The learned author takes up for discussion a very recent Tribunal decision in which the assesse had made reimbursement of expenditure to a certain party, which the assessing officer treated as payment to clearing and forwarding agent, therefore, attracting section 194C and consequently 40(a)(ia). The Tribunal, however, departed thus view
As per section 40 of the income Tax Act, 1961 (in short, ‘the Act’), certain amounts mentioned therein are not allowed as deduction, notwithstanding anything to the contrary in sections 30 to 38, in computing the income chargeable under the head “Profit and gains of business or profession”. Section 194C of the Act lays down provisions in respect of TDS on payment to contractors.
Recently, in ACIT, Kottayam v. St. Mary’s Rubbers Private Ltd., Kottayam 2017 TaxPub (DT) 2153 (Coch-Trib) [I.T.A. Nos. 224/coch/2016 date of decision 15-06-2017], the Revenue, aggrieved on the deletion of disallowance by CIT(A) of Rs.60,80,063 made by the assessing Officer(AO) under section 40(a)(ia) of the Act for non-deduction of tax at source on payment made by the assesse o C&F agents, filed appeal before ITAT, Cochin.
Facts in brief
The assesse, a manufacturer and seller of centrifuged latex, had filed its return of income for the impugned assessment year, declaring income of Rs.70,89,989. An assessment under section 43(3 was completed on 21-12-2011, computing total income of the assessee at Rs.77,87,14. Thereafter, the assessment was paid without deducting tax at source. During the course of assessment proceedings, it was noted by the AO that the course of assessment proceedings, it was noted by the AO that assessee had paid Rs.60,80,063 as clearing and forwarding charges to one
Mark Logistics. Claim of the assessee before the AO was that these were reimbursement of expenditure incurred by he said agent. As per the assessee, the said C&F agent was incurring expenditure on its behalf and therefore, According to him, the assessee should have deducted tax at source on the payment effected to Mark Logistics. Since assessee had not deducted such tax, AO applied section 40(a)(ia) of the Act and made a disallowance of Rs.60,80,063.
They also stated that they had deducted tax at source while effecting payments to various person with whom they had entrusted the work of assessee. CIT(A) sought a remand report from the AO>As per the CIT(A), in the remand report, the AO has admitted that amounts paid by assessee to Mark Logistics were re-imbursements. CIT(A) held that payment of Rs.60,80,063 made by the assessee to Mark Logistics were in the nature of reimbursement of expenditure and the payment received by them were not C&F charges. Relying on the judgment of the Hon’ble Gujarat High Court in the case of CIT v. Narmada Valley Fertilizer Co. ltd 2013 taxPub(DT) 2222 (guj-HC); (2014) 361 ITR 192 (Guj), the CIT(A) held that re-imbursement of expenditure, deduction of tax was not required. He deleted the disallowance made under section 40(a)(ia) of the Act.
Submission by Revenue
DR, assailing the order of the CIT(A), submitted before ITAT that assessee had paid Rs.60,80,063 for the service received by the assessee from Mark Logistics, which were contractual in nature. According to him, these were not reimbursement of expenditure and even if it was reimbursement, as per the DR, there would have been profit booking by Mark Logistics in built in the billings. In his opinion , AO has rightly considered the payment as liable for deduction of tax at source under section 194C of the Act. According to him , CIT(A), merely based on the submissions of the assessee, had allowed the claim of the assessee. Reliance was placed on the judgment of the Hon’ble jurisdictional High Court in the case of CBDT v. Cochin goods transport Association (1999) 236 ITR 993 (ker) and the judgement of the Hon’ble Apex Court in the case of Associated Cement Co. Ltd. v. CIT and Another (1993) 201 ITR 435 (SC)
Reply by Ar
In reply, AR submitted that the Delhi Bench of the Tribunal in the case of ITO v. Deepak Bhargawa 2017 Taxpub (DT) 21520(del’B-Trib) [ITA No.343/Del/2012, dated 13-11-2014] had clearly held that section 194C would not be applicable for reimbursement of expenditure. As per the AR, facts of this case were very similar to that case. Reliance was also placed on the decision of the Bangalore Bench of the Tribunal in case of DCIT v. Dhanyaa seeds (P) Ltd. 2014 Tax Pub (DT) 2664 (Bang ‘b’-Trib) : (2014) 64 SOT 15 (bang ;B’-trib) and that of the Hon’ble Gujurat High Court in the case of Principle CIT v. Consumer Marketing (India) (P) Ltd. 2017 Taxpub (DT) 2154 (Guj-HC)
Decision by ITAT, Cochin
The Tribunal considered the effector CBDT Circular No. 715, dated 08-0-1995 and observed that the said Circular was applicable only where consolidated bills ere raised inclusive of contractual payments and reimbursement of actual expenditure. Same view was taken by the Bangalore Bench of ITAT, Cochin in the case of Pr. CIT v. Consumer Marketing (India) (p) Ltd. (supra) held that when separate bills are there for reimbursemet of expenditure received by C&F agent, TDS was not required to be made on reimbursement. The assessee in addition to reimbursement of expenses, separately paid brokerage and commission of Rs. 2,52,410 which was subjected to disallowance in the original assessement. Hon’ble Members of the ITAT held that the CIT(A) was justified in deleting the disallowance made under section 40(a)(ia) of the Act.
