New Page 1
16 TDS : S. 194A of Income-tax Act, 1961 : Interest other
than interest on securities : Once a decree is passed, it is a judgment and
order of Court which culminates into final decree being passed which has to be
discharged only on payment of amount due under said decree : Judgment debtor is
not liable to deduct tax at source on interest component of decree.
[Madhusudan Shrikrishna v. Enkay Exports, 188 Taxman
195 (Bom.)]
In this case the dispute was settled and while passing the
order and decree, the counsel appearing on behalf of defendants raised a query
regarding deduction of TDS on the interest component of the decree.
Apprehension was expressed by the learned counsel appearing on behalf of
defendants that under the provisions of S. 194A of the Income-tax Act, on the
interest component which is payable, tax has to be deducted at source and if
it is not so done, the person who does not deduct tax at source on the
interest component would be liable for prosecution and penal consequences
under the provisions of the Income-tax Act. It was, therefore, submitted that
the defendants had withheld the payment of the amount which is payable to the
Income-tax Department as TDS and a certificate to that effect was also kept
ready.
The Bombay High Court held as under :
“Once a decree is passed, it is a judgment and the order of
the Court, which culminates into final decree being passed which has to be
discharged only on payment of the amount due under the said decree. The
judgment debtor, therefore, cannot deduct tax at source, since it is an order
and direction of the Court and, as such, would not be liable for penal
consequences for non-deduction of the tax due. Tax, if payable, can be decided
by the ITO after the amount is paid to the decree holder. The defendants,
therefore, were not entitled to withhold the payment on the pretext that it
had to be deducted as tax at source. Defendants would, therefore, pay the said
amount to the plaintiff and for that purpose they would not be liable for
non-deduction of tax at source as that issue had to be decided by the
income-tax authorities and if tax was payable, the same would be paid by the
plaintiff.”
New Page 1
15 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2000-01 : Computation of eligible amount to be on the basis of
the profits of the eligible unit : Adjustment of loss of other unit not proper :
Deductible amount not to exceed the total income.
[CIT v. Accel Transamatic Systems Ltd., 230 CTR 206
(Ker.)]
The assessee was entitled to deduction u/s.80-I of the
Income-tax Act, 1961. The assessee had two units. In the relevant year i.e.,
A.Y. 2000-01, there was profit from one unit and a loss from the other unit.
The assessee was eligible for deduction of 25% of the profit of the eligible
unit. The assessee computed the eligible amount at Rs.18,12,770 being 25% of
the profit of the first unit and limited the claim for deduction to
Rs.8,51,697 being the total income. The Assessing Officer did not accept the
method of computation adopted by the assessee. The Tribunal accepted the
assessee’s method.
On appeal by the Revenue, the Revenue relied on the
judgment of the Supreme Court in the case of Synco Industries Ltd.; 299 ITR
444 (SC) wherein the disallowance of the claim for deduction was upheld on the
ground that the total income was nil and claimed that the eligible amount
should be computed on the basis of the net figure of first unit after setting
off the loss of the second unit. The Kerala High Court explained the judgment
of the Supreme Court and held as :
“(i) U/s.80A(2) total deduction under Chapter VI-A have to
be limited to the gross total income of the assessee computed under the
provisions of the Act. Therefore, the assessee cannot claim deduction
u/s.80-IA in excess of gross total income computed, no matter eligible amount
may be higher than such income.
(ii) The procedure to be followed for the purpose of
granting deduction u/s.80-IA is to first compute the profits and gains of the
eligible unit and then to determine the eligible deduction therefrom in terms
of S. 80-IA(5). Thereafter, in the computation of total income under the
provisions of the Act, the eligible deduction has to be reduced and if the
total income computed is less than the eligible amount, deduction has to be
limited to such amount.
(iii) Since there have been variations in the total income
computed by virtue of disallowances and later orders of the higher authorities
allowing it, the Assessing Officer is directed to rework the total income and
therefrom allow eligible deduction u/s.80-IA(5) with reference to the profits
of the eligible unit, but limiting it to the total income, if the claimed
amount is higher than such amount.”
New Page 1
14 Industrial undertaking : Deduction u/s.80-I of Income-tax
Act, 1961 : A.Ys. 1992-93 to 1995-96 and 2000-01 : Computation of eligible
amount to be on the basis of the profits of the eligible unit : Adjustment of
loss of other unit not proper.
