earlier years and for the subsequent years.
In case any specified declaration is to be filed in prescribed form, if any, kindly provide me/us the same because as per our information there is no prescribed form. Furthermore, technical defect, if any, in this declaration may kindly be condoned and I/we may be permitted to file a revised declaration form or to remove technical defect, if any, as the case may be.
Thanking you,
Yours faithfully,
For Assessee "
What if the Assessing Officer takes the view to withdraw exemption for all years?
Suppose the A.O. takes view that once declaration is filed, the exemption will not be available for any of the relevant previous years ( the entire tax holiday period). The view taken by the A.O. will be totally wrong and he will have no jurisdiction to assessee income of earlier years which has been exempted and also income of any subsequent years for which assessee has not filed any declaration. The remedy available to assessee would be:
(a) to challenge the jurisdiction of the A.O. by way of writ petition before the High Court. This appears to be the best, timely , effective and practical remedy. Although alternative remedy may be by way of appeal or revision petition, however, those would be time consuming and not effective one. In case the writ petition is not admitted, leave may be obtained to pursue other remedies;
(b) to withdraw the declaration filed so that to avail exemption.
Can declaration be withdrawn?:
As per the provision of sub-section (8) the language to be used in the declaration is " may not be made applicable to me…," therefore a possible view is that the assessee may have an option to withdraw the declaration. This is also because a declaration filed by the assessee cannot be used against him to jeopardize his privileges already availed of or which he may avail in the future under law. A privilege granted cannot be withdrawn on action of the assessee, except to the extent intended by the assessee.
Therefore, the assessee may withdraw the declaration, in case the Assessing Officer intend to apply the declaration in a manner so as to deny exemption for all of the relevant previous years ( the entire tax holiday period). However, in that case the assessee may loose the benefit of set off and / or carry forward of the loss.
Relevant Rulings:
In C. I. T v. Tamil Nadu Jai Bharath Mills Ltd [2006] 287 ITR 512 (Mad) it was held that the assessee has a right to withdraw exemption for any year by filing declaration. It was further held that the assessee has also right to withdraw application for exemption u/s 10B. The court held as follows:
"Section 10B(8) which opens with a non obstante clause, clearly confers a right on the assessee to declare that the provisions of the Act may not be made applicable to the assessee, provided such a declaration is given on or before the due date for furnishing the return under section 139(1) of the Act. It was therefore, open to the assessee, notwithstanding the fact that the assessee had exercised the option to have section 10B made applicable, to withdraw that option, provided such withdrawal was made on or before the due date for filing the return.
This court in the assessee's own case in Tax Case No.302 of 2001 held that in this case, the withdrawal was made along with the return which return had been filed before the expiry of the due date. Hence, applying the ratio laid down by this court in the abovesaid decision, we do not see any question of law much less a substantial question of law that arises for consideration. Accordingly, both the appeals stand dismissed. Consequently, T.C.M.P. No.1347 of 2005 is also dismissed."
Moser Baer India Ltd V JCIT (2007) 108 ITD 80 (Delhi):
In this case tribunal while interpreting the word 'any' used under sub-sections (3) ( and (7) { now renumbered as (8)}of S. 10B held that 'any' will mean 'one or more out of several years', 'any' cannot be read as all years.. Therefore, the assessee could file declaration for any year to the effect that benefit of exemption should not apply to particular year. It has also been held that filing of declaration is directory and not mandatory. It will be sufficient compliance if declaration is file during assessment proceedings.
The Tribunal held that where the assessee filed a declaration under section 10B(7) before the A.O. withdrawing exemption claimed under section 10B and claimed that income of floppy unit be computed as per other provisions of the Act, the A.O. could not thrust exemption provided under section 10B upon the assessee.
About the Author: -
Uma Kothari
devkumar1@vsnl.net
BA.(H),AICWA,ACS Add: 20A,Charu Chandra Place East,Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 27, 2008
In some provisions relating to exemption or a deduction we find that option is given to assessee to avail exemption or deduction in any given year or years, as per prescribed provisions. For example section 10A & 10B provides for Tax exemption to certain units in free trade zones and 100% export oriented units for certain period. Detailed provisions as to eligibility, period of exemption, procedure to be followed etc are provided. There is also a provision in the nature of option to the assessee not to opt for exemption for any of the relevant years by filing a declaration. The scope of this write up is limited only in respect of assessee option to waive exemption for any year.
In some sections under the Chapter VIA, we find that in some cases deduction is allowable during certain number of consecutive years. For example, in case of some sub-section of section 80 IB. Thus in such a case the assessee has to opt for the consecutive years in which he want to avail deduction and in other years he can file declaration for not availing deduction.
The waiver of exemption is only when there is such an option is specifically provided. In case of certain other income which are exempt under section 10 in the sense that they do not form part of income at all , such option cannot be exercised. Fro example, in case of income from agricultural which is exempt u/s 10, the assessee cannot waive exemption. In case the assessee has suffered loss, he cannot claim that the exemption should not be applied to him qua agricultural loss. This is because there is no such option given in relation to exemption u/s 10 (1).
OPTION FOR NOT AVAILING EXEMPTION OR DEDUCTION:
In section 10A (8) and 10B (8) ,we find on filing a declaration the assessee can opt out the exemption. In declaration he has to declare that the provisions of the relevant section - section 10A or 10 B , as the case may be, may not be applied to him for any of the relevant assessment year. Both the sub-sections are on similar lines, having the same language, which is, reproduced below:-
Sub-section (8) of Section 10A & sub-section (8) of Section 10B:
"(8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years."
AN analysis of the above sub- section shows that:
(a) A written declaration is to be filed before the due date for furnishing of the return, This means that this is an annual exercise.
(b) the assessee has to declare that the provisions of the section may not be applied to him,
(c) on filing of such declaration the provisions of the section shall not apply to him for any of the relevant previous years.
Each assessment year is a separate unit of assessment therefore, the declaration has to be filed in respect of any particular year and not for a block of years or the initial year of exemption.
The exemption to eligible unit is automatic on satisfaction of conditions. However, the assessee has an option to waive such exemption for any year by filing a declaration.
For example if the assessee has chosen to avail exemption in the first year but he wants to waive the exemption in 2nd (second) year he can file declaration before the due date for filing of the return for the second year. Again suppose in the 3rd (third) year the assessee want to avail exemption he will not file declaration for 3rd year and therefore he will avail the exemption. Again say if the assessee has availed exemption for 3rd to 5th ( third to fifth) years, and want to waive exemption in sixth year, he will have to file a declaration for the sixth year before the due date to file the return for the sixth year.
When waiver is desirable:
The assessee shall waive exemption only if it is beneficial to him. The benefit can only be derived if the assessee has suffered business loss or there remains unabsorbed depreciation or other allowances. The loss may not be carried forward, if the exemption is availed. Therefore, only in such cases would only the assessee may file a declaration that provisions of section 10A or 10B my not be applied to him for any year so that the loss , unabsorbed depreciation and other allowances can be set off against any other income for the year or business income of subsequent years etc. Thus, the provisions of exemption as well as waiver of exemption both are intended to provide a relief to the assessee. Hence the need to interpret the provisions in a manner to serve the purpose for which the provisions have been intended.
In new projects and particularly in capital intensive projects, there would be large amount of depreciation allowable under the Act in initial years. The depreciation gradually declines. In initial year there will be lesser revenue due to lower volume and lower price realization. After the business has gained goodwill and captured market share, profitability will increase. Therefore, cumulative effect of high amortization during initial years on account of depreciation and other amortizations and lower volume and price realization, a businessman can very well expect that in initial years taxable profit will be low, and in later years profitability will improve. Therefore, in initial year he may forgo the exemption and avail exemption in later eligible period. For example, suppose if exemption is allowed in any ten consecutive years out of fifteen years., then during initial few years, assessee may declare not to avail exemption or deduction and offer income from eligible unit to tax or claim carry forward of loss and depreciation etc.
'ANY OF THE RELEVANT ASSESSMENT YEARS' :
In sub-sections (8) of section 10A and 10B , contradictory words used are `any' and 'years'. The word `any' in the context can only be considered as 'one' or some but definitely not all. So far the use of plural of the word year is concerned, one can easily understand it as a year or some of the years being the year or years for which the assessee has filed declaration and opted not to avail of exemption. We may also rely on the provisions of section 13(2) of the General Clauses Act, 1897, the relevant and effective part of which reads as follows:
Gender and number.--
13. In all Central Acts and Regulations, unless there is anything repugnant in the subject or context,--
(2) words in the singular shall include the plural, and vice versa.
