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ISSUES UNDER I T ACT

Understand the tax implications of coffee and tea production under the Income Tax Act, including legal interpretations, rulings, and assessment methods. Learn about key court decisions, rules, and provisions affecting income from coffee and tea cultivation and sale.

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ISSUES UNDER I T ACT

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  1. ISSUES UNDER I T ACT ISSUE -1 1.BACK GROUND/HISTORY 2.ASPINWAL & CO 251 ITR 324 HON’BLE SUPREME COURT DECISION

  2. ISSUE -1 AGRI.INCOME OR CENTRAL INCOME • IF A COMMERCIALLY DIFFERENT ARTICLE/THING RESULTS AFTER PROCESSING IT BECOMES A MANUFACTURING ACTIVITY. • PROCESSES RAW BERRIES AND CONVERTS THEM INTO COFFEE BEANS WHICH IS COMMERCIALLY A DIFFERENT COMMODITY • SUCH CONVERSION IS A MANUFACTURING SCTIVITY

  3. ISSUE -1 • GROWING COFFEE AND SELLING COFFEE IN RAW STAGE (FARM GATE SALE)AND GET RECEIPT FOR SELLING RAW COFFEE WILL CONSTITUTE AGRI INCOME • RULE 7B INTRODUCED wef 01.04.2001 AND AMENDED wef 01.04.2002

  4. ISSUE -1 • RULE 7B • COFFEE GROWN,CURED AND SOLD • COFFEE GROWN, CURED, ROASTED,GROUNDED AND SOLD WITH OR WITHOUT MIXING CHICORY • POSITION • 25% LIABLE TO TAX UNDER I T • 40% LIABLE TO TAX UNDER I T

  5. ISSUE -1 • FROM S 3 (d) of THE COFFEE ACT 1942: CURING DEFINED AS “CURING MEANS APPLICATION TO RAW COFFEE,OF MECHANICAL PROCESSES OTHER THAN PULPING FOR THE PURPOSE OF PREPARING IT ARKETING. • HENCE,IF SOLD AT PULPING STAGE RULE 7B IS NOT ATTRACTED.

  6. ISSUE -1 • RULE 8 • INCOME FROM SALE OF TEA GROWN & MANUFACTURED BY THE SELLER • TEA INCOME • 40% LIABLE TO TAX UNDER I T ACT

  7. ISSUE -1 • RULE 8 IS NOT ULTRAVIRUS-(TATA TEA LTD VS STATE OF W.B 173 ITR 18(S.C.) • STATE LEGISLATURE CANNOT DENY ANY DEDUCTION ADMISSIBLE UNDER I T ACT./RULES (KARIMTHARUVI TEA ESTATES LTD V STATE OF KERALA 48 ITR 83 S.C.) • A I T O BOUND TO ACCEPT ASST.MADE BY ITO (BHAGAVAN DAS NARAYANDASV AITO 70 ITR 128 MAD)

  8. ISSUE -1 • MIXED ESTATE- COFFEE AND TEA METHOD OF COMPUTING T.I. • APPORTIONMENT OF COMMON EXPENSES-M.D.SALARY,HEAD OFFICE EXPENSES, TRAVELLING, DEPRECIATION/INTEREST ON COMMON ASSETS(M.D BUNGALOW, TRACTOR,LORRY FOR TRANPORT OF BOTH COFFEE& TEA)

  9. ISSUE -1 DECISION IN MANJUSHREE PLANTATIONS CASE 130 ITR 908 TEA COFFEE GROSS INCOME FROM COFFEE LESS: DIRECT EXPENSES-COFFEE NET INCOME FROM COFFEE • GROSS INCOME FROM TEA • LESS :DIRECT EXPENSES-TEA • NET INCOME FROM TEA

  10. ISSUE -1 • UNRESOLVED: POSITION IF NET INCOME FROM ONE HEAD IS A LOSS

  11. ISSUE-2 SUMMARY ASSESSMENT ADDITIONS • HISTORY-SUB SECTIONS(1) to (1C) SUBSTITUTED wef 01.04.2008,:PREVIOUS AMENDMENTS wef:01.04.1989, 01.04.1993, 01.04.1998,01.06.1999,01.06.2001 etc., • Certain adjustments on the basis of the entries/documents enclosed with the return.

  12. ISSUE-2 • June 01-1999 to march 31,2008- no provision to make such adjustments. • 143 (IA) was in operation from 01.04.1989 to 01.06.1999 • In old provision no possibility of adding an income under summary assessment.

  13. ISSUE-2 • Opening part of the section reads as ; • 143(1) (a) • The total income or loss SHALL be computed after making the following adjustments, namely • Only up to TI STAGE • Shall—therefore mandatory

  14. ISSUE-2 • PERMISSIBLE ADJUSTMENTS:143(i)(a) • (i)arithmetical error in the return • (ii)any INCORRECT CLAIM, if such claim is apparent from any information in the return

  15. ISSUE-2 • 143(i) EXPLANATION (a)-meaning of INCORRECT CLAIM apparent from any information in the return: • ON THE BASIS OF AN ENTRY ,IN THE RETURN- • (i)of an item which is inconsistent with another entry of same or some other item in such return

  16. ISSUE-2 • (ii)in respect of which information required to be furnished under this Act to substantiate such entry has not been so furnished • (iii)in respect of deduction, where such deduction exceeds specified statutory limit expressed as monetary amount or percentage, or ratio or fraction.

