Re-development of buildings – Tax Aspects

1.1 With increase in population and people migrating from rural areas, demand for urban housing is increasing and urban area is running out of land. It is estimated that there are more than 52,000 slums in India, with more than 8 million dwelling units. Out these 17,000 slums with more than 3 million dwelling units belongs to Maharashtra.

1.2 In view the fact that land cannot be created; supply of land for new construction would be from:

a)      Redevelopment of old buildings, 

b)      Development of slums.

c)       ‘Supply from old mills and salt pans’ - in cities like Mumbai

However environmental disquiet has held the plans for developing salt pans. Hence currently redevelopment of chawls, dilapidated building, some crumbling co-operative societies and slums would drive the market.

1.3 Redevelopment of old structures involves various complicated and peculiar regulatory and tax issues. Important parties to the redevelopment scheme are:

i)        Land owners / society;

ii)       Tenants / flat owners / dwellers / society members;

iii)     Developers

iv)     Various Governmental agencies.

However for the purpose of taxation we are concern with tax issues that may surround first three parties only. Tax implication on developers are specifically not dealt herewith since all the expenses incurred by the developer would be in the ordinary course of business and no specific tax issues arises merely on undertaking redevelopment. Though there are various industry specific issues which arises on all types of construction. During the course of re-development of society, society and / or members are in receipt of sum in one or the other form.

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TDS on salary paid to expatiates in their home country by the foreign employer

Supreme Court in this decision has disposed of 104 cases (amongst them were Eli Lilly & Co. (India) (P) Ltd., Ericsson Communication (P) Ltd., Mitsui & Company Ltd. pertaining to the applicability of TDS on salary paid to expatiates in their home country by the foreign employer.

Facts of the case:
Eli Lilly & Co. (India) (P) Ltd.

Eli Lilly Inc. Netherland (Foreign Company) had a Joint Venture with Ranbaxy Ltd., in the form of Eli Lilly & Co. (India) (P) Ltd. (Indian Company). Foreign Company has seconded four expatriates to Indian Company. Expats continue to be on roll of foreign company and received salary from Indian company in India as well as from foreign company in home country. These expats did not perform any services for the foreign company and total remuneration (in India & in foreign) was paid only on account of services rendered in India. TDS u/s 192 was deducted only on that part of the salary paid in India by the Indian company. However expats have paid taxes due on home salary by way of advance tax or self-assessment tax.

The Assessing Officer held that Indian company as ‘assessee-in-default’ u/s 201 for failure to deduct tax at source on foreign / home salary paid by foreign company outside India and levied interest u/s 201(1A).
Ericsson Communication (P) Ltd.

Similarly in this case too Swedish Company has paid ‘child education payment’ to its expatriate employees in Sweeden on which no TDS was deducted by the Indian Company.
Mitsui & Company Ltd.

Mitsui & Company Ltd. (Foreign Head Office) had a project & liaison office in India. Foreign Head Office has deputed some of its employees to project & liaison office in India. As per the terms of deputation expats also received retention / continuation salary paid by the foreign Head Office in home country. TDS was deducted only on that part of salary which was paid by project & liaison office. However after consultation with CBDT, project & liaison office has agreed to pay tax & interest on retention continuation salary with the understanding that there will not be any penalty proceedings.
However the Assessing Officer has levied penalty u/s 271C against project and liaison office in India for alleged default of Foreign Head Office
Lower appellate authorities has held in favour of the assessees that assessee (Indian Counter part) were not under statutory obligation to deduct tax at source u/s 192 on Home Salary paid by Foreign Company and consequently they are also not ‘assessee-in-default’ u/s 201(1) and where department has levied penalty u/s 271C, penalty was deleted. Against all these 104 cases department was in appeal before Supreme Court.
Issue before Supreme Court
 Whether TDS provisions are applicable in respect of payments, which are chargeable under the head ‘Salaries’, made by the foreign company in home country, to expatriates who render services in India?

