Section 2(24)

Section 2(24) — the law in short

What the courts have decided on section 2(24), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Secunderabad Club v CIT Supreme CourtHelps department
  Our club's surplus sits in fixed deposits with a bank that is itself a corporate member. Is the interest covered by mutuality?
  No. The Supreme Court held that the principle of mutuality does not apply to interest earned on fixed deposits made by a club with a bank, whether or not the bank is a corporate member of the club. The interest is ordinary income under s.2(24) and is taxed like any other income. The Court dealt in the same batch with income the clubs earned through their assets and resources from persons who are not members, and held that too is taxable.
• Union of India v U.A.E. Exchange Centre Supreme CourtHelps taxpayer
  My UAE client's Indian liaison office only downloads remittance instructions from the head office server and prints cheques on Indian banks. The Assessing Officer says that is a permanent establishment and wants to tax the whole remittance commission. Is he right?
  No, on these facts. The Supreme Court held that a liaison office whose only activity is downloading information from the head office server and printing and despatching cheques is carrying on an activity of a preparatory or auxiliary character, which Article 5(3)(e) of the India-United Arab Emirates DTAA expressly takes out of the expression 'permanent establishment'. Once the office is deemed by that legal fiction not to be a PE, Article 7 gives India no right to tax the enterprise's profits, and the deeming provisions in ss.5 and 9 of the Act 'can have no bearing whatsoever'.
• Yum! Restaurants (Marketing) Pvt Ltd v CIT Supreme CourtHelps department
  We pool advertising contributions from our franchisees in a group company that runs at no profit. Is the surplus exempt on the principle of mutuality?
  No, not on these facts. The Supreme Court dismissed the appeal and held the company was not a mutual concern, so the excess of income over expenditure for assessment year 2001-02 was taxable. Contributions were taken from Pepsi Foods Ltd, which was not a franchisee and had no franchise agreement, so members and non-members were dealt with in the same activity. The parent company had a sole and absolute discretion whether to contribute at all, controlled the board, and could take royalty benefit from the pooled funds. The franchisees had no right to a refund of surplus. Each limb of mutuality failed.
• ITO v Venkatesh Premises Co-operative Society Ltd Supreme CourtHelps taxpayer
  The AO has taxed our society's transfer fees and non-occupancy charges. Is that right?
  No. The Supreme Court held that transfer charges, non-occupancy charges, common amenity fund charges and similar receipts collected by a co-operative society from its own members are covered by the principle of mutuality and are not income. On transfer charges the Court held that the amount is appropriated only after the transferee has been admitted to membership and is returned if admission is refused, so by the time it is retained the payer is a member.
• Union of India v Tata Tea Co Ltd Supreme CourtHelps department
  Sixty per cent of my tea company's income is agricultural and outside income tax. When I distribute dividend, is the distribution tax payable on the whole dividend or only on the taxable forty per cent?
  On the whole dividend. The Supreme Court upheld section 115-O as within Parliament's competence under Entry 82 of List I and set aside the Calcutta High Court's rider that additional tax could be charged only on 40 per cent of the dividend. Dividend declared and distributed is not impressed with the character of the profits out of which it is paid, so it does not become agricultural income in the shareholder's hands merely because the company's income was largely agricultural. Reading a 40 per cent limit into section 115-O would alter the provision, for which there is no warrant. The tea company's appeal was dismissed.
• Bangalore Club v CIT Supreme CourtHelps department
  Our members' club keeps its surplus in fixed deposits with banks that are themselves corporate members — is the interest exempt on the principle of mutuality?
  No. The Supreme Court held on 14 January 2013 that interest earned by a members' club on fixed deposits with banks that happen to be corporate members is taxable. Once the money goes into a bank deposit the closed circuit breaks: the bank lends it on to outsiders at a higher rate, so the funds are expended on non-members before they come back. All three conditions of mutuality fail — complete identity of contributors and participators, application of the surplus in furtherance of the club's objects, and the impossibility of members profiting from their own contributions. The club deals with the bank as a customer, not as a member.
