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Nut Crackers |
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Questions & Answers Direct Taxes
N. M. Ranka, |
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Q.1 Charitable purpose addition of proviso to section 2(15)
A1) Concept of charity:– Earlier definition and controversy:- The earlier definition of charitable purpose in section 2 [15] till its amendment by Finance Act, 1983 w.e.f. 1-4-1984 was as under:– “Section 2 [15] :- “charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on any activity of profits” [emphasis supplied in bold underline”. A perusal of the above definition will show that the concept of charity under the Income Tax was not restricted to the known conventional modes of charity i.e., relief of the poor, education and medical relief, but also extended to objects of general public utility. The terminal words “not involving the carrying on any activity of profits” became a vexatious issue. These issues were addressed by a Five Judges Bench of the Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association as reported in (1990) 121 ITR 1 (SC) The principles noted down by the Supreme Court are summarized as under: [i] As long as the dominant objects are charitable in nature, it will suffice and the fact that the incidental or ancillary objects are not charitable will not be relevant. [ii] Where the main or main objects are distributive [i.e., multiple], each and every one of them must be charitable in nature to enjoy the tax exemption. [iii] The words “not involving the carrying on any activity of profits” concern the last category of charity; i.e., “other object of general public utility” and not the previous three categories – “relief of the poor, education, medical relief,” [iv] The true meaning of the words “not involving the carrying on any activity of profits” means that the object must not be to earn profit. If the object is of general public utility, the fact that its advancement is being achieved by the carrying on of any activity of profit should not matter. Consequent amendment:– The words “not involving the carrying on any activity of profits” were omitted by the Legislature by Finance Act, 1983 w.e.f. 1-4-1984 and the amended definition appeared as under:– “Section 2(15):– “charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility”. Recent amendment:– The Finance Act, 2008 has now amended the definition of section 2 [15] w.e.f. 1-4-2009; i.e., A.Y. 2009-10 to read as under :– “Section 2 (15):– “charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;”. [emphasis supplied in bold underline.]. Effect of recent amendment:– The effect of this amendment is that if attainment of any other object of general public utility is being accomplished by carrying on an activity either • of trade, commerce or
business or Effect of recent amendment [contd …]:– In other words, even if dominant object does not involve the business or service activity, but the object is today being accomplished either by an incidental or ancillary object [or power in the memorandum] of carrying such activity, the object of other general utility will no longer be treated as charitable. The decision of the Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association as reported in [1990] 121 ITR 1 (SC) is therefore obliterated by the present amendment. The exemption provisions of section 11 [section 11[4A] permitted the carrying on of business by charitable trust to feed a charitable object. With this amendment, it is only dominant objects of relief of poor, education and medical relief than can be fed by profits of a subservient business activity and not ‘other object of general public utility”. E.g. A charitable trust carrying on exhibition of a particular trade, every year may be hit by the proviso. Professional organizations organizing a seminar if there is surplus may not be hit by the proviso reason being professional organization are not doing the trade or commerce hence may not be hit by the proviso. Q.2 Capital Gains: Depreciated office premises Mr. X is using office premises for his business purpose and had claimed depreciation up to AY 2001-02. From April 2001 the office premises were given on rent and income from house property offered for taxation. He wants to sell office premises and seeks following clarifications: i) Whether the gain arising from sale of office premises will be short term or long term capital gain? ii) Whether the gain can be invested in the bonds to claim exemption u/s. 54EC? iii) While computing short-term capital gain, whether stamp duty valuation u/s. 50C will be taken or sale consideration is to be taken? A.2 i) Section 50 is applicable once you claim the depreciation. Section is very broadly worded it covers not only the Income-tax Act, 1961, it also covers the Income-tax Act 1922. Once depreciation is claimed and allowed section 50 will come into operation. Chhabaria Trust vs. ACIT (2003) 87 ITD 181 (Mum) (SB) Earlier assessee tried to argue that the section 2(11) refers block of assets, if assessee is having only one asset e.g. office premises then the concept of block assets is not applicable and provisions of section 50 may not be applicable. However, the special bench in Chhabaria Trust vs. ACIT (2003) 87 ITD 181 (Mum) (SB) has held that singular includes plural hence even if one asset is involved section 50 will be applicable. ii) Ace Builders (P) Ltd. vs. ACIT (2001) 76 ITD 389 (Mum) – Fiction created u/s 50 for deeming any gain arising on transfer of a depreciable asset as short – term capital gain is for the purposes of section 48(2) only and it cannot be extended to deny exemption u/s 54E when the capital asset sold by assessee is in fact a long-term capital assets. Confirmed by Bombay High Court in case of CIT vs. ACE Builders (P) Ltd. (2006) 281 ITR 210 (Bom) Weifield Products Co. (I) (P) Ltd. vs. DCIT (2001) 71 TTJ 518 (Pune) CIT vs. Assam Petroleum Industries (P) Ltd. (2003) 262 ITR 587 (Gau) – Section 54E is not controlled by section 50. In CIT vs. Legal Heirs of Late Dr. (Mrs.) S.R. Pandit ITA No. 144/2007, the Bombay High Court rejected the appeal of department following the judgement of CIT vs. ACE Builders (P) Ltd. The SLP of department was dismissed. iii) Section 50 and section 50C are special provisions relating to computation of capital gains in certain specific cases. They cannot be merged together. Section 50C is for capital asset being land and building. Stamp duty valuation section 50C is applicable to such capital gain. Section 50 relates to depreciable asset. If the section 50C is applied to depreciable asset it will result in absurd results as even indexation would not be available then. Both the sections are exclusive provisions and cannot be applied simultaneously. Q.3 Reference to valuation officer u/s 55A