 While answering above, the Court has also analysed following:

a) Whether TDS provisions which are in the nature of machinery provisions are independent of charging provisions?

b) Scope of ‘Salary’ u/s 192(1)?

c) Scope of section 201(1) treating assessee-in-default and section 201(1A) levy of interest?

d) Scope of section 271C r.w.s. 273B for levy of penalty on non-deduction of tax at source?
Argument of Revenue

 S. 192, imposes an obligation for deducting tax on any person responsible for paying any income chargeable under the head “Salary”. The expression ‘any person’ would include any person, responsible for making salary payment to an employee, whether the employee is in India or outside India or whether payment is made in India or outside India. The only requirement for triggering TDS provisions is that employee is paid for rendering services in India and accordingly such salary is exigible to Indian income-tax.

 S. 192, imposes a joint and several obligation on all the persons who are responsible for paying any income chargeable under the head ‘Salary’ to an assessee employee in India.

 Alternatively, it was also argued that in view of amendment to S. 9(1)(ii), the obligation of Indian employer is co-extensively with the foreign employer (who is directly paying the foreign account of the expatriate employee outside India) as long as the salary income of such an employee arises or accrues in India or is in respect of ‘services rendered in India’.

 With respect to penalty, assesses plea of bona fide misunderstanding of law does not withstand the test of ‘reasonable cause’ so as to delete penalty.


Argument of Assessee

 The obligation to deduct tax at source is on the person responsible for paying salary. Accordingly, deduction of tax at source is qua the amounts actually paid by the employer or paid on his behalf or on his account.

 The payment of salary by the foreign company was not on behalf of or on account of Indian employer.

 The obligation to deduct tax at source does not extend in respect to salaries paid by any other person, which is not on account of or on behalf of such employer, even though such salaries may have nexus with the service of the employee with that employer and may be assessable to tax in India in the hand of employee.

 In respect of consecutive and concurrent employment, unless employee furnishes details of such employment, TDS is required to be deducted without considering salary paid by another employer.

 The TDS provisions are in nature of machinery provisions to enable easy collection and recovery of tax and are independent of charging provisions. Charging provision are applicable to receiver of income and TDS (machinery) provisions are applicable to payer of income.

 The obligation to deduct tax at source is on deductor, which is independent of the assessment of income in the hands of the expatriate employee.

 TDS provisions have no extra-territorial operation. There is no provisions in the income-tax Act providing TDS provisions applicable to payments made abroad by a person located outside India.

 Employees have discharged tax liability on home salary either by way of advance tax or self assessment tax and has also filed return of income. Accordingly even if assessee is treated as assessee-in-default, the tax cannot be recovered again from the assessee since employee has paid the tax.

 Indian employers were under bona fide impression that it was not required to deduct at source and such bona fide belief constitutes ‘reasonable cause’ for non levey of penalty.
Held

 The scheme of the TDS provisions applies not only to the amounts paid, which bears the character of ‘income’ such as salaries, dividend, interest on securities etc. but also apply to gross sums, the whole of which may not be income or profits in the hands of the recipient, such as payment to contractors and sub-contractors. The purpose of TDS provisions is to see that the sum which is chargeable u/s 4 for levy and collection on income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to non-resident.

 If the payments of the home salary paid abroad by the Foreign Company to the expatriate has any connection or nexus with rendition of services in India then such payment would constitute income which is deemed to accrue or arise to employee in India as salary earned in India in view of S. 9(1)(ii).

 S. 9(1) integrates the charging sections, the computation provisions as well as machinery provisions.

 Income-tax Act has extra-territorial operation in respect of subject matters and the subjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the Area where Act extends through the machinery provided under it.

 Salary TDS provisions is a stand alone section amongst other TDS provisions (Chapter XVII-B), which has to be read with section 9(1)(ii).

 Supreme Court concluded that-

o In generality it cannot be said that the TDS provisions are in nature of machinery provisions to enable collection and recovery of tax and are independent of the charging provisions.

o Home Salary payments made by the foreign company in foreign currency abroad can be held to be ‘deemed to accrue or arise in India’ depending upon the facts in each case.