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Urban agricultural lands are treated as capital assets and gain arising on transfer thereof is charged to capital gain tax. If land is not an urban land the gain arising from transfer thereof is not chargeable to capital gain tax. But in such a situation question arises whether the gains can be treated as agricultural income. Recently the third member bench of ITAT has answered the question in the affirmative and held that the gain is agricultural income and thus exempt from tax.
Urban agricultural lands treated as capital asset
Section 2(14) defines the term capital asset. It provides an inclusive definition of capital asst. As per section 2(14) capital asset does not include agricultural lands in India within its ambit. But all agricultural lands in India are not out of the scope of capital assets. As a consequence the following agricultural lands are treated as capital assets and their transfer will give rise to capital gains :
Land situated in any area which is comprised within the jurisdiction of a municipality ( whether know as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before that first day of the previous year; or
In any area within such distance, not being more than eight kilometres, from the local limits of any municipality or a cantonment board referred to in items (a) above as the Central Government may, having regard to the extent of, and scope for urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.Gain arising from transfer of Agricultural Lands situated as above would give rise to capital gains.The above position held good till the assessement year 2013-14.The Finance Act, 2013 has amended section 2(14) effective from the assessment year 2014-15. Therefore, from assessment year 2014-15 the agricultural land situated:
In any area is comprised within the jurisdiction of a municipality (whether know as a municipality, municipal corporation, notified area committee, town area committee, or by any other name) or a cantonment board and which has of not less than ten thousand. [similar to item (a) of sub-clause (iii) of clause (14) of section 2 as it existing upto assessment year 2013-14 except for the difference that the words according to the last preceding census of which the relevant figures have been published before the first day of the previous year has been omitted and the term population has been explained in a separate explanation added to section 2 [iii].
In any area within the distance, measured aerially,---
Not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
Not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
Not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh will be treated as capital asset and gain arising from transfer of agricultural land situated as above would give rise to capital gain.
According to Explanation to section 2(14)(iii) “population” means the population according to the last preceding census of which the relevant figures have been publishes before the first day of the previous year.
Rural Agricultural land and Treatment of gain arising from Transfer thereof Position upto assessment year 2013-14
If any agricultural land is not a---
Land situated in any area which is comprised within the jurisdiction of a municipality (whether know as a municipality, municipal corporation, notified area committe, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relavent figures have been published before the first day of the previous year; or
In any area within such distance not being more than eight Kilometres, from the local limits of any municipality or a cantonment board referred to in items (a) above as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant consideration, specify in the behalf by notification in the Official Gazette.
Then such land will not be treated as a capital asset. If the agricultural land is not a capital asset, then its transfer of such land will be treated as agricultural income
This is borne out Explanation 1 to section 2(1A) which provides that any revenue derived from transfer will not result in capital gain. Further, the gain arising from transfer of such land will be treated as agricultural income.
