Month: September

19. 
    

    Spahi Projects Pvt. Ltd., in re

29. 
    

    Cheminvest Ltd. v. ITO

ITAT Special Bench New Delhi — ‘B’ Bench

Before R. P. Garg (VP) and A. D. Jain (AM) and
Rajpal Yadav (JM)

ITA No. 87/Del./2008

A.Y. : 2004-05. Decided on : 5-8-2009

Counsel for assessee/revenue : Ajay Vohra, Rohit
Jain, Gaurav Jain & Rohit Garg/S. D. Srivastava, Rajesh Tuteja, & Manish Gupta

S. 14A — Disallowance u/s.14A can be made even in
the year in which no exempt income has been earned or received — Disallowance
u/s.14A in respect of interest expenditure is to be made with reference to
gross interest expenditure and not with reference to interest expenditure as
reduced by interest receipt.

Per R. P. Garg :

Facts :

The assessee had invested Rs.17,36,89,230 in
purchase of shares. Some of the shares were held by the assessee as its
capital assets, whereas the others were held as its stock-in-trade. The
assessee had taken unsecured loans of Rs.8,51,65,000. It had paid interest of
Rs.1,21,02,367 on unsecured loans borrowed by it. Of the borrowed funds a sum
of Rs.6,88,70,000 was invested in shares. During the previous year relevant to
the assessment year 2004-05, the assessee did not earn any dividend income.

In the course of assessment proceedings before
the Assessing Officer (AO), the assessee contended that since it had not
earned or received exempt income the question of disallowance of interest does
not arise. The AO did not accept the contention of the assessee and disallowed
interest on a proportionate basis i.e., a sum of Rs.97,87,570 was
disallowed out of total interest.

Aggrieved by the disallowance of interest the
assessee preferred an appeal to CIT(A) who confirmed the action of the AO in
disallowing proportionate interest pertaining to investment for earning
dividend, though exempt income was not earned during the year. The CIT(A),
however, agreed with the alternative contention of the assessee that the
disallowance be computed with reference to the net interest amount debited to
the Profit & Loss Account and not the gross interest expenditure. The CIT(A)
directed the AO to work out disallowable interest on pro rata basis of
the net interest i.e., interest payment as reduced by receipt of
interest.

The assessee preferred an appeal on the ground
that disallowance was not warranted since the assessee had neither earned nor
received any exempt income during the previous year relevant to the assessment
year under consideration. The Revenue preferred an appeal on the ground that
the proportionate gross interest expenditure ought to have been held to be
disallowable.

In view of the contrary decisions on the issue
under consideration, the President, ITAT constituted a Special Bench (SB) to
dispose of the appeal and decide the following question :

“Whether disallowance u/s.14A of the Act can be
made in a year in which no exempt income has been earned or received by the
assessee ?”

Held :

The Special Bench held that —

(a) when the expenditure of interest is
incurred in relation to income which does not form part of total income, it
has to suffer the disallowance, irrespective of the fact whether any income
is earned by the assessee or not. S. 14A does not envisage any such
exception;

(b) when prior to introduction of S. 14A, an
expenditure both u/s.36 and u/s.57 was allowable to an assessee without such
requirement of earning or receipt of income, such a condition cannot be
imported when it comes to disallowance of the same expenditure u/s.14A of
the Act;

(c) in the case of Rajendra Prasad Moody the SC
held that irrespective of dividend receipt, expenditure has to be allowed.
Applying the ratio of this decision in the reverse case since dividend is
exempt, expenditure has to be disallowed. The fact that during the year
dividend has neither been earned nor has it been received would be
irrelevant;

(d) the allowance of expenditure in relation to
dividend income would thus be not admissible in computing the income of an
assessee under this Act, irrespective of whether the shares are held as
investment or they are held on trading account as stock-in-trade;

(e) S. 57 allows the expenditure incurred for
making or earning the income, whereas S. 14A disallows the expenditure ‘in
relation to income which does not form part of total income’. The term
‘expenditure in relation to’ is wider in scope and provides for disallowance
if it is related to income not forming part of total income;

(f) the disallowance has to be of the entire amount of the
expenditure so related and cannot be reduced by the receipt of interest which
has no relation to such expenditure.