 On facts, it was held that home salary / special allowance payment made by the foreign company abroad is for rendition of services in India and no work was found to have been performed for the foreign company, would to subject to TDS u/s 192(1) r.w.s. 9(1)(ii).
Scope of S. 201(1) & S. 201(1A)

 Provision of S. 201(1) treating assessee-in-default and payment of interest u/s 201(1A) are independent to each other. Object of s. 201 is to recover that tax and incase of short deduction of tax, recover the shortfall. Interest u/s 201(1A) is compensatory measure for withholding tax which ought to have gone to the exchequer. The levy of interest is mandatory and absence of liability for tax will not dilute the default.

 Interest u/s 201(1A) r.w.s. 201(1) can only be levied when a person is declared as an assessee-in-default.

 Interest is levied for the period of default, which is period between the date of deductibility and date of actual payment of tax.

 In case tax is directly paid by the employee (who is principally liable to pay tax) Indian company would be liable to pay interest from the date of deductibility of tax to the date of actual payment by concern expatriate employees.
Scope of S. 271C r.w.s. 273B

 Penalty u/s 271C which, is equal to the amount of tax, is leviable if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVIIB.

 S. 273B provided that no penalty can be levied on the person for failure to deduct tax at source if such person proves that there was a reasonable cause for the failure.

 Court cancelled the levy of penalty on following counts:

o Non-deduction of tax at source took place on account of controversial addition. The concept of aggregation or consolidation of the entire income chargeable under the head ‘salary’ being exigible to deduction of tax at source u/s 192 was a nascent issue and this was never considered by the Supreme Court.

o Assessee has not claimed deduction u/s 40(a)(iii) while computing income from business and hence paid higher corporate tax and in some cases the expatriate employees had directly paid tax on such home salary.

o Deductor has been bona fide belief that they were under no obligation to deduct tax at source on such home salary.
Conclusion

 Supreme Court widens the scope of the withholding of taxes from salary. Accordingly withholding provision u/s 192 are triggered in respect of the amounts which are exigible under the head ‘Salaries’ irrespective to place of payment. In other words all Indian companies who has deputes from foreign sister / associate company will have to deduct the tax on global salary, which relates to services rendered in India, during their deputation in India.

 In view of this decision every foreign company who has deputed their employees in India, would be required to reassess their fact pattern so as to determine there withholding tax liability in India.

 However said judgment will not have applicability in case of non deduction of tax at source other than salary since Supreme Court has categorically elucidate that this judgement is confined strictly to the question of deductibility of tax from the ‘income chargeable under the head salaries u/s 192(1)

PS: Analysis published in CTC's IT Review

Income-tax Decisions

Vinod Kumar Jain vs. CIT (2010) 46 DTR 253
S. 2(14), 2(29A), 2(42A) : The assessee was allotted the flat on 27/02/1982 by issuance of an allotment letter and he had been making instalment payments in terms thereof. However, the specific number of flat was allotted to the assessee and possession was delivered on 15/05/1986. It was held that the right of the assessee prior to 15-5-1986 was a right in the property and it cannot be held that prior to the said date the assessee was not holding the flat. Thus the gain arising out of sale of flat, allotted to assessee vide allotment letter dated 27/02/1982 and sold on 6/01/1989 is a long term capital gain even though possession was granted on 15/05/1986.

CIT vs. Salitho Ores Limited (2010) 46 DTR (Bom) 377
S. 37(1) : The assessee is the best judge in the matter of commercial expediency. Assessee incurs expenditure in pursuit of a business opportunity. But sometimes judgement as to the existence of a business opportunity turns sour. Expenditure incurred for pursuit of the business or exploitation of business opportunity cannot be denied by tax authorities on the ground that the decision was imprudent. Accordingly it was held that lease rent of 4 dozers is allowed as deduction even if 3 out of 4 dozers were not used at all.