Above view has been upheld in ITO v. Dr. Koshy George & Anr (2010) 31 (II) ITCL 150 (Coch-Trib) : 2009 TaxPub (DT) 1841 (Coch-Trib): (2009) 317 ITR 116 (Coch). In this case the assessing on sale of coffee estates, over and above the registration sale deed, wewe “On Money” is still taxable in the present case. It was held that the property sold by the assessee was agricultural property situated beyond 8 k.m. of any surplus of money arising to an notified either. In such circumstances, any surplus of money arising the registered sale deed is very much agricultural income even though that surplus consideration is tainted with the expression:On Money: the genesis of the :On Money” is definitely the sale of agricultural Land.
Position from asseseement year 2014-15
If any agricultural land is not a:
Land situated in any area which is comprised within the jurisdiction of a municipality (whether know as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of more than ten thousand but not exceeding one lakh; or
In any area within the distance, measures aerially,--
Not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
Not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not execeeding ten lakh; or
Not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) nd which has a population of more than ten lakh.
Then such land will not be treated as a capital asset. If the agricultural land will not a capital assets, then its transfer will not result in capital gain. Further, the gain arising from transfer of such land will be treated as agricultural income.
Judicial precedents as to treatment of gain arising on transfer of land situated beyond specified distance.
In ITO v. Anthony John Pereira (2008) 24 (II) ITCL 582 (Mum ‘F-Trib);2008 TaxPub (DT) 2048 (Mum-Trib); (2008) 24 SOT 459 (Mum ;F’-Trib) the assessee had produced all evidence he could, by way of certificates from competent Authority Of ULC (Urban Land Celing), State PWD, ect.,, that the agricultural limits. It was held that the said agricultural land in question was not capital asst in terms of section 2 (14). Therefore, the land in question , was not a capital asset, and hence, profit earned on transfer of land to co-operative housing society was also not liable to capital gains tax.
In Ronjibhai P. Chaudhry v. Dy. CIT & Asstt. CIT v. Ramji P.
Chaudhry (2009) 29 (II) ITCL 531 (Ahd-Trib); 2009 TaxPub (DT) 696 in non specified urban area could not be treated as capital asset and gain arising on sale thereof could not be chargeable to capital gains tax.
It was held in the case of CIT v. Manilal Aomnath (1977) 106 ITR 917 (G uj) as follow:
“ Under the Income Tax Act of 1967, agricultural lend situated in India was excluded from the definition of ‘ capital asset’ and any gain from the sale thereof was not to be included in the total income of an assessee tinder the head :capital gains”. In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purpose there is a presumption that it is agricultural land. If it is used for non Agricultural purposes the presumption is that it is non Agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where agricultural purpose of the presumption is that it is non agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be casese where land which is admittedly non agricultural is used temporily or agricultural purpose the determination of the question would therefore end on the depend on the facts of each case.
‘The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operation were carried on in the land. There was no regular road to the and it was with the aid of a tractor that agricultural operation were carried on in the land. There was no regular road to the land and it was within municipal limits or took place. The facts that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purpose for a long timr and nothing had happened till the date of the sale to change that character of thr land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date o fthe sale. The land in question was therefore agricultural land.
In Smt. T. Urmilav. ITO (2013) 50 (II) ITCL 370 (HYd ‘A’-Trib): 2013 TaxPub (DT) 845 (Hyd-Trib) the assessee had purchased 20.07 acres of land in Srinagar village in Maheswaram Mandal. During the relevant land in Srinagar village in Maheswaram Mandal. During the relavant previous year, the said land was sold to R. The receipt was not offered assessing officer noticed that the impugned land was situated in the village which was included in the Hyderabad Airport Development of Andhra Pradesh had issued a land acquisition notigication under the land Acquisition Act for the acquisition of the above said lans . it may be noted that the land and there was no dispute regarding come was declared in the return of income filed by the assesse for the past several years as agricultural income. It was also an admitted fact that the assessee had not applied for conversion of this agricultural land for non-agricultural purpose and the assessee had not put the land to any purpose other than agricultural purposes. It was also an admitted subjected to any developmental activities.