Therefore, it can be said ,without any doubt that the words "any of …years" as used in sub-section (8) can mean a single year - when the assessee has filed a declaration for one year only and it will have a plural meaning only when the assessee has filed declaration of more than one years.
Furthermore, the expression 'any of the relevant assessment years' as used in the sub-section (8) , together with the requirement of filing declaration before the due date, clearly imply that the declaration shall be applicable only for the particular assessment year for which a declaration has been filed and not to all of the relevant Assessment Years - that is whole of the tax holiday period. Therefore, the assessee has an option to forgo exemption in any of the year by filing declaration for that year and not all the years. Suppose the assessee has filed declaration for the first year of the tax holiday period, he will have to file declaration for the second year separately if he wants to waive the tax exemption. If no declaration is filed for the second year, the exemption provision shall be applicable and the loss if any for the second year may not be carried forward.
Meaning full interpretation is desired:
The meaning of the expression as discussed above that is ' the year for which declaration is filed', is meaningful and serves the purpose of allowing statutory tax exemption and not allowing it, if and only if, the assessee has opted not to avail the exemption for any year.
Absurdity must be avoided:
If the view that filing of declaration in any year will lead to withdrawal of exemption for all of the relevant years is applied , we find totally absurd results, for example:
Suppose an assessee has availed exemption for the first to eighth years, filed return of income claiming exemption u/s 10A or 10B for profits from eligible business, assessments have been completed including regular assessment under section 143(3) for some of the years. Now if the assessee wants to waive exemption for the ninth year, he files a declaration before the due date. It is clear that exemption provision shall not apply for the ninth year and not to all of the relevant years of tax holiday. If the view that exemption shall not apply to all of the relevant years then the result would be that income earned during 1st to 8th years should also be taxable. The assessee or the Revenue can never intend this.
Different legislative intention would require different language:
Had the intention be to waive exemption or deny it for all the years, then possibly requirement would have been to file declaration at the beginning of the tax holiday period, and the language used in sub-section (8) would have been on the following lines:
"Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, for the initial year of the relevant years , furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him for all the relevant previous years, the provisions of this section shall not apply to him for all of the relevant assessment years."
Had the intention be to waive exemption or deny for all of the subsequent years, then possibly requirement would have been to file declaration before due date for any year after the first year, and the language used in sub-section (8) would have been on the following lines:
"Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, for any of the relevant previous years furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him for the specified year and all subsequent years, the provisions of this section shall not apply to him for all of the relevant assessment years beginning from the year for which the declaration has been filed for the first time"
Thus, in view of the use of words "any of the relevant previous years, " they means any of the relevant previous year or years for which the assessee has furnished the declaration. There appears no ambiguity in this regard.
NO PRESCRIBED PROCEDURE:
There is no prescribed procedure or form for making a declaration. The assessee may make a declaration in simple language that the provision of the section may not be applied to him for any year.
DRAFT DECLARATION FORM TO THE Assessing Officer
As noted earlier there is no prescribed declaration form. Therefore, declaration can be made in a letterform conveying the intention of the assessee that he does not want to avail of the exemption for any year. The declaration can be on the following lines to be on safe side :
Name, address, and PAN of the assessee:
Name of unit for which exemption is waived:
To,
The Assessing Officer,
……
Sub: declaration under sub-section (8) of 10A/ 10B for the assessment year …
I/We, having a unit located in ….. free trade zone / a 100% Export Oriented Unit that has been granted approval by the concerned authorities and is eligible for exemption under section 10A / 10B of the Income Tax Act, 1961. However, in view of sub-section (8) to Section 10A / 10B I / we declare that the provisions of section 10A / 10B may not be applied to me/us for the Assessment Year …., for which the due date u/s 139(1) for filing of the return is ….., and we are making declaration before the due date. And therefore the loss suffered by the unit may be allowed to be setoff and/ or carried forward.
We may mention that by this declaration we are opting not to avail exemption only for the assessment year ….., and it will not affect our rights for the exemption already availed in earlier years and for the subsequent years.
In case any specified declaration is to be filed in prescribed form, if any, kindly provide me/us the same because as per our information there is no prescribed form. Furthermore, technical defect, if any, in this declaration may kindly be condoned and I/we may be permitted to file a revised declaration form or to remove technical defect, if any, as the case may be.
Thanking you,
Yours faithfully,
For Assessee "
What if the Assessing Officer takes the view to withdraw exemption for all years?
Suppose the A.O. takes view that once declaration is filed, the exemption will not be available for any of the relevant previous years ( the entire tax holiday period). The view taken by the A.O. will be totally wrong and he will have no jurisdiction to assessee income of earlier years which has been exempted and also income of any subsequent years for which assessee has not filed any declaration. The remedy available to assessee would be:
(a) to challenge the jurisdiction of the A.O. by way of writ petition before the High Court. This appears to be the best, timely , effective and practical remedy. Although alternative remedy may be by way of appeal or revision petition, however, those would be time consuming and not effective one. In case the writ petition is not admitted, leave may be obtained to pursue other remedies;
(b) to withdraw the declaration filed so that to avail exemption.
Can declaration be withdrawn?:
As per the provision of sub-section (8) the language to be used in the declaration is " may not be made applicable to me…," therefore a possible view is that the assessee may have an option to withdraw the declaration. This is also because a declaration filed by the assessee cannot be used against him to jeopardize his privileges already availed of or which he may avail in the future under law. A privilege granted cannot be withdrawn on action of the assessee, except to the extent intended by the assessee.
Therefore, the assessee may withdraw the declaration, in case the Assessing Officer intend to apply the declaration in a manner so as to deny exemption for all of the relevant previous years ( the entire tax holiday period). However, in that case the assessee may loose the benefit of set off and / or carry forward of the loss.
Relevant Rulings:
In C. I. T v. Tamil Nadu Jai Bharath Mills Ltd [2006] 287 ITR 512 (Mad) it was held that the assessee has a right to withdraw exemption for any year by filing declaration. It was further held that the assessee has also right to withdraw application for exemption u/s 10B. The court held as follows:
"Section 10B(8) which opens with a non obstante clause, clearly confers a right on the assessee to declare that the provisions of the Act may not be made applicable to the assessee, provided such a declaration is given on or before the due date for furnishing the return under section 139(1) of the Act. It was therefore, open to the assessee, notwithstanding the fact that the assessee had exercised the option to have section 10B made applicable, to withdraw that option, provided such withdrawal was made on or before the due date for filing the return.
This court in the assessee's own case in Tax Case No.302 of 2001 held that in this case, the withdrawal was made along with the return which return had been filed before the expiry of the due date. Hence, applying the ratio laid down by this court in the abovesaid decision, we do not see any question of law much less a substantial question of law that arises for consideration. Accordingly, both the appeals stand dismissed. Consequently, T.C.M.P. No.1347 of 2005 is also dismissed."
Moser Baer India Ltd V JCIT (2007) 108 ITD 80 (Delhi):
In this case tribunal while interpreting the word 'any' used under sub-sections (3) ( and (7) { now renumbered as (8)}of S. 10B held that 'any' will mean 'one or more out of several years', 'any' cannot be read as all years.. Therefore, the assessee could file declaration for any year to the effect that benefit of exemption should not apply to particular year. It has also been held that filing of declaration is directory and not mandatory. It will be sufficient compliance if declaration is file during assessment proceedings.
The Tribunal held that where the assessee filed a declaration under section 10B(7) before the A.O. withdrawing exemption claimed under section 10B and claimed that income of floppy unit be computed as per other provisions of the Act, the A.O. could not thrust exemption provided under section 10B upon the assessee.
About the Author: -
Uma Kothari
devkumar1@vsnl.net
BA.(H),AICWA,ACS Add: 20A,Charu Chandra Place East,Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 27, 2008
Deemed Dividend is taxable in hands of shareholders
Dividend Distribution Tax (DDT) - Dividend u/s 2(22) (e) and Chapter XIID an analysis in view of decision of Tribunal in respect to deemed dividend under section 2 (22) (e)- is taxable in hands of shareholders and not the company.