CIT vs. Glaxosmithkline Asia (P) Ltd (2010) 47 DTR (SC) 65
Sec. 40(A)(2): In the case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily will be revenue neutral in nature, except in two circumstances having tax arbitrage—
[i] If one of the related Companies is loss making and the other is profit making and profit is shifted to the loss making concern; and
[ii] If there are different rates for two related units [on account of different status, area based incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of tax arbitrage. For example, sale of goods or services from non-SEZ area [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less profit taxable and non-taxable division will have a higher profit exemption.

All these complications arise in cases where fair market value is required to be assigned to the transactions between related parties in terms of Section 40A(2). In order to reduce litigation, we are of the view that certain provisions of the Act, like Section 40A(2) and Section 80IA(10), need to be amended empowering the Assessing Officer to make adjustments to the income declared by the assessee having regard to the fair market value of the transactions between the related parties. The Assessing Officer may thereafter apply any of the generally accepted methods of determination of arm’s length price, including the methods provided under Transfer Pricing Regulations.

The Court further suggestions the law should be amended to make it compulsory for the taxpayer to maintain Books of Accounts and other documents on the lines prescribed under Rule 10D

CIT vs. Vijay Kumar Goel (2010) 235 CTR (Chattisgarh) 516
Sec. 40(A)(3) read with Rule 6DD(d)(iv): Payment made through bankers cheque/ pay order / CDR, are bills of exchange and payments made through these instruments cannot be disallowed u/s 40A(3) read with Rule 6DD(d)(iv).

CIT vs. Maruti Employees Co-Op Hous. Soc. Limited (2010) 235 CTR (P&H) 407
57(iii) : Interest was derived on deposits made by the members as to so requiring the assessee to discharge the liability of maintaining their house. As a matter of executing the obligations of the deposits made, the assesse was incurring expenses. Accordingly expenses incurred towards maintenance of houses by the assessee were allowed as a deduction against such income.

CIT vs. Smt Alka Bhonsale (2010) 46 DTR (Bom) 253
Sec. 94 : Mutual fund unit striping - the conditions prescribed in clause (a),(b) and (c) of sub-section (7) of Section 94 are intended to be cumulative in nature.

Sakthi Textile Limited vs. JCIT (2010) 46 DTR (Mad) 191
Sec. 147 , 148 AY: 1991-92, 1992-93, 1993-94 : Having entertained an writ petition, if the same is dismissed after several years on the ground of availability of alternative remedy it would not be in the interest of justice.

CIT vs. Bhagwati Steels (2010) 47 DTR (P&H) 75
S. 194C: On the facts of case it was held that where whole of the distribution agreement was considered as transaction of goods per se, it cannot be segregated for the purpose of payment of expenses viz. freight charges and accordingly amount of freight charged separately in the invoice cannot be held liable for deduction of tax at source u/s 194C

Brij Lal vs. CIT [2010] 194 Taxman 566 (SC)
Settlement Commission: Provisions dealing with a regular assessment, self assessment and levy & computation of interest for default in payment of advance tax, etc are engrafted under chapter XIXA pertaining to settlement of cases. Interest u/s 234B is levied up to the date of order u/s 245D(1) and not upto the date of order u/s 245D(4). The Settlement Commission cannot reopen its concluded proceedings by invoking S. 154 so as to levy interest u/s 234B particularly in view of S. 245-I

Tribunal

Inter Gold (I)(P) Ltd vs. JCIT 2010 47 DTR (Mumbai) (Tribunal) 150
S. 4, 28(i): If the receipt is to make good actual or prospective loss in a particular trading transaction or set of transactions, it is a revenue receipt liable to tax. Any receipt towards loss of source income is capital receipt. Loss on source of income does not necessarily mean that it must absolutely extinguish. If the source of income has been severely beaten thereby causing serious damage to the income earning apparatus itself, it will also be construed as the loss of source of income. So if goodwill of the business is damaged and later on some compensation is awarded in lieu of that, it will also fall in the same category of loss of source of income. It is imperative that the receipt should be in fact towards the loss of goodwill in general and no part of it should relate to make good loss of a particular trading transaction or set of transactions.

