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.
Friday, July 11, 2008
Depreciation When Asset is Eligible for Two or More Rates
RATE OF DEPRECIATION WHEN ANY ASSET IS ELIGIBLE FOR TWO OR MORE DIFFERENT RATES BASED ON USE DURING THE PREVIOUS YEAR.
Deprecation allowance:
Depreciation allowance is allowed at specified rates, subject to fulfillment of other conditions. The scope of this write-up is only about applicable rate when an assets is put to use in different manners for which different rates of depreciation are allowable. Depreciation is allowed with a view that over a period of time (which may be one or more years) the income is computed in a real manner. In case of few assets rate of deprecation is allowable at different rates when assets is put to use in different manner.
Entitled for depreciation allowance only for a part of the year
Another situation can be that for some time the asset was put to use in a manner that it was not entitled to depreciation allowance, and on some days asset was put to use in a manner that it is entitled to deprecation allowance. For example, suppose a medical student while pursuing his course of MD purchased a car and could use it for personal purposes, while studying and appearing for MD examination during April to August. From September he started his medical practice and used car for his professional purposes. Thus during April to August the use was such that the car was not eligible for deprecation allowance, however, from September the car became eligible for depreciation allowance. In such a case based on use from September, the car will be eligible for deprecation allowance.
Rates of depreciation:
1. In case of eligible asset owned and used for the purpose of business or profession of the assessee normal depreciation is allowed under section 32 of the Income Tax Act, 1961 (The Act) read with Rule 5 of the Income Tax Rules, 1962 (The Rules) at the rates prescribed in Appendix I or Appendix IA to the Rules, as may be applicable. Some time additional depreciation / initial depreciation or weighted depreciation is also allowed on eligible assets as provide in section 32 and Rule 5.
Scope of this write-up is to undertake a study about certain assets, which may be eligible for two or more rates depending on two or more type of actual use of the asset during the previous year by the assessee.
Example of assets, which may be eligible for different rates:
2. Generally single rate is applicable to a particular type of asset irrespective of the use to which it has been put. However, from time to time some classification of assets is such which may be used differently attracting depreciation at different rates. Few examples are given below:
I. Buildings:
1. Buildings, which are used mainly for residential purposes except hotels and boarding houses - 5%
2. Buildings other than those used mainly for residential purposes and not covered by sub-item (1) above and special category provides in sub-item (3) in the appendix 10%.
Machinery and plant:
Motorcars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April 1990 - 15%
Motorbuses, motor lorries and motor taxis used in a business of running them on hire- 30%
Other motor buses*, motor lorries* and motor taxis (that is those not used in a business of running them on hire) will be eligible for depreciation at general rate applicable to plant and machinery - at present the rate is 15%
(* Not being some commercial vehicles falling in to special category eligible for 40,50,or 60% rate).
Books owned by assessees carrying on a profession -
(a) Books, being annual publications 100%
(b) Books, other than annual publications 60%
Books owned by assessees carrying on business in running lending libraries - 100%
Rates when asset is put to single use:
3. There will be no dispute when the asset is put to a single use. For example, a flat used for residential purpose for staff accommodation will be eligible for 5% depreciation. Another flat used as office will be eligible for 10% depreciation.
A Truck used in own business will be eligible for depreciation @ 15%. If the same truck is used in business of running it oh hire, it will be eligible for depreciation @ 30%.
Circumstances when asset is put to different uses:
4. Some times assets may be put to more than one type of use. The multi pal functional use may be also be different ways, for example:
(A) Same asset is used for two different purpose daily or simultaneously for example a flat may be used as office in the office hours and as residential accommodation at other times.
(B) A flat might have been used as residential flat during a part of the year and as office in other part of the year.
(C) A truck may be used within and for the purpose of assessee's own factory as well as for running it on hire for some hours for other parties.
(D) A truck might have been used in own business for some days and on other days to earn freight it may be hired out to other parties.
(E) A professional may use his library for own professional requirement and he may also allow it to other persons for reading and lending books in consideration of some hire.
In the above-mentioned circumstances it is found that the same asset is used in such way that two rates are applicable.