28. 
    

    ACIT v. L. & T. Ltd.

ITAT Mumbai ‘A’ Bench

Before R. S. Syal (AM) and

Asha Vijayaraghavan (JM)

ITA No. 4499/Mum/2008

A.Y. : 2000-01. Decided on : 22-7-2009

Counsel for revenue / assessee : Mayank Priyadarshi/Arvind Sonde

S. 115JA, S. 244A — While computing tax liability u/s.115JA
credit for tax paid in foreign country is allowable — Grant of interest
u/s.244A can not be denied on the ground that the TDS certificate was filed in
the course of assessment proceedings and not along with the return of income.

Per R. S. Syal :

Facts :

The assessment of total income of the assessee was
completed u/s.143(3) of the Act on 31-3-2003 assessing the total income at
Rs.97,09,81,536 u/s.115JA. Subsequently, the AO observed that the assessee was
allowed double tax relief while assessing the income u/s.115JA. Notice u/s.154
of the Act was issued and the credit for foreign tax given was denied on the
ground that intention behind S. 115JA is that assessee should pay minimum tax
in India on 30% of book profits and credit for taxes paid in foreign country
could not be allowed against tax liability in India when income was assessed
u/s.115JA of the Act.

In the rectification proceedings the AO did not allow
interest in respect of TDS certificates on the ground that such certificates
were not submitted along with the return of income, but were submitted in the
course of assessment proceedings.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the income on which tax has been
paid abroad was included in ‘book profit’ for the purpose of S. 115JA. The
Tribunal held that once taxable income is determined either under the normal
provisions or as per S. 115JA, subsequent portion relating to the computation
of tax has to be governed by the normal provisions of the Act. It also held
that there is no provision in the Act debarring granting of credit for tax
paid abroad in case income is computed u/s.115JA. It held the assessee cannot
be denied the set-off of tax relief of Rs.22,88,464 against the tax liability
determined u/s.115JA. It upheld the order of CIT(A) on this ground.

The Tribunal noted that tax was deducted at source at the
right time. It was also deposited into the exchequer in time. The Tribunal
noted that the AO had given credit for TDS, but had denied interest thereon
u/s.244A. The Tribunal held that interest u/s.244A cannot be denied only on
the ground that TDS certificates were not furnished along with the return of
income. It upheld the order of CIT(A) on this ground.

27. 
    

    Dy. CIT. v. Vimal Builders and
    Vimal Builders v. Dy. CIT

ITAT ‘F’ Bench, Mumbai

Before M. A. Bakshi (VP) and

R. K. Panda (AM)

ITA No. 3646/Mum./2007 & 2730/Mum./2007

A.Y. : 2003-04. Decided on : 28-7-2009

Counsel for revenue/assessee : J. V. D. Lanstich/

R. R. Vora and Manoj Anchalia

S. 80IB(10) — Amenities provided by the assessee at the
time of construction itself, though by way of a separate agreement, are to be
treated as part of the housing project undertaken by the assessee — Deduction
u/s.80IB(10) is allowable in respect of receipts for amenities — When there is
direct nexus between the funds borrowed and funds advanced to sister concerns
interest received on amounts advanced can be netted off against interest paid.