Zylog Systems Limited vs. ITO - ITA No. 1138 & 1141/Mds/2007 Order dt 2-11-2010 (Chennai Sp. Bench)
S. 10A, AY 2003-04: The appellant receiving the export proceeds in foreign exchange abroad (as per the guidelines of RBI) within due dates and utilizing the same for the purpose of business is considered as deemed receipts in India. Accordingly such receipts cannot be excluded from the exports proceeds while computing deduction u/s 10B.

DCIT vs. Shree Laxmi Tractors 2010-TIOL-572-ITAT-BANG
S.40A(3): Assessee granting discount from actual sale price of tractor to a customer at the time of purchase is cannot be categorised as a expenditure. It is merely an deduction from sale price and there is no actual cash payment. Hence disount is not liable for disallowance u/s 40A(3)

DCIT vs. SMK Shares & Stock Broking P. Ltd ITA No. 799/Mum./2009 ‘E’ Bench, Mumbai Order dt. 24/11/2010
S.45 A.Y. 2005-06 : The assessee, a broker, disclosed gains on sale of shares as a short-term capital gains and long-term capital gains. During the assessment proceeding AO treated short term gain as business income on the ground that there was large volume and frequency of transaction. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognised this fact by taxing these transactions under the head “Short Term Capital Gains”. If the Assessing Officer’s reasoning is accepted, then it would be against the legislative intent itself. It was held that if the modus operandi of the assessee remained the same in regard to other shares purchased during the year, then the assessee’s claim could not be negated only on the basis of frequency of the transaction.

Godrej Agrovet Ltd. vs. ACIT, ITA 1629/M/09 ‘G’ Bench, Mumbai Order Dt 17-09-2010
S. 14A AY 2005-06 : In view of decision of Godrej Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom), Rule 8D is applicable only prospectively i.e. from A.Y. 2008-09. Where the investment in shares was made out of own funds & not out of borrowed funds, relying on decision of CIT vs. Hero Cycles Ltd 323 ITR 518 (P&H) it was held that disallowance of interest u/s 14A is not sustainable. Further disallowance out of common administrative expenses was restricted to 2% of the total exempt income.

Sulzer India Ltd vs. JCIT AIT-2010-503-ITAT- I.T.A. No.2944/MUM/2007 (Mum Sp. Bench)
S.41(1)(a): Difference between the discounted value paid towards the future sales tax liability cannot be termed as remission/ cessation of liability because the Sate Government has neither waived any of the liability nor tax payer has enjoyed any benefit S.41(1) (a)

DCIT vs. Mayavati (2010) 42 SOT 59 (Del)
Sec. 56(2)(v) : In absence of any quid pro quo and any duties or obligations on the part of the assessee to render any services political or otherwise, gifts could not be held to be received from exercise of vocation of politics. However gifts upto and above specified amount i.e. 25000 to be considered u/s 56(2)(v).

DCM Engineering Ltd vs. ACIT (201) 46 DTR (Del) (Trib) 505
Sec. 115JB : In order to determine book profits liable for MAT, profit as per the Profit and Loss A/c for the relevant previous year is to reduced by an amounts, lower of brought forward loss or unabsorbed depreciation as per books of accounts and not by the business loss or depreciation as per tax audit report. Further no adjustment can be made on account of provision of gratuity and leave encashment arrived as per actuarial valuation

JSW Steel Limited vs. ACIT 2010 133 TTJ 742 (Bom)
Sec115JB : Debenture Redemption Reserve created even though is created towards ascertained liability is on capital account. Accordingly same cannot be deductible while computing Book Profits.

N.G. Roa vs. DCIT (2010) 133 TTJ (Del.) 797
Sec. 271(1)(c) : By no stretch of imagination an making an incorrect claim tantamount to furnishing of inaccurate particulars. The claim of HRA in respect of 2 accommodations by furnishing all particulars in the return is a case of a claim of exemption made by the assessee, which in the eyes of the department is a claim not sustainable in the law is not subject to levy of concealment penalty.