'Main use' in case of buildings:
5. A. In case of buildings we find that the words used are 'mainly used', whereas for other assets there is no such wording. Thus, in case of buildings if the building is mainly used as residence lower rate will be admissible. If it is not mainly used as residence but as an office higher rate will be admissible but this will be applicable when there is simultaneous use as residence and office.
Therefore, if the same flat is used simultaneously for the residential purposes as well as office use, one will have to find out the main use. The main use can be ascertained based on number of days or hours for which different use is made.
However, if the same flat is exclusively used as office at any time during the year, the assessee may claim higher depreciation by classifying the flat in to the category of block of asset eligible for 10% depreciation.
Suppose a flat is used exclusively for office purposes at the beginning of the previous year, thereafter it is kept ready for office use but no actual use was made. In that case depreciation for the full year shall be eligible at the rates applicable for office building. If the same flat is used as residence for some part of the year, the assessee can still claim depreciation at higher rate because on some days he used it exclusively for office. Here the beneficial provision can be applied.
In case the flat is used both as residence and as office equally, the assessee may choose to apply higher rate based on rule of application of beneficial rate / classification.
Use in case of other assets:
6. In case of assets other than buildings there is no use of phrase "mainly used". Therefore, if at any time of the previous year the asset is put to such use, which entitles the assessee higher depreciation, the assessee may claim higher depreciation.
For example:
First situation one: suppose a truck is used in the business of running on hire every day for three- four hours or say for some days only and it could not be used for rest of the period / other days. The truck will be eligible for higher depreciation of 40%.
Second situation: Now suppose if the same truck is also used for own production business of the assessee (not for running on hire) for some hours daily or some days during the year.
In this case also the assessee can rightly claim depreciation at higher rate because he also used the truck in the business of running it on hire.
It would be incorrect to say that he will be entitled to lower depreciation when truck was used more - in business of hiring and in other business merely because he used it not exclusively for hiring.
Used even on a single day entitles for depreciation:
If an asset is used at any time (theoretically say on a single day), it will be eligible for depreciation allowance at applicable rate. Therefore, when an asset is used for some days in a use which entitles for higher depreciation and suppose if the asset is not used in another purpose, still it will be entitled to higher depreciation, therefore, there would be no justification to allow depreciation at lower rate merely because the asset was used on some days in a manner that entitles for lower depreciation allowance.
Two rates can be claimed, but it will not be reasonable:
One may also argue that the truck was used as a 'vehicle on hire', so it falls in to 30% category and as it was also used in own business so it is also covered in other category so 15% depreciation can be allowed. However, it will means that the truck can appear in two block of assets simultaneously, apparently there is no prohibition for such claim in view of the definition of block of asset in section 2 (11) of the Act. Which reads as follows:
2(11) " block of assets" means a group of assets falling within a class of assets comprising—
(a) Tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature,
in respect of which the same rate percentage of depreciation is prescribed.
Thus, it can be said that when the truck was used in the business of running it on hire it was falling in to the block of assets of 30% and when it was used in own business it was falling in the general category eligible for 15% depreciation. Therefore, depreciation can be claimed separately of two businesses to compute income of two business carried by the assessee.
However, it may not appear to be logical and justified for the reason that if the truck was fully used for hiring it would be eligible for only 30% depreciation. The truck was not fully used so it could be used for other business. Therefore, taking a reasonable, rational and realistic view and also liberal and beneficial classification 30% depreciation can be claimed on such truck for the full period.
Cases before Rajasthan High Court:
In case of CIT V Bansiwala Iron & Steel RE-Rolling Mills (2004) 134 Taxman 124 (Raj.) The assessee used a truck trailer in its own business as well as in business of running on hire. As per claim of the assessee the Tribunal allowed higher depreciation taking in to note of the fact that the assessee had substantial earnings from hire. The reference applications under section 256 (1) and 256 (2) preferred by the CIT were rejected by the ITAT and the Rajasthan High court for the reason that truck trailor was used for the business of running on hire and hire income was also substantial.
In CIT V Manjeet Stone Co. (1991) 55 Taxman /190 ITR 183 (Raj.) it was held that the vehicles were used mainly in assessees own business and not in business of running on hire. Though the vehicle was registered, as a public transport vehicle the earning of hire charges was nominal, therefore, assessee was not in the business of hiring of vehicles thus not entitled to higher depreciation allowance.
