Category: Direct Taxes

J. B. Patel & Co. (Co-owners) v. Dy. CIT

ITA No. 4033 (Ahd.) of 2004

A.Y. : 1993-94. Dated : 29-2-2008

S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being
only a surrogate measure of annual value, has to be reduced by the expenses
not connected with property but incurred by landlord for enjoyment of property
by tenants, such as salary and bonus to sweeper, pumpman and liftman and
electricity charges for pump motor and common passage.

For the relevant assessment year, the assessee computed
rental income under ‘Income from House Property’ after claiming deductions in
respect of the following expenses :

(a) Salary and bonus paid to sweepers/pumpman/liftman

(b) Electricity charges for pump motor and common
passage.

Since these expenses were not covered by S. 23 and S. 24,
the Assessing Officer denied the assessee’s claim. The disallowance was upheld
by the CIT(A).

The Tribunal, deciding in assessee’s favour, noted as
under :

(1) The rent being charged by the assessee is only a
surrogate measure of the said annual value. The expenditure on the aforesaid
items, i.e. the salary (including bonus) to the maintenance staff of
the facilities such as electric motors, lift, cleaning, etc., as well as
that on the electricity consumed in respect of any common area and the
electric motors, is not attributable directly to the house property as such,
but to its enjoyment by the tenants/users thereof.

(2) In a given case it may happen that the said
expenditure is incurred by the tenant or tenants (collectively), with the
landlord having no locus standi or role therein. Who incurs the expenditure
in the first instance is only a matter of mutual arrangement or convenience
and thus, of no consequence where the bona fides of such expenditure are, as
in the present case, not in doubt. The rent being charged by the assessee,
which represents the measure of its annual value, would, in such a case
stand correspondingly reduced.

(3) As such, although the assessee, being entitled only
to the deductions in respect of the said expenditure in the computation of
income under the said head of income only in terms of its provisions, would
not be entitled to the impugned deductions, we consider that the annual
value of its house property be assumed at the reduced value, i.e.
after deducting the impugned amounts (from the rental), being only in
relation to the expenditure required to be necessarily incurred for the
enjoyment/user of the relevant property and, therefore, can only be
considered as having been included at the said amount, i.e. at cost
by the two parties in the determining of the rental.

(4) The standard deduction admissible to the assessee on
account of repairs @ 1/6th of the annual value of its house property is in
relation to the repairs, whether actually incurred or not, by the assessee
during the relevant year. The impugned sums are not in relation to any
repairs to the house property, but for the maintenance of the facilities
enjoined therewith and necessary for its useful enjoyment.

Vinod Kumar Rai v. CIT

ITA No. 234 (Agra) of 2005

A.Y. : 2002-03. Dated : 21-11-2008

S. 143(1) and S. 263 of the Income-tax Act, 1961 —
Provisions of S. 263 are not applicable where only intimation u/s.143(1) has
been issued.

For the relevant assessment year, the CIT passed a revision
order u/s.263 in respect of the return of income processed u/s.143(1). Before
the Tribunal, the assessee contended that the processing u/s.143(1) is neither
an assessment nor an assessment order and the same cannot be subjected to
revision u/s.263 and the revision order made by the CIT may, therefore, be
declared as bad in law.

On account of difference of opinion between members of the
Bench, the matter was referred to the Third member u/s.255(4).

The Third Member held in favour of the assessee. The Third
Member noted as under :

(a) After an intimation u/s.143(1) is issued, the
Assessing Officer had full power to issue a notice u/s.143(2) and make a
regular assessment u/s.143(3). The Assessing Officer could also proceed
u/s.147/148, if applicable.

(b) There was no explanation as to why these provisions
were not applied in this case.

(c) Various High Courts in India are not unanimous
whether provisions of S. 263 are applicable where only intimation u/s.143(1)
has been issued, whether such intimation is an order or assessment to
attract provisions of S. 263. The Supreme Court, at an appropriate time,
will take up and settle the issue.