It was observed that it is important to mention that mere inclusion of impugned property in the HADA cannot change the character of the property. Mere inclusion of the property in the HADA by State Government notification does not change the character of the property if the property still continues to be agricultural land at the point of sale of said property. Nothing had been brought on record to show that in this village of Srinagar (Maheswaram Mundal) any infrasture development had taken place. In the present case during the relevant point of sale of the land in question the surimpugned of the land for non agricultural purpose would not change the character of the land into non-agricultural purpose would not change the character of the land into non agricultural land at the relevant point of sale of land by the assessee.
Facts of the case in Supriya Kanwar v. ITO (2015) 61 (II) ITCL 219 (Job- Trib) (TM): 2014 TaxPub (DT) 2468 (Job-Trib) (TM)- (2014) 163 TTJ (job-Trib)(TM)1
The assessee purchased certain agricultural land and sold in the previous year relevant to assessment year under consideration. The case of the assessee was that the income arose from the transaction of agricultural land and hence, it was exempt under section 10(1) read with swction 2[1A](a) of the Act. Even otherwise the income arising therefrom was not assessable to capital gains tax in the view of the provision of section 2(14)(iii)(a)/(b). On the other hand the case of the Revenue was that it was an adventure in the nature of trade and the income from the impugned land was business income. The assessing officer as well as the by the assessee on sale of the impugned land deserve to be treated as profit from adventures in the nature of trade and assessable as business income. When the case was heard land was purchase on 7-2-2006 and it was sold on 23-03-2007 (b) the land was situated beyond the prescribed municipal limits (beyond 8 kms. From the municipal limits) in a village of Alwar District, Rajasthan, and (c) it being agricultural land the sale proceeds thereon were not assessable to tax as business income wherein agricultural income on sale of standing crops was shown. He had also taken into consideration the plea of the assessee that at no point of time the assessee sought for conversion of land use by making an application with the respective authorities. Though the assessee was dealing in sale and purchase of plots in urban areas, so far as this land was concerned, the intention was not to convert into plots and in fact the agricultural land with standing crops was sold to single party, i.e. Vedic Village Developers (P) Ltd.
The case of the assessee was that no steps had taken to change the character of the land and hence it continued to remain as agriculture land till the date of sale to Vedic Village Developers (P) ltd. And the assessee did not make any effort to locate the buyer and because of the attractive price which was offered by Vedic Village Developers (P) Ltd. Assessee was persuaded to sell the land.
The assessee submitted that only such land which falls within the description of agricultural land under section 29(14) (iii), upon sale thereof, gives rise to income which cannont be considered as agricultural land which is situated beyond eight kilometres (specified distance for the A.Y 2014-15) from the local limits of any municipality, the sale proceeds thereof has to be considered as ;agricultural income’, in which event section 1091) comes into play, i.e., whether it is o capital account or revenue account, agricultural income cannot be included in the total income. It was also submitted that the assessee had also included the impugned sale proceeds for rate purpose.
Opinion of Judicial Member
The JM observed that the assessee purchased five pieces of agricultural land adjoining each other through different sale deed and the tural land was registered on different dates from 7-2-2006 to 5-4-2006. The assessee showed the purchase of agricultural land as ‘fixed asset’. In the preceding year the assessee earned Rs.70000 on sale of crop which was accepted by the Revenue. In this year Rs. 22,000 was declared on sale of outstanding crop and accepted by to assessing officer. In fact on sale of standing at the time of sale which was passes. If the intention of the assessee was to carry on an adventure in the nature of trade she would have applied ffor conversion of land use and drawn up the requisite plotting scheme, engaged professional architects for preparing site plan approval and would have commenced preliminarily development works whereas no such activity was undertaken by the assesse which shows that the intention of the assessee at the time of purchase of land was only to retain the land and it was not purchased for the purpose of resale as an adventure in the nature of trade. He also observed that undoubtedly the land was situated beyond 8 kms. From the municipal limit and hence the land has to be considered as agricultural land. So long as the land is capable of agricultural operations, the sale of agricultural land by itself would not make it business income. He also relied upon several precedents apart from analysing the facts of the case to come to the conclusion that the impugned land is Barani land admeasuring only seven Bighas with standing crop which it itself prove that it was not purchased with an intension to utilise the land for the purview of the definition of ‘capital assets’ and hence income therefrom cannot be assessed to tax by treating it as adventure in the nature of trade.