In the above cases it appears that the Court has taken view on the basis of main use of vehicle by way of earnings made and also the business of the assessee.
The logical view:
In view of the above discussion on a logical view it can be said that higher depreciation may be allowable if the asset is used in a business or put to such use for which higher rate is eligible even if the asset is used in other business for which lower rate is applicable. Provided that first type of business should also be a business carried on by the assessee.
Thus, where a flat is used as office and residence of employees, it will be eligible for depreciation @ 10%. Because if it is not used as residence still depreciation @ 10% will be allowable.
When the library is used for own profession as well as for lending books to others the books will be eligible for depreciation @ 100%.
Where a motorcar is also used in business of running for hire as a motor taxi, besides use for transportation of own staff for some time of the day, the motorcar will be eligible for higher depreciation.
Where a building is used as residential accommodation for staff in a seasonal factory and as a hotel or boarding house in off-season, the building will be eligible for higher depreciation.
Deprecation allowance:
Depreciation allowance is allowed at specified rates, subject to fulfillment of other conditions. The scope of this write-up is only about applicable rate when an assets is put to use in different manners for which different rates of depreciation are allowable. Depreciation is allowed with a view that over a period of time (which may be one or more years) the income is computed in a real manner. In case of few assets rate of deprecation is allowable at different rates when assets is put to use in different manner.
Entitled for depreciation allowance only for a part of the year
Another situation can be that for some time the asset was put to use in a manner that it was not entitled to depreciation allowance, and on some days asset was put to use in a manner that it is entitled to deprecation allowance. For example, suppose a medical student while pursuing his course of MD purchased a car and could use it for personal purposes, while studying and appearing for MD examination during April to August. From September he started his medical practice and used car for his professional purposes. Thus during April to August the use was such that the car was not eligible for deprecation allowance, however, from September the car became eligible for depreciation allowance. In such a case based on use from September, the car will be eligible for deprecation allowance.
Rates of depreciation:
1. In case of eligible asset owned and used for the purpose of business or profession of the assessee normal depreciation is allowed under section 32 of the Income Tax Act, 1961 (The Act) read with Rule 5 of the Income Tax Rules, 1962 (The Rules) at the rates prescribed in Appendix I or Appendix IA to the Rules, as may be applicable. Some time additional depreciation / initial depreciation or weighted depreciation is also allowed on eligible assets as provide in section 32 and Rule 5.
Scope of this write-up is to undertake a study about certain assets, which may be eligible for two or more rates depending on two or more type of actual use of the asset during the previous year by the assessee.
Example of assets, which may be eligible for different rates:
2. Generally single rate is applicable to a particular type of asset irrespective of the use to which it has been put. However, from time to time some classification of assets is such which may be used differently attracting depreciation at different rates. Few examples are given below:
I. Buildings:
1. Buildings, which are used mainly for residential purposes except hotels and boarding houses - 5%
2. Buildings other than those used mainly for residential purposes and not covered by sub-item (1) above and special category provides in sub-item (3) in the appendix 10%.
Machinery and plant:
Motorcars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April 1990 - 15%
Motorbuses, motor lorries and motor taxis used in a business of running them on hire- 30%
Other motor buses*, motor lorries* and motor taxis (that is those not used in a business of running them on hire) will be eligible for depreciation at general rate applicable to plant and machinery - at present the rate is 15%
(* Not being some commercial vehicles falling in to special category eligible for 40,50,or 60% rate).
Books owned by assessees carrying on a profession -
(a) Books, being annual publications 100%
(b) Books, other than annual publications 60%
Books owned by assessees carrying on business in running lending libraries - 100%
Rates when asset is put to single use:
3. There will be no dispute when the asset is put to a single use. For example, a flat used for residential purpose for staff accommodation will be eligible for 5% depreciation. Another flat used as office will be eligible for 10% depreciation.
A Truck used in own business will be eligible for depreciation @ 15%. If the same truck is used in business of running it oh hire, it will be eligible for depreciation @ 30%.