(Published in WIRC December 2010 News Letter; CA. Paras K. Savla, CA. Lalchand Chaudhary )

Talk by Shri Deepak Parekh Chairman HDFC and Shri Yashwant Sinha, MP, Chairman Standing Committee of Finance & Former Finance Minister

Tax has a significant effect on actions of the people, which determines the economic growth of the Country. The Chamber of Tax Consultants and D.M.Harish Foundation organised 3rd D.M. Harish Memorial lecture on the topic of “Economic Growth, Equity and Taxation” addressed by Hon’ble Shri Yashwant Sinha, MP, Chairman of Parliament’s Standing Committee on Finance. Shri Deepak Parekh, Chairman HDFC was the Guest Speaker who spoke on the subject “Governance”

While delivering the Guest Speech, Shri Deepak Parekh, placed emphasis on the Education and systematic efforts to be made to fix corruption in the economy. He emphasised need to have in place mission 2020 on Governance with immediate focus on governance at National, local and, corporate and self levels. E-Governance should be encourage which would reduce corruption and increase transparency in system. In coming days large number of people would live in urban India. Persons like City Manager can be appointed to manage the City. In the days to come hand of the professionals would be full due to introduction of DTC, GST, IFRS, and new Companies Bill.

Shri Yashwant Sinha lauded the efforts of The Chamber of Tax Consultants for representations, since it is not a institution of vested interest. He mentioned that this will help for better tax policy and administration. Growth without equity is like a jungle and growth with equity is garden. Growth should be an inclusive growth. What is required in current period is better quality of living of the people but within predetermined time frame. He compared ideal tax policy with the quote from Raghuvams by Kalidasa. Wherein learned poet mentions “King receives taxes from his subjects only for the promotion of their welfare; for the sun sucks up water simply to give it back a thousand-fold (in the shape of rain)”.

Upcoming proposed tax legislations viz DTC,GST are path breaking legislation in the years to come. He also promised that his committee (Standing Committee on Finance) would take every effort to ensure that DTC law is better law then what is currently presented before the Parliament and which would withstand the test of time for next atleast half a decade. To over come the weakness in present form of DTC representation from the institution like Chamber has a greater weight than others, since it is neutral body. On the functioning of the parliamentary committees his view was that it in need of time to move from opaqueness to openness.

Eight tax saving secrets you should know

The Income Tax Act 1961 is a voluminous piece of legislation. Taxmann Publications’ latest edition of the Act runs into 1,125 pages. It’s enough to intimidate even the most diligent law student and tax expert, leave alone ordinary taxpayers. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit.


ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year.
 
Some of my comments has been captured in this write up published in The Economic Times Wealth January 3, 2011 Page 2, 3 & 4. Link to the article : http://economictimes.indiatimes.com/articleshow/7201334.cms

Can you defer the payment of Capital Gains Tax on sale of immovable property?

Capital Gains Tax Planning on conversion of capital asset into stock in trade

In view of decision of Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003] 129 TAXMAN 497 (BOM.) difficulty is faced by the property owners who sell there property for development / redevelopment, where payment is staggered over number of years, but tax on such sale is required to be paid in the year of transfer itself, even though he has not received ay consideration. Difficulty is further exaggerated where consideration is in kind eg in the form of constructed flats/shops.

Tax Idea:
The Section 45(2) provide in case capital asset is converted into stock in trade it would be considered as transfer on the date of such conversion but the actual chargeability to tax would arises only when the stock-n-trade (erstwhile capital asset) is sold. The value of consideration is taken to be market value of the asset on date of the conversion.

Accordingly in case a property owner converts capital assets into stock in trade, his tax liability shall be deferred to future date. This provision is applicable to all assets, movable or immovable, considering the huge appreciation of properties it assumes a special importance in regard to immovable properties.

(This was originally Published in CVO News & Views December 2010 issue)