[CIT v. Sona Koyo Steering Systems Ltd., 230 CTR 251
(Del.)]
The assessee was entitled to deduction u/s.80-I of the
Income-tax Act, 1961. The assessee had two units, one making profit and the
other incurring losses. The assessee computed the amount deductible u/s.80-I
on the basis of the profits of the unit making profits ignoring the loss of
the other unit. For the A.Ys. 1992-93 to 1995-96 and 2000-01, the Assessing
Officer did not accept the computation and computed the eligible amount after
setting off the loss of the other unit. The Tribunal allowed the assessee’s
claim.
On appeal by the Revenue, the Revenue relied on the
judgment of the Supreme Court in the case of Synco Industries Ltd.; 299 ITR
444 (SC) wherein the disallowance of the claim for deduction was upheld on the
ground that the total income was nil. The Delhi High Court explained the
judgment of the Supreme Court, upheld the decision of the Tribunal and held as
under :
“(i) In view of S. 80-I(6), the quantum of deduction is to
be computed as if the industrial undertaking were the only source of income of
the assessee during the relevant years. In other words, each industrial
undertaking or unit is to be treated separately and independently. It is only
those industrial undertakings, which have a profit or gain, which would be
considered for computing the deduction. The loss-making industrial undertaking
would not come into the picture at all.
(ii) The plain reading of the provision suggests that the
loss of one such industrial undertaking cannot be set off against the profit
of another such industrial undertaking to arrive at a computation of the
quantum of deduction that is to be allowed to the assessee u/s.80-I(1).”
New Page 1
13 Industrial undertaking : Deduction u/s.80-IB of Income-tax
Act, 1961 : A.Y. 2001-02 : Sum offered to tax by assessee to cover up certain
discrepancies : Is income from industrial undertaking eligible for deduction
u/s.80-IB ?
[CIT v. Allied Industries, 229 CTR 462 (HP)]
The assessee was in the business of manufacturing tractors
and automobile components. The assessee was entitled to deduction u/s.80-IB of
the Income-tax Act, 1961. In the course of the assessment proceedings for the
A.Y. 2001-02, the assessee offered a sum of Rs.2,50,000 for taxation to cover
up all discrepancies. The Assessing Officer added the amount but disallowed
the claim for deduction u/s.80-IB in respect of this amount. The Tribunal
allowed the assessee’s claim and held that the amount offered by the assessee
as addition for the purposes of taxation would amount to profits and gains of
business and were entitled for deduction u/s.80-IB.
On appeal filed by the Revenue, the Himachal Pradesh High
Court upheld the decision of the Tribunal and held as under :
“Additional income surrendered by the assessee firm having
been added to the income of the business itself, is to be considered while
work-ing out deduction u/s.80-IB, in the absence of any finding of any
authority that the said income was derived from any undisclosed source.”
New Page 1
12 Company : Book profits : S. 80HHC and S. 115JA of
Income-tax Act, 1961 : In case of MAT assessment amount deductible u/s. 80HHC
has to be computed on the basis of adjusted book profits and not on basis of
profit computed under the normal provisions.
[CIT v. SPEL Semiconductor Ltd., 188 Taxman 130 (Mad.)]
The assessee-company was engaged in manufacture and sale of
integrated circuits. For the relevant year, the assessment was completed u/s.
115JA. The assessee claimed that the amount deductible u/s.80HHC has to be
computed on the basis of the adjusted book profits and not on the basis of the
profit computed under the normal provisions. The Assessing Officer rejected
the assessee’s claim. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal following its judgment in the case of CIT v.
Rajanikant Schnelder & Associates (P) Ltd., 302 ITR 22 (Mad.).
New Page 1
11 Capital gains : Cost of acquisition : A.Y. 2003-04 :
Interest on loan taken for purchase of property : Interest to be included in the
cost of acquisition for computing capital gain on sale of property.
[CIT v. Sri Hariram Hotels (P) Ltd.; 229 CTR 455
(Kar.), 188 Taxman 178 (Kar.)]
