December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 1   i
CONTENTSii   December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 2
VOLUME 22 • ISSUE 7 • DECEMBER 1-15, 2011                                                                            conte...
CONTENTS677 Accounts & Audit in Brief//RAJESH GOSAIN              Service Tax684 Carbon credits : A new dimension to the  ...
DIRECT TAX LAWS                                              INTRODUCTION                                              1. ...
DIRECT TAX LAWSon behalf of the assessee, that whatever is              assessee was entitled to treat the accretion tosho...
2.2 The ruling in Veekaylal Investment’s case -        loss account but also as equally, if not moreThe well-reasoned deci...
DIRECT TAX LAWSthe Tribunal in Sutlej Cotton Mills Ltd.’s case          therefore, would be, what is not required to(supra...
available for transfer of asset to wholly owned          treated as part of book profits. Any other viewsubsidiary, normal...
DIRECT TAX LAWSDIRECT TAX LAWS                                                       INTRODUCTION    A Critical           ...
only if tax is deducted at source as per the           during the previous year but paid after theprovisions of Chapter XV...
DIRECT TAX LAWSretrospective effect from date of insertion of           liability. No exception can be taken toprovision, ...
The interest paid by assessee is not interest          prescribed in section 139(1), disallowance couldon loan but for del...
DIRECT TAX LAWSnot executed jointly by both parties but total           payment is made to a group concern undercontract w...
any work), on which tax is deduc-                 “An amount may be payable without being          tible at source under C...
DIRECT TAX LAWSdated 15-7-2005 held that the purpose of                      taxmann.com 7 (Kol.), the assessee madeintrod...
DIRECT TAX LAWS Concept                               INTRODUCTION     of                                       1. In the ...
DIRECT TAX LAWSspecified in section 10(22). The relevant                [2011] 198 Taxman 63. In this case the assesseeobs...
128 Taxman 261 (Mad.). To sum up, inter-               of Income-tax (Exemptions) [2009] 183 Taxmancharity donations have ...
DIRECT TAX LAWS6. THE SUPREME COURT ON                                  P.A. Inamdar v. State of Maharashtra AIR 2005COMME...
DIRECT TAX LAWS                                              INTRODUCTION                                              1. ...
DIRECT TAX LAWSnow hit by the mischief of the provisions                2.2 CBDT’s Circular no. 11 of 2008 on thiscontaine...
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Dear Members
It gives me immense pleasure to share the e-copy of magazine "Corporate Professionals Today" published by Taxmann for the current month.

The main focus of the magazine is on controversies in the matters of income-tax, service tax and accounts and audit. In addition to these, it covers various articles analyzing the recent developments.

I am encapsulating the articles covered in this magazine under following heads to give you an idea about the in-depth nature and extent of range of our article:
1) Controversy of taxability of capital gain under MAT - By Mr. S. Rajaratnam
2) Controversies wrt TDS - By Narayan Jain and Gaurav Pahuja
3) Controversies on allowability of charitable status to facilitating NGO\'s (If parent trust is just supporting its member trust, the parent trust is entitled for benefit under Section 11 and 12 and many more issues) - By Manoj Fogla;
4) The uncharitable face of charity - Analyzing the amendment of expression "any activity of rendering any service in relation to any trade, commerce or business" - By Mr. G. N. Gupta;
5) Controversies on allowability of treatment of expenditure incurred before commencement of business (i.e. preliminary expenses and pre-operative expenses) - By Naveen Wadhwa (it\'s me)
6) Fair value accounting - By Mr. Dolphy D\'Souza
7) Issues in CARO reporting and Schedule VI - By. Srinivasan Anand G
8) Synchronization of AS 11 and AS 16 - By Varun Kumar
9) Controversies on service tax in form of FAQ - By Mr. V.S. Datey
10) Shamiana and Pandal - By Mr. T.N. Pandey
11) Conversion of CA firm into LLP, investment planning, stock market, etc.

I feel the copy of magazine will serve as a collectors\' item for yourself, as it it the special annual issue on the 7th anniversary of this magazine.
(Just want to clarify, this e-magazine is meant especially for circulation without violating the copyright)

Copy and paste the following link & Get your free copy of Corporate professional Today.

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Free copy of e-magazine Corporate professional Today

  1. 1. December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 1 i
  2. 2. CONTENTSii December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 2
  3. 3. VOLUME 22 • ISSUE 7 • DECEMBER 1-15, 2011 contentsFOUNDER EDITOR :U.K. BHARGAVA Direct Tax LawsEDITOR : 605 Treatment of Capital GainsRAKESH BHARGAVA under the provisions ofHON. COORDINATING EDITOR : MAT//S. RAJARATNAMDR. VINOD K. SINGHANIA 610 A Critical Analysis of theCorporate Professionals Today comes in three provisions of sectionVolumes, Annual subscription from January - 40(a)(ia)//NARAYAN JAINDecember 2011 is Rs. 3200. Single copy Rs. 200only. 617 Concept of Facilitating NGOs//MANOJ FOGLACorporate Professionals Today is published onevery 10th & 25th of the month. Non-receipt of 621 Uncharitable Face ofpart must be notified within 60 days of the due Charity//G.N. GUPTAdate. 625 Tax Accounting Standard onAddress your editorial and subscription Government Grants andcorrespondence to : Accounting Standard 12 -TAXMANN ALLIED SERVICES (P.) LTD., A comparative study//59/32, New Rohtak Road, New Delhi- DINDAYAL DHANDARIA110 005. Phones : +91-11-45562222Fax : +91-11-45577111 630 An insight into expenditurePRINTED AND PUBLISHED BY : before commencement ofAMIT BHARGAVA on behalf of Taxmann Allied business//NAVEEN WADHWAServices (P.) Ltd. and Printed at Tan Prints (India) 638 TDS Issues//GAURAV PAHUJAPvt. Ltd., 44 Km. Mile Stone, National Highway,Rohtak Road, Village Rohad, Distt. Jhajjar, Haryana 641 Landmark Rulings(India) and Published at 59/32, New Rohtak Road,New Delhi-110 005 (India).EDITOR : RAKESH BHARGAVAMaterial published in this part is the exclusive copyrightedproperty of Taxmann Allied Services (P.) Ltd. and cannot Accounts & Auditbe reproduced or copied in any form or by any meanswithout written permission of the Publisher. 659 Fair value accounting -Editors do not necessarily agree with the views expressedby authors of articles/features. Views so expressed are the Integral to IFRS//DOLPHYpersonal views of author(s). D’SOUZAThis publication is sold with the understanding that authors/ 664 Issues in CARO reporting ineditors and publishers are not responsible for the result ofany action taken on the basis of this work nor for any error Audit report of companies//or omission to any person, whether a purchaser of this SRINIVASAN ANAND G.publication or not. All disputes are subject to jurisdictionof the Delhi High Court. 672 AS-11 and AS-16 – Dusting the dilemma for treatmentEmail : sales@taxmann.comWebsite : http//www.taxmann.com of exchange rate differencesMODE OF CITATION [2011] 22 CPT. . . on borrowing cost during construction period//VARUNTOTAL PAGES INCLUDING COVER 136 KUMAR December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 3 iii
  4. 4. CONTENTS677 Accounts & Audit in Brief//RAJESH GOSAIN Service Tax684 Carbon credits : A new dimension to the accounting and taxation methods//DR. SUSHMA 694 Some Controversies in Service Tax//V.S. DATEY BAREJA 701 The Ongoing Battle on Validity of Levy of Service Tax on Renting of Immovable Property for Commercial/Business use//V. PATTABHIRAMAN 708 Hindu marriage is a religious ceremony besides being a social function//T.N. PANDEYCorporate Laws688 Conversion of Chartered Accountant (“CA”) Firms into Limited Liability Partnerships (“LLP”) //SARIKA GOSAIN 713 Service Tax Penalty & Reasonable Cause// GAURAV GUPTA Investment Planning 721 Recent changes in PPF & Small Saving Schemes w.e.f. 1-12-2011 Stock Market 727 How shareholders are cheated by some promot- ers//ARUN K. MUKHERJEE •••iv December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 4