Circumstances when asset is put to different uses:
4. Some times assets may be put to more than one type of use. The multi pal functional use may be also be different ways, for example:
(A) Same asset is used for two different purpose daily or simultaneously for example a flat may be used as office in the office hours and as residential accommodation at other times.
(B) A flat might have been used as residential flat during a part of the year and as office in other part of the year.
(C) A truck may be used within and for the purpose of assessee's own factory as well as for running it on hire for some hours for other parties.
(D) A truck might have been used in own business for some days and on other days to earn freight it may be hired out to other parties.
(E) A professional may use his library for own professional requirement and he may also allow it to other persons for reading and lending books in consideration of some hire.
In the above-mentioned circumstances it is found that the same asset is used in such way that two rates are applicable.
'Main use' in case of buildings:
5. A. In case of buildings we find that the words used are 'mainly used', whereas for other assets there is no such wording. Thus, in case of buildings if the building is mainly used as residence lower rate will be admissible. If it is not mainly used as residence but as an office higher rate will be admissible but this will be applicable when there is simultaneous use as residence and office.
Therefore, if the same flat is used simultaneously for the residential purposes as well as office use, one will have to find out the main use. The main use can be ascertained based on number of days or hours for which different use is made.
However, if the same flat is exclusively used as office at any time during the year, the assessee may claim higher depreciation by classifying the flat in to the category of block of asset eligible for 10% depreciation.
Suppose a flat is used exclusively for office purposes at the beginning of the previous year, thereafter it is kept ready for office use but no actual use was made. In that case depreciation for the full year shall be eligible at the rates applicable for office building. If the same flat is used as residence for some part of the year, the assessee can still claim depreciation at higher rate because on some days he used it exclusively for office. Here the beneficial provision can be applied.
In case the flat is used both as residence and as office equally, the assessee may choose to apply higher rate based on rule of application of beneficial rate / classification.
Use in case of other assets:
6. In case of assets other than buildings there is no use of phrase "mainly used". Therefore, if at any time of the previous year the asset is put to such use, which entitles the assessee higher depreciation, the assessee may claim higher depreciation.
For example:
First situation one: suppose a truck is used in the business of running on hire every day for three- four hours or say for some days only and it could not be used for rest of the period / other days. The truck will be eligible for higher depreciation of 40%.
Second situation: Now suppose if the same truck is also used for own production business of the assessee (not for running on hire) for some hours daily or some days during the year.
In this case also the assessee can rightly claim depreciation at higher rate because he also used the truck in the business of running it on hire.
It would be incorrect to say that he will be entitled to lower depreciation when truck was used more - in business of hiring and in other business merely because he used it not exclusively for hiring.
Used even on a single day entitles for depreciation:
If an asset is used at any time (theoretically say on a single day), it will be eligible for depreciation allowance at applicable rate. Therefore, when an asset is used for some days in a use which entitles for higher depreciation and suppose if the asset is not used in another purpose, still it will be entitled to higher depreciation, therefore, there would be no justification to allow depreciation at lower rate merely because the asset was used on some days in a manner that entitles for lower depreciation allowance.
Two rates can be claimed, but it will not be reasonable:
One may also argue that the truck was used as a 'vehicle on hire', so it falls in to 30% category and as it was also used in own business so it is also covered in other category so 15% depreciation can be allowed. However, it will means that the truck can appear in two block of assets simultaneously, apparently there is no prohibition for such claim in view of the definition of block of asset in section 2 (11) of the Act. Which reads as follows:
2(11) " block of assets" means a group of assets falling within a class of assets comprising—
(a) Tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature,
in respect of which the same rate percentage of depreciation is prescribed.
Thus, it can be said that when the truck was used in the business of running it on hire it was falling in to the block of assets of 30% and when it was used in own business it was falling in the general category eligible for 15% depreciation. Therefore, depreciation can be claimed separately of two businesses to compute income of two business carried by the assessee.
However, it may not appear to be logical and justified for the reason that if the truck was fully used for hiring it would be eligible for only 30% depreciation. The truck was not fully used so it could be used for other business. Therefore, taking a reasonable, rational and realistic view and also liberal and beneficial classification 30% depreciation can be claimed on such truck for the full period.