The assessee company had purchased an immovable property
out of borrowed funds. On sale of the property, for computation of capital
gain the assessee company included the interest on the borrowed funds in the
cost of acquisition of the property. The Assessing Officer held that the
interest on the borrowed funds does not form part of the cost of acquisition.
The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Karnataka High Court followed
its decision in the case of CIT v. Maithreyi Pai, 152 ITR 247 (Kar.) and
upheld the decision of the Tribunal.
New Page 1
10 Capital receipt or income from other sources : Interest on
share capital during pre-operative period : A.Ys. 2001-02 and 2002-03 : Due to
legal entanglement with respect to title of land to be acquired for the
assessee, share capital contribution put in fixed deposit with bank : Interest
earned on fixed deposit is capital receipt liable to be set off against
pre-operative expenses : Not income from other sources.
[Indian Oil Panipat Power Consortium Ltd. v. ITO, 230
CTR 199 (Del.)]
Due to legal entanglement with respect to title of land
which was sought to be acquired by the Government for the assessee, share
capital contribution was temporarily put by the assessee in fixed deposit with
bank. Interest earned on fixed deposit in the A.Ys. 2001-02 and 2002-03 was
assessed by the Assessing Officer as income from other sources. The CIT(A)
accepted the stand of the assessee that the interest was in the nature of
capital receipt which was liable to be set off against pre-operative expenses.
The Tribunal reversed the decision of the CIT(A).
On the appeal filed by the assessee, the Delhi High Court
reversed the decision of the Tribunal and held as under :
“(i) The test is whether the activity which is taken up for
setting up of the business and the funds which are generated are inextricably
connected to the setting up of the plant. The clue is perhaps available in S.
3 which states that for newly set up business the previous year shall be the
period beginning with the date of setting up of the business. Therefore, as
per the provisions of S. 4 which is the charging Section, income which arises
to an assessee from the date of setting of the business but prior to
commencement is chargeable to tax depending on whether it is of a revenue
nature or capital receipt. It is clear upon a perusal of the facts as found by
the authorities below that the funds in the form of share capital were infused
for a specific purpose of acquiring land and the development of
infrastructure. Therefore, the interest earned on funds primarily brought for
infusion in the business could not have been classified as income from other
sources.
(ii) Since the income was earned in a period prior to
commencement of business, it was in the nature of capital receipt and hence
was required to be set off against pre-operative expenses.
(iii) On account of the finding of fact returned by the
CIT(A) that the funds infused in the assessee by the joint venture partner
were inextricably linked with the setting up of the plant, the interest earned
by the assessee could not be treated as income from other sources.
(iv) The Tribunal misdirected itself in law in holding that
interest which accrued on funds deployed with the bank could be taxed as
income from other sources and not as capital receipt liable to be set off
against pre-operative expenses.”
New Page 1
8 Business expenditure : A.Y. 2004-05 : Premium paid by
assessee-firm on keyman insurance policy of partner is business expenditure
allowable as deduction.
[CIT v. M/s. B. N. Exports (Bom.); ITA No. 2714 of
2009, dated 31-3-2010]
The assessee is a partnership firm. For the A.Y. 2004-05,
the assessee’s claim for deduction of the premium paid by the assessee-firm on
the keyman insurance policy of the partners was disallowed by the Assessing
Officer. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :
“(i) The Circular No. 762, dated 18-2-1998 issued by the
CBDT clarifies the position by stipulating that the premium paid for a keyman
insurance policy is allowable as business expenditure.
(ii) In the present case, on the question whether the
premium which was paid by the firm could have been allowed as business
expenditure, there is a finding of fact by the Tribunal that the firm had not
taken insurance for the personal benefit of the partner, but for the benefit
of the firm, in order to protect itself against the setback that may be caused
on account of the death of the partner.
(iii) The object and purpose of a keyman insurance policy
is to protect the business against the financial setback which may occur, as a
result of a premature death, to the business or professional organisation.
There is no rational basis to confine the allowability of the expenditure
incurred on the premium paid towards such a policy only to a situation where
the policy is in respect of the life of an employee.
(iv) A keyman insurance policy is obtained on the life of a
partner to safeguard the firm against a disruption of the business that may
result due to the premature death of the partner. Therefore, the expenditure
which is laid out for the payment of premium on such a policy is incurred
wholly and exclusively for the purpose of business.”
