An Analysis By CA K.U.Sancar
Indian Union Budget 2008 - Introduction: - "Kodai Ali Sengol Kudi-Ombal Nangum Udaiyanam Vendharkku Oli" - Generous grants, Compassion, Righteous rule and Succour to the downtrodden are the hallmarks of good governance. - ThiruKural The Finance Minister in his Indian Union Budget speech quoted this Kural and stated that the Government has tried to remain true this philosophy. Truly, the Finance Minister has been able to maintain these hallmarks while drafting the Finance Bill 2008, in almost all the cases. Anyway, I restrict myself to Direct Taxes. Topics Covered in this Page
A complete new slab of tax rates prescribed in the Indian Union Budget 2008. Tax savings range from Rs.4,120 to Rs.45,320, depending on the slab of each of such person. The benefit is sizeable taking into account the number of middle class salaried employees and businessmen covered. A little bit too generous, but yet not so unwarranted under constant inflation. However, the loss of revenue is partially compensated by increase in the rate of short-term capital gains on shares under section 111A & 115AD from 10% to 15% - Righteous? Go to Top
'Whether the sale of seedlings and saplings in a nursery is an agricultural income?' has been a matter of dispute in various jurisdictions of High Courts. There are contradicting views of treatment, contrasting analysis and conflicting decisions. They are: - The Allahabad High Court in the cases of Jugal Kishore Arora vs. DCIT - 269 ITR 133 & Maharaja Vibhuti Narain Singh (H.H.) vs. State of Uttar Pradesh - 65 ITR 364, has categorically held the nursery operations are not 'agriculture' in nature and are most cases carried on as if business. Also, the plants sold in pots cannot be treated as 'produce' fit for market. Further, it does not involve the basic operations like tilling the land, sowing the seed, etc. The High Court found that, based on the facts presented to it, right from the beginning, the plants were grown in pots. Interesting decision has been rendered by the Kerala High Court in the case of Cochin Malabar Estates and Industries Ltd. vs. Commissioner of Agricultural Income-tax - 135 ITR 536. It has been stated that the nursery plants were held by the assessee as a capital asset and hence the income arising thereon is 'capital income'. It cannot be an 'agricultural income'. The Madras High Court in the case of CIT vs. Soundarya Nursery - 241 ITR 530 has held that, as per the case presented before it, there were basic operations on land and after a certain period of maturity, the plants were transplanted to the pots and nurtured, and sold. Hence, it was held by the High Court that the conditions of agricultural operations as enunciated by the Supreme Court in CIT v. Raja Benoy Kumar Sahas Roy - 32 ITR 466 was fulfilled. In the memorandum explaining the salient features of amendment, it has been stated that: - It has been held by judicial authorities that whether income from nursery operations constitutes agricultural income or not, will depend on the facts of each case. If the nursery is maintained by carrying out basic operations on land and subsequent operations are carried out in continuation of the basic operations, then income from such nursery would be agricultural income not liable to tax under section 10. However, if the nursery is maintained independently without resorting to basic operations on land, then income from such nursery would not be agricultural income and would be liable to be included in the total income. With a view to giving finality to the issue, it is proposed to amend section 2(1A) so as to provide that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried out on land, such income will be treated as agricultural income, thus qualifying for exemption under section 10(1) of the Act. This truly settles the issue as to whether the basic operation is required to be carried out only on land. Now, the issues that could arise are: - Whether the nurseries, which merely buy and sell the plants, which have been already developed in pots, are eligible for exemption? The answer could be in the negative, because the word used in the Explanation introduced is "saplings or seedlings grown in a nursery". These words would signify that, still basic operations are required to be done by the nursery itself, either on land or in pots. Merely carrying out subsequent operations, after the plant has been transplanted in the pot, would be protective operations and not grown - CIT v. Raja Benoy Kumar Sahas Roy - 32 ITR 466 (SC) would still apply. Whether the decision of the Kerala High Court in the case of Cochin Malabar Estates and Industries Ltd. vs. Commissioner of Agricultural Income-tax stating that the income from nursery plants held as 'capital assets' is not an agricultural income, has been nullified? The answer, in my opinion, could be yes, so long as basic operations are carried out, either in land or in pot. Reason, the explanation starts with the word 'Any income'. The amendment is righteous and upholds the sanctity of the meaning of the term 'agricultural income'. Go to Top