• CIT v Ponni Sugars & Chemicals Ltd Supreme CourtCuts both ways
  I got a government incentive that came to me as a higher free sale quota and an excise rebate, and I had to use it to repay my term loans. Is that taxable income?
  No, on those terms it is a capital receipt. The Supreme Court applied the purpose test: what decides the character of a subsidy is the object for which it is given, not when it is paid, where it comes from, or the mechanism through which it reaches you. Because the incentive was available only to new or substantially expanded units and had to be used to repay term loans taken to set up or expand the plant, it was capital, not a trade receipt. On the separate section 80P(2)(a)(i) claim the matters went back to the Tribunal.
• CIT v Gold Coin Health Food P Ltd Supreme CourtHelps department
  My return declared a loss and even after the addition the assessed figure is still a loss. Can concealment penalty under section 271(1)(c) be levied when no tax is payable?
  Yes. A three-judge bench of the Supreme Court held that Explanation 4 to section 271(1)(c) is clarificatory and not substantive, so penalty was leviable even between 1 April 1976 and 1 April 2003 where the addition of concealed income merely reduced a returned loss and the assessed figure remained negative. Income in section 2(24) includes losses, as Harprasad had held, so the returned loss is no answer. The contrary view of a two-judge bench in Virtual Soft Systems Ltd v CIT was held not to be correct. The two assessees before the Court were spared, the Solicitor General having said the Department would not demand penalty from them.
• CIT v. Willamson Financial Services (Supreme Court) — a Chapter VI-A deduction on a tea company's composite income is allowed AFTER the Rule 8(1) sixty-forty apportionment, not against the whole composite income Supreme CourtHelps department
  Our tea company exports. Should the section 80HHC deduction be worked out on the whole composite income before Rule 8 splits it sixty-forty, or only on the forty per cent that is taxable?
  Only on the forty per cent. The Supreme Court held that the deduction under section 80HHC is required to be allowed AFTER the apportionment of income under Rule 8(1), and answered the issue in favour of the Department. The legal fiction in Rule 8(1) is confined to that rule: it assigns chargeability and computability only to the non-agricultural forty per cent, and it cannot be extended into section 80HHC(3)(a), because deductions under Chapter VI-A are made from gross total income and are not part of the computation of income under the head "Profits and gains of business".
• Chelmsford Club v CIT Supreme CourtHelps taxpayer
  My members-only club owns its own club house and uses it for members. Can the Department tax the annual letting value of that building as income from house property?
  No. The Supreme Court held that the principle of mutuality covers the annual value of a club house used only for members and their guests. Two steps get there. Section 22 taxes income, not property: the levy is traceable to entry 82 of List I and the Act cannot tax anything but income, so what is charged is deemed income from the property. And section 2(24) recognises mutuality by excluding businesses governed by it, other than those in clause (vii). Since the club satisfied the three tests of mutuality, the deemed income from its property was outside the charge too.
• Sahney Steel & Press Works Ltd v CIT Supreme CourtHelps department
  The State refunds my sales tax and subsidises my power for five years after I start production. Is that a capital receipt because the scheme was meant to encourage new industry?
  No. The Supreme Court held that these were operational subsidies and therefore revenue receipts. Nothing was paid towards setting up the industry: the incentives became available only once production had begun, ran for five years, and were tied to production - power subsidy only for power consumed for production, sales tax refunds only on taxes levied after production started. Their object was to give a newly set up unit a helping hand so it could run its business more profitably. The Court applied Viscount Simon's rule in Ostime that a subsidy from public funds paid to a trade is a trading receipt.
• CIT v Bankipur Club Ltd Supreme CourtHelps taxpayer
  My members' club charges for drinks, rooms and subscriptions and ends the year with a surplus. Is that surplus taxable income?
  No, where the receipts come from members. The Supreme Court held that amounts realised from members for drinks, refreshments, letting of buildings, admission fees and periodical subscriptions were charges for the privileges, conveniences and amenities the members were entitled to under the club's rules, offered without profit motive and untainted with commerciality. That is not a trading activity, and the excess of receipts over expenditure arising from a mutual arrangement is not income under the Act. Income from extending facilities to non-members was not in issue in these appeals.