Summary:
In true sense dividends are those distribution of profits which are declared in proportion to share capital held, (on paid basis) by shareholder on the record date. At relevant times company is made liable to pay additional tax on dividend distributed and the shareholder is exempted. Certain payments made by companies in which public is not substantially interested to shareholders who hold substantial interest in the company are deemed as dividend u/s 2 (22) (e), if the company has accumulated surplus. Such payments are in fact in nature of loans and advances and are generally not in proportion of capital held by shareholders. Though there is no release of funds in favor of the borrower-shareholder, and therefore, they are not really dividend. However, These are deemed dividend in hands of shareholders but are not considered as dividend for the purpose of additional tax payable by the company. Therefore such deemed dividend is not exempt in hands of shareholders.
Payment of dividend by companies
Companies can distribute their profit or income including accumulated profit or income to shareholders in certain manners. Such distribution is called declaration of dividend. The term dividend has been defined in section 2(22) in an inclusive manner and it also provides certain payments, which will not be included within the definition of dividend. In this write up detailed discussion of the section is not desirable and we are concerned with dividend within meaning of section 2(22) and the liability of company to pay tax on dividend distributed during relevant period.
Clause (e) of section 2(22)
As per this clause certain payment by a company in which public are not substantially interest of any sum out accumulated profits of the company made to specified persons, is deemed as dividend. In popularly referral language certain loans and advances made by a company in which public are not substantially interested to substantially interested shareholders is being deemed as dividend.
Meaning of dividend for Chapter XIID
Chapter XIID contains a special provision relating to tax on distributed profits of domestic companies. This has only three sections, namely section 115 O, which is a charging section and also prescribes the period, the rate of additional tax, which is payable, and time and manner of payment etc. by company on dividend distributed. Section 115-P provides for interest payable for non-payment or delayed payment of additional tax by domestic companies. Section 115-Q is about when company is deemed to be in default. At the end of the chapter, there is an explanation, which reads as follows:
Explanation - For the purposes of this Chapter, the expression "dividends" shall have the same meaning as is given to "dividend" in clause (22) of section 2 but shall not include sub-clause (e) thereof.
A reading of the above explanation shows that this is applicable to the entire Chapter XIID and not to any specific section and according to this explanation for the purpose of this chapter, deemed dividend under clause (e) of section 2(22) is not considered to be dividend. All other types of dividend specifically covered u/s 2(22) or in any other manner (as the definition is inclusive) are considered dividend and the company which distributes profit to its shareholders is liable to pay tax u/s 115 O.
Why is the explanation?
On perusal of section 2(22) we can find that in case of other modes of distribution of profit, the company may distributes such profit in any manner but it will be to all the shareholders in proportion to the number of shares held by them, if all shares are equal in entitlement. In case there are different types of shares, then dividend will be in proportion to paid-up capital thereon and as per the terms of issue. Whereas in case of payments which are deemed as dividend under clause (e), the payments are not in proportion to the share holding / paid up capital held by different members. Therefore, the deemed dividend u/s 2(22)(e) is materially different from other types of dividend-covered u/s 2(22). In fact, the company does not declare a dividend of the nature contemplated in section 2(22)(e), rather the company advances certain money with a condition that the same will be in nature of loan or advance, it may bear interest also and it is refundable. However, still it is deemed to be dividend in hands of shareholder who receives such payment because the purpose of treating such payment as dividend is to check the practice of giving away money of company to shareholders without paying corporate tax. This being the factual and legal position, it appears that such deemed dividends are excluded from the ambit of section 115 O and the company is therefore, not liable to pay additional tax on such payments.
An example:
Company: Dividend Rich Manufacturing Company P. Ltd.
The company is a manufacturing company and money lending is not its business.
Paid up capital Rs.500000/- (500000 shares of Re. 1/- each fully paid-up)
Share holders: A, B, C, and D each holding 125000 shares that is each has a stake of 25% and every one is substantially interested.
Dividend declared Rs.10/- per share Rs.50, 00,000/-. This dividend will have to be paid in proportion of shares held by the shareholders on the record date. In this case as all shareholders hold equal number every one will get equal amount of dividend that is Rs.12, 50,000/- as dividend will be paid to each of A, B, C and D.
The company is required to pay additional tax on the sum of Rs.50, 00,000 distributed by way of dividend under section 115 O.
Suppose, the company has accumulated surplus of Rs.Ten crores. It advances a sum of Rs. one crore to Mr.A as loan bearing interest @ 14% p.a. and refundable after one year.
Mr. A holds 25% (that is not less than 10% voting power) stake in the company and therefore clause (e) of subsection 22 of section 2 is applicable in his case.
Any other shareholder has not taken any loan from the company. Here lies the difference; the loan or advance is not in proportion of capital held.
The sum of Rs. one crore, is not dividend for the purpose of Chapter XII D as it is expressly excluded from the scope of dividend for the purpose of the entire chapter. Therefore, the amount of loan granted to Mr. A, may be deemed dividend under clause (e) of sub section (22) of section 2 but it is not dividend for the purpose of Chapter XII D. Therefore, the company will not be liable to additional tax on this sum. The shareholder Mr. A, may be liable to tax by deeming such sum as dividend u/s 2 (22) (e), unless, he is able to bring it in some exempted category specified in section 2 (22) or if it can be established that the shares are eligible only for a fixed rate of dividend.
When company is not liable to pay tax, the shareholder is liable
From the above discussion it is observed that on deemed dividend u/s 2(22)(e), company is not liable to not pay additional tax u/s 115-0. Therefore, such dividend is not a dividend referred to in section 115-O. From the history of section 115-O, we find that it provided for levy of additional tax on companies and exemption in the hands of shareholders simultaneously. When tax u/s 115 O was withdrawn, exemption u/s 10(33) was also withdrawn. Therefore, it can be said that section 115 O is a special provision and a special manner of collecting tax on distribution of income. In totality there is no extra burden when we consider the company and its shareholders together. For this reason also, it can be said that a distribution of profit which does not require payment of additional tax by the company is not intended to be exempted u/s 10(33).
Provisions of old section 10 (33) and new section 10(34) (w.e.f. 01.04.2004) reads as follows:
"Any income by way of dividends referred to in section 115 O"
This clearly shows that dividend referred to in section 115 O are exempted. Dividend referred to in section 115 O is those divided in respect to which the company has paid additional tax under section 115 O.
Recent decision of ITAT
In case of ITO v. Kalyan Gupta, (2007) 107 ITD 570 (Mum.) " E" bench, Mumbai ITAT considered claim of the assessee that a sum of money to which section 2(22)(e) is applicable is also exempt u/s 10(33) {now section 10 (34).}. The assessee contended that the explanation appears after section 115 Q, therefore, it is applicable only to S. 115Q. On reading of the provisions in entirety, the Tribunal held that the words 'dividend' or 'dividends' appears only in section 115 O and not at all in sections 115 P and 115 Q. The explanation starts with the words ' for the purpose of this chapter', therefore, the explanation is applicable to the entire chapter including section 115 O. (in fact practically the explanation is meant only for section 115 O).
Therefore, the Tribunal held that the assessee couldn't claim loans granted by the company which is deemed as dividend u/s 2 (22) (e), as exempt by virtue of section 10 (33) because it is not a dividend referred to in section 115 O.
Conclusion:
It can be said that dividend which has suffered tax by way of additional tax paid by the company who distributed dividend can only be considered as dividend for the purpose of exemption under section 10 (33) or section 10 (34) at the relevant times. As deemed dividend under section 2(22) (e) is not included in meaning of dividend for the purpose of Chapter XII D including section 115 O, therefore it is not a dividend referred to in section 115 O, and therefore the company is not liable to pay additional tax but the deemed dividend will be included in the income of shareholder if other conditions are satisfied.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 30, 2008
Summary:
In true sense dividends are those distribution of profits which are declared in proportion to share capital held, (on paid basis) by shareholder on the record date. At relevant times company is made liable to pay additional tax on dividend distributed and the shareholder is exempted. Certain payments made by companies in which public is not substantially interested to shareholders who hold substantial interest in the company are deemed as dividend u/s 2 (22) (e), if the company has accumulated surplus. Such payments are in fact in nature of loans and advances and are generally not in proportion of capital held by shareholders. Though there is no release of funds in favor of the borrower-shareholder, and therefore, they are not really dividend. However, These are deemed dividend in hands of shareholders but are not considered as dividend for the purpose of additional tax payable by the company. Therefore such deemed dividend is not exempt in hands of shareholders.
