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18.02.2017 - Voice of CA presents - Updates
Saturday, February 18, 2017

I. Headlines Today    

  1. ST Circular: Applicability of service tax on the services by way of transportation of goods by a vessel from a place outside India to the customs station in India w.r.t. goods intended for transhipment to any country outside India  (Click for detail)
  2. FEMA Circular: Issuance of Rupee denominated bonds overseas - Multilateral and Regional Financial Institutions as Investors  (Click for detail)
  3. GST council likely to finalise draft model, clause for lower tax benefits today  (Click for detail)
  4. Tax refund checks are finally in the mail  (Click for detail)
  5. I-T department to scrutinise tax relief claims by sick companies  (Click for detail)
  6. CBDT proposal to tap Aadhar database needs Cabinet OK  (Click for detail)
  7. How to claim tax benefit on tuition fees under Section 80C  (Click for detail)
  8. Check before you donate: Will you get 50% or 100% tax benefit under Section 80G  (Click for detail)
II.  Direct Taxes Case Laws: 

1.  State of Karnataka Vs. Selvi J. Jayalalitha & Ors, Criminal Appeal Nos. 300-303 of 2017, Date of Judgement: 14.02.2017, Supreme Court of India

Whether income tax returns and the assessments orders passed thereon, would not constitute a full proof defence against a charge of acquisition of assets disproportionate to the known lawful sources of income as contemplated under the Prevention of Corruption Act,1988 (PC Act) and that further scrutiny/analysis  thereof is imperative to determine as to whether the offence as contemplated by the PC act is made out or not?

Held: Yes

Brief Facts:
Selvi J. Jayalalitha being a public servant was found to have acquired and possessed pecuniary resources and properties in her name and family & friends and the firms floated by them, which were overwhelmingly disproportionate to her known sources of income to the extent of Rs.66,65,20,395/- which is an offence of criminal misconduct within the definition of Sec.13(1)(e) punishable under Section 13(2) of 1988 Act. To discharge the allegations, ld. senior counsel of the respondent contended that the term “income” which has been used in Section 13(1)(e), would include all earnings, sources whereof are not prohibited by law and it is always open to the accused to prove those other sources of income which have not been taken into account or brought into evidence by the prosecution.

The term “income”, according to him, would also include receipts in the form of “gifts” and “loans” which have been disclosed to and accepted by the income tax authorities. According to him, income tax/wealth tax returns and assessment orders, being public documents, are admissible in evidence. Under the 1988 Act the burden on the accused is proved by preponderance of probabilities as in a civil case and same is the degree of proof required under the Income Tax Act also. Therefore, where the assessee had established the income and the extent of the expenditure before the Income Tax authorities, the judicial decision there under would be binding on the prosecution in a case under the 1988 Act. He further contended that assessee’s income and expenditure have been accepted by the Income Tax authorities for all the five years of the check period. In none of the assessment years any income is assessed as from an unexplained source.

In this regard, various extracts of the judgement of the Hon’ble Supreme Court related to above mentioned issue are highlighted as under:

“175.  The decision is to convey that though the I.T. returns and the orders passed in the I.T. Proceedings in the instant case recorded the income of the accused concerned as disclosed in their returns, in view of the charge levelled against them, such returns and the orders in the I.T. Proceedings would not by themselves establish that such income had been from lawful source as contemplated in the explanation to Section 13(1(e) and that independent evidence would be required to account for the same.

176. Where the income tax returns relied upon by the defence as well as the orders passed in the proceedings pertaining thereto have been filed/passed after the charge-sheet had been submitted, neither the income tax returns nor the orders passed in the proceedings relatable thereto, either definitively attest the lawfulness of the sources of income of the accused persons or are of any avail to them to satisfactorily account the disproportionateness of their pecuniary resources and properties as mandated by section 13(1)(e) of the Prevention of Corruption Act, 1988.

