Capital Gains

C O N T E N T S Messages Hon'ble Justice P. P. Bhatt, President, ITAT ..............................................................................................16 Mr. R. S. Syal, Vice President, ITAT ...........................................................................................................17 Mr. Pramod Kumar, Vice President, ITAT ................................................................................................18 Mr. A. D. Jain, Vice President, ITAT ..........................................................................................................19 Mr. G. S. Pannu, Vice President, ITAT .......................................................................................................20 Mr. Rajpal Yadav, Vice President, ITAT .....................................................................................................21 From the Editor – K. Gopal .........................................................................................................................22 President's Communique – M. Srinivasa Rao ..........................................................................................24 Foreword – A Tribute – 80 Glorious Years of the Income Tax Appellate Tribunal – 80 Landmark Judgements of Special Benches – Dr. K. Shivaram, Senior Advocate, Bombay High Court .........25 80 Landmark Judgments of Special Benches Sr. Section Subject Page No. No. No. 1. 2(1A) Agricultural income – Mushrooms – Production – Cultivation of 27 mushrooms is an agricultural activity and income derived from such an activity is exempt from tax. 2. 2(18) Company in which public are substantially interested – Second 29 subsidiary – Meet the requirement of being company in which public are substantially interested. 3. 2(22)(e) Deemed dividend – Deemed dividend can be assessed only in the hands 31 of a shareholder of lender company and not in the hands of a person other than shareholder. 4. 2(47) Transfer – Capital gains – Revaluation of stock – Asset forming stock-in- 32 trade of assessee is converted into a capital asset either by implication of law or by an act or conduct of assessee and, thereupon, contributed to a firm as capital contribution by assessee in capacity of a partner at value more than cost to assessee – in such a case, there is transfer of asset taking place – a value of asset recorded in books of firm deemed to be full value of consideration received or accruing as a result of transfer of asset – chargeable to tax as assessee’s income of previous year in which such transfer has taken place. AIFTPJ - 1157 AIFTP Journal March 2021 3 Sr. Section Subject Page No. No. No. 5. 4 Charge of income-tax – Accrual of Income – As agreement itself got 34 terminated there could be no other completion except completion as a result of termination of agreement and Ld. AO could tax all sums to tax on reasoning that amounts became accrued as a result of project completion method followed by assessee. Also, said receipts are chargeable to tax on accrual basis as per specific provision of section 28(ii), read with section 5. 6. 4 Charge of income-tax – Capital or revenue – Refund of excise duty is 36 capital receipt hence not chargeable to tax. 7. 4 Charge of income-tax – Capital or revenue – Mesne profit and interest 37 – Mesne profit is a capital receipt and interest on mesne profit till the decree of the court is a capital receipt and thereafter a revenue receipt. 8. 4 Charge of income-tax – Principle of Mutuality – Transfer fees received 40 by the Co-operative Housing Society from transferor is exempt from income-tax in accordance with the principle of mutuality but the transfer fee received from transferee is not exempt. 9. 4 Charge of income-tax – Capital or revenue – Mesne profits – Amount 42 received by assessee in accordance with a consent decree for continued occupation of land does not represent ‘mesne profit’ and is taxable as revenue receipt. 10. 4 Charge of income-tax – Capital or revenue – Sales tax subsidy – Subsidy 43 given for setting up/ expansion of industry in a backward area - will be capital receipt irrespective of modality/ source of funds, through/ from which it is given. 11. 4 Charge of income tax – In computing the profits attributable to PE in 46 India Interest paid by an Indian branch of a foreign bank to its head office is neither deductible in hands of the branch nor chargeable to tax in the hands of the head office – Entities are one and the same – one cannot make profit out of himself – interest payment is treated as payment to self. 12. 5 Scope of total income – Income – Accrual of Income – Time share 48 membership fee – over the term of the contract. 13. 