  17. ISSUE-2 • An entry inconsistent with another entry • Required information- not furnished/ so as to substantiate the claim • Deductions exceeding the limit • PLUS • Arithmetical error

  18. ISSUE-2- incorrect claim-I type • A) ITR 4 P & L A/C VS B) schedule of business income/property income/other sources- inconsistency • Eg: interest in P&L schedule vs other sources & exempt incomes • depreciation in P&L schedule vs disallowance under business schedule under appropriate heading( SCH BP ITEM A 11)

  19. ISSUE-2 P & L SCHEDULE SCH OF HEAD OF INCOME I ST LINE 19 00 000 item a 1 DIS ALLOWANCE U/S 40 145000 Donations disallowed u/s 37 RS 55000 • NET PROFIT 20 00 000 item 43 • INCOME TAX 200000 • Donations 75000

  20. ISSUE-2 SCHEDULE OI SCHEDULE B P DISALLOWANCE U/S 40 DISALLOWANCE U/S 40 Any item not included in P& L a/c item A 23 Item A 15 • SALARY TO PARTNER IN EXCESS OF LIMITS • INCOME TAX • INCOME NOT CREDITED TO P & L A/C • Disallowance u/s 37

  21. ISSUE-2- incorrect claim-II type • Information VS entry • Information- personal, OI , Schedules • 1)status vs deduction u/s 80 • 2)sch 80G Vs deduction u/s 80G • 3)Sch IF vs Claim in sch BP for sh of Profit from firm • 4)Nature of Business Vs Ded u/s 80 OR 44AD • 5)Sch TDS V salsch S (PAN)

  22. ISSUE-2 • INCOME CAN BE ADDED IF: • 1)There are inconsistencies in entries in same/different parts of return • 2)information not furnished so as to substantiate an entry where ever required

  23. ISSUE-3 BARREN AGRI LAND • SECTION 45 • SECTION 2 (14) • AGRI LAND NOT DEFINED • AGRI INCOME 2(1A) • BASIC OBJECT OF EXEMPTING AGRI.INCOME

  24. ISSUE 3 • 2 (1A)AGRI.INCOME MEANS: • a)Rent or revenue from LAND situated in INDIA and is USED for agri.purpose • b)income derived from such LAND by • i) agriculture • Ii)performance by cultivator/receiver of rent in kind of any process(ordinarily employed)to make the produce fit to be taken to market

  25. Issue 3 • Iii)sale by such persons of the produce with no process other than the one mentioned above • c)Income from building owned or occupied by receiver of rent in kind • Conditions for this : building and land two provisos and three explanations are in the statue:

  26. ISSUE 3 • Conditions land to be assessed to land revenue/local rate and if not so assessed conditions about it’s location(PROVISOS) • Agri income never includes income from transfer of such land:income from buildings does not include income arising from use of such land/bldg for purposes other than agri (EXPLANATIONS)

  27. ISSUE 3 • 2(14) CAPITAL ASSETS EXCLUDES AGRI.LAND (iii) • Clause iii OPENS WITH THE WORDS • Agri land in India not being land situated in any area ---- ----- ------

  28. ISSUE 3 • Therefore to qualify for exemption u/s 2(14)(iii) • Firstly, it has to be AGRI LAND • AND SECONDLY it should not be situated in the specified areas.- in otherwords it should be situated outside the specied areas • Both the conditions to be satisfied

  29. ISSUE 3 • CIT V RAJA BENOY KUMAR SAHAS ROY (32 ITR 466) IS it necessary to perform agri operations to make a land agri.land? • Agar= field: cultra= cultivation • In simple sense tilling of land,sowing of seeds, planting and similar operations- basic operations • In wider sense basic as well as subsequent operations- the raising on the land of products

  30. ISSUE 3 • Fundamental requirement is that cultivation of the land should be present in order to constitute agri .income • Agri Produce not limited to food/grains for human/animal consumption • Includes- vegetable,fruits,grass, • Betel,coffee,tobacco • Cotton ,jute etc

  31. ISSUE 3 • 1)Now as per 2 (1A) IF THERE IS AGRI OPERATION on the land –income is exempt • In respect of building(exemption u/s 22) • 2) satisfy (1) above and such land is assessed to local rate • OR the land is situated out side the specified areas • It will constitute AGRI INCOME eligible for exemption

  32. ISSUE 3 • Since 2 (14) (iii) opens with the words Agri. Land (which TERM is not defined) • Determination of whether a land is agri land or not is of utmost importance wrt section 45 and 2(14) unlike wrt 2(1A)