Per R. K. Panda :

Facts :

The assessee was engaged in the business of constructing
residential buildings. During the assessment year under consideration the
assessee had claimed deduction of Rs.3,15,40,268 u/s.80IB(10). The Assessing
Officer (AO) noted that the assessee had considered receipts for amenities as
part of total sales and had claimed deduction u/s.80IB on the profit element
contained in receipts for amenities. He observed that the amenities included
superior quality flooring, false ceiling, fans and tubes, superior quality
fittings in toilets, box grills and pipe gas from Mahanagar Gas Limited. The
AO did not consider profit derived from providing amenities as part of total
sales and accordingly denied benefit of deduction on an amount of Rs.22,12,360
being the profit on amenities receipts of Rs.55,34,797.

The CIT(A) held that provision of amenities should be
treated as part of the housing project undertaken by the assessee and since
these amenities are provided by the assessee at the time of construction
itself, though by way of a separate agreement, the profit element in receipts
for amenities qualifies for deduction u/s.80IB(10). He allowed the appeal of
the assessee.

The CIT(A), in the course of appeal proceedings before him,
noted that the assessee had advanced monies to its sister concerns and had
received interest of Rs.16,27,802 which interest was netted off against
interest paid. After giving an opportunity to the assessee, he held that
interest receipts should be excluded for the purpose of calculating deduction
u/s.80IB(10) of the Act. He directed AO to recompute the deduction
u/s.80IB(10) by excluding interest receipts.

Aggrieved, the Revenue and the assessee preferred appeals
to the Tribunal.

Held :

The Tribunal noted that the extra amenities are provided
only to purchasers of the flats at the time of purchase of flat itself and no
such activity has been undertaken for any other person; the agreement for sale
of flat and for provision of extra amenities were both entered on the same
date; work for extra amenities was carried out through the same contractor at
the time of construction of the flat itself. It found merit in the submission
that extra amenities given to the buyer cannot be provided in isolation as the
same are inextricably connected with the housing project and the decision of
providing such extra amenities to the buyer was a commercial decision and
within the conditions of S. 80IB(10) of the Act. Accordingly, this ground was
decided in favor of the assessee.

As regards the exclusion of interest receipts for computing
deduction u/s.80IB(10) the Tribunal after considering the submissions made on
behalf of the assessee (viz. that the funds were borrowed from banks
and private parties for the purpose of its housing project; the borrowings
from the banks were for a specified period and prepayment would have resulted
into levy of penalty interest and therefore funds were advanced to sister
concerns on a temporary basis so as to recoup part of the interest costs)
directed the AO to give an opportunity to the assessee to prove the nexus that
borrowed funds were used for giving advances on which interest has been earned
and if the assessee can prove such nexus then netting may be allowed.

26. 
    

    Topman Exports v. ITO

ITAT Special Bench, Mumbai

Before D. Manmohan (VP),

R. S. Syal (AM) and N. V. Vasudevan (JM)

ITA No. 5769/Mum./2006

A.Y. : 2002-03. Decided on : 11-8-2009

Counsel for assessee/revenue : Rajan Vora/

G. C. Srivastava and Anil Kumar

S. 80HHC — Entire amount received on sale of DEPB
entitlements does not represent profit chargeable u/s.28(iiid). Computation of
profit on sale of DEPB entitlements requires an artificial cost to be
interpolated.

Per R. S. Syal :

Facts :

The assessee, a manufacturer and exporter of
fabric/garments, filed its return of income declaring total income of
Rs.36,24,230. While computing its total income, the assessee had claimed
deduction of Rs.83,69,303 u/s.80HHC of the Act. The assessee had reduced a sum
of Rs.3,01,93,428 being sale proceeds of DEPB licence from its total purchases
of Rs.16,96,83,882 and had shown net purchases of Rs.13,94,90,454. The profit
on transfer of DEPB licence was only Rs.14,35,097 and profit on transfer of
DFRC licence was Rs.19,902. Before the Assessing Officer (AO) the assessee
justified its action by submitting that the profits on sale of DEPB licence
was an export incentive covered u/s.28(iiia) for the purpose of claiming
deduction u/s.80HHC. The AO held that the net profit after reduction of export
incentive of Rs.3.01 crores was a loss of Rs.1.82 crores. The AO denied the
deduction claimed u/s.80HHC of the Act.