5 Scope of total income – Income – Accrual – Enhanced Compensation – 49 Land acquired under land acquisition Act – enhanced compensation as well as interest thereon challenged before court – enhanced compensation is liable to be taxed in the year of receipt – however, interest on enhanced compensation is to be assessed on accrual basis from year to year and can be subjected to tax only after it is finally determined by courts. 4 AIFTP Journal March 2021 AIFTPJ - 1158 Sr. Section Subject Page No. No. No. 14. 9(1)(i) Income deemed to accrue or arise in India – Business Connection read 51 with Article 7 and 15 of India UK DTAA – Whether legal consultancy services rendered by firm of Solicitors in connection with different projects in India, part of which was performed in India, would be income accruing from business connection in India under section 9(1)(i) and not under 9(i)(vii) as fees for technical services Consequently, whether profits of enterprise arising of out contracts was to be apportioned on the basis of contribution made by the PE to the relevant transactions. Whether profits apportioned to other parts of the enterprises which have contributed to transactions of the PE can be added to the profits of the PE as being indirectly attributable to that PE – DTAA-India-United Kingdom (UK) 15. 9(1)(i) Income deemed to accrue or arise in India – Business Connection 54 – Supply of Equipment – Existence of Permanent Establishment – Interpretation of Agreements between the Assessee and Other Parties – Supply contract – Not taxable in India – DTAA-India-USA. 16. 9(1)(i) Income deemed to accrue or arise in India – Business connection – 58 Income from offshore supply of equipment – Income not taxable in the absence of PE and business connection – DTAA-India-Finland. 17. 9(1)(i) Income deemed to accrue or arise in India – Business connection – Where 59 property in goods was transferred outside India, payment thereof could not be taxed in India – Further, if the employees of a foreign company had a right to enter office of an Indian Company for purpose of working for such foreign company in India, the place of business of such Indian Company constituted a Fixed Place PE. If the Fixed Place PE is only used for carrying out preparatory and auxiliary activities in India, then it could not be considered as permanent establishment in terms of Article 5.3(e) of DTAA between India and USA. 18. 9(1)(vi) Income deemed to accrue or arise in India – Amount received by a 61 satellite owning company for providing transponder facility is in the nature of ‘royalty’ 19. 10A Newly established undertakings – Free trade zone – Business losses of 63 a non-10A unit cannot be set off against the profits of the undertaking eligible for deduction under section 10A. 20. 10A Newly established undertakings – Free trade zone – Delay in filing return 64 – Mandatory – Denial of exemption – Assessee filed its return beyond the due date provided under section 139(1) and claimed exemption under section 10A of the Act – Assessee not entitled to exemption in view of proviso to sub section (1A) of section 10A of the Act. AIFTPJ - 1159 AIFTP Journal March 2021 5 Sr. Section Subject Page No. No. No. 21. 10A Newly established undertakings – Free trade zone – Manufacture – 66 Exemption – Definition of manufacturer – Blending and processing of tea – Assessees, who are in the business of blending & processing of tea and export, can be said to be “Manufacturer/Producer” of the tea for the purpose of Section 10A/10B. 22. 11 Property held for charitable purposes – Charitable purpose – Scope and 68 applicability – General public utility. 23. 17(2) Perquisite – Salary – Charge of Income-tax – Non compete fee – Profits 70 in lieu of salary – Compensation received for undertaking restrictive covenant for not competing with business of the company – Adversely affected assessee’s earning potential by exploiting entrepreneur skill, knowledge etc. – Capital receipt - Not taxable under any head of income 24. 22 Income from house property – Business income – Rental income – The 72 rental income received by the Assessee in capacity of an owner of the property and not a businessman – Earning rental income is not business object of the Assessee – the rental income is chargeable to tax under the head ‘Income from house property’ and not ‘Business Income’. 25. 28(i) Business loss – Exchange fluctuation loss on pending forward contract is 76 an “accrued” loss – Losses on account of valuation of unmatured foreign exchange forward contract is allowed as a deduction. 26. 28(i) Business loss – Notional Loss of an assessee on account of fluctuation 77 in rate of foreign exchange is a revenue loss and not a capital loss. Adjustment to the cost of capital asset on account of difference in foreign exchange on capital account loans as an increased liability under section 43A for

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