Cases before Rajasthan High Court:
In case of CIT V Bansiwala Iron & Steel RE-Rolling Mills (2004) 134 Taxman 124 (Raj.) The assessee used a truck trailer in its own business as well as in business of running on hire. As per claim of the assessee the Tribunal allowed higher depreciation taking in to note of the fact that the assessee had substantial earnings from hire. The reference applications under section 256 (1) and 256 (2) preferred by the CIT were rejected by the ITAT and the Rajasthan High court for the reason that truck trailor was used for the business of running on hire and hire income was also substantial.
In CIT V Manjeet Stone Co. (1991) 55 Taxman /190 ITR 183 (Raj.) it was held that the vehicles were used mainly in assessees own business and not in business of running on hire. Though the vehicle was registered, as a public transport vehicle the earning of hire charges was nominal, therefore, assessee was not in the business of hiring of vehicles thus not entitled to higher depreciation allowance.
In the above cases it appears that the Court has taken view on the basis of main use of vehicle by way of earnings made and also the business of the assessee.
The logical view:
In view of the above discussion on a logical view it can be said that higher depreciation may be allowable if the asset is used in a business or put to such use for which higher rate is eligible even if the asset is used in other business for which lower rate is applicable. Provided that first type of business should also be a business carried on by the assessee.
Thus, where a flat is used as office and residence of employees, it will be eligible for depreciation @ 10%. Because if it is not used as residence still depreciation @ 10% will be allowable.
When the library is used for own profession as well as for lending books to others the books will be eligible for depreciation @ 100%.
Where a motorcar is also used in business of running for hire as a motor taxi, besides use for transportation of own staff for some time of the day, the motorcar will be eligible for higher depreciation.
Where a building is used as residential accommodation for staff in a seasonal factory and as a hotel or boarding house in off-season, the building will be eligible for higher depreciation.
Damned if you file, damned if you don’t
Publication:Economic Times Delhi;
Date:Jul 10, 2008;
Section:EFM;
Page Number:7
M Padmakshan MUMBAI FILING income-tax returns has never been so saral, as is made out to be. The latest controversy is about filing TDS (tax deducted at source) certificates. Last year, the department had issued an advise to taxpayers not to file any attachment with the returns. However, when taxpayers complied, the department changed its stand. It said the TDS certificates would have to be filed along with the returns, else the returns will not be accepted. Now, taxpayers are in a fix: to file the attachment or not. Chartered accountant Nilesh Kapadia explains the dilemma. He says the income-tax commissioners are refusing to accept the returns if TDS certificates are not filed with the returns. Even when you produce copies of TDS certificates along with the returns, the commissioners continue to reject the returns. The department insists that TDS certificates should be original. The I-T department says the advise by the tax authorities not to file any attachment with the returns was part of its ongoing exercise to automate the whole administration. Office of the chief commissioner, Mumbai, said the instruction for not filing any attachment with the return was made in the financial year 2006-07. The CBDT has already issued instructions that if the TDS claim by the employer is less than Rs 5 lakh or if the refund is less than Rs 25,000, the taxpayer need not produce the TDS certificate. In all other cases, the returns should carry the TDS certificate. The office also explained the reason for the changed stance. Quite often, employers who are supposed to file quarterly returns do not follow the rule. And when they file it, they do not fill in crucial details like the PAN of the employee from whose salary the TDS has been deducted. This prevents the officers from verifying the TDS payment mentioned in the return. Therefore, despite a decision to ask the employees not to file any attachment with the returns, the department had to reconsider the decision. According to tax lawyer Jignesh R Shah, “Till the tax administration becomes completely automated, the taxpayers should be given an option to file returns electronically or manually.”