  5. 5. DIRECT TAX LAWS INTRODUCTION 1. Mr. N. A. Palkhivala, the eminent jurist, described the tax on book profits as "constitutionally illegal, economically unsound and morally repugnant". But such tax has marched ahead with liability becoming stiffer with the each Finance Act. The tax liability now referred to as Minimum Alternate Tax (MAT) has been in vogue in different garbs in sections 115J, 115JA and now in section 115JB, mutilating the book profits with many deeming provisions out distancing book profits computed under the company law with the liability further enhanced with the progressive hike in rates of taxes. One of the outstanding issues, which is awaiting decision of the Apex Court is regarding the treatment of capital gains in the computation of the book profits. 2. RELEVANT JUDICIAL PRECEDENTS 2.1 The Ruling in Sutlej Cotton Mills Ltd.’s case - The assessee-company had taken the amount of sale proceeds of capital assets directly to reserves without routing it through the Profit & Loss Account (P&L). The Assessing Officer questioned the computation in view of the fact that the treatment of gains in the accounts did not accord with the requirements of Parts II and III of Schedule VI of the Companies Act, and that, therefore, it had to be added to the disclosed book profits so that liability for tax S. RAJARATNAM on capital gains was not avoided. This treatmentAdvocate & Tax Management was affirmed in first appeal and the matter Consultant came before the Special Bench of the Tribunal in Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22 (Cal.)(SB). The Tribunal did not question the right of the Assessing Officer to recast the profit and loss account. It did not agree with the contention December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 5 605
  6. 6. DIRECT TAX LAWSon behalf of the assessee, that whatever is assessee was entitled to treat the accretion toshown in the books is bound to be accepted fixed assets, when realised, as capital reserve,by the Assessing Officer "without questioning", particularly when the realised amount issince acceptance of such a view would mean reinvested in another asset and not availablethat the Assessing Officer is bound to accept for distribution as profits following the rulebook profits even in case of fraud or of ‘purposive interpretation’ in the light ofmisrepresentation or where there has been a objects expressed in the Finance Minister’s speechtotal disregard of the provisions of Parts-II and Memorandum explaining the provision inand III of the Schedule VI of the Companies the absence of any allegation of fraud orAct, which is the subject-matter of cross reference misrepresentation. In other words, the disclosedin section 115J as well. There can be no inference, book profit cannot be lightly disturbed. Thethat accounts approved by the Board of Directors Assessing Officer has got a right to makehave been prepared according to the requirements adjustments but only those specifically authorisedof company law. There is an implied authority under section 115J and not any other adjustment,for the Assessing Officer to verify and satisfy where the profits in the profit and loss accounthimself, whether the net profit as shown in are rightly computed as found in the instantthe P&L account is based upon accounts prepared case.in accordance with Parts-II and III of the The decision of the Supreme Court in McDowellSchedule VI. & Co. v. CTO [1985] 154 ITR 148/22 TaxmanThe Tribunal would not, however, accept the 1, which was pressed into service by the revenue,argument of the Revenue that the assessee was also considered by the Tribunal, butknowing fully well, that it would be caught concluded that a mere tax mitigation cannotwithin the mischief of section 115J, if capital be tax avoidance as decided by the Privy Councilgains had been credited to the P&L Account, in Challenge Corporation 187-(1) AC 155, wheretook it to the capital reserve with the sole for revaluation of shares in the facts of theobject of avoiding tax. The Tribunal found case, it was held, cannot be treated as a colourablethat considering the objective of the provision action. A permissible accounting treatment withinto tax zero tax companies and the requirement the frame work of law with the incidental taxof the Companies Act as regards computation advantage cannot be dismissed by characterisingof income as required under the company law, it as a "device".the transaction relating to capital structure of The ruling in Sutlej Cotton Mills Ltd.’s casethe company could not and need not form (supra) was followed in GKW Ltd. v. Jt. CITpart of Profit and Loss Account, which normally [2000] 74 ITD 161 (Cal.), where it was decidedrepresents operating profits from trading that profit on sale of capital assets cannottransactions and not transactions relating to form part of the book profits. In coming to theinvestments. The need for disclosure of the conclusion, the Tribunal cited two decisions inprofit on sale of investments is satisfied, if the Pandit Deo Sharma v. CIT [1953] 23 ITR 226information relating to them is available as a (All.) and CIT v. Sugauli Sugar Works (P.) Ltd.part of the accounts and not necessarily by [1983] 140 ITR 286/[1981] 7 Taxman 163 (Cal.).credit to the profit and loss account. There is In the latter case, it was decided in the contextsupport for such a view in Spicer and Pegler’s of section 41(1), that a mere credit in the‘Book Keeping and Accounts’ and also in the accounts does not justify taxation, if it was notlanguage of Parts-II and III of Schedule VI of normal business profit. The decision of thethe Companies Act itself. Calcutta High Court has since been affirmedIt was felt by the Tribunal as a matter of in CIT v. Suguali Sugar Works (P.) Ltd. [1999]sound accepted accounting practice, that the 236 ITR 518/102 Taxman 713 (SC).606 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 6
  7. 7. 2.2 The ruling in Veekaylal Investment’s case - loss account but also as equally, if not moreThe well-reasoned decision of the Special Bench importantly, in the balance sheet with Schedulesof the Tribunal in Sutlej Cotton Mills Ltd.’s case and Notes on Accounts.(supra) has been specifically overruled by the In Needle Industries (I) Ltd. v. CIT [1990] 183Bombay High Court in CIT v. Veekaylal Investment ITR 393/[1989] 46 Taxman 93 (Mad.), whereCo. (P.) Ltd. [2001] 249 ITR 597/116 Taxman the company had credited insurance monies104. The main reason, though not the sole for loss of stocks due to fire directly to thereason of the High Court, runs as under : reserves, the inference was that it was sufficient “The important thing to be noted is that disclosure, so that jurisdiction even within the while calculating the total income under shorter time-limit under section 147(b) was the Income-tax Act, the assessee is required held to be not available. The High Court found to take into account income by way of that the credit to the reserves in the balance capital gains under section 45 of the Income- sheet is sufficient information. tax Act. In the circumstances, one fails One has only to point out that moneys received to understand as to how in computing towards share capital, for example, is always the book profits under the Companies disclosed in the balance sheet and is not expected Act, the assessee-company cannot consider to be routed through profit and loss account. capital gains for the purposes of computing book profits under section 115J of the There is also a direct authority in CIT v. N. Act.” Guin & Co. (P.) Ltd. [1979] 116 ITR 475/1 Taxman 124 (Cal.) for the view, that capitalThere is a clear misdirection, in law, in the gains cannot be equated with commercial profitsabove reasoning, because section 45 could have in the context of additional tax under sectionno application, because of the non obstante 23A (now deleted) for inadequate distributionclause with which section 115J (now sections of dividend. It was decided with reference to115JA and 115JB) is prefaced. Capital gain is Palmer’s Company Law and Spicer and Pegler’sa class of income deemed as income for purposes Book Keeping and Accounts, that divisible profitsof computation of statutory income and cannot, in business sense cannot include reserves andtherefore, be part of taxable book profits. capital profits for purposes of distribution ofAccounting of book profits has to conform to dividend by businessmen and accountants. Theaccounting principles, mandatory accounting Legislature itself had made a sharp distinctionstandards and requirements of company law. between profits and gains of business on oneThe High Court has, no doubt, also justified hand and