(d) It is clear from the record that two reasonable views
of the matter are possible. In such a situation, it has been laid down by
the Supreme Court in numerous cases that the view which is favoring the
assessee has to be taken.

Therefore, it was held that the intimation u/s.143(1)
cannot be sought to be revised u/s.263.

ACIT v. Real Image Tech. (P) Ltd.

ITA No. 201 (Mad.) of 2007

A.Y. : 2001-02. Dated : 15-2-2008

S. 32 of the Income-tax Act, 1961 — Commercial right comes
into existence whenever the assessee makes payment of non-compete fee and such
non compete right is an intangible asset eligible for depreciation.

During the relevant assessment year, the non-compete fees
paid by the assessee in pursuance of non-compete agreements entered into by it
with certain companies was claimed as revenue expenditure and the claim was
disallowed by the Assessing Officer. Under an application to the Joint CIT
u/s.144A, the assessee made an alternate plea for treating such fees as
capital expenditure — it should be treated as an intangible asset u/s.32 and
depreciation be allowed accordingly. The Jt. CIT did not allow the same,
holding that the payment was capital in nature i.e. neither a revenue
expenditure nor a capital expenditure. The CIT(A) allowed the assessee’s
claim.

The Tribunal, relying on the decisions in the following
cases, allowed the assessee’s claim for depreciation :

(b) ACIT v. Radaan Media Works India Ltd., ITA No.
2241 (Mad.) of 2006 dated 14-12-2007

(c) Techno Shares & Stocks Ltd. v. ITO, (2006) 101
TTJ 349 (Mum.)

The Tribunal noted as under :

(1) When a businessman pays money to another businessman
for restraining the other businessman from competing with the assessee, he
gets a vested right which can be enforced under law and without that the
other businessman can compete with the first businessman.

(2) When by payment of non-compete fee, the businessman
gets his right what he is practically getting is kind of monopoly to run his
business without bothering about the competition.

(3) Generally, non-compete fee is paid for a definite
period which in this case is five years. The idea is that by that time the
business would stand firmly on its own footing and can sustain later on.
This clearly shows that a commercial right comes into existence whenever the
assessee makes payment for non-compete fee.

(4) The term ‘or any other business or commercial rights
of similar nature’ has to be interpreted in such a way that it would have
some similarities as other assets mentioned in clause (b) of Expln. 3. The
other assets mentioned are know-how, patents, copyrights, trade marks,
licences, franchises, etc. In all these cases no physical asset comes into
possession of the assessee. What comes in is only a right to carry on the
business smoothly and successfully and, therefore, even the right obtained
by way of non-compete fee would also be covered by the term ‘or any other
business or commercial rights of similar nature’ because after obtaining
non-compete right, the assessee can develop and run his business without
bothering about the competition. The right acquired by payment of
non-compete fee is definitely an intangible asset.

(5) This right (asset) will evaporate over a period of
time (of five years in this case) because after that the protection of
non-competition will not be available to the assessee. This right is subject
to wear and tear by the passage of time, in the sense that after the lapse
of a definite period of five years, this asset will not be available to the
assessee and, therefore, this asset must be held to be subject to
depreciation.

Chandrakant H. Shah v. ITO

ITA No. 3966 (Mum.) of 2008

A.Y. : 2005-06. Dated : 12-1-2009

S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free
loan obtained by assessee from sister concerns for purchase of a flat from one
of them cannot be said to be without consideration because while the assessee
was benefited by interest-free loan, lenders were benefited by profit embedded
in the sale consideration, hence not exigible to tax u/s.56(2)(v).

During the relevant assessment year, the assessee took
interest-free loans of Rs.54.70 lacs from four builders (sister concerns) for
purchasing a flat from one of them. The assessee was also employed with one of
the concerns. The Assessing Officer formed an opinion that the assessee was
working with the group for several decades and, hence, having regard to the
said association, these parties gave such a huge loan to the assessee without
any security and interest as a mark of gratitude irrespective of his repayment
capacity and, therefore, in the absence of any obligation on the part of the
assessee to repay these loans, the entire transaction was of the nature of
gift which was given a colour of loan. Accordingly, he added a sum of Rs.54.45
lacs after giving a rebate of Rs.25,000 u/s.56(2)(v) to the total income of
the assessee.

