Solution for DT – PCC-May 2010

Heres the solution for May 2010 PCC DT questions – only the practicals..
Enjoy!!
Tax _ PCC _Solution

Note: Please ignore the 2 earlier posts as I encountered some problem in uploading the file links.

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All the best for the Exams

Heres wishing all the very best to the students appearing for CA Final, IPCC and PCC for May 2010…

planning to revive the blog

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Conditions for claiming section 54

Court : ITAT, HYDERABAD ‘B’ BENCH HYDERABAD


Brief : : The benefit of exemption under section 54 is to be extended only when the property sold as well as the property purchased by the assessee are intended to be used as residential houses.


Citation : ITO v Rohini Reddy ITA No. 595/Hyderabad/2006


Judgment :


We have carefully considered the rival submissions and perused the record. Marginal heading of section 54 of the Act, which is relevant in this context, refers to “profit on sale of property used for residence”. Main section speaks of transfer of a capital asset- being building or lands appurtenant thereto and being a residential house – the income of which is chargeable under the head income from house property. It is not the case of the assessee that the roofed structure built on the Banjara Hills land was either self-occupied or let out and there is nothing on record to suggest that it was intended to be used as residence. Considering the market value of the property, the so called “house” constructed on the property cannot be said to be for use of the assessee or for letting out as a residential house. Similarly, the assessee purchased tow plots for a total consideration of Rs. 68,27,300/- which contain small temporary structures covered with asbestos roofing in a corner of the plots. These plots also cannot be said to have been purchased to use the temporary structures as residential houses. Since the expression ‘residential house’ is not defined under the Income Tax Act, a purposive meaning has to be adopted to such expression instead of going by the technical meaning assigned under various enactments or the dictionary meaning given in the dictionary. It is appropriate herein to reproduce the observations of the Supreme Court, as extracted by the Author – Justice G. P.Singh, in the book ‘Principles of Statutory Interpretation’, Seventh Edition, at page 94.

“ The words of a statute, when there is doubt about their meaning are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view. Their meaning is found not so much in a strict grammatical or etymological propriety of language, nor even in its popular use, as in the subject or in the occasion on which they are used, and the object to be attained”.

As could be noticed from the marginal heading, the original intention in inserting the provisions of section 54 of the Act and the amendments made from time to time to mitigate the unintended hardship by originally using the expression used by the “assessee or parent of his…” without changing the expression “used for residence” in the marginal heading and also by specifying the nature of building by use of the expression “being a residential house”, it has to be assumed that the intention of the legislature was to extend the benefit of exemption under section 54 of the Act only when the property sold as well as the property purchased by the assessee were intended to be used as residential houses, whereas the totality of circumstances clearly indicate that they were never intended to be used as residential houses either for self-occupation or for letting of. We are, therefore, of the view that the assessee is not entitled to exemption under section 54 of the Act on the sale value of the impugned property.

Charitable trust – amendment

Exemption under section 11 in case of assessee claiming both to be charitable institutions as well as mutual organisations
Circular No. 11/2008, dated 19-12-2008

Definition of Charitable purpose under section 2(15) of the Income-tax Act, 1961

Section 2(15) of the Income Tax Act, 1961 (Act) defines charitable purpose to include the following:-

(i) Relief of the poor

(ii) Education

(iii) Medical relief, and

(iv) the advancement of any other object of general public utility.

An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of charitable purpose. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying on of

(a) any activity in the nature of trade, commerce or business; or

(b) 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.

2. The following implications arise from this amendment

2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute charitable purpose even if it incidentally involves the carrying on of commercial activities.

2.2. Relief of the poor encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that

(i) the business should be incidental to the attainment of the objectives of the entity,and

(ii) separate books of account should be maintained in respect of such business.

Similarly, entities whose object is education or medical relief would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is advancement of any other object of general public utility i.e. the fourth limb of the definition of charitable purpose contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

3.1. There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants.

Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15).

3.2. In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.

Happy New Year

Wishing Everyone a happy new year 2009

Taxability of advance against dividend in closely held companies

In the case of private companies loans are taxed as dividend. But can one take advance against dividend?


Loans and advances given by all closely-held companies, that is, in the case of private sector companies whose shares were not listed in a recognised stock exchange on the last date of the relevant previous year, are taxable as dividend in the hands of dominant shareholders, that is, shareholders who have got at least 10 per cent stake in the company.

But this is subject to the condition that at the time of giving of loan the company had accumulated profits. If there were accumulated profits at the time such shareholder took loan, there of course would be a tax on such deemed dividend but the loan can be set off against his actual dividend entitlement when it is declared.

For example, if such a shareholder takes a loan of Rs 2 crore and the company thereafter sets off the loan against his dividend entitlement of Rs 3 crore, the position would be as follows:

deemed dividend taxable in his hands, Rs 2 crore; and

actual dividend on which dividend distribution tax is payable, Rs 1 crore.

But this is not a complete consolation because while DDT rate is 17 per cent, the maximum marginal rate for individuals is 34 per cent.


Admission open for Nov ‘2010 exams

Admissions have already opened for Nov 2010 exams. We offer only 45 seats for a batch and admissions have already started filling up with only 10 seats remaining

Batch for May 2010

Classes scheduled to start from February 2009 for May 2010
November 2017
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