capital gains on the other. At anyits decision on the further argument, that clause rate, it is for the directors to decide, whether(2) of Part II of Schedule VI of the Companies the surplus realised on sale of capital assetAct would require disclosure of non-recurring should be treated as profits of the companytransactions of an exceptional nature, so that and where it is channelised to reserves, "it issuch disclosure is necessary, whether it is on not for the Income-tax Officer to lay downcapital or revenue account. What had been that it should have been treated as profits".overlooked is that, disclosure does not mean Where the admitted position is that the directorsthat it should be shown as income in profit have taken the surplus to reserves, it was heldand loss account, even where it does not have in this case, that such treatment is bound tothe character of income as is commonly be accepted. This law should have an equalunderstood. Information relating to capital gains application for purposes of book profit tax,is bound to be reported in the final accounts the object of which is also to tax income,of the assessee like various other items relating which is not distributed as dividend. It is not,to any company required to be given to the therefore, surprising that the Special Bench ofshareholders not only by way of profit and December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 7 607
  8. 8. DIRECT TAX LAWSthe Tribunal in Sutlej Cotton Mills Ltd.’s case therefore, would be, what is not required to(supra) relied upon this decision. be included in the case of deemed income like capital gains, should not form part of book2.2.1 Aftermath of Veekaylal’s case - The Tribunal profits irrespective of accounting treatment.in Kopran Pharmaceuticals Ltd. v. Dy. CIT [2009]119 ITD 355 (Mum.) upheld the inclusion of In another case dealing with capital gains, thecapital gains as taxable book profits, though assessee had sold a rubber estate and claimedit was taken by the assessee directly to the that the surplus was exempt as an agriculturalreserves following the decision in Veekaylal income, so as to be outside the purview ofInvestment Co. (P.) Ltd.’s case (supra) as the taxation, whether it be in computation of statutorydecision was that of the jurisdictional High income or book profits. The Tribunal in HarrisonsCourt. Same view was taken by the Tribunal Malayalam Ltd. v. Asstt. CIT [2009] 315 ITRin Growth Avenue Securities (P.) Ltd. v. Dy. CIT (AT) 1/32 SOT 497 (Cochin) decided the issue[2010] 126 ITD 179 (Delhi). on the basis that the sale of rubber estate by way of slump sale of agricultural land hasWhere the capital gains were credited to profit character of an agricultural income and thatand loss account, it was treated as the only the surplus is not, therefore, includible as ajustification for inclusion in CIT v. Indo Marine part of taxable book profits. The TribunalAgencies (Kerala) (P.) Ltd. [2005] 279 ITR 372 adverted to the decisions of the several High(Ker.), so that the controversy as to whether Court’s including that of the Supreme Courtaccounting treatment will make a difference in Singhai Rakesh Kumar v. Union of India [2001]to liability persists. This view was adopted by 247 ITR 150/115 Taxman 101 for its inference.the Tribunal in ITO v. Frigsales (India) Ltd. Being exempt under section 10, it fell outside[2005] 4 SOT 376 (Mum.), where capital gains the purview of the Minimum Alternate Taxwere credited to profit and loss account. Where under section 115JB. In the view taken by thethe assessee had credited the gains in the P&L Tribunal, it was not necessary to consider theAccount, the High Court in N.J. Jose & Co. (P.) larger question, whether capital gains couldLtd. v. Asstt. CIT [2010] 321 ITR 132/[2008] be treated as part of income for purposes of174 Taxman 141 (Ker.) found that there is no MAT steering clear of the subsisting controversy.provision for exclusion of such income in thelist of adjustments permitted under the Where the assessee had availed of the benefitExplanation to section 115J. The same view of tax exemption for capital gains by investingwas taken in respect of capital gains on transfer the proceeds in approved bonds under sectionof business by way of slump sale in CIT v. 54E, the issue was whether even in such aBrindavan Beverages Ltd. [2010] 321 ITR 197/ case, non-taxable capital gains on account of186 Taxman 233 (Kar.), in the light of the the relief, could be treated as liable for bookpreponderant view in favour of including capital profits tax. Where capital gains are includedgains, where it is taken into account in the as part of the book profits, there is no entitlementP&L account by the assessee. to concessions for such capital gains as was found in Nafab India (P.) Ltd. v. Dy. CIT [2005]Weight of evidence on the basis of decision 92 ITD 343 (Delhi).in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC) would appear to favour A view adverse to the taxpayer relying uponthe inference of liability on the basis of accounting decision in Veekaylal Investment Co. (P.) Ltd.’streatment, but the non-controversial inference, case (supra) was taken by the Special Benchin law, is that mere accounting treatment cannot of the Tribunal in Rain Commodities Ltd. v. Dy.create a liability in the context of computation CIT [2010] 4 ITR (Trib.) 551/40 SOT 265 (Hyd.)of income. Should such a law be inapplicable (SB) in respect of long-term capital gains infor book profits tax? The better reasoning, the view that exemption under section 47(iv)608 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 8
  9. 9. available for transfer of asset to wholly owned treated as part of book profits. Any other viewsubsidiary, normally available, will not be would make the tax on book profits a mockeryavailable for purposes of computation of book by making the taxable book profits even moreprofits under section 115JB overlooking the different from the real book profits.fact that the question of section 47 would ariseonly where section 45 itself is applicable, and CONCLUSIONthat both the section 45 or 47 should not beapplicable because of the non obstante clause 3. The decision in Veekaylal Investment Co. (P.)prefacing section 115JB. If section 45 is applicable, Ltd.’s case (supra) would need review in thethere should be no reason why exemption under light of reasoning in Sutlej Cotton Mills Ltd.’ssection 47 should not be applicable. But in this case (supra) and in the view that it is superseded,case, the assessee had included the capital where capital gains is not credited to the profitgains by crediting the same to the profit and and loss account, so that it may not be openloss account but claimed it as a deduction in to the Assessing Officer to treat it as bookthe computation of book profits, so that the profits, because of the bar against distortiondecision in Apollo Tyres Ltd.’s case (supra) was of accounts, which have become final, byalso relied upon. Where the assessee unwittingly adjustments not authorised by the Explanationor under the wrong impression that the audit to the provision. If this could be the finalguidelines which require disclosure are view, it would make a difference between twounderstood as requiring credit to the profit companies with different accounting treatmentand loss account, such credit invites liability, of such capital gains, so that a clarification orwhere the accounting entries are treated as review may well be required as regardsbinding. It is an unsatisfactory position of law, application of Apollo Tyre Ltd.’s case (supra) asif this is the law. Incidentally, audit guidelines well, whether the income as per profit andare sometimes understood as requiring every loss account is so sacrosanct as to be unalterable,credit to the reserves to be routed through a point dealt with more satisfactorily in Sutlejprofit and loss account, but such guidelines Cotton Mills Ltd.’s case (supra), when it did notdo not bind the company, so that such take a rigid view on accounting treatment, butunderstanding at best may only require the based its decision on merits of the case.Auditor to record his qualification. Now that this tax has to be carried over toIn case of depreciable assets, accounting the Direct Taxes Code with the same uncertaintyprinciples require the surplus to the extent of relating to treatment of capital gains, one woulddepreciation allowed to be credited back to wish the reasonable interpretation confiningprofit and loss account, so that the tax on the tax to real book profits which would findcapital gains relating to that extent cannot official acceptance too, by necessary amendmentpossibly avoid liability, but even in such a to the Bill before it becomes a law.case, the surplus over original cost cannot be ••• December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 9 609