Payment of dividend by companies
Companies can distribute their profit or income including accumulated profit or income to shareholders in certain manners. Such distribution is called declaration of dividend. The term dividend has been defined in section 2(22) in an inclusive manner and it also provides certain payments, which will not be included within the definition of dividend. In this write up detailed discussion of the section is not desirable and we are concerned with dividend within meaning of section 2(22) and the liability of company to pay tax on dividend distributed during relevant period.
Clause (e) of section 2(22)
As per this clause certain payment by a company in which public are not substantially interest of any sum out accumulated profits of the company made to specified persons, is deemed as dividend. In popularly referral language certain loans and advances made by a company in which public are not substantially interested to substantially interested shareholders is being deemed as dividend.
Meaning of dividend for Chapter XIID
Chapter XIID contains a special provision relating to tax on distributed profits of domestic companies. This has only three sections, namely section 115 O, which is a charging section and also prescribes the period, the rate of additional tax, which is payable, and time and manner of payment etc. by company on dividend distributed. Section 115-P provides for interest payable for non-payment or delayed payment of additional tax by domestic companies. Section 115-Q is about when company is deemed to be in default. At the end of the chapter, there is an explanation, which reads as follows:
Explanation - For the purposes of this Chapter, the expression "dividends" shall have the same meaning as is given to "dividend" in clause (22) of section 2 but shall not include sub-clause (e) thereof.
A reading of the above explanation shows that this is applicable to the entire Chapter XIID and not to any specific section and according to this explanation for the purpose of this chapter, deemed dividend under clause (e) of section 2(22) is not considered to be dividend. All other types of dividend specifically covered u/s 2(22) or in any other manner (as the definition is inclusive) are considered dividend and the company which distributes profit to its shareholders is liable to pay tax u/s 115 O.
Why is the explanation?
On perusal of section 2(22) we can find that in case of other modes of distribution of profit, the company may distributes such profit in any manner but it will be to all the shareholders in proportion to the number of shares held by them, if all shares are equal in entitlement. In case there are different types of shares, then dividend will be in proportion to paid-up capital thereon and as per the terms of issue. Whereas in case of payments which are deemed as dividend under clause (e), the payments are not in proportion to the share holding / paid up capital held by different members. Therefore, the deemed dividend u/s 2(22)(e) is materially different from other types of dividend-covered u/s 2(22). In fact, the company does not declare a dividend of the nature contemplated in section 2(22)(e), rather the company advances certain money with a condition that the same will be in nature of loan or advance, it may bear interest also and it is refundable. However, still it is deemed to be dividend in hands of shareholder who receives such payment because the purpose of treating such payment as dividend is to check the practice of giving away money of company to shareholders without paying corporate tax. This being the factual and legal position, it appears that such deemed dividends are excluded from the ambit of section 115 O and the company is therefore, not liable to pay additional tax on such payments.
An example:
Company: Dividend Rich Manufacturing Company P. Ltd.
The company is a manufacturing company and money lending is not its business.
Paid up capital Rs.500000/- (500000 shares of Re. 1/- each fully paid-up)
Share holders: A, B, C, and D each holding 125000 shares that is each has a stake of 25% and every one is substantially interested.
Dividend declared Rs.10/- per share Rs.50, 00,000/-. This dividend will have to be paid in proportion of shares held by the shareholders on the record date. In this case as all shareholders hold equal number every one will get equal amount of dividend that is Rs.12, 50,000/- as dividend will be paid to each of A, B, C and D.
The company is required to pay additional tax on the sum of Rs.50, 00,000 distributed by way of dividend under section 115 O.
Suppose, the company has accumulated surplus of Rs.Ten crores. It advances a sum of Rs. one crore to Mr.A as loan bearing interest @ 14% p.a. and refundable after one year.
Mr. A holds 25% (that is not less than 10% voting power) stake in the company and therefore clause (e) of subsection 22 of section 2 is applicable in his case.
Any other shareholder has not taken any loan from the company. Here lies the difference; the loan or advance is not in proportion of capital held.
The sum of Rs. one crore, is not dividend for the purpose of Chapter XII D as it is expressly excluded from the scope of dividend for the purpose of the entire chapter. Therefore, the amount of loan granted to Mr. A, may be deemed dividend under clause (e) of sub section (22) of section 2 but it is not dividend for the purpose of Chapter XII D. Therefore, the company will not be liable to additional tax on this sum. The shareholder Mr. A, may be liable to tax by deeming such sum as dividend u/s 2 (22) (e), unless, he is able to bring it in some exempted category specified in section 2 (22) or if it can be established that the shares are eligible only for a fixed rate of dividend.
When company is not liable to pay tax, the shareholder is liable
From the above discussion it is observed that on deemed dividend u/s 2(22)(e), company is not liable to not pay additional tax u/s 115-0. Therefore, such dividend is not a dividend referred to in section 115-O. From the history of section 115-O, we find that it provided for levy of additional tax on companies and exemption in the hands of shareholders simultaneously. When tax u/s 115 O was withdrawn, exemption u/s 10(33) was also withdrawn. Therefore, it can be said that section 115 O is a special provision and a special manner of collecting tax on distribution of income. In totality there is no extra burden when we consider the company and its shareholders together. For this reason also, it can be said that a distribution of profit which does not require payment of additional tax by the company is not intended to be exempted u/s 10(33).
Provisions of old section 10 (33) and new section 10(34) (w.e.f. 01.04.2004) reads as follows:
"Any income by way of dividends referred to in section 115 O"
This clearly shows that dividend referred to in section 115 O are exempted. Dividend referred to in section 115 O is those divided in respect to which the company has paid additional tax under section 115 O.
Recent decision of ITAT
In case of ITO v. Kalyan Gupta, (2007) 107 ITD 570 (Mum.) " E" bench, Mumbai ITAT considered claim of the assessee that a sum of money to which section 2(22)(e) is applicable is also exempt u/s 10(33) {now section 10 (34).}. The assessee contended that the explanation appears after section 115 Q, therefore, it is applicable only to S. 115Q. On reading of the provisions in entirety, the Tribunal held that the words 'dividend' or 'dividends' appears only in section 115 O and not at all in sections 115 P and 115 Q. The explanation starts with the words ' for the purpose of this chapter', therefore, the explanation is applicable to the entire chapter including section 115 O. (in fact practically the explanation is meant only for section 115 O).
Therefore, the Tribunal held that the assessee couldn't claim loans granted by the company which is deemed as dividend u/s 2 (22) (e), as exempt by virtue of section 10 (33) because it is not a dividend referred to in section 115 O.
Conclusion:
It can be said that dividend which has suffered tax by way of additional tax paid by the company who distributed dividend can only be considered as dividend for the purpose of exemption under section 10 (33) or section 10 (34) at the relevant times. As deemed dividend under section 2(22) (e) is not included in meaning of dividend for the purpose of Chapter XII D including section 115 O, therefore it is not a dividend referred to in section 115 O, and therefore the company is not liable to pay additional tax but the deemed dividend will be included in the income of shareholder if other conditions are satisfied.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 30, 2008
CBDT relaxes scrutiny norms in a few cases
July, 07th 2008
The Central Board of Direct Taxes has decided to relax norms on scrutiny of tax payers whose premises have been surveyed by the officials, a step aimed at encouraging evaders to pay up.
"The decision is likely to provide relief to thousands of taxpayers and it would save them from harassment at the hands of taxmen apart from litigation costs," said a senior Finance Ministry official. The decision has been taken following finance Minister P Chidambaram's assertion that government wanted to send a message that those who comply with the tax laws would not be harassed by the tax officials.
CBDT has decided to exempt a taxpayer from scrutiny after a survey if his account books are not impounded, there is no retraction of income declared during the survey and income declared excluding additional tax demanded by the department is not less than the last fiscal, the official said.
He said the decision would immediately save about 15,000 taxpayers, whose premises were surveyed in 2006-07 and those who filed returns last year, from scrutiny. Going by earlier norms, they would have to appear before the assessing officer for scrutiny of their returns.