The CIT(A) held that such loan transactions were abnormal
in the sense that there was no interest or any repayment stipulation, and
hence, the said sums were without consideration and upheld the addition.

The Tribunal, relying on various decisions, deleted the
addition.

The Tribunal noted as under :

(1) All these loans have been shown in the balance sheet
submitted along with the return of income as loans and the lenders have also
confirmed the same as such. Thus, apparently, it is a case of loan
transactions and not a case of gift.

(2) Since some of the loans were repaid partly/fully, it
was a material fact so as to rebut the presumption of the Assessing Officer
that the assessee was not under any obligation to repay the loans and this
fact also proves the assessee’s claim that no opportunity was granted by the
Assessing Officer to the assessee before making such addition.

(3) This type of addition also leads to a situation of
having two provisions for charging one type of income i.e. the
legislature has provided two charging sections i.e. S. 68 and S. 56
(2)(v) which cannot be possible. In that case, the legislature would have
made the provisions of S. 56(2)(v) either of overriding nature by stating
that ‘notwithstanding anything contained in S. 68’ or by providing for
applicability of provisions of S. 56(2)(v) in any other manner, in case
provisions of S. 68 could not be invoked. When a specific provision exists
in law for a particular thing, then that thing is liable to be examined
thereunder only and if that item cannot be taxed under that provision, then
that thing cannot be charged to tax under other provisions of the Act.

(4) In the present case, it is not that provisions of S.
68 were not applicable at all and, hence, the Assessing Officer invoked the
provisions of S. 56(2)(v). On the contrary, the Assessing Officer has made
necessary enquiries in that regard and he has not made addition u/s.68 for
the reason that all the requirements of that section i.e. identity,
creditworthiness and genuineness of transactions have been proved. Hence, a
loan transaction has to be treated as a loan transaction only and it should
be examined in the light of provisions of S. 68 and not under provisions of
S. 56(2)(v) and for this reason alone, this addition is liable to be
deleted.

(5) It is important to note that in S. 56(2)(v), the term
‘consideration’ is neither prefixed by the word ‘adequate’ nor it is
suffixed by the words ‘money or money’s worth’. Hence, if in any transaction
there exists consideration as per the provisions of the Indian Contract Act,
1872 such transaction would not come into the ambit of this section.

(6) Consideration for a promise may consist of either
some benefit conferred on the promisor or detriment suffered by the promisee
or both. Hence, on this criteria, the assessee has gained by way of
interest-free loan and the lenders have suffered by giving interest-free
loans and such suffering has got some value and, therefore, the said
transaction cannot be said to be without consideration.

(7) There is another very important aspect of the matter,
i.e. lenders have sold the flat to the assessee. In that sale
consideration, they have earned profit because it is nobody’s case that the
flat to the assessee has been sold at cost. Therefore, lenders have also
derived some benefit which has got value and, therefore, the same forms
consideration for giving interest-free loans to the assessee. Other three
lenders are the sister concerns of the company who actually built or sold,
hence the benefit derived by such company is a good consideration for other
three lenders. Benefit conferred to a third party not connected with the
promissor or promise in a pecuniary capacity would also be a good
consideration to support the transaction. There can be consideration without
any apparent monetary consideration and the only requirement is that the
consideration should create a legal relationship between the contracting
parties and this fact is not in dispute in the present case. Hence, the
transaction is with consideration. The term ‘consideration’ in legal sense,
is somewhat different from what is generally understood and the Revenue’s
decision is based on general understanding and, therefore, the same is not
correct in law. The transaction meets all the requirements of general law
which is only to be looked into while invoking provisions of S. 56(2)(v)
and, therefore, it is a transaction having a consideration and, therefore,
the same does not fall within the ambit of the provisions of S. 56(2)(v) for
this reason also.

