T.N. Pandey: Judicial property requires consistency

CHAT ROOM

Our organisation coaches boys to compete in basketball games all over India. For this, we have raised funds, which have been invested in business organisations. It fetches us income exceeding the taxable limit of Rs 50,000. What will be the tax liability of the association in this case?

Any income of an association involved in the control, supervision, regulation or encouragement of games was exempt from tax under Section 10(23) on compliance of prescribed conditions up to March 31, 2004. But as promotion of sports and games is considered a charitable activity within the meaning of Section 2(15), an association/institution engaged in promotion of sports/ games can claim exemption under Section 11, even if it is not exempt under Section 10 (23).

But compliance to the requirement prescribed under Sections 11 to 13 (including requirement relating to the mode of investment of funds of the association will have to be made for claiming the exemption.

Our company constructs and sells lease properties. In the assessment year 2001-02, two flats, which constituted our commercial assets (inventory), could not be sold because of a slump in the real estate business. So those flats were rented out and the rental income was shown as income from business. The tenancy continued in the assessment year 2002-03 and income from these flats had been shown as business income. But the assessment officer wants to assess this income as "income from house property" without giving any reasons for change in his opinion. Is he correct?

No. A finding reached in the assessment proceeding for an earlier year, after due inquiry, cannot not be reopened in the subsequent year, if no fresh facts are found in the subsequent year. There has to be finality and certainly in all litigaitons, including those arising under the Income Tax Act (See the Sardar Kehar Singh vs Commissioner of Income Tax case, (1992) 195 ITR 769 (Rajasthan).

In the Commissioner of Income Tax vs National Bearing Co Ltd case, (1994) 208 ITR 872 (Rajasthan), it was held that though the principle of res judicata was not applicable and the assessee as well as the department was free to challenge the order in a different year, judicial property required consistency.

When a particular question of fact or law is decided in one year and an identical matter or question comes up for consideration in the subsequent year, the decision rendered in the previous year will be certainly "good and cogent evidence" in the subsequent year. So long as the finding of fact has not been vacated in appropriate proceedings and stands and there is no fresh material or other circumstance demonstrating or demanding a "fresh look" into the matter, there is absolutely no inhibition in relying upon that finding of fact. (See the Sakti Rani Roy vs Commissioner of Income Tax case, (1978) 115 ITR 722 (Calcutta).

Please explain the concept of "permanent establishment" in the context of taxation of a foreign equity.

The fundamental principle enumerated in all the double taxation avoidance agreements is that the country, in which the owner of any business enterprise has a permanent establishment (PE), may charge tax on so much of the owner's income as is attributable to it. The United Nations' commentary on the articles (pages 2.52 to 2.64, Part-II) is exhaustive in its analysis of the reasons on which the principle is based.

The general definition is that a PE is a fixed place of business through which the business of the enterprise is wholly or partially carried on. This is further elaborated by specifying some of the things, which constitute a PE, including a place of management, a branch, an office, a factory, a workshop, a warehousing providing storage facilities for others and any premises used as a sale outlet or for securing or soliciting orders.

While most conventions declare that an installation or structure used for exploration or development of natural resources is also a PE, the agreement with the US stipulates its use for a minimum of 120 days in any 12-month period as a pre-requisite for such a treatment. India's agreement with New Zealand includes a general provision; an enterprise shall be deemed to have a PE in India and to conduct business through the PE, if it is engaged in any activities in connection with the exploration of natural resources in India.

Some agreements also provide that a building site or a construction or installation or assembly project or supervisory activities in connection there will be treated as a PE, where such site, project or activities continue for a period more than six months. The time limit is three months in treaties with Italy and Norway.

The matter relating to establishment of permanent establishment has created problems in the context of taxation of incomes through e-commerce/ business deals. Issues, such as, whether a server can be considered as a permanent establishment, have cropped up and no satisfactory solutions to such issues, acceptable to all have been found.

I am a resident taxpayer in India. I carry on business in London also. On my London income, I have paid certain amount of tax in the UK, income whereof is to be included for tax purposes in India "" I , being a resident taxpayer. Can I get deduction for the tax paid in the UK in computing the taxable income in India?

No. The law on this subject is settled. For computing the income chargeable under the Income Tax Act, 1961 under the head "profits and gains of the business", there is no provision for allowing deduction on amount of taxes levied either in India or abroad.

Hence, tax paid in the UK can not be deducted in computing the queriest's taxable income in India. But since India is having a double taxation avoidance agreement with the UK, the quriest can claim benefit admissible for avoiding double taxation of the same income under this pact.