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27.02.2017 - Voice of CA presents - Updates
Monday, February 27, 2017

I. Headlines Today    

  1. CBDT Issues SOP For Verification Of Cash Transactions Relating To Demonetisation To Curb Malpractices & Tax Evasion  (Click for detail)
  2. DT Circular: Clarification for determination of Place of Effective Management (POEM) of a company, other than an Indian company  (Click for detail)
  3. Section 391(2) closure of place of business by a Foreign Company  (Click for detail)
  4. Government warns banks over non-acceptance of PMGKY tax  (Click for detail)
  5. PwC seeks GAAR clarity on various M&A deals  (Click for detail)
  6. FEMA: Master Direction - Money Transfer Service Scheme (MTSS)  (Click for detail)
  7. RBI to frame standard procedure for FDI approvals post FIPB  (Click for detail)
  8. HSBC discloses tax evasion probes in India, other countries  (Click for detail)
II.  Direct Taxes Case Laws: 

1.  Rajesh Projects (India) Pvt. Ltd. Vs. CIT (TDS), W.P. (C) 8085/2014, Date of Order: 16.02.2017, High Court of Delhi

Whether TDS needs to be deducted u/s 194-I on lease rental payments made to GNOIDA constituted under section 3 of the Uttar Pradesh Industrial Development Act?

Held: Yes

Brief facts:
The assessee is engaged in developing, constructing and selling residential units, plots and flats. It entered into a long-term 90 years lease with the Greater Noida Industrial Development Authority (GNOIDA), for development and sale of land in various housing colonies. In terms of the lease deed entered into with the lessor, the petitioner paid upfront consideration and the balance was payable in terms of annual instalments according to the terms and conditions of the lease deed. Along with the lease premium, each lease deed contained stipulation that interest payments would also be made to the lessor. The assessee was served with notices under Sections 201 /201 (lA) of the Income Tax Act, 1961 for the F.Y. 2010- 11 to 2012-13 for non-deduction and non-payment of TDS required to be deducted from the payments of lease rent/interest/other payments for acquisition of a plot of land on lease from GNOIDA. The Revenue was of the opinion that these interest amounts resulted in income in the hands of the authority which is taxable and that the failure of the assessees, in deducting TDS is without legal foundation. The assessee, In regard to the query of the Assessing Officer (“AO”) pertaining to the non-deduction and non-payment of tax at source, submitted that Noida Development Authority has directed the assessee company not to deduct TDS from the lease rent as it has been constituted as an authority under Section 3 of the Uttar Pradesh Industrial Development Act, 1976 and it is a notified institution under section 194A(3) (iii) (f) of the Act by the CBDT. Therefore, provisions of Section 194-I of the Act are inapplicable to it.

The income tax authorities ignored the explanations provided and issued notices of demand under Section 156 of the Income Tax Act treating the assessee company as assessee-in-default and has also levied interest thereon. The assessee preferred appeal to the CIT(A). Later, the AO issued further notice of demands for other periods under Section 221(1), which were duly replied to. In these circumstances, assessee approached the Hon’ble court for appropriate relief, contending that the GNOIDA’s position on this issue is that amounts payable to it cannot be subjected to tax deduction, since it is a “local authority”. The GNOIDA also argued that in the explanation to Section 10(20) of the Income Tax Act, 1961, a "Municipality as referred to in clause (e) of Article 243P of the Constitution" falls under the ambit of a “local authority” and Article 243P clause (e) of the Constitution of India, states that ―Municipality means an institution of self-government constituted under Article 243Q and that GNOIDA has been declared as an "Industrial Township" with effect from 24th December, 2001. The GNOIDA therefore argues that, it falls squarely under the meaning of a 'Municipality' and this is a 'local authority'.

It was held by the Hon’ble High Court that the prerequisite for characterization of a unit or body as a municipality is that it should be self-governing and its members shall be filled by persons chosen by direct election from the territorial constituencies in the Municipal area and for such purpose (i.e. election) ―each Municipal area shall be divided into territorial constituencies to be known as ward. In the case of GNOIDA, this essential characteristic is absent. However, the court affirms and upholds that GNOIDA is an institution established by a state act. And based on this analysis concluded that:

1.    Amounts paid as part of the lease premium in terms of the time-schedule(s) to the Lease Deeds, or bi-annual or annual payments for a limited/specific period towards acquisition of lease hold rights are not subject to TDS, being capital payments. (This view is also reinforced by the Income Tax Circular No. 35/2016 dated 13 October, 2016 issued by the CBDT)

2.    Amounts constituting annual lease rent, expressed in terms of percentage of the total premium for the duration of the lease, are rent, and therefore subject to TDS.

3.    Amounts which are payable towards interest on the payment of lump sum lease premium, in terms of the Lease which are covered by Section 194-A are covered by the exemption under Section 194A(3)(iii)(f) and therefore, not subjected to TDS. Consequently, payments made by banks towards interest accruing on deposits, etc. are not deductible.

And since the assessee was unable to deduct and pay tax due to the directions of GNOIDA the court ordered that all pending payments be made by GNOIDA instead of the assessee.
Hence, the appeal was allowed.

(Please click here for judgment)


2.  DCIT Vs. M/s. Allied Blenders and Distillers Pvt. Ltd., I.T.A. Nos. 2447 & 2446 / 2015, Date of Order: 21.02.2017, ITAT - Mumbai

Whether purchases can be treated as bogus merely on the basis of assessee’s dealing with parties who were found out to be hawala dealers by the sales tax department?

Held: No

Brief Facts:
The assessee was engaged in the business of manufacturing, marketing and sale of Indian made foreign liquor and other allied products. The AO during the course of assessment proceedings received an information from DGIT(Investigation), Mumbai that the assessee has entered into bogus transactions from three hawala parties without taking actual delivery of goods the details. In this regard, assessee stated that he had purchased from these parties various gift articles for promoting its sales and a few Xerox copies of photographs taken during the promotional activity were also filed. The assessee also filed a copy of stock register, evidencing the receipt and issue of gift articles besides copies of confirmations from shopkeepers, etc which as per the AO were self made, incomplete and without PAN. Therefore, the assessment u/s 143(3) was completed by making various additions inter alia of bogus purchase of Rs.4,92,43,370/-. Being aggrieved by that, the assessee filed an appeal before CIT(A). The Ld. CIT had affirmed the additions made by AO on account of bogus purchase. Therefore, assessee preferred an appeal before the Hon’ble ITAT.

The Hon’ble ITAT has placed reliance on the judgment given in case of M/s MPIL Steel Structures Ltd V/s DCIT in ITA No.6602/Mum/2014 (AY-2011-012) and held that in our opinion, the purchase made by the assessee could not be disbelieved merely on the basis of information received from the third party without carrying out any meaningful enquiry and further verification on the various records and information filed during the course of assessment proceedings. We are not in agreement with conclusion drawn by the FAA upholding the action of the AO. The assessee has discharged his primary onus by showing the books of account and payment by way of account payee cheques and producing bills and vouchers for sales of goods, therefore, the addition could not be sustained.

The assessee was also not given a copy of the statements recorded from the hawala operators and therefore no cross-examination could be asked by the assessee which is also against the equity and the principle of natural justice Moreover, the assessee was not named principle beneficiary by any of the suppliers of goods to be purchased from hawala entries and therefore it would be unreasonable to infer that the assessee might have availed the benefit of hawala transactions. we are of the considered opinion that the order passed by the FAA is not correct and cannot be sustained. We, therefore, following the ratio laid down in the decisions referred to above are inclined to set aside the order of ld.CIT(A) and direct the AO to delete the addition.

(Please click here for judgment)

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