Opinion of Accountant Member
The AM was not agreeable with the view taken by the JM. Having regard to the peculiar factual matrix of the case, which was highlighted in his order, he order, he concluded that the assessee sold the land to make profit. He observed that the assessee was not having any agricultural background since she was deriving income b way of salary from Ashapurna land and also on fencing the land. The land was purchased along with standing crop and he said standing crop was sold in the earlier year. It was claimed that two crops were raised in this year and the first crop fact that both the lower authorised have given concurrent finding that the transaction of purchase and sale of agricultural land and purchase deriving a huge return of 558 percent, he also observed that the land was situated at a distance of more than 500kms. From the place where the assessee usually resided and therefore he drew a conclusion that these lands were not purchased for the purpose of cultivation. Since she was engaged in the business of real estate development the impugned purchase was with the full knowledge that the values are likely to appreciate rapidly as these fall within thw new town of National Capital Region (NCR) the global city, on national highway No.8 he also observed that the investment was made out of borrowed funds.
Adventure in trade vis-a-vis of sale
The issue as to whether a particular transaction amount to mere sale of investment or an adventure in the nature of trade was subjected matter of several judicial decisions and the Apex Court have time and again observed that no principal can be evolved which would govern the decision of all cases in which the character of the impugned transaction falls to be considered. In the case of Venkataswami Naidu & Co. (supra) the Court observed that even an isolated transaction can safisy the description of adventure in the nature of trade may partake of the character of an adventure in the nature of trade but at the same time cautioned that the ‘ single plunge must be in the waters of trade.’ The Hon’ble Court observed that it is impossible to evolve any formula which can be applied in determining the character of isolated transaction; if a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit derives from an adventure in the nature of trade. These factore were taken into consideration to come to the conclusion that it was an adventure in the nature of trade. The Apex Court as well as various High Court have reiterated the basic principal and observed that it is impossible to evolve any formula which can be applied in determining the character of an isolated transaction and a holistic view has to be taken, by taking into consideration the circumstances of the case.
Agricultural land situated within specified distance vis-a-vis agricultural land situated beyond specified distance
If it is not considered as adventure in the nature of trade the next issue that arises for consideration is whether sale of agricultural land gives rise to ‘agricultural income’ or it is assessable to tax under the head ;capital gains’. Admittedly, the expression “agricultural income” is not comprehensively defined in the Income Tax Act, though it was explained under section 2(1A) , that any revenue derived from land, which is situated in the India, can be considered as agricultural income. Section 2(14) of the Act defines capital asset, which substituted by Finance Act, 1970 and thereafter in 1989 whereby only such agricultural land which is located within eight kilometres from the municipal limit should be treated as capital assets. In other words, agricultural land situated beyond eight kilometres from the nearest municipal limits not be treated as capital assets and sale proceeds thereof may be treated as revenue derived from land which is situated in India and is used for agricultural purpose. The Apex Court in the case of Singhal Rakesh Kumar v. Union of India & Ors. (2001)247 ITR 150 (SC) explained the meaning of the expression ‘agricultural income’ as well as the expression ;capital asset’. In the said case the issue was whether the profit arising out of sale of agricultural land gives rise to capital gains, within the meaning of income Tax Act, 1961. Awrit petition was filed by the assessee asking the High Court to declare as unconstitutional the Explanation to clause (1A) and sub clause (iii) of clause (12) of s. 2 of income Tax Act, 1961 to declare that capital gains arising from sale of agricultural land within the municipal area were not liable to capital gains tax under the Income Tax Act.1961. the Hon’ble High Court of Madhya Pradesh having dismissed the writ petition the matter came up before the Hon’ble Supreme Court. The Apex Court observed that the parliament is empowered to legislate to say what “agricultural income “ means. What Parliament says in this regard is that the meaning given under Income Tax Act should be taken as the correct meaning of the expression ‘agricultural income’ and in regard to such agricultural income the State may legislated in the aforementioned case the court observed that the Land being situated within the municipal limits income arising from transfer of agricultural land falls within the terms of items (a) and (b) of sub-clause (iii) of clause (14) of section 2 and falls outside the ambit of revenue derived from land, therefore, outside the ambit of ‘agricultural income’ and consequently liable to capital gains tax under section 45 of the Act. The assessee placed reliance upon the aforecited decision to submit that the impugned land sold by the assessee was situated beyond eight kilometres from the nearest municipal limt and hence, the income arising from transfer of agricultural land falls within the ambit of revenue derived from transfer of agricultural land falls as agricultural income in which event it has to be considered for rate purposes only.