The CIT(A) held that since the assessee did not satisfy the
two conditions mentioned in the third proviso to S. 80HHC(3), it is not
entitled to deduction in respect of amounts received under DEPB and DFRC
schemes. As regards the assessee’s contention that only the profit on transfer
of DEPB and DFRC licences was covered by the provisions of S. 28(iiid) and S.
28(iiie) and not the sale proceeds, the CIT(A) held that the cost of these
entitlements/certificates to the assessee was Rs.Nil and hence, the entire
sale consideration of the licences was profit on transfer. The CIT(A) directed
the AO to treat the entire amount of sale consideration of DEPB and DFRC
licences as profit on transfer for the purpose of working out deduction
u/s.80HHC as per the amended provisions. The CIT(A) did not give any finding
regarding the eligibility of duty drawback for deduction u/s.80HHC.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The President of the Tribunal constituted a Special Bench (SB) and
referred the following question to the SB for its consideration and decision :

“Whether the entire amount received on sale of DEPB
entitlements represents profit chargeable u/s.28(iiid) of the Income-tax Act
or the profit referred to therein requires any artificial cost to be
interpolated ?”

Briefly stated, Explanation (baa) to S. 80HHC defines the
term ‘profits of the business’ to mean the profits under the head ‘profits and
gains’ as reduced by 90% of the sum referred to in S. 28(iiid). The 2nd and
3rd provisos to S. 80HHC(3) provide that the profits computed thereunder shall
be increased by the said 90% amount computed in the proportion of export
turnover to total turnover. S. 28(iiid) refers to “any profit on the transfer
of Duty Entitlement Pass-book Scheme (‘DEPB’). The Special Bench had to
consider whether the entire amount received on sale of DEPB entitlement
represents ‘profits’ chargeable u/s.28(iiid) or the profit referred to therein
requires any artificial cost to be imputed.

Held :

The SB decided the appeal in favour of the assessee and
while so deciding it held that :

(i) the argument of the Revenue that DEPB is a
post-export event and has no relation with the purchase of goods cannot be
accepted. There is a direct relation between DEPB and the customs duty paid
on the purchases. For practical purposes, DEPB is a reimbursement of the
cost of purchase to the extent of customs duty;

(ii) the DEPB benefit (face value) accrues and becomes
assessable to tax when the application for DEPB is filed with the concerned
authority. Subsequent events such as sale of DEPB or making imports for
self-consumption, etc. are irrelevant for determining the accrual of income
on account of DEPB;

(iii) on a harmonious construction of clauses (iiia), (iiib)
and (iiic) of S. 28 it is evident that clauses (iiia) and (iiic) deal with
specific species of incentives, clause (iiib) is a residual clause which
brings within its sweep all forms of export incentives other than those
specifically set out in clauses (iiia) and (iiic);

(iv) the face value of DEPB benefit falls within the
ambit of S. 28(iiib);

(v) S. 28(iiid) which refers to the ‘profits on transfer
of the DEPB’, obviously refers only to the ‘profit’ element and not the
gross sale proceeds of the DEPB. If the Revenue’s argument that the sale
proceeds should be considered is accepted, there would be absurdity because
the face value of the DEPB will then get assessed in the year of the DEPB
and also in the year of its transfer;

(vi) profit on sale of DEPB representing the excess of
sale proceeds of DEPB over its face value is liable to be considered
u/s.28(iiid) at the time of sale;

(vii) only the ‘profit’ (i.e., the sale value less
the face value) is required to be considered for the purposes of S. 80HHC;

(viii) whatever has been said about DEPB also holds good
for DFRC, on both its components, viz. the face value of DFRC and
profit on its transfer, except for the fact that the profit on sale of DFRC
shall be charged to tax u/s.28(iiie);

(ix) Duty drawback shall be chargeable to tax at the time
of accrual of income u/s.28(iiie) when application is filed with the
competent authority after making exports.