• CIT v G.R. Karthikeyan Supreme CourtHelps department
  I won prize money in a car rally that was a test of skill, not a lottery or a race. Is it taxable when it does not fit any sub-clause of section 2(24)?
  Yes. The Supreme Court held that section 2(24) is an inclusive definition, so a receipt can be income even though it falls under none of the sub-clauses. It is wrong to test a receipt against sub-clause (ix) and conclude, if it does not fit, that it is not income. The rally was a contest, the assessee entered it to win, and the prize was a return for his skill and endurance. If money not earned in the true sense is income, money earned by skill and toil is income too. It may be casual, but section 10(3) itself shows casual income is income.
• Emil Webber v CIT Supreme CourtHelps department
  My Indian contract says my pay is free of Indian tax and the Indian company pays the tax for me. Is that tax itself taxable in my hands?
  Yes. The Supreme Court held that tax paid by an Indian company on an expatriate's salary, under an obligation to pay him free of Indian tax, is itself income of the expatriate. The definition in section 2(24) is inclusive and does not rob income of its natural meaning; anything properly described as income is taxable unless exempted. The payment was made for and on behalf of the assessee, was not gratuitous, and had an integral connection with the salary he received. Since he was not an employee of the company that paid, it fell under section 56 as income from other sources. The appeals were dismissed.
• CIT v Kumbakonam Mutual Benefit Fund Ltd Supreme CourtHelps department
  My company lends and takes deposits only from its own shareholders and shares the surplus among them. Is that mutual trading, so that the surplus is not taxable?
  No. The Supreme Court held that mutuality requires complete identity between contributors and participators: every contributor to the common fund must be entitled to share in the surplus, and every participator in the surplus must be a contributor. Here a shareholder could take his dividend without ever making a deposit or taking a loan, so the surplus came back to him as a shareholder on his shares, not as a person who had put money in. That is a company making a profit out of its members as customers, which is taxable. The Madras High Court's test, that the right to contribute and the right to participate need only be open to an identical body, was held unsound.
• All India Central Bank Officers Federation v Union of India High CourtHelps departmentNo later treatment found
  My client is a bank officer taxed on a deemed concession in rent for the bank's quarters even though the market rent is lower than the percentage of salary applied. Is the deeming provision open to challenge?
  Not on the grounds run so far. A Division Bench of the Bombay High Court dismissed a batch of writ petitions by bank officers' associations challenging Explanations 1 to 4 below s.17(2) inserted by the Finance Act 2007 with limited retrospective effect. It held the legal fiction is not an impermissible legislative override of Arun Kumar v Union of India, that the retrospectivity is valid, and that classifying by city population and measuring the concession as a percentage of salary does not offend Article 14.
• Mewar Polytex Ltd v ACIT High CourtHelps departmentNo later treatment found
  The loan my client's company took carried interest and TDS was deducted on it, and the lender's objects clause covers financing. Is that enough to keep it out of s.2(22)(e)?
  No, on these facts. The Rajasthan High Court held that payment of interest and deduction of tax at source do not convert a loan into an inter-corporate deposit or into a loan taken in the ordinary course of business, and that the sub-clause (ii) exception needs money lending to be a substantial part of the lender's business — interest of Rs 2,97,552 on a single loan was not. The Court also held that deemed dividend under s.2(22)(e) was outside the s.10(34) exemption read with s.115-O and remained taxable in the recipient's hands.
• Shell India Markets P Ltd v ACIT High CourtHelps taxpayerNo later treatment found
  The TPO says we issued shares to our parent too cheaply. Can he tax the shortfall?
  No. The issue of equity to a non-resident parent is on capital account and gives rise to no income, and Chapter X is machinery for computing income at arm's length, not a charge. With no income there is nothing for the transfer pricing machinery to work on, and re-characterising the alleged shortfall as an interest-bearing loan has no statutory foundation.
• Vodafone India Services P Ltd v Union of India High CourtHelps taxpayer
  We issued shares to our foreign parent at a premium the Transfer Pricing Officer says is too low. Can he tax the shortfall as income under the transfer pricing provisions?