The Hon’ble Bombay High Court in the the case of Gopal C. Sharma v. CIT (1994) 209 ITR 946 (Bom), on the other hand, observed that the expression agricultural land is not defines in the Income Tax Act and going by the Intention of the legislature, i.e. encouraging cultivation sale of agricultural land gives rise to capital gains. It may be noticed that the Court was not concerned with the case of agricultural land situated outside the municipal limit and had not specifically dealt with the provisions of section 2(1A) read with section 2(14) (iii)(a) and (b). On the contrary, the Apex Court in the case of Singhai Rakesh Kumar v. Union of India & Ors. (supra) observed that agricultural land situated within eight kilometres from the municipal limits
Land situated beyond specified distance cannot be treated as capital assets and gain arising on sale thereof gives rise to agriculture income
The Third Member held that the impugned land cannot be treated aas capital assets since it was situated beyond eight kilometres from the municipal limits and it was purchased as agricultural land and sold accordingly without making any change such as cconversion in the land records, plotting of land, ect. In facts the assessee stated that even at the time of purchase of the land cannot be inferred that the assessee intended to make enormous profit by selling the land within a short spam It was also submitted that National Capital Region masters plan was prepared in 2002 and notified in 2010 and it was to come into effect from 2031 whereas the land was purchased. There was nothing on record to suggest that the assessee has done any act to convert the land for non-agricultural use. It was not even the case of the Revenue that the assessee advertised for sale of the land the case of the assessee, on the other hand, was that the Vedic Village Developers (P) Ltd. Offered tempting pric and the assessee decided to take the benefit out of it though there was no intention to carry on trade
It is thus clear that it was a case of sale of agricultural land and the land being situated to tax under the Income Tax Act either as business income or capital gains. In the light of the latest decision of the Apex Court in the case of Snghai Rakesh Kumar v. Union of India & Ors (2001) 247 ITR 150 (SC) the only interpretation permissible is that the land situated outside the municipal limits stands excluded from the expression ‘capital Assets’ from the inception and the sale proceeds have to be treated as revenue received from agricultural land.
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The view stated in the title of the article (supra) has been expressed by the C- Bench of the C- Bench of the ITAT, Kolkata, in the case of Tarun kumar sarkar v. DY.Director Of Income -3 (1) , Kolkata 2017 Taxpub (DT) 3872 (Kol ‘C’ –Trib): (2017 ) 166 ITD 125 (Kol-Trib).The decision has been picked up for this write –up because the AO’s decision in the case is contry to the CBDT’s Circulars No.13/2017, dt.11-4-2017 and No.17/2017 dt.20-4-2017 issued ofter the assessment.
2.Facts of the case
The assessee,a Marine Engineer by profession , for the AY 2011-12 filed his return of income ,showing an income of Rs.2,09,021 in the status of a ‘non–resident ‘.He was engaged with M/s Mercator Lines Ltd ., Singapore, as a Marine Engineer .During the previous year ,relevant to the AY 2011-12, he was paid a sum of Rs.23,71,727 by the employer company on different dates for his services as a seafarer by credit to his two NRE accounts in india with HSHC Bank. The assessee did not show this amount as income in the return as income in the india filed in the status of a ‘Non-Resident’. The assessee’s case was that this income was received from outside india in foreign currency and,therefore, claimed as exempt.The assessee stated that he used to get his contract to do services with india/foreign shipping company through Indian agent and that contrats were executed in india duly signed by the agent in india and himself before joining the ship. But, he was to float on foreign water to render services during the courses of voyage and accordingly, when he will stay more than 182 days outside india or on foreign water,his residential status will be treated as ‘Non –resident’ as per provision of law and his salary income ,which are received out side india in foreign currency also will not be taxable under section 5 of the Act .The AO accepted the residential status of assessee as non-resident after verification of copy of passport and other details submitted . The assessee claimed that as per provisions of law ,salary income , which is received outside india in foreign issued show cause notice to the assessee as to why the remuneration received in india should not be brought to tax in terms of section 5(2)(a) of the Act. However, before examining the assessee’s defence to the AO’s notice ,it is relevant to examine the provisions of section 5(2)(a) of the Income Tax Act,1961 (Act).