25. 
    

    ITO v. Cyril Traders Pvt. Ltd.

24. 
    

    Haresh A. Dhanani v. ACIT

ITAT ‘SMC’ Bench, Mumbai

Before A. L. Gehlot (AM)

ITA No. 5850/M/2008

A.Y. : 2002-03. Decided on : 22-5-2009

Counsel for assessee/revenue : R. Ajay Singh/

Malati Sridharan

S. 68 — Cash credit — Loan amount received in earlier year
converted into gift — Valid gift.

Facts :

During the year under appeal the assessee had claimed to
have received gift of Rs.2.5 lacs from his uncle on the occasion of his
marriage anniversary. As per the facts noted, the said amount had been shown
by the assessee in his balance sheet as loan from his uncle up to 31-3-2001.
During the year under consideration, the said loan was converted into gift
vide gift deed dated 6-1-2002. The assessee passed necessary journal entry and
the amount was transferred to his capital account from the loan account.
According to the AO since the gift was not received by actual delivery of
cash/cheque, it cannot be considered as valid gift and he treated the said
amount as unexplained cash credit in the hands of the assessee u/s.68 of the
Act. The CIT(A) on appeal relied on the decision of the Apex Court in the case
of Dr. R. S. Gupta and upheld the order of the AO.

Held :

According to the Tribunal, the case relied on by the CIT(A)
was distinguishable on the facts. In the case of Dr. R. S. Gupta, the amount
was deposited with a third person while in the case of the assessee, the loan
amount was with him only which was converted as gift. Further, it observed
that even if the gift was not considered as genuine gift, the addition of
Rs.2.5 lacs was not warranted u/s.68 because the credit entry as loan was
there as on 31-3-2001 with the assessee himself and there was no fresh cash
credit during the year.

Case referred to :

CIT v. Dr. R. S. Gupta, 165 ITR 36 (SC)

The assessee was a non-resident
company carrying on banking business in India. It entered into forward contracts
with its clients to buy or sell foreign exchange at an agreed price on a future
date. On the date of maturity, the execution of the contract resulted in profits
or losses to the assessee. There was no dispute as regards losses arising on
execution of the contracts within the same year. However, in cases where the
date of maturity of the contract fell beyond the end of the accounting period,
the assessee evaluated the unmatured forward contract on the last day of the
accounting period on the basis of rate of foreign exchange prevailing on that
date and booked the profit or loss accordingly. The Assessing Officer (AO) taxed
the profit so booked but did not allow the assessee’s claim of loss, by relying
on the decision of the Madras High Court in the case of Indian Overseas Bank
(183 ITR 200), on the ground that the loss is incurred on the date of maturity
of the contract and there cannot be any loss prior to such date. In other words,
he held such loss to be notional.

Aggrieved the assessee preferred
an appeal to the Commissioner of Income-tax (Appeals) who allowed the assessee’s
appeal.

Aggrieved the Revenue preferred
an appeal to the Tribunal.

The assessee supported its claim
by relying on the decision of the Mumbai Tribunal in the case of Deutsche Bank
A.G., 86 ITD 431 (Mum.). The Tribunal noted that in the case of Deutsche Bank
(supra) the decision of the Madras High Court was distinguished on the ground
that the Court was concerned with the issue as to whether notional or
anticipated loss could be allowed as deduction or not, while the Tribunal was
concerned with the valuation of stock-in-trade. The Bench referred the matter,
since the assessee, as a banker, only entered into contract to sell/buy the
foreign currency at a future date, but did not buy or sell such contracts from
or in the market. It observed that the assessee was not holding these contracts
as stock-in-trade and, therefore, the decision in the case of Deutsche Bank was
not applicable.