  10. 10. DIRECT TAX LAWSDIRECT TAX LAWS INTRODUCTION A Critical 1. Section 40(a)(ia) was introduced in the Income- tax Act, 1961 by the Finance Act, 2004. The said provision was introduced for better Analysis of compliance of TDS provisions. It has resulted in augmenting the revenue through the disallowance of various expenses on which TDS is not deducted by the assessees. Under the provisions the provisions of section 40(a)(ia), read with TDS provisions the A.O. can disallow the expenses where TDS is not deducted or paid of section in time with respect to the expenses claimed by the assessee. It disallows the claim of even genuine and admissible expenses claimed by an assessee under the head “Income from 40(a)(ia) Business & Profession”, if the assessee does not deduct TDS on such expenses. The default in deduction of TDS or its non-payment would also result in levy of interest or penalty as provided for under section 201, under section 221 and under section 271C. The Act also provides for prosecution proceedings under section 276B. The hue and cry over such a harsh provision, is in continuum, especially when the High Courts of Madras and Punjab & Haryana have upheld the vires of the provision. However, in view of hardship faced by the assessees and different representations made, the Finance Act, 2010 has liberalised the provisions of section 40(a)(ia) w.e.f. AY 2010- 11 as per which the assessee will be entitled to deduction of expenses if he has deposited the TDS on or before the due date of filing of return under section 139(1). In this article some of the related aspects and recent cases have been discussed. NARAYAN JAIN Advocate & Tax Consultant EXPENSES WHICH ARE ALLOWED SUBJECT TO DEDUCTION AND DEPOSIT OF TDS (WHERE THE PAYMENT IS MADE TO A RESIDENT) 2. As per section 40(a)(ia), the following payments made to a resident shall be allowed as deduction610 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 10
  11. 11. only if tax is deducted at source as per the during the previous year but paid after theprovisions of Chapter XVII-B and is deposited due date specified under section 139(1), suchas per the provisions of section 200(1) : an expenditure shall be allowed as a deduction in computing the income of the previous year (a) Interest - section 193 or section 194A (w.e.f. in which such tax has been paid. Asst. Year 2005-06) (b) Payment to contractors/sub-contractors - section 194C (w.e.f. Asst. Year 2005-06) AMENDMENT MADE BY THE FINANCE ACT, 2010 W.E.F. ASST. YEAR 2010-11 (c) Commission or brokerage - section 194H (w.e.f. Asst. Year 2005-06) 3. Relaxing the provisions of section 40(a)(ia) - Whether clarificatory in nature and with a (d) Fees for technical services, fees for pro- retrospective effect? fessional services under section 194J (w.e.f. Asst. Year 2005-06) and The matter was dealt with by the Mumbai Special Bench of ITAT in Bharati Shipyard Ltd. (e) Rent under section 194-I [w.e.f. Asst. Year v. Dy. CIT [2011] 132 ITD 53/13 taxmann.com 2007-08] 101 wherein it was held that any amendment (f) Royalty under section 194J [w.e.f. Asst. which has not been given retrospective effect Year 2007-08] by the Legislature, cannot be construed as retrospective on solitary ground that originalHowever, in view of hardship faced by the provision caused some hardship to assessees.assessees and different representations made, Relevant criteria to be taken into considerationthe Finance Act, 2010 has liberalised the for arriving at decision about retrospective orprovisions of section 40(a)(ia) w.e.f. Asst. Year prospective effect of a later provision, is to2010-11. As per the amended provisions the unearth intention of the Legislature at time ofassessee will be entitled to deduction of introducing original provision and not whetherexpenses if the assessee has paid the tax it caused hardship to taxpayers. If it was verydeducted at source (which was deducted/ well known at time of inserting original provisiondeductible anytime during the previous year) that it is going to be harsh, then any subsequenton or before the due date of filing of return relaxation in it will not be retrospective unlessunder section 139(1). expressly so stated. The amendment broughtThe Finance Act, 2008 had earlier granted out by Finance Act, 2010 to section 40(a)(ia)marginal relief with retrospective effective from w.e.f. 1-4-2010 has only extended time forthe Asst. Year 2005-06 by providing that where depositing tax deducted at source by due datethe tax is deducted in the last month of the under section 139(1) from earlier lesser timeprevious year, i.e., March, then the deduction available for compliance; other consequencesof expenses was allowed if the payment was of section 40(a)(ia) are still present in provision.made within the due date of filing of return Thus, amendment by Finance Act, 2010 is notof income under section 139(1). However, if aimed at removing any unintended hardship to assessee, but to relax intended hardship tothe deduction was made between April to some extent by increasing time available forFebruary and the tax was not paid within the deposit of tax. When the amendment does notprevious year, deduction for such expenses remove unintended hardship or is notwas not available. explanatory, same cannot be held to be2.1 If the TDS is paid after the due date of retrospective unless it is specifically providedfiling the return - In this connection it has now for. Therefore, amendment brought out bybeen clarified by proviso to section 40(a)(ia) Finance Act, 2010 to section 40(a)(ia) w.e.f.that where tax has been deducted after the 1-4-2010 being not remedial and curative inend of previous year or has been deducted nature cannot be declared as having December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 11 611
  12. 12. DIRECT TAX LAWSretrospective effect from date of insertion of liability. No exception can be taken toprovision, i.e., 1-4-2005. incorporation of a provision which excludes right to seek permissible deduction in the eventEarlier decisions : The Mumbai Bench of ITAT of failure of the assessee to deduct or to depositin the case of Bansal Parivahan (India) (P.) Ltd. the deducted tax. Moreover, the proviso relaxesv. ITO [2011] 43 SOT 619 and Ahmedabad Bench the rigour. If in the subsequent years, onein the case of Kanubhai Ramjibhai Makwana v. makes the deduction or makes the deposit,ITO [2011] 44 SOT 264/9 taxmann.com 55 had one gets the benefit of deduction. The provisionheld that the amendment by Finance Act, 2010 cannot be held to be harsh. There is no inherentis remedial in nature, designed to eliminate lack of jurisdiction on the part of the Legislatureunintended consequences which may cause in enacting the provision providing for penaltyundue hardship to taxpayers and which made for evasion of statutory liability.the provision unworkable or unjust in a specificsituation is clarificatory in nature. The Earlier also at the time of introduction of sectionamendment has to be treated as retrospective 40(a)(ia) into the statute book, the constitutionalityw.e.f. 1-4-2005. of the said provision was challenged before the Madras High Court in the case of TubeThe above decisions have been followed in Investments of India v. Asstt. CIT [2010] 325 ITRKulwant Singh v. ITO [2011] 10 taxmann.com 610/[2009] 185 Taxman 438. The Court rejected25 (Ahd.) wherein Interest, commission, etc., the said challenge and upheld the validity ofwere paid without deduction of tax at source section 40(a)(ia) and the competence of thefor the Asst. Year 2005-06 and it was held that Legislature in enacting such a provision onamendments made in provisions of section the ground that the said provision had been40(a)(ia) by the Finance Act, 2008 and Finance introduced in order to augment tax throughAct, 2010, being curative in nature, would the mechanism of TDS and section 40(a)(ia)apply with retrospective effect from was in furtherance to the said objective.1-4-2005 and held that where assessee deductedtax at source from payments on account oftransportation charges for FY ending 31-3-2005 DISALLOWANCE OF FREIGHT CHARGESand paid same to the credit of Government FOR NON-DEDUCTION OF TDSbefore due date of filing of