Under the scrutiny norms, the tax officials would issue a notice to the assessee to appear in person on a particular day and provide detailed information relating to statements of all bank accounts, matching of money withdrawals with expenses, including those on credit cards besides cross-checking the perks, and scrutinies other incomes like interest-free loans.
Income Tax officials said the scrutiny would usually require taxpayers to hire chartered accountants or corporate lawyers to represent their case before the department. In 2008-09, the Department is expected to scrutinise 3.8 lakh returns. Of this, about 2.50 lakh cases will be selected through the Computer Aided Scrutiny Selection (CASS) while another 1.30 lakh will be chosen manually.
Under Section 133 A of the Income Tax Act, the tax official could conduct survey at the business and residential premises of a taxpayer to examine books of accounts, documents, stocks, business records and cash. In 2007-08, the direct tax collections, including personal income tax and corporate tax stood to Rs 3,14,468 crore.
It witnessed an increase of 38.61 per cent to Rs 57,373 crore in the first quarter of this fiscal as compared to Rs 41,391 crore mopped up during the same period a year ago.
The Central Board of Direct Taxes has decided to relax norms on scrutiny of tax payers whose premises have been surveyed by the officials, a step aimed at encouraging evaders to pay up.
"The decision is likely to provide relief to thousands of taxpayers and it would save them from harassment at the hands of taxmen apart from litigation costs," said a senior Finance Ministry official. The decision has been taken following finance Minister P Chidambaram's assertion that government wanted to send a message that those who comply with the tax laws would not be harassed by the tax officials.
CBDT has decided to exempt a taxpayer from scrutiny after a survey if his account books are not impounded, there is no retraction of income declared during the survey and income declared excluding additional tax demanded by the department is not less than the last fiscal, the official said.
He said the decision would immediately save about 15,000 taxpayers, whose premises were surveyed in 2006-07 and those who filed returns last year, from scrutiny. Going by earlier norms, they would have to appear before the assessing officer for scrutiny of their returns.
Under the scrutiny norms, the tax officials would issue a notice to the assessee to appear in person on a particular day and provide detailed information relating to statements of all bank accounts, matching of money withdrawals with expenses, including those on credit cards besides cross-checking the perks, and scrutinies other incomes like interest-free loans.
Income Tax officials said the scrutiny would usually require taxpayers to hire chartered accountants or corporate lawyers to represent their case before the department. In 2008-09, the Department is expected to scrutinise 3.8 lakh returns. Of this, about 2.50 lakh cases will be selected through the Computer Aided Scrutiny Selection (CASS) while another 1.30 lakh will be chosen manually.
Under Section 133 A of the Income Tax Act, the tax official could conduct survey at the business and residential premises of a taxpayer to examine books of accounts, documents, stocks, business records and cash. In 2007-08, the direct tax collections, including personal income tax and corporate tax stood to Rs 3,14,468 crore.
It witnessed an increase of 38.61 per cent to Rs 57,373 crore in the first quarter of this fiscal as compared to Rs 41,391 crore mopped up during the same period a year ago.
Is sale of Green Tea Leaves Agriculture Income
SALE OF AGRICULTURAL PRODUCE LIKE GREEN TEA LEAVES WILL RESULTS INTO PURELY AGRICULTUAL INCOME NOT LIABLE TO APPORTIONMENT
Union of India V. Belgachi Tea Co. Ltd. 2008 -TMI - 3950.
Relevant provisions:
Income tax Act- sections 2 (1A) ,10 (1) and 28.
Income Tax Rules - Rules 7, 7A,7B and 8.
And provisions of Indian constitution and agricultural income tax laws of state governments.
Sale of agricultural produce will result into deriving agricultural income even if the owner of estate is normally engaged in combined agricultural and manufacturing activities. For example in a tea estate tea leaves are cultivated, manufactured and sold- this results into combined income consisting of agricultural and business income. As per Rule 8 40% of such combined income is chargeable to tax under the income-tax Act and balance 60% is considered as agricultural income on which the state government may impose tax as tax on agricultural income. When a tea estate sell some green tea leaves, the income is not mixed income but purely agricultural income.
Therefore, when a tea estate, rubber estate or coffee estate sell green tea leaves, raw rubber or raw coffee etc. purely agricultural income will be derived and the rules of computing composite income and then allocating it in two segments will not apply.
In case agricultural produce like green tea leaves are purchase, processed and sold purely business income is derived and Rule 8 is not applicable.
The Rule 7A for Rubber and 7B for Coffee are also similar to Rule 8, therefore, law laid down in relation to rule 8 relating to tea will be equally applicable to Rubber estates and Coffee Estates.
Tea , rubber or coffee estates:
In this write-up tea/ rubber/ coffee estate' is considered as an organization having tea/ rubber/ coffee garden/ plantation as well as factory to process agricultural produce grown and then selling processed agricultural produce like black tea, cured rubber or processed coffee. Income from such combined activities is considered as mixed income, it is computed as if total income is business income and then certain portion of such composite income (e.g. 40% in case of tea) is chargeable to tax under the income-tax Act,1961. Balance of such income is considered as 'agricultural income' within the meaning of S. 2(1A) and is therefore exempt u/s 10 (1) of the income-tax Act,1961. As per the provisions of the Indian Constitution, the income from business can be taxed by the Central Government and any agricultural income can be taxed by the state government in which the agricultural land is situated, whereon the agricultural produce is grown.
The legal position is settled by several judgments of the supreme Court.
Rubber and Coffee:
W.e.f. 01.04.2002 that is assessment year 2002-03 new Rules 7A and 7b have been inserted. These rules are on the same line as Rule 8 relating to tea. The ratio of chargeable profit are different in different situations as laid down in the respective rules.
Thus, by framing of the Rules 7A, 7B and 8 the definition of agricultural income stands modified for the purpose of ascertainment of agricultural income for the purpose of Income-tax Act and as a consequence for the purpose of Indian Constitution.
As the Rules for rubber and coffee are similar (except ratio of chargeable income) to rule for tea, the law laid downs in the case of tea are equally applicable for rubber and tea. Therefore, constitutional validity, meaning of agricultural income in different circumstances, extent of chargeable income under central income tax, and state's agricultural income tax laws will be governed similarly.
Agricultural produce sold without processing:
Some time a tea estate, rubber estate or a coffee estate may sell its agricultural produce that is tea, rubber or coffee, as the case may be to other parties. The reasons for such may be of varied nature for example:
a. lesser quantity of agricultural produce, which is not considered economical to process. This happens at the beginning or during last days of season.
b. Problems in factory - break downs or labor unrest etc.
c. Financial problem.
d. Getting better price of agricultural produce in comparison to manufactured produce- this may happen when another manufacturer is having stronger order position and is able to sell produce in his brand at a better price due to value addition made by marketing efforts, and brands popularity.
In all above cases, the selling of agricultural produce is undoubtedly incidental to the entire activities of the estate. But the fact remains that the agricultural produce ( tea, rubber or coffee) is sold in its raw form without any processing in factory. Therefore, the condition of 'selling agricultural produce which was cultivate, and manufactured by the organization' are not satisfied. What is sold is agricultural produce therefore in such a case income from sale of such raw agricultural produce will be purely agricultural income and will not have an element of income chargeable to tax under the income-tax Act. The Rule 7A, 7B and 8 will not apply.
Incidental buying of agricultural produce by estate:
In some circumstances an estate may purchase agricultural produce and process it in its factory along with own agricultural produce. In relation to goods manufactured from bought out agricultural produce, the estate does not carryout any cultivation activity, and therefore, income from sale of final product made out of bought out agricultural produce will be fully chargeable income under the Income-tax Act and it will not contain any element of agricultural income.
An analysis of Rules:
Rule 8 is an old rule, which has been interpreted by the Supreme Court and its validity vis a vis the Indian Constitution has been upheld and it has also been held that the provision of the Rules is to be considered as integral part of the Act and accordingly agricultural income has also to be determined as per the Rule, even for the purpose of India Constitution and for determining agricultural income for the purpose of tax by state government. Therefore, the meaning of agricultural income, for the purpose of Indian Constitution is also to be ascertained according to the Rule 8, wherever it is applicable. That is the case computing income derived from selling tea which was grown and manufactured by the assessee. The new rule 7A and 7B for rubber and coffee are also on the same lines except the ratio of taxable income. Three rules also provide for allowability of some costs of re plantations.