Date:Jul 10, 2008;
Section:EFM;
Page Number:7
M Padmakshan MUMBAI FILING income-tax returns has never been so saral, as is made out to be. The latest controversy is about filing TDS (tax deducted at source) certificates. Last year, the department had issued an advise to taxpayers not to file any attachment with the returns. However, when taxpayers complied, the department changed its stand. It said the TDS certificates would have to be filed along with the returns, else the returns will not be accepted. Now, taxpayers are in a fix: to file the attachment or not. Chartered accountant Nilesh Kapadia explains the dilemma. He says the income-tax commissioners are refusing to accept the returns if TDS certificates are not filed with the returns. Even when you produce copies of TDS certificates along with the returns, the commissioners continue to reject the returns. The department insists that TDS certificates should be original. The I-T department says the advise by the tax authorities not to file any attachment with the returns was part of its ongoing exercise to automate the whole administration. Office of the chief commissioner, Mumbai, said the instruction for not filing any attachment with the return was made in the financial year 2006-07. The CBDT has already issued instructions that if the TDS claim by the employer is less than Rs 5 lakh or if the refund is less than Rs 25,000, the taxpayer need not produce the TDS certificate. In all other cases, the returns should carry the TDS certificate. The office also explained the reason for the changed stance. Quite often, employers who are supposed to file quarterly returns do not follow the rule. And when they file it, they do not fill in crucial details like the PAN of the employee from whose salary the TDS has been deducted. This prevents the officers from verifying the TDS payment mentioned in the return. Therefore, despite a decision to ask the employees not to file any attachment with the returns, the department had to reconsider the decision. According to tax lawyer Jignesh R Shah, “Till the tax administration becomes completely automated, the taxpayers should be given an option to file returns electronically or manually.”
BEST OF LUCK
Best of Luck to all who are waiting there results.
only few seconds are left for celebration.
wish u all the best
with regards
CA SATBIR
ON BEHALF OF
JAB WE MET CA GROUP
only few seconds are left for celebration.
wish u all the best
with regards
CA SATBIR
ON BEHALF OF
JAB WE MET CA GROUP
Golden Quotes
“When you start caring about yourself, you start loving somebody.
But when start caring about others somebody will start loving you.”
But when start caring about others somebody will start loving you.”
Thursday, July 10, 2008
KPMG gets notice for tax evasion
KPMG gets notice for tax evasion
Publication:Economic Times Delhi;
Date:Apr 25, 2008;
Section:Economy;
Page Number:10
Deepshikha Sikarwar NEW DELHI Consultancy firms have drawn the ire of the service tax department for alleged evasion. The department has issued show-cause notice to leading consultancy firm KPMG. It is understood that notices have been issued to some other firms of the same league in other cities. The show-cause notice to KPMG group of entities — KPMG (partnership firm), KPMG Advisory Services (P) Ltd, KPMG(I) Pvt Ltd, KPMG Resource Centre (P) Ltd, BSR & Co and BSR & Associates is for service tax totalling Rs 29 crore. The notice has been issued to them on foreign remittances made to entities abroad in respect of professional services received by them on out-of-pocket expenses billed by them on services wrongly claimed as export, on regulatory services and on membership fee during the course of investigation. KPMG group of entities have already deposited service tax amounting to Rs 4.38 crore and interest of Rs 42 lakh. This amount has been paid for period from June, 2005 to March 2007, when an explanation was added to the section 65(105) of the Finance Act, 1994, making such services specifically taxable. But, the department has alleged that the services provided in India by foreign service providers were always taxable and liability to pay tax was on service receiver since August 2002 when the service tax rules were amended. When contacted, a KPMG spokesperson said: “This is an accounting industry issue and not limited to KPMG alone. We believe we have paid taxes wherever applicable. We are examining the issue and will contest it based on merit and as per the law.” Earlier, the Delhi service tax Commissionerate is understood to have issued show cause notices to Ernst & Young group of companies for Rs 8.15 crore on reverse charge issue and out of pocket expenses. Some other consultancy firms have also been issued show cause notices in Mumbai and Kolkata on similar grounds.
