Interest in leasehold property includible in net wealth of assessee

Case Law Citation: Jay Hind Sciaky Limited vs. DCIT (Bobmbay High Court), Wealth Tax Appeal No.-33/2001, Date of Pronouncement -18.12.2015

Brief of the case:

• The Hon’ble Bombay High Court in the case of Jaya Hind Sciaky Limited held that the words “belonging to” as used in sec 40(2) of the Act would include assets in possession of the Company without full Ownership, but sufficient domain over it, to exercise the powers which would otherwise normally vest in the owner on the valuation date.
• Further, it was held that a lease giving right to assessee to use the premises during lease period subject to complying with the terms & conditions as set out in the lease agreement. It create a sufficient interest of the assessee in the leasehold property to hold that the assets held by the assessee belongs to it.

Facts of the case:

• The assessee company had taken on lease a plot of land in Pimpri Industrial Area, village – Akrudi for a period of 95 years from Maharashtra Industrial Development Corporation (MIDC) having a total area 9605sq meters as per the lease deed. Assessee constructed a factory building, leaving a balance area of 2175 sq. meters. of the said plot as open land.
• Assessee filed its return of wealth declaring net wealth of Rs. 13 lacs which did not include the interest in lease hold open land. However, as per the AO the said land should form the part of wealth as the open land taken on lease by the assessee was an asset belonging to the Appellant in terms of Section 40(2) and (3) of the Act to be included to determine the net wealth chargeable to Wealth Tax under the Act.

• Commissioner of Wealth Tax (Appeals) upheld the order of AO by holding that the open land in which the assessee has lease hold rights over the next 95 years, is chargeable to wealth tax, as for all practical purposes, it belongs to the assessee within the meaning of expression “belonging to” used in Sec 40(2).Tribunal also concurred with the order of Commissioner (Appeals) on the same footing and dismissed the appeal of assessee.
• Aggrieved assessee is in appeal before the High Court.

Contention of the Assessee:

• It was submitted that leasehold interest cannot be included as an asset under Section 40(3) of the Act as it is not ‘property of every description’ which is defined as an asset u/s 2(e) of the Act . Further, it was also submitted that the word ‘belonging to’ as used in Section 40(2) of the Act covers only the legal ownership of the assets and cannot be extended to cover beneficial ownership coupled with terms & conditions as agreed. In his support reliance was placed on the decision of this high court in the case of CIT v/s. O. P. Monga 162 ITR 224 wherein the court held that the lessee not being beneficial owner not entitled to depreciation as per Sec 32.
• Even further, the assessee claimed that if at all it is assumed that the charge of wealth tax extend to beneficial ownership , given the strict conditions to be complied with in the lease agreement it could not be hold that assessee has sufficient interest in the leasehold property so that the same could assessed as belonging to him.

Contention of the Revenue:

• The learned counsel for the revenue placed reliance on the decision of Apex Court in the case of Nawab Sir Mir Osman Ali Khan v/s. Commissioner of Wealth Tax – 162 ITR 888 wherein the court held that though the expression ‘belonging to’ no doubt was capable of denoting an absolute title, it was nevertheless not confined to connoting that sense. Full possession of an interest less than of full ownership could also be signified by that expression.

• It was also submitted that the lease is for a period of 95 years, subject to further renewal, the assessee has a conditional right to use to the said property provided the terms & conditions as set out in the lease agreement are complied with. Such arrangement is sufficient enough to conclude that the open land is belonging to the assessee.

Held by the High Court:

• In the present case the court is concerned with the leasehold right in the property. As per proviso to Sec 40(3)(v) of the Act unused land held by the assessee for an industrial purposes for a period in excess of two years from the date of its acquisition from the definition of asset because in the provision the words “held” and not the word “owned “ has been used Therefore, land other than agricultural land held unused in excess of two years from the date its acquisition is an asset as defined under Section 40(3) of the Act even if it is not owned.

• As regards ,examining whether such asset is belonging to the assessee , the court relied on the decision of Supreme Court in the case of Raja Mohammad Amir Ahmed Khan v/s. Municipal Board of Sitapur wherein the court held that even possession of an interest less than that of full ownership could be signified by the word “belonging to”.
• Further, in Sec 40(2) the word “belonging to” has been used instead of the word “owned by” which makes the intention of parliament clear the concept of less than full ownership is sought to be introduced by the use of the word ‘’belonging to”.
• However, to determine whether the asset belong to an assessee or not would have to be determined on the facts of each case and in the present case the same would require examination of the lease deed.
• The terms of lease deed establishes that the Appellant has a right to use the property provided the terms and conditions of the lease, are adhered to by the assessee . This is a right though subject to terms & conditions as set out in lease deed is sufficient enough to hold that assessee has an interest in the property for a period of 95 years. Such interest in in turn is sufficient to hold that on the valuation date, this land belongs to the assessee, notwithstanding the fact that the ownership in the land would belong to MIDC .
• In result the assessee was liable to be assessed for the open land by it and appeal of the assessee was dismissed.