Balan alias Shanmugam Balkrishnan Chettiar v.
Dy. CIT

ITA No. 1859 (Pune) of 2005

A.Y. : 2002-03. Dated : 31-1-2008

S. 14A and S. 48 of the Income-tax Act, 1961 :

(i) Interest on funds borrowed for acquisition of
shares is to be taken into account towards the cost of acquisition for the
purpose of computation of capital gains as prescribed u/s.48(ii)

(ii) Capital gain on the sale of shares being part of
the total income of the assessee and not an exempt income, S. 14A has no
application.

For the relevant assessment year, the Assessing Officer and
the CIT(A) disallowed the assessee’s claim for inclusion of interest paid on
funds borrowed for investment in shares in the cost of acquisition for the
purpose of computing capital gains.

The Tribunal, relying on the decisions in the following
cases, held in favour of the assessee :

(a) CIT v. Mithilesh Kumari, (1973) 92 ITR 9
(Del.)

(b) Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372
(AP)

(c) CIT v. Maithreyi Pai, (1984) 43 CTR 88 (Kar.)/
(1985) 152 ITR 247 (Kar.)

The Tribunal noted as under :

(1) In the past, the assessee had always capitalised the
interest.

(2) S. 48 says that capital gain is to be computed by
deducting from the consideration the cost of acquisition of the asset and
the cost of any improvement thereto.

(3) Once it is established that the assessee had borrowed
the funds for acquisition of shares and the burden of interest had been
capitalised, that interest burden cannot be segregated from the amount of
investment.

In response to the argument of the Revenue that since
interest had a nexus to exempt income, the provisions of S. 14A should be
applied, the Tribunal noted as under :

(1) The words ‘in relation to income which does not form
part of the total income under this Act’ mean if an income does form part of
the total income, then the related expenditure is out of the ambit of the
applicability of S. 14A. The capital gain shown by the assessee had formed
part of the total income of the assessee. Otherwise also, capital gain is
not exempt income and without any ifs and buts, always being taxed in the
hands of a taxpayer. Therefore, the Revenue authorities have proceeded on a
wrong premise that the interest expenditure was in respect of an income
which was exempt or did not form part of the total income.

Sarnath Infrastructure (P) Ltd. v. ACIT

ITA No. 301 (Luck.) of 2006

A.Y. : 2004-05. Dated : 20-12-2007

S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit
from sale of shares out of investment portfolio was taxable as capital gains
and not as business income.

The assessee-company was dealing in shares both as business
as well as investment and keeping separate accounts in respect of the two
portfolios. Valuation of holdings in investment portfolio was done at cost
only and holdings were reflected in Balance Sheet as investment. For the
relevant assessment year, the profit on sale of shares out of the investment
portfolio was treated by the Assessing Officer as business income and not as
long term capital gain. The CIT(A) upheld the addition.

The Tribunal held that the said profit was to be treated as
long term capital gain and not as business income. The Tribunal’s decision was
arrived at after examining various decisions.

The Tribunal noted as under :

(1) The material on record showed that the assessee had
clear independent portfolios for investment in shares as well for trade and
it has kept separate accounts in respect of the two portfolios.

(2) The shares which were sold out of investment
portfolio during this year and on which capital gains have been offered by
the assessee were held by it for more than two years and in some cases for
more than three years.

(3) No material is brought on record by the Department to
show that demarcation line between business and investment is hazy or that
assessee has not maintained an investment portfolio and it was dealing in
shares only like a trader.

(4) Valuation of holdings has been done at cost for
investment portfolio. They were reflected in the Balance Sheet as
investment.

(5) The frequency of such purchase or sale in this
portfolio is not large enough to doubt that the investment portfolio is only
a device to pay lesser taxes by parking some stock-in-trade in the
investment portfolio.

(6) Turnover to stock ratio in investment portfolio is
very low as compared to that in trading portfolio. Further, there is no
material to show that these shares in the investment portfolio were also
traded in the same and like manner as those which were in stock-in trade
portfolio.

(7) All the sales out of the investment portfolio were
identifiable to purchases made in the same portfolio.