180.  This Court ruled that the fact that the accused, other than the two Ministers, had been assessed to income tax and had paid income tax could not have been relied upon to discharge the accused persons in view of the allegation made by the prosecution that there was no separate income to amass such huge property. It was underlined that the property 255  in the name of the income tax assessee itself cannot be a ground to hold that it actually belongs to such an assessee and that if this proposition was accepted, it would lead to disastrous consequences. This Court reflected that in such an eventuality it will give opportunities to the corrupt public servant to amass property in the name of known person, pay income tax on their behalf and then be out from the mischief of law.           

183.  The import of this decision is that in the tax regime, the legality or illegality of the transactions generating profit or loss is inconsequential qua the issue whether the income is from a lawful source or not. The scrutiny in an assessment proceeding is directed only to quantify the taxable income and the orders passed therein do not certify or authenticate that the source(s) thereof to be lawful and are thus of no significance vis-à-vis a charge under Section 13(1)(e) of the PC Act.

197.  It was emphasized that to examine the genuineness of a gift, the test of human probability was very appropriate.  It was reiterated that a gift cannot be accepted as such to be genuine merely because the amount has come by way of cheque or draft through banking channels unless the identity of the donor, his creditworthiness, relationship with the donee and the occasion was proved.  Unless the recipient proved the genuineness of the transaction, the same could be very well treated as an accommodation entry of the assessee's own money, which was not disclosed for the purpose of taxation. 

198.  In all however, the process undertaken by the Income Tax authorities under Section 68 of the Act is only to determine as to whether the receipt is an income from undisclosed sources or not and is unrelated to the lawfulness of the sources or of the receipt.  Thus even if a receipt claimed as a gift is after the scrutiny of the Income Tax  Authorities construed to be income from undisclosed sources and is subjected to income tax, it would not for the purposes of a charge under Section 13(1)(e) of the Act be sufficient to hold that it was from a lawful source in absence of any independent and satisfactory evidence to that effect.”

(Please click here for judgment)


2.  CIT Vs. M/s Virat Investment & Mercantile Co., I.T.A. Nos. 709/2004, 37/2005 & 636/2004, Date of Order: 19.01.2017, High Court of Delhi

Whether service charges/ interest paid for raising funds to subscribe the rights issue and for retaining control in the other company, is an allowable expenditure?

Held: Yes

Brief facts:
The assessee was an investment company which had reported, a loan transaction with LIC Mutual Funds to fund its subscription of Rs.1,50,00,000/- in Shreyans Industries Ltd. in the assessment year 1992-93. The assessee was an existing shareholder with 28% equity holding in the company and wished to subscribe to certain debentures which had both convertible and non-convertible elements. The LIC Mutual Funds, through an agreement, required the assessee to ensure that the debentures were subscribed in its name & the loan carried the interest rate of 19.5% p.a. AO disallowed the interest paid to LIC Mutual Funds Corporation on the ground that it was inadmissible by virtue of Section 57 (iii) of the IT Act, 1961. However, CIT(A) & ITAT both held the appeal in assessee’s favour. Thereafter, the Revenue appealed before the Hon’ble High Court and contended that the object of the expenditure ultimately was to retain control of the 28% shareholding and thus, it should be treated on the capital side.

The Hon’ble High Court upheld the decision of ITAT. It was concluded that the interest expenditure is not of the kind that went into capital stream as the expenditure clearly is not towards acquisition of the capital nor it is an integral part of it, it is service alone. It is of a similar kind that would otherwise have been permitted under Section 37 of the IT Act. Since this expenditure does not pertain to the stream of income covered by Section 37 and is not excluded by Section 57(3), thus it is allowed.
Hence, the appeal was held against the Revenue and in favour of the assessee.

(Please click here for judgment)  

III. A Useful Article:

1.  Post sale discounts shall not form part of the turnover

(Please click here for detail)

(Contribution by CA. Bimal Jain and contributor is available at eMail-id: 

 Golden Rules:

  "Quitters never win;
Winners never quit"


  Thanks & Regards


Voice of CA 

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