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HAPPY NEW YEAR 2016

Another year of success and happiness has passed.
With every new year, comes greater challenges and
obstacles in life. I wish you courage, hope and
faith to overcome all the hurdles you face. May
you have a great year and a wonderful time ahead.
God bless you.

Disallowance u/s 14A

Citation of the Case:- UTI Bank Ltd. vs. ACIT (ITAT Ahmedabad), Income tax (Appeal) nos.152 & 2572 of 2006 and 65 of 2009, Date of Judgment: 28/10/2015

Brief of the Case

ITAT Ahmedabad held In the case of UTI Bank Ltd. vs. ACIT that we find that the assessee’s interest free deposits exceed its tax free investment in current year as well as in succeeding assessment year 2003-04. The tribunal and hon’ble jurisdictional high court deleted an identical section 14A disallowance based on the very presumption. The Revenue’s Special Leave Petition stand admitted qua administrative expenses only. The only distinction that is to be seen in these two assessment years is that the assessee has suo moto disallowed Rs. 6.23 crores in the impugned assessment year. The Revenue seeks to apply estoppel principle. We are of the view that purpose of scrutiny assessment is to determine correct taxable income as per law and not to rely on such technicalities. The same principle applies even in appellate proceedings being in the nature of continuity of original proceedings. Therefore, we follow consistency and hold that the impugned disallowance of Rs. 36.68 crores made in the course of assessment partly sustained in lower appellate proceedings; suo moto or the one computed by the lower authorities, is not liable to be sustained.

Facts of the Case

The assessee company M/s UTI Bank Ltd is now known as M/s Axis Bank Ltd. It started its banking operations in 1995. The assessee filed its return on 30-10-2002 admitting income of Rs. 208, 83,29,510/- and claimed refund of Rs. 42,15,67,337/-. This was followed by a revised return of income reading a sum of Rs. 208,95,81,108/- with refund of Rs. 41,76,27,996/-. The Assessing Officer took up scrutiny. He noticed exempt income of Rs. 39.65 crores arising from tax free bonds, debentures and dividends. The assessee had invested a sum of Rs. 4,14 crores in these instruments.

The assessee had suo moto disallowed a sum of Rs. 6.23 crores comprising of interest pertaining to incremental demand deposits. The Assessing Officer in assessment order computed section 14A disallowance of Rs. 36.68 crores i.e. net figure of Rs. 30.45 crores over and above Rs. 6.23 crores added back suo moto.

Contention of the Assessee

The assessee’s submissions on merits are that its suo moto disallowance of Rs. 6.23 crores is qua interest sums only. Our attention is invited to details of its interest free funds vis-à-vis tax free investment right from its initial year of business i.e. up to 31-03-1995 to 31-03-2003. The assessee’s interest free deposits in the impugned assessment year are Rs. 1,766 crores in capital reserves and deposits. Tax free interest investment in question are of Rs. 4,14 crores leaving behind a surplus of Rs. 1,352 crores. This results in surplus percentage of interest free funds @ 327%. The assessee then takes us to its suo moto disallowance. It pleads that its interest free funds are much more than tax free investments.

The tribunal in assessment year 2003-04 relied upon the case law of CIT vs. Reliance Utilities and Power Ltd 313 ITR 340 for deleting an identical disallowance. The only difference being that the assessee therein had not challenged suo moto disallowance. The Revenue filed tax appeal no. 119 of 2013 before the hon’ble jurisdictional high court. The same stood dismissed on 22-03-2013. The Revenue preferred Special Leave Petition (Civil) No. 468 of 2014. The hon’ble apex court in its order dated 07-02-2014 admitted it only qua disallowance of administrative expenses. The assessee accordingly submits that even on merits, it deserves to succeed qua the entire issue as well.