  33. ISSUE 3 • CIT V SIDDHARTH J DESAI 139 ITR 628 (GUJ): • 1)WHETHER THE LAND WAS CLASSIFIED AS AGRILAND in revenue records and subjected payment of land revenue, • 2)was the land actually used for agri.purpose at or about relevant time • 3)whether such user was for a long period or stop gap arrangement

  34. ISSUE 3 • 4)income from land vs investment in purchasing land-rational proportion • 5)use of land in adjoining areas • 6)any previous sale of part of land for non agri.purpose • 7)was the land ceased to be put to agri use was it put to alternative use • 8)was the sale on yardage / acreage basis

  35. ISSUE 3 • 9)was the land developed by plotting and providing road & other facilities • 10)whether an agriculturist will purchase the land for agri purpose at the price • All these may not be present in a case: the decision has to be taken on a balanced consideration of the totality of the circumstances

  36. ISSUE 3 • CWT V Officer in charge(court of wards)Paigah 105 ITR 133(SC) • Shivshankarlal V cit 94 ITR 433(del) • MERE possibility for agri use by a future owner –not enough:Entry in revenue records is a rebuttable presumption • Land must not only be capable of being put to agri use but should be actually used as agri land at such a point of time

  37. ISSUE 3 • Since in a barren land agri operations are GENERALLY not possible it can not be considered as agri land in such situations. • Necessary to prove use for agripuroses • Factors to determine whether a piece of land is agri.land; sampathIyengar- law of income tax- vol I 10 th edition p 422( more or less similar to case discussed in preceding slide)

  38. ISSUE-4 DISSSOLUTION OF FIRM • S 45 S 49 TRANSFER 2 (47) AND HISTORY before introduction of S 45 (3) & 45 (4) • Section 45 (3) wef 01.04.1988 • Section 45(4) • Amendment in 49 no corresponding amendment in 2(47)

  39. ISSUE-4 • Since charging s 45(3) and (4) contain these modes safely it can be subjected to tax even in the absence of a speaking amendment in 2 (47): • Still when there is a dissolution were there were only 2 partners can it be concluded that there is a distribution on dissolution because it is not on account of conscious act but by operation of law

  40. ISSUE-4 • Again in such cases there is no distribution among the partners. • More so when the deceased partner had executed a will and the assets pass as per the will and not by dissolution • CBDT circular 495 dt 22.09.1987 containing explanatory notes on Finance Act 1987- these sections introduced to meet device used for tax avoidance

  41. ISSUE-4 • When a partner retires and the firm continues with or without new partners 45 (4) is not applicable CIT V G K Enterprises(2003) 131 TAXMAN 181:CIT V Sohrabjikhanna &co(2003) 133 taxman 112: CIT V Goyal Dresses (2010) 126 ITD 131 (Chennai) • Contrary view CIT V A N Naik associates (2004) 136 Taxman 107/265 ITR 346 (BombayHC)-interpretation of “or otherwise “

  42. ISSUE 4 • NO DENIAL THERE IS automatic dissolution in the given example. • The question is whether there is a distribution among partners on dissolution • Distribution of assets connotes a conscious action by all partners of the firm whereby different assets of the firm are distributed among different partners

  43. ISSUE 5 Transfer of shares in co • S 2 (47) • Transfers shares in one co and receives shares in another co plus cash- exchange • Case study • What is the full value of consideration • Whether it is the amount credited as paid up in the books of buying co ? OR • Is it necessary to determine the market value? • .

  44. ISSUE 5 • Sale price of existing asset = market value of new asset received in exchange + cash received

  45. ISSUE 5 • Letter of offer to buy 20/10/1989 (Rs 180/-) • Cut off date to send completed form 01.12.1989 • Circular dt 08.10.1990 offer more attractive as the prices have sky rocketed since 1 year(Rs 450) • Transfer formalised on 30.10.1990( 1 week from 24.10.1990 last date for surrender of documents) (Rs 400.25)

  46. ISSUE 5 • Market value of which date relevant • First letter written by co is not offer • Letter written by assessee expressing willingness to transfer his holding amounts an offer which when accepted by the other co becomes a contract

  47. ISSUE 5 • The market value on the date the assessee was offered by first letter is the asset which the assessee agrees to buy in exchange and hence it is the price on such date that is relevant • SALE PRICE= (180+ 100) / 2 = 140 PER SHARE • AR.ALAGAPPA CHETTIAR V ITO 267 ITR 749(MAD)

  48. ISSUE 6&7 SHARES • 1)SHARES HELD AS INVESTMENT even if shares are sold for 2 crores S 44AB IS NOT ATTRACTED 2)SPECULATIVE TRANSACTIONS S 43(5)- ALWAYS BUSINESS, liable u/s 44AB if turn over exceeds limits

  49. SPECULATIVE • INTRA DAY TRADE • EG: SBI shares • 17/09/2012 • bought 1000@1900 Rs1900000 • Sold 1000@1920 RS1920000 • PROFIT RS 20000 • turn over RS 1920000 or RS 20000?

  50. ISSUE-6&7 F & O DERIVATIVES • 3)DERIVATIVES F &O - NOT SPECULATIVE SUBJECT To conditions. • S 43(5) • But business • Manner of identifying turnover

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