3. Section 5(2)& (b) of the Act
Clauses (a) and (b) of section 5(2) of the Act read as under –
“(2) Subject to the provisions of this Act ,the total income of any previous year of a person , who is a non-resident, includes all income from whatever source derived , which-
(a) is received or is deemed to be received in india in such year by or on behalf of such person ;0
(b) accrues or arises or is deemed to accure or arise to him in india during such year”
Explanation 2 to section 5(2) provides that income,which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in india.
4.Analysis of section 5(2)(a)
From the foregoing extract of section 5(2)(a),it could be seen that section 5 of the Act provides for charge of income tax on accrual or receipt basis . Explanation 2 to section 5(2) provides that if an income has been subject of taxation on accrual basis , it cannot again be taxed on receipt basis. The section ,however , does nit give any indication as to in respect of what income ,the charge shall be on the receipt basis and on what income the charge shall be on accrual basis . Obviously , this would depend on the factual matrix.
5. Appraisal of the Tribunal’s decision
With the above background of legal provisions, the tribunal’s decision can be examined.
According to the AO, the provisions of section 5(2)(a) of the Act state that income from whatever source derived, which is received in india in such year by or on behalf of such person shall be included in the total income of any previous year of such person. He further observed that the said sextion does not mention anything about Indian currency. The section specifically states that any income received or deemed to be received in india taxable in india.He observed that the law states that the income received in india is taxable
In india in all cases (whether accrued in india or elsewhere), irrespective of residential status of the assessee. He also observed that it is significant to know the meaning of income received in india . if the place where the recipient gets the money (on first occasion) under his control ,is in india,it is said be income received in india. In the instant case ,all the income was remitted by the employer to the bank accounts of the assessee maintained in india .therefore, the AO added a sum of Rs .23,71,727 as income chargeable to tax in india. In support of his proposition , he placed of Capt . A.L.Fernandes v. ITO (2002) 81 ITD 203(Mum) (TM) whrerin it was held that teh salary received by the assessee in india was taxable under section 5(2)(a) of teh Act.
(ii)CIT (A)’s decision
The assessee claimed before the CIT (A) that teh AO’s decision is wrong,interalia, on the ground that he was under employment of a foreign company and serevices were rendered outside India. For The services rendered by the assessee outside India ,the entire payment of salary made by the foreign company in US$ and remittance was made to the NRE account of the assessee in india . The meaning of section 5(2) (a) or the Act. Should be interpreted only in the context of income received in india currency in india.There is a distinction between receiving money and transfer of money . The distinction between receiving money and transfer of money.the distinction is that where a foreign company makes payment to the non-resident for services rendered outside india , the foreign currency to the assessee who is a non- resident and the money in foreign received by the assessee not in india as because the point po payment by the company is in foreign land & the point of receipt by the assessee should be taken from the of payment. Mere remittance or transfer of the payments by the foreign co in the NRE account of the assessee in india that also in foreign exchange shall not be considered as income received in india & larger interpretation to the section would render it otiose.
The CIT (A) did not feel convinced with assessee (appellant before him) and confirmed AO’s order . Hence ,the assessee filed appeal before the income tax Appellate Tribunal (Tribunal ,for short,in later discussion).
(iii) Tribunal’s decision
The Tribunals has decided the appeal in favour of the case of the assessee , inter alia , on the following grounds.