  No. The Bombay High Court held that the issue of equity shares at a premium by an Indian company to its non-resident holding company is a capital account transaction that gives rise to no income, so Chapter X cannot be applied at all. Chapter X is a machinery provision for arriving at the arm's length price; the charge must be found in sections 4 and 5 and in one of the heads of income. There being no charge, express or implied, on the premium not received, the reference to the Transfer Pricing Officer, his order, the draft assessment order and the Dispute Resolution Panel's order were quashed as without jurisdiction.
• Aditya Balkrishna Shroff v ITO ITATHelps taxpayerNo later treatment found
  I lent a relative dollars and the rupee moved. Is the extra rupee amount I got back taxable?
  No, on these facts. The Tribunal held the rupee surplus on repayment of an interest-free loan advanced in foreign currency was a capital receipt: the loan was a transaction in the capital field, exactly the same number of dollars came back, the accretion was on account of exchange fluctuation and not interest, and a capital receipt is outside the charge unless a provision brings it in. It also held that whether the loan was permissible under the exchange control law is not for the income-tax authorities to adjudicate. The addition of Rs 22,04,568 made under income from other sources was deleted.
• Smt. Trishla Jain v. Dy. CIT (ITAT Delhi) — short-term capital gains derived from a foreign exchange asset fall within 'investment income' in s.115C(c) and take the concessional rate, notwithstanding that s.115E names only long-term capital gains ITATHelps taxpayerNo later treatment found
  My NRI client bought equity shares of an Indian company in convertible foreign exchange and sold them within a year. The assessing officer says section 115E mentions only long-term capital gains, so the short-term gain goes at ordinary rates. Is there any authority the other way?
  Yes. The Tribunal held that a short-term capital gain derived from a foreign exchange asset is income derived from that asset and therefore falls within the definition of 'investment income' in section 115C(c), so the assessee is entitled to the concessional rate under section 115E. It rejected the Revenue's argument that the express mention of long-term capital gains in section 115E excludes short-term gains by necessary implication.
• In re Danfoss Industries P Ltd Advance RulingHelps department
  We pay our Singapore group company a share of its regional costs for market research and management advice. If there is no profit in it, must we still deduct tax under section 195?
  Yes. The Authority ruled that the payments to Danfoss Singapore would be subject to withholding under section 195. It accepted the common ground that section 195 applies only where the amount is income of the payee and not a mere reimbursement of cost, but held that these payments were not reimbursements. The fee was worked out by an allocation key based on each group company's budgeted turnover, weighted for growth rate and market maturity, so there was no direct nexus between what Danfoss Singapore actually spent in serving the applicant and what the applicant paid. Even if the total matched the cost, that would be a quid pro quo for the service fees and not a reimbursement of expenses.
• Statutory position — place of effective management under section 6(3)(ii) from AY 2017-18, and the CBDT Circular 6/2017 guidelines CBDT Circulars & InstructionsCuts both ways
  A foreign company in my client's group is run largely from India. From when can it be treated as resident here, and what test does the department actually apply?
  From assessment year 2017-18, a company is resident in India if it is an Indian company or if its place of effective management in that year is in India — 'the place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made'. CBDT Circular No. 6 of 2017 dated 24 January 2017 lays down the guidelines: a company 'engaged in active business outside India' is presumed to have its POEM outside India if the majority of its board meetings are held outside India, and only a company failing that test goes through the two-stage enquiry of identifying who actually makes the key management and commercial decisions and then where those decisions are in fact made.
• ITO v Kalpesh Synthetics Pvt Ltd (miscellaneous applications) ITATHelps departmentOverruled
  I won my section 36(1)(va) appeal in the Tribunal before Checkmate. The department has now filed a miscellaneous application to recall the order. Can it do that?
  This bench held it can. Non-consideration of a Supreme Court decision is a mistake apparent from the record within section 254(2), and because a judicial decision operates retrospectively — the judge discovers the law rather than makes it — a decision handed down after the Tribunal's order can equally found a recall. Both favourable orders were recalled for a fresh hearing.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.