Contention of the Revenue

The ld counsel of the revenue supports Assessing Officer’s action in making the disallowance of Rs. 36.68 crores. Its case is that the CIT( A) has erred in granting part relief to assessee. It opposes assessee’s arguments that our adjudication is confined to the limited issue of suo moto disallowance only by referring to the crucial expression of ‘entire issue’ used in the hon’ble high court remand directions reproduced hereinabove. It accordingly presses for restoration of entire disallowance as against that added suo moto and seeks rejection of the instant appeal. Case law of (2014) 363 ITR 11 (Kerala), South Indian Bank Ltd vs. CIT, (2011) 16 taxmann.com 289 (Kerla) CIT vs. State Bank of Travancore, (2015) taxmann.com 297 (Pan) Avon Cycles Ltd vs. CIT is also quoted.

Held by CIT (A)

CIT (A) partly allowed the appeal of the assessee. It was held that the action of the A.O. is not correct as regards disallowing interest expenses amount after allocating it to the investments for exempted income. The appellant has filed the details before the A.O. admitting that only part of the interest bearing funds is used for investing in the investments giving tax exempted income. The interest cost is calculated at Rs. 6.23 Cr. which is offered for taxation. Hence, the A.O. is not justified in further allocating the interest expenditure for this purpose disregarding the fact that the appellant has surplus funds.

However as regards the other operating expenses are concerned, appellant has not filed any details as to how much expenditure is to be apportioned for earning the exempt income. The total operating expenses are Rs. 205.47 Cr. and the exempt income claimed by the appellant is Rs. 39.65 Cr. whereas the total income earned by appellant is Rs. 1595.40 Cr. Hence the exempted income is 2.485% of the total income. Therefore, by allocating the operating expenses of Rs. 205.47 Cr. in this ratio, the expense allocable to the exempt income comes to Rs. 5.11 Cr. (205.47 x 2.485%) Therefore, this expenditure has to be disallowed out of the total expenditure for earning the exempt income under the provisions of Sec. 14A.

Held by ITAT

 It has come on record that the tribunal in first round had remitted the issue of this disallowance back to the assessing authority for afresh adjudication. The net result was that corresponding ground in assessee’s instant appeal as well as that filed at Revenue’s behest stood restored for afresh adjudication. The Revenue’s limited grievance was accordingly confined to the issue of suo moto disallowance of Rs. 6.23 crores in assessee’s appeal as it could not have been aggrieved against the tribunal’s decision in restoring the issue in appeal. It framed only two substantial questions of law before the hon’ble jurisdictional high court i.e. suo moto disallowance and correctness of co-ordinate bench decision in admitting additional ground. Their lordships hon’ble jurisdictional high court considered tribunal’s common order in cross appeal for using the crucial expression ‘entire issue in the operative part of para no. 8 hereinabove. We reject assessee’s first argument seeking to restrict our adjudication in these facts and circumstances and proceed to decide the entire issue of section 14A disallowance.

We find that the assessee’s interest free deposits exceed its tax free investment in current year as well as in succeeding assessment year 2003-04. The tribunal and hon’ble jurisdictional high court deleted an identical section 14A disallowance based on the very presumption. The hon’ble jurisdictional high court in Tax Appeal No. 119 of 2013 decides the very question in assessee’s favour. It was held that in the present case, since the assessee has suo moto disallowed Rs. 5.53 crore u/s. 14A, respectfully following the decision of Bombay High Court in case of Reliance Utilities & Power Ltd, 313 ITR 340, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles the Hon’ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s. 14A cannot be accepted. Disallowance u/s. 14A requires finding of incurring of expenditure, the present case, the AO has presumed that the assessee might have incurred expenditure to earn the exempt income. He has not given any finding of incurring of expenditure. In view of these facts and respectfully following the decision of High Court, we are of the view that no disallowance of administrative expenses can be made

The Revenue’s Special Leave Petition stand admitted qua administrative expenses only. The only distinction that is to be seen in these two assessment years is that the assessee has suo moto disallowed Rs. 6.23 crores in the impugned assessment year. The Revenue seeks to apply estoppel principle. We are of the view that purpose of scrutiny assessment is to determine correct taxable income as per law and not to rely on such technicalities. The same principle applies even in appellate proceedings being in the nature of continuity of original proceedings. Therefore, we follow consistency and hold that the impugned disallowance of Rs. 36.68 crores made in the course of assessment partly sustained in lower appellate proceedings; suo moto or the one computed by the lower authorities, is not liable to be sustained.

The Revenue’s reliance placed on case law Goetze India Ltd vs. CIT (2006) 284 ITR 323 (SC) that the assessee ought to have file a revised return for deleting this suo moto addition also stands decided in assessee’s favour by hon’ble jurisdictional high court in case of Mitesh Impex Appeal No.2562/2009 for holding that if a claim though available in law is not made either inadvertently or on account of erroneous of belief of complex legal position, such claim cannot be shut out for all times to come merely because it is raised for the first time before the appellate authority without resorting to revising the return before the assessing authority.