return, provisionsof section 40(a)(ia) could not be invoked for 5. Where there is no oral or written contractdisallowing those payments. with the transporter: Where there is no contract, oral or written, with the transporter, the provisions of section 194C do not apply. Hence,CONSTITUTIONALITY OF no disallowance under section 40(a)(ia) isSECTION 40(a)(ia) permissible - CIT v. Bhagwati Steels [2010] 326 ITR 108/[2011] 198 Taxman 275/9 taxmann.com4. Recently in Rakesh Kumar & Co. v. Union 266 (Punj. & Har.), CIT v. United Rice Land Ltd.of India [2010] 325 ITR 35/[2009] 178 Taxman [2008] 174 Taxman 286 (Punj. & Har.), R.R.481 (Punj. & Har.) wherein there was case of Carrying Corporation v. ACIT [2009] 30 DTRbusiness disallowance of Interest, commission, 569 (Ctk.); Also refer Mrs. Kavita Chug v. ITOetc., paid from which no TDS was deducted [2011] 44 SOT 95 (Kol.).and it was held that provisions of section40(a)(ia) cannot be declared ultra vires on theground of being harsh and discriminatory. The DISALLOWANCE UNDER SECTION 40(a)(ia)Legislature, in exercise of its taxing power, 6. Where assessee paid interest outside Indiacannot only provide for levying tax, but it canalso provide for penal action for enforcing the for delayed payment for the purchase of machinery without deduction of tax:charge, if there is any evasion of tax or statutory612 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 12
  13. 13. The interest paid by assessee is not interest prescribed in section 139(1), disallowance couldon loan but for delayed payment for the purchase not be made under section 40(a)(ia). In theof machinery, therefore, the provisions of section result, the appeal filed by the assessee was40(a)(i) are not attracted. Therefore, no dis- allowed.allowance can be made under section 40(a)(i) - 7.3 In Dy. CIT v. Choice Sanitaryware IndustriesCIT v. India Pistons Ltd. [2006] 282 ITR 632 [2011] 9 taxmann.com 120 (Rajkot) the case(Mad.); CIT v. India Pistons Ltd. [2007] 295 ITR related to Asst. Year 2005-06 where the assessee550 (Mad.). had paid certain sum to Clearing and Forwarding, (C&F) agents besides payment of agency7. SOME RECENT JUDGMENTS commission. The amounts consisted of reimbursement of various expenses claimed7.1 In Raja & Co. v. CIT (Central) [2011] 335 by C&F agents. The A.O. relying on BoardsITR 381/196 Taxman 461 (Ker.) the assessee Circular No. 715, dated 8-8-1995 held thatdid not make any payment of tax at source assessee was required to deduct tax onin respect of inward freight charges paid for reimbursement of expenses as well and madegoods purchased. The A.O. passed an assessment impugned disallowance. Hon’ble ITAT heldorder without considering disallowance under that the circular in question is applicable onlysection 40(a)(ia). The CIT in exercise of power in cases where bills are raised for gross amountunder section 263, set aside assessment order inclusive of professional fees as well asand directed the A.O. to consider whether any reimbursement of actual expenses. Since C&Fdisallowance was required to be made under agent raised two separate bills, one forsection 40(a)(ia). Since the assessee had not commission and other for reimbursement ofdeducted any tax at source while making expenditure, CBDT’s Circular No. 715, datedpayments to transport contractors, impugned 8-8-1995 would not be applicable in such caseorder of the CIT issued under section 263 for and assessee would not be liable to deduct taxconsidering disallowance under section 40(a)(ia) on said payment. Also refer to ITO v. Dr.was to be upheld. Willmar Schwabe India (P.) Ltd. [2005] 3 SOT7.2 In H.S. Mohindra Traders v. ITO [2011] 44 71 (Delhi).SOT 43 (Delhi)(URO), assessee paid interest, 7.4 In Dy. CIT v. Divi’s Laboratories Ltd. [2011]commission, etc., without deduction of tax at 131 ITD 271/12 taxmann.com 103 (Hyd.) itsource for Asst. Year 2007-08. Assessee was was held that no tax is deductible under sectionrequired to deduct tax on clearing charges, 195 on commission payable to non-residentfreight cartage inward and shipping expenses. for services rendered outside India. Therefore,A.O. found that tax was required to be deducted payment of commission made to overseas agenton these expenditures in month of February, without deduction of TDS does not attract2007 and assessee had deducted tax only in disallowance under section 40(a)(ia).month of March, 2007 and, thereupon, tax sodeducted was paid on 9-4-2007 and 12-6-2007. 7.5 In ITO v. UAN Raju Constructions [2011]A.O. relying on provisions of section 40(a)(ia) 48 SOT 178/14 taxmann.com 184 (Visakha.)held that since tax was not deducted and the case related to section 40(a)(ia), read withdeposited within stipulated time, the expenditure section 194C. In this case the assessee was acould not be allowed. On appeal, CIT(Appeals) ‘Joint venture’ formed by a company and aupheld disallowance. Hon’ble Delhi ITAT held proprietary concern with an objective tothat in view of fact that assessee having participate in tender process for constructiondeducted tax in month of March, 2007 paid of highways and bridges. The assessee obtainedthe same before due date of filing return as a contract from KRC. The said contract was December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 13 613
  14. 14. DIRECT TAX LAWSnot executed jointly by both parties but total payment is made to a group concern undercontract was divided between two parties in a cost sharing arrangement and the paymentan agreed ratio. The returns of income were is thus not for services but as reimbursementfiled for both years in status of ‘association of expenses. Therefore, TDS requirements doof persons’, declaring NIL income. The A.O. not come into play at this stage. The disallowancewas of view that assessee should be treated was deleted.as main contractor and members to whomwork was allotted should be treated as sub- 8. ‘PAYABLE’ OR ‘AMOUNTS/SUMScontractor and, therefore, assessee should havecollected sub-contract commission from sub- PAYABLE’, CONNOTATION OFcontractors. Accordingly, A.O. computed income 8.1 Appellate Courts inundated with appealsof assessee by treating 1 per cent of gross against provisions of section 40(a)(ia).Thereceipt as income of assessee by way of sub- appellate courts have been inundated withcontract commission in both assessment years. appeals against AOs action in invoking theThe A.O. also observed that assessee had provisions of section 40(a)(ia) of the Act. Onededucted TDS at 1 per cent under section of the grounds agitated by assessees is that194C on major portion of value of contract the section is applicable only to amounts whichallotted to its members but in Asst. Year 2005- are outstanding at the end of the year, i.e., the06, TDS was not deducted. Accordingly, A.O. amounts payable and that the provision cannotdisallowed relatable amount by invoking be applied to the expenses actually “paid”provisions of section 40(a)(ia). Held that, since during the year. This argument is accepted byconsortium of joint venture had been formed few Courts and Tribunals. However, recentonly to procure contract work and in reality, trend of the judgments is to the contrary, whichboth parties had divided contract work between seems to be the correct view. Some precedentsthemselves and declared income derived from in this respect are given hereunder.their respective share of contract work intheir hands, there was no merit in presumption 8.2 Interpretation of the words ‘payable’ ormade by A.O. that assessee was main contractor ‘sums payable’:and members were sub-contractors. Hence, 8.2.1 The provision reads as hereunder:the question of estimation of income by wayof sub-contract commission did not arise; further “40. Notwithstanding anything to thequestion of deduction under section 194C(2) contrary in sections 30 to 38, the followingand disallowance under section 40(a)(ia) also amounts shall not be deducted in computingdid not arise. the income chargeable under the head “Profits and gains of business or profession”,—7.6 In Emersons Process Management India (P.)Ltd. v. Addl. CIT [2011] 47 SOT 157 (Mum.)(URO), (a) in the case of any assessee-it was held that TDS requirements do not ** ** **come into play in case of reimbursement of (ia) any interest, commission or broker-expenses and is a settled law. Undoubtedly, age, rent, royalty, fees for profes-these payments are made for the services sional services or fees for technicalrendered but the TDS requirements would come services payable to a resident, orinto play at the point of time when payments amounts payable to a contractor orare made to the person who is rendering the sub-contractor, being resident, forservices or to the person with whom contract carrying out any work (includingfor rendering of these services is entered into. supply of labour for carrying outHere the issue dealt with a situation in which614 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 14