(8) In view of the above facts, the assessee had
discharged its primary onus by showing that it was maintaining separate
accounts for two portfolios and there was no intermingling. The onus then
shifted on the Revenue to show that apparent was not real. There was no
material brought in by the Revenue to show that separate accounts of two
portfolios were only a smoke screen and there was no real distinction
between the two types of holdings. This could have been done by showing that
there was intermingling of shares and transactions and the distinction
sought to be created between two types of portfolios was not real but only
artificial and arbitrary.

Therefore, in absence of any material to the contrary and
on appreciation of cumulative effect of several factors present, it was held
that the surplus was chargeable to capital gains only and the assessee was not
to be treated as trader in respect of sales and purchases of shares in the
investment port-folio.

ITO v. Margasoochi Chits Pvt. Ltd.

ITA No. 995/Bang./2008

A.Y. : 2005-2006. Dated : 16-1-2009

Income-tax Act, 1961 — S. 194A — Whether a chit fund
agreement is not a money lending contract but a special type of contract —
Held, Yes. Whether in a scheme of chit fund there is neither any money
borrowed nor any debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest — Held, Yes.

Facts :

In these cases the AO relying on the instructions issued by
CBDT held that the dividend payments made to the subscribers of chit fund were
in the nature of interest and were liable for deduction of tax at source
u/s.194A. Since the assessees had not deducted tax u/s.194A, the AO passed
orders u/s.201(1) and u/s.201(1A) in respect of five assessees for the
impugned assessment years by creating demand on the dividends paid but not
subjected to tax deduction at source. Since identical orders were passed in
all the fifteen appeals they were taken up together by the Tribunal.

The CIT(A) held that a chit agreement is not a money
lending contract, but a special type of contract and any payment with
reference to a chit agreement being referred to as interest payment does not
arise and installments in chit fund being non-refundable in nature cannot be
equated with ‘deposit’ and consequently, the dividend or discount credited to
the account of the subscribers would not constitute interest. He also held
that the CBDT circulars are not binding on the appellate authorities.

Aggrieved by the orders of CIT(A), Revenue preferred an
appeal to the Tribunal.

Held :

The Tribunal noted that the scheme of Chit Funds is
regulated by The Chit Funds Act, 1982 and S. 3 in Chapter I of the Chit Funds
Act provides that the provisions of the Act override all other laws,
memoranda, articles, etc. save as otherwise expressly provided in the Act. In
view of the non obstante clause the Tribunal held that the definitions of the
expression ‘discounts’, ‘dividends’, ‘prize amount’ as given in the said Chit
Funds Act will prevail over similar definition as found in the Income-tax Act.
The Tribunal held that in a scheme of chit fund there is neither any money
borrowed nor a debt incurred and since interest is defined in the Income-tax
Act as interest payable in any manner in respect of any monies borrowed or
debt incurred (including deposit) and in a chit fund there is neither any
money borrowed nor a debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest. The Tribunal held that the demands created u/s.201(1) and
u/s.201(1A) were not justified. It upheld the order of the CIT(A) and
dismissed the appeals filed by the revenue.

Competent Films Pvt. Ltd. v. ITO

ITA No. 3397/Del./2008

A.Y. : 2005-2006. Dated : 9-2-2009

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194C — Whether
an agreement entered into by the assessee with distributors whereby revenue
was shared was a works contract and therefore liable to TDS u/s.194C — Held,
No.

Facts :

The assessee company was engaged in the business of running
of cinema hall, canteen and food courts. It had entered into a Memorandum of
Understanding (MOU) with M/s. Mukta Movies Distributors (Distributors) which
inter alia provided that — the assessee was to be a booking agent for
the cinema hall for three years; the assessee had exclusive rights to book
Hindi films for the said cinema and to run a certain number of shows daily as
per the local laws; the MOU also fixed the rate of admission to the cinema
hall; stated revenue at full capacity and the amount due to the assessee on a
weekly basis subject to the exceptions provided in the MOU.