Recent judgment of the Supreme Court:
In Union of India V. Belgachi Tea Co. Ltd.decided on May 9, 2008 the Supreme Court
Considered provisions relating to business income under section 28(i) of the Income-tax Act, 1961, read with rule 8 of the Income-tax Rules, 1962 and also section 8(1A) of the Bengal Agricultural Income-tax Act, 1944 in relation to agricultural income derived from lands situated in the state of West Bengal. The Court reiterated its earlier decision that income from 'tea grown and manufactured' shall be computed in accordance with provisions of 1961 Act and thereafter 40 per cent of that income is taxable under 1961 Act and remaining 60 per cent income is taxable under 1944 Act by State,as income from agriculture. This is as per already settled legal position.
In fact the new controversy that arose was whether , income from green tea leaves sold without any processing to make into black tea, as an incidental activity in the tea estate can also be considered under Rule 8 and 40% can be considered as business income and only 60% can be considered as agricultural income. The Supreme Court held that when assessee directly sells green tea leaves resulting into an income from agricultural products, it cannot be taken as incidental income to business and whatever income is derived from sale of green tea leaves will be assessed by Agricultural Income-tax Officer under 1944 Act.
The assessee, inter alia, claimed and submitted that the sale proceeds of green tea leaves be treated as incidental to business and income there from should also be computed under the provisions of the 1961 Act. However, the revenue was of the view that the income from sale of green tea leaves was taxable as income from agriculture under the Bengal Agricultural Income-tax Act, 1944. The Court also held that the income derived from sale of green tea leaves was agricultural income assessable under the 1944 Act of the State Government.
The observations and ruling of the Supreme Court are analyzed below:
a. There was no dispute on the fact that from the composite income from composite activities computed , 60 per cent was taxable by the State as agricultural income and 40 per cent was taxable by the Centre as business income.
b. The apportionment of 60 per cent and 40 per cent share of the composite income is that there are common expenses on establishment and staff for two different activities, that is, tea grown and tea manufactured. There can be independent income from sale of green tea leaves and by sale of tea, that is, after processing of green tea leaves when green tea leaves become tea for use. Income from agriculture is taxable by the State and sale of tea after manufacturing is taxable by the Union of India as business income.
c. Though segregation of income and expenses from two combined activities of the assessee is not possible, but at the same time, there cannot be two assessments of income by two different authorities. Therefore, there can be only one assessment of income from the tea business.
d. The combined reading of rule 8 of the Income-tax Rules, 1962 and section 8 of the 1944 Act and its amendment by insertion of sub-section (1A) in section 8 of the 1944 Act leaves no doubt in that the income from 'tea grown and manufactured' business shall be computed in accordance with provisions of the 1961 Act by the Assessing Officer under the 1961 Act and 40 per cent of the income is taxable under the 1961 Act and remaining 60 per cent income is taxable under the 1944 Act by the State, treating it as income from agriculture.
e. According to the assessee, agricultural income derived from the sale of green tea leaves is incidental income from its business and could not be taxed separately by the 1944 Act.
f. Mixed income means the income derived by an assessee from the combined activities, i.e., growing of tea leaves and manufacturing of tea to which Rule 8 apply. Therefore, for the purpose of computation of income under the 1961 Act, it should be the mixed income from 'tea grown and manufactured' by the assessee.
g. If the income is by sale of green tea leaves by the assessee, it cannot be called income assessable under the 1961 Act for the purpose of 40:60 share between the Centre and the State. In both the provisions, i.e., rule 8 of the Income-tax Rules, 1962 and section 8 of the 1944 Act, the words used are 'income derived from the sale of tea grown and manufactured'. Therefore, when there is restricted activity of growing and selling tea leaves, without manufacturing, then these provisions are not applicable.
h. The income from sale of green tea leaves is purely income from the agricultural product. There is no question of taxing it ( or any part of it - added by the author) as incidental income of the assessee when there is a specific provision and authority to tax that income, i.e., the State, under the 1944 Act. Thus, the agricultural income cannot be taxed under the 1961 Act.
i. It was also pertinent to mention that the Assessing Officer had assessed the income of tea manufactured by the assessee from 1977-78 to 1980-81 at a very low amount as compared to the assessee's income from the sale of green tea leaves. In that view of the matter, the income of the assessee from the sale of tea leaves could never be incidental to its business.
j. In the instant case, the assessee could process only 10 per cent of green tea leaves and 90 per cent of green tea leaves were sold directly in the market. That income from sale of green tea leaves could not be treated incidental to the business.
k. In case, the assessee directly sells the green tea leaves resulting into an income from agricultural products, it cannot be taken as income incidental to the business and whatever the income is derived from the sale of the green tea leaves can be assessed by the Agricultural Income-tax Officer under the 1944 Act.
l. The conclusion arrived at by the Division Bench of the High Court was in consonance with the judgment of the Supreme Court in Tata Tea Ltd.'s
m. The view, which had been taken by the Division Bench of the High Court in the impugned judgment, was to be upheld.
n. The Assessing Officer was to be directed to frame the assessment order in the case of the assessee on the principle of law laid down by the Supreme Court in the case of Tata Tea Ltd. (supra) and followed by the Division Bench of the High Court in the impugned judgment.
Situations when significant or insignificant quantity is sold:
A. In the case before the Supreme Court, 90% of green tea leaves were sold in raw condition and only 10% was processed and then sold as black tea. Therefore, in such a situation on commercial principals and on the basis of quantitative analysis it can at best be said that growing and selling of green tea leaves was the main activity of assessee, and therefore, the assessee was principally engaged in purely agricultural activity. In such situation, the 10% quantity sold after processing cannot be considered as principal activity and with due respect it is felt that the assessee had raised patently wrong contention that the cultivation and selling of green tea leaves ( to the extent of 90%) was incidental to 'growing, manufacturing and selling made black tea ( which was only to the extent of 10%)
B. On the other hand, in many tea estates, as discussed earlier in some circumstances, some quantity of green tea leaves are sold in exceptional cases and on economic criterion. For example, suppose a tea estate cultivated fifty lakh Kg. tea leaves, out of which, during initial period of season it sold fifty thousand kg. tea leaves to a neighboring tea garden or a bought leaves factory and similarly at the fag end of season fifty thousand kg of tea leaves were sold without processing. In this case total green tea leaves sold without processing is only 2% of total green tea leaves grown. The action of selling green tea leaves is because at that time factory was not ready at beginning of season or early closure of factory was preferred to prepare the factory for new season or the quantity of green leaves was not enough to economically operate the factory. In such circumstances, it can be said that the selling of green tea leaves is incidental to the main activity of tea estate.
However, for computing income Rule 8 cannot be applied because in relation to one lakh kilograms of tea leaves, any manufacturing efforts are not made and tea leaves are sold in raw form and not in manufactured black tea form. Therefore, income is to be considered as purely agricultural income from the sale of one lakh Kilograms of tea leaves, though the quantity sold is insignificant. In such circumstances role of agricultural is 60% in comparison to composite activity on application of Rule 8.
Purchasing some green tea leaves:
Similarly, some times tea estates purchase green tea leaves as incidental activity. For example, in the beginning of season as well as at the end of season, green tea leaves are purchased from neighboring tea estates, the bought leaves are mixed and manufactured in tea along with own green tea leaves. In such activity, purely business activity is involved. As per Rule 8 role of such activities is considered as 40% in comparison of composite activities.
How to compute income:
Buying and selling some quantity of green tea leaves, in a tea estate, can be considered as an incidental activity of tea estate provided major quantity is processed by the tea estate. In the case before the Supreme Court 90% of green tea leaves were sold, therefore in this case factually processing only 10% of tea leaves can be considered as incidental to cultivation and sale of green tea leaves and not vice versa. Strictly speaking, howesever small quantity of agricultural produce be sold in relation to such raw produce like tea leaves grown and sold, the tea estate has only carried agricultural activity. On the other hand in relation to green tea leaves bought from others and then processed and manufactured and sold as black tea, only business activity is involved.