  15. 15. any work), on which tax is deduc- “An amount may be payable without being tible at source under Chapter XVII-B due. Debts are commonly payable long and such tax has not been deducted before they fall due.” or, after deduction, has not been paid (c) According to West’s Legal Thesaurus/Dic- on or before the due date specified tionary: Paid means pay to discharge a in sub-section (1) of section 139,- debt. Payable : means Justly or legally Provided that where in respect of any due (payable immediately). Uncollected such sum, tax has been deducted in any (Outstanding debts). Unpaid, undischarged, subsequent year, or has been deducted unsatisfied, unsettled, mature, owed, ripe, during the previous year but paid after collectable, in arrears, redeemable. the due date specified in sub-section (1) 8.2.3 Comparison of the provision as initially proposed of section 139, such sum shall be allowed to be enacted and after its enactment - On a as a deduction in computing the income comparison between the provision as initially of the previous year in which such tax proposed to be enacted and the one after its has been paid.” enactment it can be noticed that the Legislature (emphasis supplied) consciously replaced the word “amounts credited or paid” with the word “payable”. By changingThe provision clearly uses the term “payable” the words from “credited or paid” to “payable”and not “paid”. Hence, as per the literal the legislative intent has been made clear thatconstruction no word can be substituted in only the outstanding amount or the provisionplace of the said word nor can any new word for expense liable for TDS is sought to bebe supplied in the provision by the Courts. disallowed in the event there is a default inThe language of the provision has thrown open making compliance of the obligation laid underthe two terms “paid” and “payable” for judicial Chapter XVII-B of the Act.interpretation. 8.2.4 Decisions in favour of assessee - One of the8.2.2 Meaning of terms “payable” and “paid” as first decisions on this point was dealt in theper judicial dictionaries: case of Teja Constructions v. Asstt. CIT [2010] (a) Oxford dictionary defines the terms “pay- 39 SOT 13 (Hyd.)(URO) wherein the provisions able” and “paid” as under: of section 40(a)(ia) were interpreted by applying payable (pay-a-ble) adjective [predic.] Rule of Literal Construction and it was held that only those expenses can be disallowed 1. (of money) required to be paid; due: which are “payable” at the end of the year, interest is payable on the money owing because the provision of section 40(a)(ia) uses send a check, payable to the ASPCA the term “amounts payable” and not “amounts 2. able to be paid: it costs just $195, paid”. It was held that only those expenses payable in five monthly instalments can be disallowed, for default in deducting tax at source, which have not been actually Noun (payables) spent by the assessee, though claimed in its debts owed by a business; liabilities. books of account maintained on mercantile system of accounting. Also refer to K. Srinivas Paid: Past and past participle of PAY. Naidu v. Asstt. CIT [2010] 131 TTJ 17 (Hyd.) (b) According to Black’s Law Dictionary (Sev- (UO) and Mrs. Shah Charulata Milind vide ITA enth Edition) at p. 1150, the term ‘pay- No. l318/PN/2008 (Pune Bench). able’ is defined as a sum of money that In the case of Jaipur Vidyut Vitran Nigam Ltd. is to be paid. Another meaning to the v. Dy. CIT [2009] 123 TTJ 888, the Jaipur ITAT term “payable” is given as under: relying on CBDT’s Circular No. 5 of 2005, December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 15 615
  16. 16. DIRECT TAX LAWSdated 15-7-2005 held that the purpose of taxmann.com 7 (Kol.), the assessee madeintroducing section 40(a)(ia) was to augment certain payments to contractors withoutTDS compliance and to curb bogus payments. making any TDS and the A.O. disallowedHence, the payments which have been made those payments by invoking provisions ofand not found to be bogus cannot be disallowed section 40(a)(ia). On instant appeal, asses-by invoking section 40(a)(ia) of the Act. The see contended that section 40(a)(ia) wasITAT held that the bare provisions of section not applicable in a case where sum had40(a)(ia) provide for disallowance of expenses been paid, as impugned section was withfor non-deduction of amount which remains reference to ‘sums payable’. The Hon’blepayable to a resident in respect of certain Kolkata ITAT rejected the contention ofexpenses. It is not applicable where expenditure the assessee and held that the issue hadis paid and is applicable only in cases where been considered by the ITAT, Kolkatapayments are due and outstanding. The word, Benches, Kolkata in ITA No. 1418 (Kol.)/‘payable’ is not defined, though the word ‘paid’ 09 vide order dated 15-1-2010 in the caseis defined under section 43(2) to mean actually of Poddar Son’s Ex.L (P.) Ltd. v. ITOpaid or incurred. Hence, by implication the where it had been held as per para 6.6,word “payable” does not include paid or that even if the sum payable or paid toincurred. It placed reliance upon the decision the contractors or sub-contractors on whichof Teja Constructions’ case (supra). tax is deductible at source as per the provisions of the Act, section 40(a)(ia) will8.2.5 Decisions against the assessee - There are be attracted. Since assessee has not de-following 2 decisions against the assessee and ducted TDS as per provisions of sectionin favour of Revenue which have been 194C of the Act, it was held that thepronounced by the Hon’ble Kolkata ITAT: CIT(A) had rightly confirmed the action (a) Matrix Glass & Structures (P.) Ltd. [ITA of the A.O. in making disallowance. No. 658 (Kol.) of 2010] - It was held that Disallowance made by A.O. was upheld. the plea that disallowance under section 40(a)(ia) can be made only on “payable” amount cannot be accepted. It held that CONCLUSION such an interpretation would defeat the 9. The law has developed in the recent times very purpose of enacting the said provi- with respect to the provisions of section 40(a)(ia). sion. Even if the sum payable is paid and While as the Constitutionality of the section TDS is not deducted and/or deposited, has been upheld, the ‘crack-down’, in law, the provisions of section 40(a)(ia) would and the new ‘centre-point’ has been the be attracted. Hon’ble ITAT further held interpretation of words ‘paid’, ‘payable’ and that when the literal construction pro- ‘amounts payable’. There are differing views duces unjust or unwarranted or absurd of various Tribunals on the point. The air may result, then such, literal construction has be cleared now by either by a High Court’s to be given a go by for the sake of verdict or by the CBDT’s intervention. implementing the provision. (b) Very recently, in Dy. CIT v. Ashika Stock ••• Broking Ltd. [2011] 44 SOT 556/9616 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 16
  17. 17. DIRECT TAX LAWS Concept INTRODUCTION of 1. In the current milieu of corporatisation of the charities sector and the increasing influence of CSR various new models of NGOs areFacilitating emerging. One of the new models of charitable work is the concept of Mother NGO or a Facilitating NGO which does not implement programmes directly but generates funds and NGOs resources for its downstream NGOs. The issue here is whether such NGOs can be considered as charitable in nature and whether they can charge a facilitation fee without being deemed as a commercial entities? The judicial precedents on these issues have been given as FAQs in the following paras: 2. A CHARITABLE ORGANISATION WORKING THROUGH OTHERS ONLY 2.1 Can a Charitable Organisation be said to be existing for a particular purpose when it is not directly engaged in such a purpose but is working through various other charitable organisations? - In the case of Aditanar Educational Institution v. Addl. CIT [1997] 90 Taxman 528 the Hon’ble Supreme Court laid down the ratio for determining the purpose for which an organisation exists. In this case the assessee was registered solely for the educational purposes but it imparted education through various registered schools and colleges. The department contended that the assessee itself was not MANOJ FOGLA providing any education directly, therefore, it CA could not be considered as existing solely for educational purposes. The Court observed that it would rather be unreal and hyper-technical to hold that the assessee-society was only a financing body and would not come within the scope of ‘other educational institution’ as December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 17 617