The Supreme Court in the case of CIT vs. Gujarat Maritime Board - 295 ITR 561, had held that the Gujarat Maritime Board, which was constituted under the Gujarat Maritime Board Act, 1981, for the purpose of development and maintenance of minor ports in the State of Gujarat was entitled to registration under section 12A, on the ground that the development and maintenance of ports is an object of general public utility. However, the Supreme Court, in this case, abstained from discussing the issue relating to application of income. In arriving this decision, the Supreme Court relied on its own earlier judgment in the case of CIT v. Andhra Pradesh State Road Transport Corporation - 159 ITR 1, where it was held that the running of road transport by 100% State Government financed corporation, the profits of which are re-invested in the maintenance of roads, etc., would be an object of general public utility. The amendment made this year seeks to nullify the decision of the Supreme Court. Interestingly, the words 'not involving the carrying on of any activity for profit' attached to the words 'object of general public utility' was omitted from Assessment Year 1984-85. Prior to the Assessment Year 1984-85, in Dharmadeepti vs. CIT - 114 ITR 454, the Supreme Court held that the 'object of general public utility' should be 'not involving the carrying on of any activity for profit'. However, even in those cases, it was held that the objects alone need to be free from profit motive. The means of attaining the object can be involving profit motive operations, like carrying on business, running lotteries, etc. Even after the amendment proposed this Indian Union Budget 2008 comes into effect, the restriction applies only on the object of the trust and not the means, that is, the trust can carry out profit motive activities, which are held as 'properties held for charitable purpose', in order to achieve the charitable object which does not involve profit making activity - Assistant Commissioner of Income-tax Vs. Thanthi Trust - 247 ITR 785 (SC). Probably, the intention of the amendment of the meaning of 'Charitable Purpose' is righteous but the means could have been simpler by re-introducing the words 'not involving the carrying on of any activity for profit'. Go to Top
Section 47(xvi) has been introduced to clarify that transfer of capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government is not regarded as 'transfer' for the purpose of charge to 'Capital Gains'. Further, the amount received by an individual as a loan, either in lumpsum or in instalment, in a transaction of reverse mortgage under a scheme made and notified by the Central Government is being exempt under section 10(43). The memorandum explaining the Finance Bill 2008 states that: - In the context of the aforesaid scheme, it was necessary to resolve the tax issues arising therefrom. The first issue is whether mortgage of property for obtaining a loan under the reverse mortgage scheme is transfer within the meaning of the Income-tax Act, thereby giving rise to capital gains. Section 2(47) of the Income-tax Act provides an inclusive definition of "transfer". Further, "transfer" within the meaning of the Transfer of Properties Act includes some types of mortgage. Therefore, a mortgage of property, in certain cases, is a transfer within the meaning of section 2(47) of the Income-tax Act. Consequently, any gain arising upon mortgage of a property may give rise to capital gains under section 45 of the Income-tax Act. However, in the context of a reverse mortgage, the intention is to secure a stream of cash flow against the mortgage of a residential house and not to alienate the property. It is therefore proposed to insert a new clause (xvi) in section 47 of the Income-tax Act to provide that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be regarded as a transfer and therefore shall not attract capital gains tax. Whether mortgage can amount to transfer. There is a Mumbai Tribunal judgment in favour of assessee in Gripwell Industries Ltd. vs. ITO - 284 ITR (AT) 188: - The purpose or object of mortgage is to secure a debt. In a sale, all the rights of ownership which the transferor has, pass to the transferee, whereas in a mortgage, some rights are transferred to the mortgagee and some remain vested in the mortgagor. The nature of the right of transfer depends upon the form of the mortgage. But, whatever be the form of mortgage, there is a transfer of some interest only and not a transfer of the whole interest of the mortgagor. The characteristic feature of mortgage is that the right in the property created by the transfer is accessory to the right to recover the debt. Mortgage creates a pecuniary liability on the mortgagor and the mortgagee becomes a secured creditor who has the first charge on the immovable property for the satisfaction of his debt. Any mortgage of the property would not invalidate the contract of agreement of sale or part performance thereof, but would only give the right to preference for the satisfaction of the debt. Held by the Tribunal that, on the facts of the case, by the mortgage, the bank got only a right of interest in the property but not the right to the title to the property. Again, section 10(43) is a clarification with abundant caution. What is received by the Senior Citizen is only in the form of loan, as clarified in memorandum to budget 'a capital receipt'. There cannot charge to income-tax on an amount in which the assessee has right to repay - CIT Vs. Hindustan Housing and Land Development Trust Ltd. - 161 ITR 524 (SC). Probably, the amendment is a measure of compassion towards Senior Citizens, to avoid any unwarranted legal issues that might have to be faced by them. Go to Top
SECTION 10(26AAA): The income accruing or arising from any source in Sikkim and any Dividend and Interest on Securities are totally exempted from Income-tax in the hands of Sikkimese. Go to Top
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