We draw support from this decision for accepting the assessee’s additional ground leading to our adjudication in its favour on merits. The entire disallowance of Rs. 36.68 crores made by the Assessing Officer including that added suo moto at assessee’s behest of Rs. 6.23 crores is deleted by placing reliance on the hon’ble jurisdictional high court decision for succeeding assessment year. The assessee’s arguments on merits are accepted. The Revenue’s case law does not hold ground in view of hon’ble jurisdictional high court’s decision in assessee’s own case for succeeding assessment year. The ld. Assessing Officer need not proceed with the earlier remand directions. ITA 152/Ahd/2006 is allowed on the issue of section 14A disallowance.

Accordingly appeal of the assessee allowed.

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Supply of shrink-wrap software is transfer of right to use copyright and covered in royalty liable to TDS u/s 195

Citation of the Case:- M/s Tejas Networks Ltd. vs. DDIT (ITAT Bangalore), Income tax (Appeal) nos.715-717 of 2015, Date of Judgment: 16/10/2015

Brief of the Case

ITAT Bangalore held In the case of M/s Tejas Networks Ltd. vs. DDIT that the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute “royalty” for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the nonresident companies would amount to “royalty” within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195.

Facts of the Case

The assessee is an Indian Company who is engaged in developing telecommunication equipment. During the relevant asst. year, the assessee has purchased shrink-wrap Software from Cadence Designs Ireland amounting to Rs.5,946,245/- and Rs.4,015,887/- respectively. The AO noticed that the assessee has remitted the above amounts to Cadence Designs Systems Ireland without deducting tax at source u/s 195. The AO initiated proceedings u/s 201(1).

The assessee submitted that the payment made to the non-resident Indian was made for the use of software under non exclusive and non transferable and licensed to use the software. Accordingly, the payments in question are not chargeable to tax in India and, therefore, no liability to deduct tax at source in respect of such payment. The AO however did not convinced with the explanation furnished by the assessee and was of the view that as per the provision of sec. 195, the assessee was liable to deduct tax at source on the payment made to Cadence Designs Systems Ireland. During the purchase of shrink-wrap software as a payment made amounts to royalty under the Income-tax Act as well as the Indo-Ireland DTAA. The AO accordingly held that the assessee is default u/s 201 and 201(1A) and accordingly calculated the tax liability.

Contention of the Assessee

The ld counsel of the assessee submitted that the appeals are already decided against the assessee in assessee’s own case in ITA No.31/Bang/2015 dated 5/6/2015.

Contention of the Revenue

The ld counsel of the revenue supported the order of the CIT (A).

Held by CIT (A)

The CIT(A) dismissed the assessee’s appeal by following the decision of the Hon’ble High Court of Karnataka in the case of CIT Vs. Samsung Electronics Co. Ltd., 245 ITR 181. It was held that it is very clear from the express terms of the agreement that the right to use copy righted software has been transferred to the assessee. Keeping in view the fact that the judgment of the Hon’ble High Court of Karnataka takes the nature of binding precedent the amounts in question paid as consideration for the right to use copy-righted software amounts to Royalty within the meaning of the Act read with respective DTAA, the contentions of the assessee’s representative are rejected.

Held by ITAT

 Whether the payments made for acquiring the shrink-wrap Software amounts to royalty u/s 9(1)(vi) of the Income tax Act and also Indo- Ireland DTAA?

As pointed out by both the counsels, the issue is already decided against the assessee in assessee’s own case by this tribunal in ITA No.31/Bang/2015 dated 5/6/2015 considering the ratio of Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. 245 ITR 181. It was held in this case that It is clear from the analysis of the DTAA, the Income-tax Act, the Copyright Act that the payment would constitute “royalty” within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) of the Act as the definition of “royalty” under clause 9(1)(vi) of the Act is broader than the definition of “royalty” under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute “royalty” for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the nonresident companies would amount to “royalty” within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195.

Respectfully following the above decision of the Hon’ble Karnataka High Court and also decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case in ITA No.31/Bang/2015 dated 5/6/2015, we are of the opinion that the contentions raised by the assessee are not acceptable for the reason that the payment in question was consideration for the right to use copy right shrink-wrap software amounts to royalty within the meaning of sec. 9(1)(vi) of the Act and also Art 12 of the Indo- Ireland DTAA, therefore, grounds raised by the assessee are dismissed.

Accordingly appeal of the assessee dismissed.

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