Publication:Economic Times Delhi;
Date:Apr 25, 2008;
Section:Economy;
Page Number:10
Deepshikha Sikarwar NEW DELHI Consultancy firms have drawn the ire of the service tax department for alleged evasion. The department has issued show-cause notice to leading consultancy firm KPMG. It is understood that notices have been issued to some other firms of the same league in other cities. The show-cause notice to KPMG group of entities — KPMG (partnership firm), KPMG Advisory Services (P) Ltd, KPMG(I) Pvt Ltd, KPMG Resource Centre (P) Ltd, BSR & Co and BSR & Associates is for service tax totalling Rs 29 crore. The notice has been issued to them on foreign remittances made to entities abroad in respect of professional services received by them on out-of-pocket expenses billed by them on services wrongly claimed as export, on regulatory services and on membership fee during the course of investigation. KPMG group of entities have already deposited service tax amounting to Rs 4.38 crore and interest of Rs 42 lakh. This amount has been paid for period from June, 2005 to March 2007, when an explanation was added to the section 65(105) of the Finance Act, 1994, making such services specifically taxable. But, the department has alleged that the services provided in India by foreign service providers were always taxable and liability to pay tax was on service receiver since August 2002 when the service tax rules were amended. When contacted, a KPMG spokesperson said: “This is an accounting industry issue and not limited to KPMG alone. We believe we have paid taxes wherever applicable. We are examining the issue and will contest it based on merit and as per the law.” Earlier, the Delhi service tax Commissionerate is understood to have issued show cause notices to Ernst & Young group of companies for Rs 8.15 crore on reverse charge issue and out of pocket expenses. Some other consultancy firms have also been issued show cause notices in Mumbai and Kolkata on similar grounds.
Goods transport agents get tax exemption
Goods transport agents get tax exemption
Publication:Economic Times Delhi;
Date:Jun 27, 2008;
Section:Economy;
Page Number:18
Agents Won’t Have To Pay Service Tax On Renting Of Goods Carriage
Our Bureau NEW DELHI TRANSPORTERS hit by the hike in diesel prices have a reason to cheer. The government has exempted goods transport agents from paying a service tax on renting of goods carriage. The Centre on Thursday issued a notification fully exempting from levy of service tax the supply of transport vehicles (goods carriage) to a goods transport agency (GTA) which is used for transport of goods by road. This follows representations from the All India Confederation of Goods Vehicle Owners’ Associations and the All India Motor Transport Congress requesting the government to provide relief on levy of service tax on supply of goods carriage to GTA for use in transport of goods. GTAs often provide services for transportation of goods by road using the goods carriage obtained on rent or hire basis. They had sought relief on the ground that the service tax paid on renting or hiring of goods carriage could not be claimed as input credit for payment of service tax towards GTA service. Services provided by a GTA in relation to transportation of goods is leviable to service tax under GTA service. However, service tax for the GTA service provided is payable only on 25% of the amount charged for providing the GTA service and the balance amount is exempt from levy of service tax. In the view of this provision, GTAs were not entitled to take input credit under Cenvat credit scheme on goods and services used for GTA service. Moreover, the service tax for GTA services provided in seven specified cases is not required to be paid by the GTA service provider but by the person making payment towards the freight. In this year’s Budget, services provided in relation to supply of tangible goods for use, without transfer of possession and effective control, has been made as separate taxable service and this service has come into force with effect from May 16, 2008. Consequently, supply of goods carriage to the GTA, without transfer of possession and effective control, for using the said goods carriage for transport of goods by road becomes leviable to service tax. “Notification No.29/2008-Service Tax, dated 26.06.2008 exempts fully the levy of service tax on supply of goods carriage to GTA for use in transportation of goods by road,” an official statement said here.
E-PAYMENT OF TAXES- CONCEPT AND
E-PAYMENT OF TAXES- CONCEPT AND
PROCEDURE
E-payment of tax is a facility provided to the tax payers to make tax
payments through internet using net-banking facility.
Recent Clarification - Service Tax
Recent Clarification - Service Tax
The Ministry of Finance, Department of Revenue, Tax Research Unit has issued a Circular on January 4, 2008. This circular is an amendment to the master circular no.96/7/2007-ST issued on August 23, 2007. The circular clarifies the departments stand on cenvat credit that can be availed by service providers who either provide or utilize services that come under the category of works contract, construction and rental of immovable property.
The following issues have been addressed: Read More......
The following issues have been addressed: Read More......
19 steel companies under scanner on excise evasion
19 steel companies under scanner on excise evasion
NEW DELHI: The Directorate General of Central Excise Intelligence has issued showcause notices to 19 steel firms for alleged duty evasion of about Rs 108 crore. Parmarth Industries, Kamakhya Steel and Jain Steel are among the defaulters. Taxmen had raided the premises of Parmarth, an Uttar Pradeshbased saria maker about a year ago and recovered Rs 1.78 crore, sources said.
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