The Bench framed the following
question of law for reference :

“Whether on facts and
circumstances of the case, can it be said that where a forward contract is
entered into by the assessee to sell the foreign currency at an agreed price at
a future date falling beyond the last date of accounting period, the loss is
incurred to the assessee on account of evaluation of the contract on the last
date of the accounting period i.e., before the date of maturity of the forward
contract.”

The Special Bench of the
Tribunal decided this ground in favour of the assessee and held :

(1) Deduction is allowable
under the Act in respect of those liabilities which crystalise during the
previous year. Therefore, the concept of crystalisation of liability under
the Income-tax Act assumes significance vis-à-vis commercial principles in
vogue. As per the commercial principles of policy of prudence, all
anticipated liabilities have to be accounted, but as per Income-tax Act,
only that liability will be allowed which has actually accrued. Due
weightage must be given to commercial principles in deciding such issues.

(2) Anticipated liabilities
which are contingent in nature are not allowable, but if an anticipated
liability is coupled with present obligation and only quantification can
vary depending upon the terms of the contract, then a liability is said to
have crystalised on the balance sheet date.

(3) A contingent liability
depends purely on the happening or not happening of an event, whereas if an
event has already taken place, which, in the present case, is of entering
into the contract and undertaking of obligation to meet the liability, and
only consequential effect of the same is to be determined, then, it cannot
be said that it is in the nature of contingent liability.

    4. The issues relating to accrual of income cannot be decided on the same footing and considerations on which the issues relating to loss/expense is to be decided. In case of loss/expense, it is the concept of reasonable certainty to meet an existing obligation which comes into play which in legal terminology is said to be ‘crystalisation of liability’. When outflow of economic resources in settlement of present obligation can be anticipated with reasonable accuracy, then it is to be recognised as a crystallised liability. This is in consonance with the principle of prudence as considered by the Supreme Court in the case of Woodward Governor of India Pvt. Ltd.

13. When  profits  are  being  taxed  by  the Department in respect of such unmatured foreign exchange contracts, then there was no reason to disallow the loss as claimed by the assessee in respect of the same contracts on the same footing.

26 ITO v. Smt. Darshan Kaur

ITAT Amritsar Bench, Amritsar (SMC)

A.Y. : 2001-02. Decided on : 16-11-2007

Counsel for revenue/assessee : M. S. Minhas/

P. N. Arora

The assessee filed return of income for A.Y. 2001-02,
declaring total income of Rs.32,180, which was processed u/s.143(1)(a) of the
Act. Subsequently, based on tax evasion petition, the Assessing Officer
initiated proceedings u/s.147 allegedly on the ground that the assessee had
purchased ½ share of land with one room, on 15-11-2000, for a consideration of
Rs.1,19,250 from undisclosed income. Thus, reassessment proceedings were
initiated to bring to tax unexplained investment in property. In response to
notice u/s.147, the assessee filed return of income declaring total income to be
the same as that shown in his original return. Along with this return of income,
he filed copy of capital account indicating opening capital of Rs.4,56,298. The
assessee had shown withdrawals of Rs.1,25,000 from the said opening capital as
being invested in purchase of property. The assessee explained the source of
opening capital to be accumulated savings of the past. The Assessing Officer
observed that income earned in the past must have been utilised for purchase of
property from which rental income is being shown in the returns. Thus, the
Assessing Officer allowed credit of Rs.1,00,000 of past savings and made an
addition of Rs.3,56,298 on account of opening capital shown in the return. No
addition on account of unexplained investment in purchase of property for which
proceedings were initiated u/s.147 was made. The CIT(A) quashed the order passed
by the Assessing Officer on the ground that no addition in respect of ground for
which proceedings u/s.147 were initiated has been made by the Assessing Officer.
Aggrieved by the order of CIT(A), the Revenue preferred an appeal to the
Tribunal.