  18. 18. DIRECT TAX LAWSspecified in section 10(22). The relevant [2011] 198 Taxman 63. In this case the assesseeobservation of the Court is as under : had received ` 2 crores as donation during the year and had donated ` 2.07 crore to various "It will be rather unreal and hyper-technical NGOs and institutions. The Assessing Officer to hold that the assessee-society is only argued that giving money to various a financing body and will not come within organisations could not be considered to be a the scope of ‘other educational institution’ charitable activity. He further argued that the as specified in section 10(22). The object funds given as inter-charity donation might of the society is to establish, run, manage not have been applied for charitable purposes. or assist colleges or schools or other It was held that the Assessing Officer had not educational institutions solely for pointed out violation of any provision of section educational purposes and in that regard 13 by the assessee. The Commissioner (Appeals) to raise or collect funds, donations, gifts, as well the Tribunal, both had found that the etc. Colleges and schools are the media organisations to which donations were given through which the assessee imparts by the assessee during the assessment year in education and effectuates its objects. In question, were genuine charitable organisations. substance and reality, the sole purpose There was absolutely no material before the for which the assessee has come into Assessing Officer to show that the funds given existence is to impart education at the to those NGOs/institutions were used for levels of colleges and schools and so, personal benefit of the donor or any of its such an educational society should be directors. regarded as an ‘educational institution’ coming within section 10(22)." 3.2 Can inter-charity donation be treated on par with direct implementation of Charitable2.2 The other relevant cases - The other relevant Activities? - ‘End justifies the means’ is whatcases in this regard are: Addl. CIT v. Aditanar the Courts have consistently held in determiningEducational Institution [1979] 118 ITR 235/[1980] the charitable nature of an organisation. In3 Taxman 56 (Mad.); CIT v. Rajagopal Educational CIT v. J.K. Charitable Trust [1992] 196 ITR 31/Trust [Special Leave Petition No. 6281 of 1986]; [1991] 59 Taxman 602 (All.), it was held aKatra Education Society v. ITO [1978] 111 ITR charitable purpose may be served in more420 (All.); CIT v. Doon Foundation [1985] 154 than one way. One is to directly contribute forITR 208/22 Taxman 9 (Cal.); Agarwal Shiksha the promotion of that cause; the other is toSamiti Trust v. CIT [1987] 168 ITR 751/[1988] contribute money to another charitable36 Taxman 165 (Raj.); Governing Body of Rangaraya organisation which advances that cause. InMedical Colleges v. ITO [1979] 117 ITR 284 other words, the Allahabad High Court laid(AP); and Secondary Board of Educations v. ITO down the principles of treating the work done[1972] 86 ITR 408 (Ori.). through another charity on par with doing the work directly. The Supreme Court in CIT v.3. A CHARITABLE ORGANISATION Thanthi Trust [1999] 239 ITR 502, has alsoMOBILISING DONATIONS AND THEN upheld the treatment of inter-charity donationsGIVING THEM AS INTER-CHARITY as valid application of funds. In this case the Supreme Court further held that the AssessingDONATIONS Officer cannot deny exemptions even if the3.1 Can a Charitable Organisation be considered donee-trust has not expended the amountsas charitable in nature when the entire donation received in the year of receipt. Similar viewsmobilised is given as inter-charity donation? - were also taken in CIT v. Aurobindo MemorialThis issue was brought before the Delhi High Fund Society [2001] 247 ITR 93/[2000] 108 TaxmanCourt in CIT v. HPS Social Welfare Foundation 271 (Mad.) and CIT v. Matriseva Trust [2003]618 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 18
  19. 19. 128 Taxman 261 (Mad.). To sum up, inter- of Income-tax (Exemptions) [2009] 183 Taxmancharity donations have been held as valid 462 (Delhi), the assessee was a foundation set-applications for the purposes of section 11(1)(a). up by the Institute of Chartered Accountants of India (ICAI) with the main objective to make it an academy for imparting, spreading4. NGOs PROVIDING NON-FINANCIAL and promoting knowledge, learning, educationSUPPORT ONLY and understanding in various fields related to4.1 Is it possible to create a Charitable Orga- profession of accountancy. It was a deemednisation which acts as a support organisation company under section 25 of the Companiesto another Charitable Organisation? (Such Act, 1956 and was having status of an academy.support need not be financial in nature) - The assessee filed an application for claimingCharitable purpose has never been confined exemption under section 10(23C)(iv) taking aor given a narrow interpretation of expecting plea that it was covered by the expressioncharities to physically implement the programmes ‘charitable purposes’ as defined in section 2(15).themselves. The Courts have always held that The application was rejected on the grounds :any activity which directly or indirectly supports (i) that the assessee had undertaken threecharitable activities or even charitable organi- research projects on behalf of the localsations should be considered as a charitable bodies and had also received remunera-activity. There was an interesting case in the tion for those projects which amounted toDelhi High Court where one NGO formed a doing business of providing professionalcharitable trust to manage its properties. The services; andCIT denied it’s registration because accordingto him managing the properties of another (ii) that the assessee had received monies fromNGOs was not a charitable purpose. The Delhi Infosys Technologies Limited in the formHigh Court in the case of DIT (Exemption) v. of Infosys Fellowship Fund and, thoughPradan Property Holding Trust [IT Appeal No. it was for grant of fellowship to deserv-361/2007, dated August 16, 2010, ruled that ing candidates for undertaking researcha trust constituted for the management of projects, yet if a fellow would leave in theproperties of another charitable society should middle of the programme or would finishbe considered as charitable in nature. The Court his research early with funds left in theobserved that the stated fact that the assessee account, only Infosys would decide howdoes not carry on any independent charitable money was to be spent and, hence, theactivity was not enough to deny it registration assessee could not be said to be doingunder section 12AA. It further observed that any charitable activity in that regard. Thethere was no reason why holding of properties issue raised was, whether merely oncannot be said to be a charitable object. undertaking research projects at the in- stance of the Government/local bodies and taking remuneration for such projects,5. CHARGING OF REMUNERATION OR essential character of assessee-foundationADMINISTRATIVE COST IN CASE OF A could be said to have been converted intoCHARITABLE PROJECT one which carried on commerce or busi- ness or activity or rendering any service5.1 Can any remuneration or fee charged against in relation to trade, commerce or busi-any Charitable Project be considered as a ness? It was held that the charitable characterCommercial Activity? - In the case of ICAI would not change even if the foundationAccounting Research Foundation v. Director General had charged fees against various projects. December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 19 619
