T N Pandey: Right to vote is a capital asset for tax calculations

CHAT ROOM

The assessee company is running a software unit, which is located in a special economic export promotion zone. It entered into an agreement with a foreign company, which licensed the assessee company to customise its software in India.

The company in its return of income claimed deduction under Section 10A of the Income Tax Act in respect of profits of the unit set up in the zone, which comprised of profits relating to customisation of the foreign company's software.

The assessment officer is contemplating disallowance of the exemption under Section 10A on the ground that the company has not developed any software of its own, but has merely provided services for implementation of the products manufactured by the foreign company.

So its activities cannot be considered a manufacturing activity and the provisions of Section 10A are not applicable. Kindly advise how the company should meet the objection raised by the assessment officer.

The facts mentioned are similar to the facts in the ISBC Consultancy Services Ltd vs Deputy Commissioner of Income Tax case, (2004) 88 ITD 134 (Mumbai).

In this case, the tribunal observed that in such a situation, the assessee only used the developments and programming platforms embedded in the standard software to evolve the customised software programme.

As the customisation exercise involved intellectual process, resulting in new things, it amounted to manufacture. Hence, the assessee was held entitled to exemption under Section 10A.

But I feel the decision of the tribunal raised an arguable issue, which could be taken for the final view to the Supreme Court. For the time-being, the queriest can base its claim on the decision of the tribunal.

I hold 25 per cent shares in a firm. A group in the firm wanted to secure the control. It promised to pay me an amount if I voted on a resolution in a particular manner.

I complied with the request and received the amount. The tax department has taxed the amount received as income disregarding the objection that it is a capital receipt, not liable to tax. Is the department's decision correct?

The right to vote could be considered a capital asset within the meaning of Section 2(14) of the Income Tax Act, 1961. Hence the amount received could be considered capital receipt, generating capital gain.

But the queriest can claim that the capital gain arising to him is not liable to tax, as it has no cost of acquisition in view of the Supreme Court decision in the Commissioner of Income Tax vs BC Srinivasa Setty case, (1981) 5 Taxman 1 (SC). Though getting money for exercising voting power in a particular way is illegal, this cannot affect the taxability of the amount.

My son paid Rs 3 lakh capitation fee for admission in a professional institute. The institute refused to accept the money by cheque or draft and wanted it in cash.

I had no cash balance with me but had a fixed deposit receipt, which was to mature after two months. I did not want to encash it before it matured because that would have meant considerable loss of interest.

On of my friends had sufficient amount in her current account. She gave me a temporary loan of Rs 3 lakh for two months after withdrawing the amount from her bank account. The amount was used for meeting the need of my son for the capitation fee. When my fixed deposit matured, I put the money in my savings bank account and returned the loan by a cheque, which she deposited in her current Account.

Holding me guilty of violation of Section 269SS of the Income Tax Act, the assessment officer has imposed a penalty for taking the loan in cash. What is the remedy open to me to get relief from the penalty?

All transaction are, prima facie, bona fide. Once bona fide is proved, what remains is only a procedural default, which is only of a venial nature.

"De minimis non curat tax" is well known maxim in legal parlance. The procedure has to be the maid not a mistress of the legal justice.

Since there existed a reasonable cause for accepting the cash loan, the assessee has good ground to be exonerated from the rigour of Section 271D. Hence, the queriest should file appeal before the Commissioner of Income Tax (assessment), where relief should be justifiably come to her.

For supporting the case for non-levy of penalty, the queriest can take support from the decision of the income tax appellate tribunal in the Mrs Rupali R Desai vs Additional Commissioner of Income Tax case, (2004) 88 ITD 76 (Mumbai) (TM).

What is the income tax department's approach to the business process outsourcing transactions in India?

It is contained in Circular No. 1 of 2004 issued in January 2004, to which a reference can be made. But the finance ministry has indicated that the income tax department's circular issued in January, 2004 on taxation of foreign entities outsourcing certain activities to the country may be revised.

The complexities involved in the BPO sector are much more intricate and the circular is inadequate to deal with the problems of taxation arising in that area.

The CBDT will take appropriate decisions after considering the representation and factoring in the recommendations made by the emerging issues task force.

The CBDT had declared that a "considerable portion of the profits" derived by foreign entities from outsourcing of their core revenue generating business activities to India would be taxable under the Income Tax Act if the Indian entity were to constitute a "permanent establishment" of the non-resident of foreign firm in India. Hence, the situation in this regard could be said to be fluid.