In a situation where only some quantity is sold in raw state, the problem of estimation can be solved by mathematical formulae. Generally tea companies allocate income in the ratio of green tea leaves sold and used in manufacture of tea, this is also accepted by the Assessing Officers. However, that formula is not perfect because the factor of activity is not considered. Therefore, a weightage of activity involved can be applied as follows:
A. Activity of cultivation, manufacture and sale of tea- full activity - weight 1.00
B. Activity of cultivation and sale of green tea leaves-agricultural activity- weight 0. 60
C.Activity of purchasing green leaves and manufacture and sale of tea - business activity - weight 0.40
Rule 8 vis a vis Rule 7A and 7B
Rule 8 is old one and has seen judicial scrutiny. Rule 7A and 7B are new. Principally rules are similar, therefore, interpretation prevailing for Rule 8 are equally applicable to situations when Rules 7A and 7B are applied. The difference will be only in relation to ratio of business and agricultural income, deductions actually allowed or allowable while computing taxable income under income-tax Act etc. For example in case of tea companies when Rule 8 is applied only 40% of depreciation taken into consideration of composite income is actually allowed under the income-tax Act and thus for computing written down value of assets only 40% of total depreciation is deductible from the cost vide CIT Vs Suman Tea and Plywood Ind. P. Ltd 204 ITR 719 (Cal) followed in 226 ITR 34 (Cal). Similarly in case of rubber and coffee also when rule 7A or 7B are applied, depreciation actually allowed will be in the ratio in which the composite income is considered taxable under the income-tax Act. In case of assets eligible for 100% depreciation allowance, full deduction may be considered against composite income but depreciation actually allowed against business income will only be in ratio of taxable income. Such assets will be eligible for additional depreciation allowance u/s 32 (1) (iia) and cannot be considered as not eligible merely because rate of 100% is prescribed.
Union of India V. Belgachi Tea Co. Ltd. 2008 -TMI - 3950.
Relevant provisions:
Income tax Act- sections 2 (1A) ,10 (1) and 28.
Income Tax Rules - Rules 7, 7A,7B and 8.
And provisions of Indian constitution and agricultural income tax laws of state governments.
Sale of agricultural produce will result into deriving agricultural income even if the owner of estate is normally engaged in combined agricultural and manufacturing activities. For example in a tea estate tea leaves are cultivated, manufactured and sold- this results into combined income consisting of agricultural and business income. As per Rule 8 40% of such combined income is chargeable to tax under the income-tax Act and balance 60% is considered as agricultural income on which the state government may impose tax as tax on agricultural income. When a tea estate sell some green tea leaves, the income is not mixed income but purely agricultural income.
Therefore, when a tea estate, rubber estate or coffee estate sell green tea leaves, raw rubber or raw coffee etc. purely agricultural income will be derived and the rules of computing composite income and then allocating it in two segments will not apply.
In case agricultural produce like green tea leaves are purchase, processed and sold purely business income is derived and Rule 8 is not applicable.
The Rule 7A for Rubber and 7B for Coffee are also similar to Rule 8, therefore, law laid down in relation to rule 8 relating to tea will be equally applicable to Rubber estates and Coffee Estates.
Tea , rubber or coffee estates:
In this write-up tea/ rubber/ coffee estate' is considered as an organization having tea/ rubber/ coffee garden/ plantation as well as factory to process agricultural produce grown and then selling processed agricultural produce like black tea, cured rubber or processed coffee. Income from such combined activities is considered as mixed income, it is computed as if total income is business income and then certain portion of such composite income (e.g. 40% in case of tea) is chargeable to tax under the income-tax Act,1961. Balance of such income is considered as 'agricultural income' within the meaning of S. 2(1A) and is therefore exempt u/s 10 (1) of the income-tax Act,1961. As per the provisions of the Indian Constitution, the income from business can be taxed by the Central Government and any agricultural income can be taxed by the state government in which the agricultural land is situated, whereon the agricultural produce is grown.
The legal position is settled by several judgments of the supreme Court.
Rubber and Coffee:
W.e.f. 01.04.2002 that is assessment year 2002-03 new Rules 7A and 7b have been inserted. These rules are on the same line as Rule 8 relating to tea. The ratio of chargeable profit are different in different situations as laid down in the respective rules.
Thus, by framing of the Rules 7A, 7B and 8 the definition of agricultural income stands modified for the purpose of ascertainment of agricultural income for the purpose of Income-tax Act and as a consequence for the purpose of Indian Constitution.
As the Rules for rubber and coffee are similar (except ratio of chargeable income) to rule for tea, the law laid downs in the case of tea are equally applicable for rubber and tea. Therefore, constitutional validity, meaning of agricultural income in different circumstances, extent of chargeable income under central income tax, and state's agricultural income tax laws will be governed similarly.
Agricultural produce sold without processing:
Some time a tea estate, rubber estate or a coffee estate may sell its agricultural produce that is tea, rubber or coffee, as the case may be to other parties. The reasons for such may be of varied nature for example:
a. lesser quantity of agricultural produce, which is not considered economical to process. This happens at the beginning or during last days of season.
b. Problems in factory - break downs or labor unrest etc.
c. Financial problem.
d. Getting better price of agricultural produce in comparison to manufactured produce- this may happen when another manufacturer is having stronger order position and is able to sell produce in his brand at a better price due to value addition made by marketing efforts, and brands popularity.
In all above cases, the selling of agricultural produce is undoubtedly incidental to the entire activities of the estate. But the fact remains that the agricultural produce ( tea, rubber or coffee) is sold in its raw form without any processing in factory. Therefore, the condition of 'selling agricultural produce which was cultivate, and manufactured by the organization' are not satisfied. What is sold is agricultural produce therefore in such a case income from sale of such raw agricultural produce will be purely agricultural income and will not have an element of income chargeable to tax under the income-tax Act. The Rule 7A, 7B and 8 will not apply.
Incidental buying of agricultural produce by estate:
In some circumstances an estate may purchase agricultural produce and process it in its factory along with own agricultural produce. In relation to goods manufactured from bought out agricultural produce, the estate does not carryout any cultivation activity, and therefore, income from sale of final product made out of bought out agricultural produce will be fully chargeable income under the Income-tax Act and it will not contain any element of agricultural income.
An analysis of Rules:
Rule 8 is an old rule, which has been interpreted by the Supreme Court and its validity vis a vis the Indian Constitution has been upheld and it has also been held that the provision of the Rules is to be considered as integral part of the Act and accordingly agricultural income has also to be determined as per the Rule, even for the purpose of India Constitution and for determining agricultural income for the purpose of tax by state government. Therefore, the meaning of agricultural income, for the purpose of Indian Constitution is also to be ascertained according to the Rule 8, wherever it is applicable. That is the case computing income derived from selling tea which was grown and manufactured by the assessee. The new rule 7A and 7B for rubber and coffee are also on the same lines except the ratio of taxable income. Three rules also provide for allowability of some costs of re plantations.
Recent judgment of the Supreme Court:
In Union of India V. Belgachi Tea Co. Ltd.decided on May 9, 2008 the Supreme Court
Considered provisions relating to business income under section 28(i) of the Income-tax Act, 1961, read with rule 8 of the Income-tax Rules, 1962 and also section 8(1A) of the Bengal Agricultural Income-tax Act, 1944 in relation to agricultural income derived from lands situated in the state of West Bengal. The Court reiterated its earlier decision that income from 'tea grown and manufactured' shall be computed in accordance with provisions of 1961 Act and thereafter 40 per cent of that income is taxable under 1961 Act and remaining 60 per cent income is taxable under 1944 Act by State,as income from agriculture. This is as per already settled legal position.
In fact the new controversy that arose was whether , income from green tea leaves sold without any processing to make into black tea, as an incidental activity in the tea estate can also be considered under Rule 8 and 40% can be considered as business income and only 60% can be considered as agricultural income. The Supreme Court held that when assessee directly sells green tea leaves resulting into an income from agricultural products, it cannot be taken as incidental income to business and whatever income is derived from sale of green tea leaves will be assessed by Agricultural Income-tax Officer under 1944 Act.
The assessee, inter alia, claimed and submitted that the sale proceeds of green tea leaves be treated as incidental to business and income there from should also be computed under the provisions of the 1961 Act. However, the revenue was of the view that the income from sale of green tea leaves was taxable as income from agriculture under the Bengal Agricultural Income-tax Act, 1944. The Court also held that the income derived from sale of green tea leaves was agricultural income assessable under the 1944 Act of the State Government.