(i) Thuogh the third Member’s decision in the case of capt .A.L.Fernandes v. ITO (2002) 81 (Mum) (TM), could be said to support the AO’s case , but More important are the CBDT’s Circulars (infra), which read as under and are binding on the AO’s:-
“Section 5 of the act –income- Accrual of –Clarification regarding liability to income tax in india for a non-resident seafarer receiving remuneration in NRE (non –resident external) account maintained with an Indian Bank
Circular NO. 13/2017 (F.No500/07/2017- FT & TR –V) dt 11-4-2017 (as corrected by Circular No 17/2017(F.No 500/07/2017-FT& TR- V) dt.26-4-2017)
Represent have been received in the board that income by way of salary received by non- resident seafarers for services rendered outside india on-board foreign ships,are being subjected to tax in india for the reason that the salary has been received by the seafarer.
2. The matter has been examined in the board. section 5(2)(a) of the Act provides that only such income of a non- resident shall be subjected to tax in india that is either received in india. It is hereby clarified that salary accrued to a non-resident seafarer for services rendered out side india on a foreign going ship (with indian flag or foreign flag) shall not be included in the NRE account maintained with an indian bank by the seafarer".
"section 5 of the act - income -accrual of - clarification regarding liability to income - tax in india for a non-resident seafarer receiving remuneraton in NRE (non-resident external) account with an indian bank - Corrigendum to circular NO.13/2017(F.NO.500/07/2017-FT&TR-V) dt.11-4-2017) Circular NO.17/2017(F.NO.500/07/2017-FT&TR-V) dt. 26-4-2017)
In the 4 of the paragraph No. 2 of the captioned circular, the words "Foreign Ship " may be "foreign going ship (with Indian flag or foreign flag)".
(iv) Final summing up by the tribunal
According to the Tribunal, a perusal of the Circulars reffered to above shows that salary accrued to a non-resident seafarer for services rendered outside india on a foreign going ship (withindian flag or foreign flag) shall not be included in the total income merely because the said salary hsa been crtedited in the NRE account maintained with an indian bank by a seafarer.Remittance of salary into NRE account maintained with an indian Bank by a seafarer could bea two types:
(i) employer directly creditng slary to the NRE account maintained with an Indian bank by the seafarer '
(ii) employer directly creding salary to the account maintained outside India by the seafarer transfering such money to NRE account maintained by him in india .the latter remittance would be outside the purview of provisions of section 5(2)(a) of the Act as what is remitted is not 'Salary income' but a mere transfer of assessee's fund from one bank account to another ,which does not give rise to 'income'.It ios not clear as to whether the expression 'merely because ' used in the Circular refers to the former type of remittance or the latter.To this extent, the circular is vague.
However, giving the benefit of doubt to the assessee ,the Tribunal has said that inthe case before it, the employer has directly credited the salary for services rendered outside India into the NRE bank account as it does not specify as to whether the circular covers either of the situations contemplated above. Hence, we deem it fit to give the benifit of doubt to the assessee by holding that the circular covers both teh situations referred to above. The result of such interpretation of teh circular would be that the provisions of section 5(2)(a) of the Act is rendered redundant. Be that as it may,it is well settled that the circulars issued by CBDT are binding on the revenue authorities . This position has been confirmed by the Apex Court in the case of Commissioner of Customs v.Indian Oil Corpn .Ltd .2004 Taxpub (DT) 1391 (SC) : (2004) 267 ITR 272 (SC) wherein their Lordships examined the earlier decisions of the Apex Court with regard to binding nature of the circulars and laid down that when a circular issued by the Bourd remains of the circulars issued by the Board remais in operation then the revenue is bound by it and cannot be allowed to plead that it is contrary to the terms of the statute.Accordingly,the grounds raised by the assessee are allowed.Hence the Tribunal allowed the assessee’s appeal.
Logically also,the Tribunals decision seems to be correct The salary accrued to the assessee for services rendered outside territorial waters when his status was that of non- resident, about which there is no dispute .The salary having accrued outside territorial waters, whether he rerceives it so on his behalf should make no difference.If at all, it could only be a technical non-compliance, for which the assessee need not be subjected abroad when it is squarely covered by teh CBDT’s circulars. Hence,it is respectfully said that the Tribunal has reached to a correct conclusion though through a circuitous route.
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