The distributor raised a bill on the assessee under which
the daily collections were shown and after reducing the payment to be made to
the assessee for the cinema hall hired, a bill was raised for the balance by
the Distributor which bills were paid by the assessee. The Assessing Officer
(AO) held that the MOU was in the nature of a works contract and held the
assessee liable to deduct tax at source u/s.194C. Since the assessee had not
deducted tax on payments made to distributor pursuant to the said MOU, the AO
disallowed a sum of Rs.72,43,965 by invoking provisions of S. 40(a)(ia).

The CIT(A) upheld the order of the AO. Aggrieved, assessee
preferred an appeal to the Tribunal.

Held :

The Tribunal upon a close reading of the agreement held it
to be a profit sharing agreement. It further held that the agreement was not
for services rendered but for sharing the profits with the assessee. Following
the ratio of the decisions of Ahmedabad Bench of ITAT in Sunsel
Drive-in-Cinema (P.) Ltd. v. ITO, (2006) 5 SOT 64 (Ahd.) and Mumbai Bench
of ITAT in ITO v. Shrinagar Cinemas (P.) Ltd., (2008) 20 SOT 480 (Mum.)
it held that there was no works contract and, therefore, the assessee was not
liable to deduct any tax u/s.194C of the Act. The Tribunal found that the
distributor has only given the right to exhibit the films and the assessee had
only rendered the services of exhibiting the films and therefore the question
of deduction of tax by the assessee did not arise. The claim of the assessee
was allowed.

ITO v. H. E. Distillery Pvt. Ltd.

IT(SS)A No. 28 (Bang.)/2008

Block Period : 1-4-1990 to 18-1-2001 Dated : 30-1-2009

Income-tax Act, 1961 — S. 158BFA — Whether for levy of
penalty u/s.158BFA issuance of notice is mandatory — Held, Yes. Whether in the
absence of issuance of pre-requisite notice, the entire penalty proceedings
are to be held as illegal and without jurisdiction — Held, Yes.

Facts :

The assessee, in response to notice u/s158BC, filed return
for block period on 13-8-2001 admitting undisclosed income of Rs.73,80,526.
The AO assessed the undisclosed income at Rs.2,42,47,658 and initiated
proceedings for levy of penalty u/s.158BFA(2) on the ground that the assessee
failed to disclose the income and furnished inaccurate particulars of income.
Against the order assessing undisclosed income the assessee filed an appeal on
the ground that business loss suffered by the assessee during the block period
and depreciation have to be set off against undisclosed income. The CIT(A) and
the Tribunal decided the appeal against the assessee.

The assessee vide letter dated 15-12-2005 was asked to
offer explanation to the proposed penalty. No reply was received from the
assessee. The AO levied a minimum penalty of Rs.1,18,40,726.

The assessee filed an appeal to the CIT(A) and challenged
levy of penalty on the ground that no notice for initiation of penalty was
issued. The CIT(A) cancelled the penalty.

Aggrieved, the revenue preferred an appeal to the Tribunal
where on behalf of the Revenue it was inter alia contended that the assessment
order did mention that penalty proceedings u/s.158BFA(2) are initiated; the
assessee attended the proceedings for levy of penalty; during the penalty
proceedings when the AO was transferred the new AO did issue a notice before
imposing penalty. It was submitted that CIT(A) took a rigid and narrow view
that physical service of notice was a must before imposition of penalty for
concealment. The intention of the AO to levy penalty was never in doubt.

Held :

The Tribunal relying on the decision of the Supreme Court
in the case of 82 ITR 821, 61 ITR 147, 76 ITR 696, 168 ITR 705 and also on the
decision of the co-ordinate bench of the Tribunal in IT(SS)A. No.
21/Bang./2001 in the case of Nemichand held that issuance of notice is a
pre-requisite for assuming jurisdiction to levy penalty u/s.158BFA(2) and in
the absence of issuance of a pre-requisite notice, the entire penalty
proceedings were held to be illegal and without jurisdiction. It held that
CIT(A) was perfectly justified in canceling the penalty. The Tribunal
confirmed the order of CIT(A) and dismissed the appeal filed by the revenue.