The observations and ruling of the Supreme Court are analyzed below:
a. There was no dispute on the fact that from the composite income from composite activities computed , 60 per cent was taxable by the State as agricultural income and 40 per cent was taxable by the Centre as business income.
b. The apportionment of 60 per cent and 40 per cent share of the composite income is that there are common expenses on establishment and staff for two different activities, that is, tea grown and tea manufactured. There can be independent income from sale of green tea leaves and by sale of tea, that is, after processing of green tea leaves when green tea leaves become tea for use. Income from agriculture is taxable by the State and sale of tea after manufacturing is taxable by the Union of India as business income.
c. Though segregation of income and expenses from two combined activities of the assessee is not possible, but at the same time, there cannot be two assessments of income by two different authorities. Therefore, there can be only one assessment of income from the tea business.
d. The combined reading of rule 8 of the Income-tax Rules, 1962 and section 8 of the 1944 Act and its amendment by insertion of sub-section (1A) in section 8 of the 1944 Act leaves no doubt in that the income from 'tea grown and manufactured' business shall be computed in accordance with provisions of the 1961 Act by the Assessing Officer under the 1961 Act and 40 per cent of the income is taxable under the 1961 Act and remaining 60 per cent income is taxable under the 1944 Act by the State, treating it as income from agriculture.
e. According to the assessee, agricultural income derived from the sale of green tea leaves is incidental income from its business and could not be taxed separately by the 1944 Act.
f. Mixed income means the income derived by an assessee from the combined activities, i.e., growing of tea leaves and manufacturing of tea to which Rule 8 apply. Therefore, for the purpose of computation of income under the 1961 Act, it should be the mixed income from 'tea grown and manufactured' by the assessee.
g. If the income is by sale of green tea leaves by the assessee, it cannot be called income assessable under the 1961 Act for the purpose of 40:60 share between the Centre and the State. In both the provisions, i.e., rule 8 of the Income-tax Rules, 1962 and section 8 of the 1944 Act, the words used are 'income derived from the sale of tea grown and manufactured'. Therefore, when there is restricted activity of growing and selling tea leaves, without manufacturing, then these provisions are not applicable.
h. The income from sale of green tea leaves is purely income from the agricultural product. There is no question of taxing it ( or any part of it - added by the author) as incidental income of the assessee when there is a specific provision and authority to tax that income, i.e., the State, under the 1944 Act. Thus, the agricultural income cannot be taxed under the 1961 Act.
i. It was also pertinent to mention that the Assessing Officer had assessed the income of tea manufactured by the assessee from 1977-78 to 1980-81 at a very low amount as compared to the assessee's income from the sale of green tea leaves. In that view of the matter, the income of the assessee from the sale of tea leaves could never be incidental to its business.
j. In the instant case, the assessee could process only 10 per cent of green tea leaves and 90 per cent of green tea leaves were sold directly in the market. That income from sale of green tea leaves could not be treated incidental to the business.
k. In case, the assessee directly sells the green tea leaves resulting into an income from agricultural products, it cannot be taken as income incidental to the business and whatever the income is derived from the sale of the green tea leaves can be assessed by the Agricultural Income-tax Officer under the 1944 Act.
l. The conclusion arrived at by the Division Bench of the High Court was in consonance with the judgment of the Supreme Court in Tata Tea Ltd.'s
m. The view, which had been taken by the Division Bench of the High Court in the impugned judgment, was to be upheld.
n. The Assessing Officer was to be directed to frame the assessment order in the case of the assessee on the principle of law laid down by the Supreme Court in the case of Tata Tea Ltd. (supra) and followed by the Division Bench of the High Court in the impugned judgment.
Situations when significant or insignificant quantity is sold:
A. In the case before the Supreme Court, 90% of green tea leaves were sold in raw condition and only 10% was processed and then sold as black tea. Therefore, in such a situation on commercial principals and on the basis of quantitative analysis it can at best be said that growing and selling of green tea leaves was the main activity of assessee, and therefore, the assessee was principally engaged in purely agricultural activity. In such situation, the 10% quantity sold after processing cannot be considered as principal activity and with due respect it is felt that the assessee had raised patently wrong contention that the cultivation and selling of green tea leaves ( to the extent of 90%) was incidental to 'growing, manufacturing and selling made black tea ( which was only to the extent of 10%)
B. On the other hand, in many tea estates, as discussed earlier in some circumstances, some quantity of green tea leaves are sold in exceptional cases and on economic criterion. For example, suppose a tea estate cultivated fifty lakh Kg. tea leaves, out of which, during initial period of season it sold fifty thousand kg. tea leaves to a neighboring tea garden or a bought leaves factory and similarly at the fag end of season fifty thousand kg of tea leaves were sold without processing. In this case total green tea leaves sold without processing is only 2% of total green tea leaves grown. The action of selling green tea leaves is because at that time factory was not ready at beginning of season or early closure of factory was preferred to prepare the factory for new season or the quantity of green leaves was not enough to economically operate the factory. In such circumstances, it can be said that the selling of green tea leaves is incidental to the main activity of tea estate.
However, for computing income Rule 8 cannot be applied because in relation to one lakh kilograms of tea leaves, any manufacturing efforts are not made and tea leaves are sold in raw form and not in manufactured black tea form. Therefore, income is to be considered as purely agricultural income from the sale of one lakh Kilograms of tea leaves, though the quantity sold is insignificant. In such circumstances role of agricultural is 60% in comparison to composite activity on application of Rule 8.
Purchasing some green tea leaves:
Similarly, some times tea estates purchase green tea leaves as incidental activity. For example, in the beginning of season as well as at the end of season, green tea leaves are purchased from neighboring tea estates, the bought leaves are mixed and manufactured in tea along with own green tea leaves. In such activity, purely business activity is involved. As per Rule 8 role of such activities is considered as 40% in comparison of composite activities.
How to compute income:
Buying and selling some quantity of green tea leaves, in a tea estate, can be considered as an incidental activity of tea estate provided major quantity is processed by the tea estate. In the case before the Supreme Court 90% of green tea leaves were sold, therefore in this case factually processing only 10% of tea leaves can be considered as incidental to cultivation and sale of green tea leaves and not vice versa. Strictly speaking, howesever small quantity of agricultural produce be sold in relation to such raw produce like tea leaves grown and sold, the tea estate has only carried agricultural activity. On the other hand in relation to green tea leaves bought from others and then processed and manufactured and sold as black tea, only business activity is involved.
In a situation where only some quantity is sold in raw state, the problem of estimation can be solved by mathematical formulae. Generally tea companies allocate income in the ratio of green tea leaves sold and used in manufacture of tea, this is also accepted by the Assessing Officers. However, that formula is not perfect because the factor of activity is not considered. Therefore, a weightage of activity involved can be applied as follows:
A. Activity of cultivation, manufacture and sale of tea- full activity - weight 1.00
B. Activity of cultivation and sale of green tea leaves-agricultural activity- weight 0. 60
C.Activity of purchasing green leaves and manufacture and sale of tea - business activity - weight 0.40
Rule 8 vis a vis Rule 7A and 7B
Rule 8 is old one and has seen judicial scrutiny. Rule 7A and 7B are new. Principally rules are similar, therefore, interpretation prevailing for Rule 8 are equally applicable to situations when Rules 7A and 7B are applied. The difference will be only in relation to ratio of business and agricultural income, deductions actually allowed or allowable while computing taxable income under income-tax Act etc. For example in case of tea companies when Rule 8 is applied only 40% of depreciation taken into consideration of composite income is actually allowed under the income-tax Act and thus for computing written down value of assets only 40% of total depreciation is deductible from the cost vide CIT Vs Suman Tea and Plywood Ind. P. Ltd 204 ITR 719 (Cal) followed in 226 ITR 34 (Cal). Similarly in case of rubber and coffee also when rule 7A or 7B are applied, depreciation actually allowed will be in the ratio in which the composite income is considered taxable under the income-tax Act. In case of assets eligible for 100% depreciation allowance, full deduction may be considered against composite income but depreciation actually allowed against business income will only be in ratio of taxable income. Such assets will be eligible for additional depreciation allowance u/s 32 (1) (iia) and cannot be considered as not eligible merely because rate of 100% is prescribed.
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