A.3 In CIT vs. Daulal Mohta ITA No. 1031 of 2008. (Bombay High Court) dt. 22nd September, 2008, the High Court confirmed the finding of the Tribunal that reference to DVO can only be made in cases where the value of capital asset shown by the assessee is less than its F.M.V. Tribunal Order : Daulat Mohta vs. ITO, Mumbai ITAT, ITA No. 322/M/2007 Bench D dt. 23rd July, 2008 ITO vs Smt. Lalitaben B. Kapadia (2008) 115 TTJ 938 (Mum) Reference to the DVO can be made under s. 55A only when the AO is of the opinion that the value of the capital asset claimed by the assessee is less than its fair market value and not when he was of the opinion that the fair market value of the property on 1st April, 1981, as shown by the assessee was more than its actual fair market value. Patel India (P) Ltd. vs. Deputy Commissioner of Income Tax (1999) 63 TTJ 19 (Mumbai) The provisions of s. 55A are attracted only when the AO is of the opinion that the fair market value of the assets exceeds the value of the assets as claimed by the assessee and not in a reverse case such as the present one where the assessee claims that the value as on 1st April, 1981 exceeds the fair market value determined by the AO. So, on the plain language of the section, the provisions of ss. 55A(a) and (b)(i) are not attracted and that is also made clear by the Board’s Circular No. 96 dt. 25th Nov., 1972. As mentioned in the circular, a reference can be made under s. 55A(b)(ii) when having regard to the nature of the asset and other relevant circumstances, it is necessary so to do. In the circumstances, it is not correct to say that it was mandatory in the present case to have made a reference under s. 55A(a) or 55A(b)(i). However, valuation of a flat is highly technical matter and varies not only from road to road but between building ITD and building and even between one flat and another in the same building while the sale instances taken by the AO definitely support the stand of the Department. There are other properties which have been valued by the Departmental valuation officer as on 1st April, 1981 at much higher figures. In the circumstances, in the interest of justice, the matter deserves to be referred to the Valuation Cell for working out the fair market value as on 1st April, 1981. Reference may be made under s. 55A(b)(ii). The AO is free to bring all the sale instances on which he has relied in the assessment order to the notice of the Valuation Officer.— Raj Paul Oswal vs. CWT (1988) 67 CTR (P&H) 60 : (1988) 171 ITR 489 (P&H) distinguished. Sajjankumar Harlalka vs. JCIT (2006) 100 ITD 418 (Mum) As per the provisions of s. 55A(a) the reference can only be made by the AO to the ITD valuation cell if he is of the opinion that the fair market value as estimated by the registered valuer is less than the fair market value. The AO could not have formed such an opinion in this case as the whole basis of the references is that the fair market value estimated by the registered valuer as on 1st April, 1981 is higher than its actual fair market value. The reference can be made under s. 55A(b)(ii) by the AO if he is of the opinion having regard to the nature of asset and other relevant circumstances that it is necessary to do so. It is obligatory on the part of the AO to record such other relevant circumstances on the basis of which he forms such opinion in order to refer the matter to the valuation cell under said clause. Nothing has been shown by the Revenue to state that the reference was made under s. 55A(a) or 55A(b)(ii) and if it was made under s. 55A(b)(ii), then what circumstances were in existence on the basis of which the AO had formed his opinion to make such reference. In the absence of the same the reference made to the Valuation Officer was invalid. — CIT vs. Hotel Joshi (1999) 157 CTR (Raj) 369: (2000) 242 ITR 478 (Raj) relied on. Q.4 During the course of survey, can the A.O. record a statement on oath as per sub-clause (iii) of sub-section 3 of section 133A of I.T. Act from any person? Whether such statement taken during the course of survey has evidentiary value for being used as relevant to any proceedings under the Act, including the reopening of an assessment under section 147 of the I.T. Act? A.4 Statement recorded during survey has no evidencing value. However the same can be used for investigation. Based statement if some material fact is disclosed reopening is permissible. CIT vs. S. Khader Khan Son (2008) 300 ITR 157 (Mad.) Ashok Manilal Thakkar vs. ACIT (2005) 97 ITD 361 (Ahd.) Paul Mathews & Sons vs. CIT (2003) 263 ITR 101 (Ker.) Q.5 Is the assessing officer justified in initiating penalty proceedings in the case of a protective assessment? Pursuing it further can he impose the penalty during the pendency of the matter in the substantive appeal of the same addition considering that there shall be no appeal in the case of a protective assessment? A.5 The Calcutta Tribunal in case of ITO vs. Miss Vasudha Bajoria (1992) 43 TTJ 373 (Cal) held that, no penalty can validly be levied on the basis of protective assessment. Surjeet Singh Mahan Singh vs. WTO (1997) 64 ITD 104 Abhay Kumar vs. ACIT (1997) 63 ITD 15 (Pat) K. Deedar Ahmed vs. ITO (2005) 97 ITD 240 (Hyd) |