  20. 20. DIRECT TAX LAWS6. THE SUPREME COURT ON P.A. Inamdar v. State of Maharashtra AIR 2005COMMERCIALITY AND EXISTENCE SC 3226.OF PROFIT FOR CHARITABLEORGANISATIONS CONCLUSION6.1 Courts decision in some of the cases - 7. In the light of the various judicial precedantsWith regard to the issue of surplus generated it can be said that the term ‘charitable purpose’by charitable organisation it is important to is very broad one and is not confined to astudy the observations of the Hon’ble Supreme narrow interpretation, i.e., the charitable workCourt in T.M.A. Pai Foundation v. State of Karnataka has to be directly implemented by the NGO.[2002] 8 SCC 481. The 11-Judge Constitution To sum up, the following ratios emerge fromBench has held that the private educational these judicial precedents :institutions are bound to generate funds for u A charitable organisation can be said tobetterment and growth of the institutions for be existing for a particular purpose, evenwhich there may be a surpluses for furtherance if it is not directly engaged in such aof education. Therefore, it is not only permissible purpose but is working through variousbut an important requirement to run the other charitable organisations.institutions of such strength. Further, in AditanarEducational Institution’s case (supra), the Hon’ble u Inter-charity donation is treated on parSupreme Court has observed that when surplus with direct implementation of the chari-is utilized for educational purposes i.e., for table activities.infrastructure development, it cannot be said u A charitable organisation can be consid-that the institution was having the object to ered as charitable in nature, even if themake profit. The Hon’ble Supreme Court has entire donation mobilised is given as anrightly observed time and again that surpluses inter-charity donation.used for management and betterment of theinstitutions could not be termed as profit. If u The revenue cannot argue that the fundsthe stand of the Department/revenue is accepted given as inter-charity donation might notto be correct, especially in the wake of the have been applied for charitable purposesmethodology adopted by the Assessing Officer in the absence of any evidence.in ascertaining profits, then no educational u It is possible to create a charitableinstitution like the petitioner-society could be organisation which acts as a supportsaid to be existing solely for educational purposes, organisation to another charitableas in every case of an educational institution organisation. Such support needs not bethere is possibility of a profit. The Court further financial in nature.held that no profiteering does not imply that u Reasonable remuneration or fee chargedthe institutions cannot have a reasonable surplus against any charitable project cannot befor future sustenance and expansion of the considered as a commercial activity.institute. It was held that upto 6-15 per centof the profit could be considered as reasonable u Existence of a surplus or profit as a partand legitimate. This issue was further reaffirmed of charitable activity is permissible.by the Supreme Court’s ruling in the case of •••/SEC. 11620 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 20
  21. 21. DIRECT TAX LAWS INTRODUCTION 1. Before amendment by the Finance Act, 2008Uncharitable with effect from 1-4-2009, the definition of ‘charitable purpose’ contained in section 2(15) of the Income-tax Act, 1961 (hereinafter called ‘the Act’) included “relief of the poor, education, medical relief and the advancement of any Face of other object of general public utility.” The newly substituted section 2(15), however, is as follows: “Charitable purpose” includes “relief of the poor, education, medical relief, preservation of environment (including watersheds, forests Charity and wildlife) and preservation of monuments or places or objects of artistic or historic interest, 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]. PROFESSIONAL ASSOCIATIONS NO LONGER CONSIDERED AS CHARITABLE G.N. GUPTA INSTITUTIONS BY THE REVENUE Advocate, Chairman CBDT (Retd.) 2. Till the assessment year 2008-09 most of the professional associations were successfully claiming that they were engaged in the advancement of objects of general public utility, despite the fact that they were charging membership fees, selling professional journals to members and public, deriving considerable income from seminars and conferences and often, from educational activities as well. However, from the assessment year 2009-10 onwards, the revenue is more or less consistently holding that such professional associations are December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 21 621
  22. 22. DIRECT TAX LAWSnow hit by the mischief of the provisions 2.2 CBDT’s Circular no. 11 of 2008 on thiscontained in the proviso to section 2(15) and, issue - Similarly, it has been stated in thetherefore, are no longer entitled to be considered CBDT’s Circular No. 11 of 2008, dated 19thas charitable institutions. This matter is likely December, 2008 [reported in 308 ITR (St.) 5]to spawn a lot of litigation as the underlying that an entity with a charitable object, interissue is highly debatable and the stand hitherto alia, consisting of advancement of any objecttaken by the revenue, to say the least, is rather of general public was eligible for exemptionsimplistic in view of the following reasons & under section 11 of the Act. “However, it wascase laws : seen that a number of entities who were engaged in commercial activities were also claiming2.1 Rationale behind amendment to section exemption on the ground that such activities2(15) - At the very outset, it would be useful were for the advancement of objects of generalto understand the rationale behind the public utility in terms of the fourth limb ofamendment to section 2(15) by the Finance the definition of “charitable purpose”. Therefore,Act, 2008. The best way to do so would be section 2(15) was amended vide Finance Act,to refer to the relevant portion of the 2008, by adding a proviso.” (emphasis supplied).Memorandum explaining the provisions in the Further, para 3 of the said circular read as :Finance Bill, 2008 reported in 298 ITR (St) 200- “The newly inserted proviso to section 2(15)201 which read as “It has been noticed that will apply to entities whose purpose isa number of entities operating on commercial “advancement of any other object of generallines are claiming exemption on their income public utility”, i.e., the fourth limb of the definitioneither under section 10(23C) or section 11 of of “charitable purpose” contained in sectionthe Act on the ground that they are charitable 2(15). Hence, such entities will not be eligibleinstitutions. This is based on the argument for exemption under section 11 or under sectionthat they are engaged in the “advancement of 10(23C) of the Act if they carry on commercialan object of general public utility” as is included activities. Whether such an entity is carryingin the fourth limb of the current definition of on an activity in the nature of trade, commerce“charitable purpose”. Such a claim, when made or business is a question of fact which will bein respect of an activity carried out on commercial decided based on the nature, scope, extentlines is contrary to the intention of the provision. and frequency of the activity.With a view to limiting the scope of the phrase“advancement of any other object of general 2.3 Facts emerging from conjoint reading ofpublic utility”, it is proposed to amend section the memo and CBDT’s circular - A conjoint2(15) so as to provide that “the advancement reading of the Memo Explaining the provisionsof any other object of general public utility” of Finance Bill, 2008 & CBDT’s Circular datedshall not be a charitable purpose if it involves 19-12-2008 will make it abundantly clear thatthe carrying on of following activities : firstly, an entity not engaged in commercial activities will not be hit by the mischief of (a) any activity in the nature of trade, com- proviso to section 2(15) of the Act and secondly, merce or business or, whether an entity is carrying on an activity (b) any activity of rendering of any service in the nature of trade, commerce or business in relation to any trade, commerce or busi- is a question of fact. ness, for a fee or cess or any other con- 2.4 The issue is no longer res integra after the sideration, irrespective of the nature of decision in DIT (Exemptions) v. ICAI - In fact, use or application of the income from this issue is no longer res integra in view of such activity, or the retention of such the decision of the Hon’ble Delhi High Court, income, by the concerned entity.” [Em- dated 19th September, 2011 in the case of DIT phasis supplied] (Exemptions) v. Institute of Chartered Accountants622 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 22

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