The Tribunal dismissed the appeal filed by the Revenue on the
ground that since the Assessing Officer has not made any addition, in respect of
which proceedings were initiated, he was not competent to bring to tax the
opening capital during the course of completing the reassessment. The Tribunal
observed as under :

(b) Since in this case, the AO has not made any addition in
respect of ground for which proceedings were initiated, he was not competent
to bring to tax the opening capital during the course of completing the
reassessment. The AO was competent to initiate separate proceedings u/s.147 to
bring to tax the unexplained capital by dropping the proceedings already
initiated, provided such action was within the time allowed.

25 Arvind Gupta v. ITO

ITAT ‘B’ Bench, Jaipur

A.Y. : 2003-04. Decided on : 31-3-2008

Counsel for assessee/revenue : Mahendra Gargieya & Sharvan
Gupta/D. P. Gupta

During the previous year relevant to A.Y. 2003-04, the
assessee was granted subsidy aggregating to Rs.26.16 lacs by the Government of
Rajasthan. The assessee’s claim for deduction u/s.80JJA of the Act, included the
said amount of subsidy. The AO was of the view that the subsidy is not derived
from the specified business and therefore he disallowed the claim of deduction
u/s.80JJA. The CIT(A) upheld the action of the AO.

The Tribunal noted that the certificate of the Additional
Director of Agriculture made it evident that subsidy was not given to the
manufacturer, but it was a subsidy to the cultivators. As per the procedure laid
down by the Government, the assessee had to receive a part of the sale price
from the Government. Thus, the subsidy was only a part of the selling price and
hence was a trading receipts. The Tribunal agreed with the contentions of the
assessee that the subsidy granted was nothing but a part of the sale price of
the product, which was realised. The Tribunal further observed that u/s.80JJA,
the subjected profit is not confined merely to the undertaking, but profit and
gains should be derived from any business of an undertaking, thus giving it a
wider meaning.

24 Yamaha Motors India Pvt. Ltd. v. ACIT

ITAT ‘G’ Bench, Delhi

A.Y. : 2000-01. Decided on : 23-5-2008

Counsel for assessee/revenue : Ved Jain/

Surkesh K. Jain

The assessee had capitalised certain assets at Rs.4,71,51,016
on 1-11-1996. WDV of these assets as on 31.3.1999 was Rs.2,32,07,141. These
assets were discarded and written off by the assessee in the books of accounts
during the previous year relevant to A.Y. 2001-02. The discarded assets were not
disposed of or sold during the relevant financial year. The assessee while
computing the WDV of the block of assets qualifying for depreciation did not
reduce the WDV of the block brought forward from immediately preceding previous
year by the WDV of the assets discarded. The AO disallowed a sum of Rs.58,01,785 being depreciation on assets written off in the books of accounts,
on the ground that these assets have not been used for the purpose of the
business of the assessee. The CIT(A) confirmed the action of the AO. The
assessee preferred an appeal to the Tribunal.

The Tribunal noted that the scheme of depreciation effective
from 1-4-1988 has done away with the assetwise depreciation by substituting the
same by the scheme of block of assets by putting all the assets entitled to the
same rate of depreciation in one block of assets. The WDV of the block can now
be adjusted only in the manner provided in Ss.(6) of S. 43 of the Act. The
action of the AO in reducing the WDV of a block of assets by WDV of individual
assets by working out the same on the basis of asset-wise depreciation was held
by the Tribunal to be not in accordance with the provisions of S. 43(6)(c) of
the Act. The Tribunal held that what needs to be reduced from WDV of a block of
assets in the present case is only the scrap value of assets which have been
discarded during the year under consideration.

23 C. S. Gosalia v. ITO

ITAT ‘A’ Bench, Mumbai

A.Y. 2002-03. Decided on : 30-7-2008

Counsel for revenue/assessee : Ajay C. Gosalia/

S. Srivastava

The assessee had purchased 64 deep discount bonds between
February 1999 and April 1999 through Bombay Stock Exchange for a total cost of
Rs.4.9 lacs. The same were held by the assessee as investment and he had not
offered to tax any income thereon in the year of holding. The said bonds were
redeemed by IDBI on 31-3-2002, resulting into gain of Rs.2.78 lacs. The said
gain was offered to tax by the assessee as long-term capital gain.

According to the AO, the income was liable to be taxed as
‘Income from other sources’ as per the Board Circular dated 15-2-2002. The
asssessee’s contention that the Circular relied on by the AO was applicable to
bonds issued after 15-2-2002 and his case was covered by the earlier Circular
dated 12-3-1996 was rejected. On appeal, the CIT(A) confirmed the action of the
AO.

The Tribunal agreed with the assessee and held that the
subsequent Circular issued by the Board was not retrospective in nature and the
case of the assessee was covered by the earlier Circular of the Board viz.,
the Circular dated 12-3-1996. It also took note of the fact that the
assessee was holding the bonds as investment. Accordingly, the assessee’s appeal
was allowed.

22 ACIT v. Vijay Furniture Mfg. Co. Pvt. Ltd.

ITAT ‘F’ Bench, Mumbai

A. Y. 2000-01. Decided on : 9-7-2008

Counsel for revenue/assessee : B. K. Singh/

Jayesh Dadia

During the year under consideration the assessee had earned
capital gain of Rs.8.81 crore. In the accounts the said capital gain was
credited directly to the capital reserve in the balance sheet. The as-sessee had
claimed the capital gain as exempt u/s. 54E of the Act.

As per the accounts of the assessee, there was a book loss.
However as per the Assessing Officer, the capital gain was required to be
credited to the profit and loss account. Thus, according to him, there was a
book profit u/s.115JA. Applying the ratio of the Bombay High Court decision in
the case of Veekaylal Investment Co. Ltd., he assessed the income at Rs.2.66
crore, after adjusting the book loss disclosed in the Profit and Loss Account
against the capital gains.

The CIT(A), relying on the Apex Court decision in the case of
Appollo Tyres Ltd. and of the Mumbai High Court decision in the case of Kinetic
Motor Co. Ltd., held that the Assessing Officer had no power to recast the
profit disclosed in the audited accounts. Accordingly, the appeal filed by the
assessee was allowed.

The Tribunal relying on the decisions of the Apex Court in
the case of Appollo Tyres Ltd. and of the Mumbai High Court in the case of
Akshay Textile Trading & Agencies Pvt. Ltd. agreed with the CIT(A) and held that
the AO has no power to recast the profit once the same was certified by the
statutory auditors, and only those adjustments which are permitted by
Explanation to Ss.(2) of S. 115JA of the Act, can be made.

In respect of the years under appeal there was delay in
filing of returns of income which ranged between 553 days to 1,649 days. The
delay according to the assessee, was due to non-availability of accounts which
were taken by the accountant of the assessee and which could be obtained by the
assessee after long persuasion, in the year 2003-04. This resulted into delay in
finalisation of accounts and in auditing thereof. However, according to the
Assessing Officer, there was no reasonable cause for the failure to file the
return within the stipulated time and relying on the Bombay High Court decision
in the case of Malad Jain Yuvak Mandal Medical Relief, levied a penalty
u/s.272A(2)(e) of the Act, which aggregated to Rs.6.44 lacs computed @ Rs.100
for each day of default. On appeal, the CIT(A) relied on the decisions listed at
S. Nos. 2 to 4 below and deleted the penalty.

Being aggrieved, the Revenue went in appeal before the
Tribunal and relied on the order of the Assessing Officer, and the Bombay High
Court decision relied on by the Assessing Officer.

The Tribunal agreed with the CIT(A). Further, according to
the Tribunal, the returns filed by the assessee were non-est returns.
Therefore, relying on the Tribunal decision in the case of Rupam Cut Piece
Centre, it held that no penalty can be imposed.