New Page 1
9 Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 :
A.Y. 2003-04 : Loans and advances from one company to another with common
shareholder with substantial interest : Deemed dividend to be assessed in the
hands of the shareholder and not in the hands of the recipient company.
[CIT v. Universal Medicare Pvt. Ltd. (Bom.); ITA No.
2264 of 2009, dated 22-3-2010]
An amount of Rs.32,00,000 was transferred from the bank
account of a company CSPL to the bank account of the assessee in the Chembur
branch of the State Bank of India. There was a common shareholder holding the
number of shares in the two companies as specified in S. 2(22)(e) of the
Income-tax Act, 1961. The amount was misappropriated by an employee of the
assessee and the transaction was not entered in the accounts of the assessee.
The Assessing Officer treated the said amount as deemed dividend u/s.2(22)(e)
of the Act and made the addition of the said amount. The Tribunal held that
the amount was part of a fraud committed on the assessee and the transaction
was not reflected in its books of account. The Tribunal therefore held that S.
2(22)(e) was not applicable. The Tribunal further held that even otherwise,
the amount would have to be taxed in the hands of the shareholder who obtained
the benefit and not in the hands of the assessee-company.
On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :
“(i) The Tribunal has found that as a matter of fact no
loan or advance was granted to the assessee, since the amount in question had
actually been defalcated and was not reflected in the books of account of the
assessee. Consequently, according to the Tribunal the first requirement of
there being an advance or loan was not fulfilled. In our view, the finding is
a pure finding of fact which does not give rise to any substantial question of
law.
(ii) Even on the second aspect which has weighed with the
Tribunal, we are of the view that the construction which has been placed on
the provisions of S. 2(22)(e) is correct.
(iii) The effect of clause (e) of S. 22 is to broaden the
ambit of the expression ‘dividend’ by including certain payments which the
company has made by way of a loan or advance or payments made on behalf of or
for the individual benefit of a shareholder. The definition does not alter the
legal position that dividend has to be taxed in the hands of the shareholder.
Consequently, in the present case the payment, even assuming that it was a
dividend, would have to taxed not in the hands of the assessee, but in the
hands of the shareholder.”
New Page 1
20 TDS : Credit of : S. 199 of Income-tax
Act, 1961 : A.Y. 2002-03 : TDS in relation to interest on Deep Discount Bonds is
required to be treated as payment on behalf of ‘owner of security’ or ‘unit
holder’.
[CIT v. Smt. Sonal Bansal, 167 Taxman 311 (P&H); 215
CTR 65 (P&H)]
On 1-1-2001, the assessee had purchased Deep Discount Bonds
1997 of IDBI at the rate of Rs.9,700 each from one ‘V’ who had originally
purchased the same at the rate of Rs.5,500. On maturity, the IDBI deducted tax
at source of Rs.91,800 on the interest income of Rs.9 lakhs. In the A.Y.
2002-03, the assessee had declared the income of Rs.1,07,140 which included
Rs.60,000 being interest on the said Bonds as the secondary purchaser. The
assessee had also claimed credit of the said tax deducted at source of Rs.91,800
on the said interest of Rs.9 lakhs. The Assessing Officer allowed credit for TDS
of Rs.6,120 only, proportionate to the interest income of Rs.60,000 offered by
the assessee and disallowed the balance. The CIT(A) and the Tribunal allowed the
full claim.
On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :
“(i) A perusal of the provisions of S. 199 shows that any
deduction made of tax at source and paid to the Central Government is required
to be treated as payment of tax on behalf of the person from whose income the
deduction was made. However, with effect from 1-4-1997, amendments were
introduced by Finance Act, 1996, which resulted in addition of words
‘depositor’ or ‘owner of property’ or ‘owner of security’ or ‘unit holder’, as
the case may be. Therefore, it is clear that any deduction made of tax at
source and paid to the Central Government is required to be treated as payment
of tax on behalf of ‘owner of security’ or ‘unit holder’.
(ii) In the instant case, it is obviously the assessee-secondary
purchaser who was owner of security and, therefore, tax deducted at source had
to be regarded as payment made on her behalf. Moreover, certificate u/s.203
had also been issued to the assessee.”
New Page 1
II. Reported :
17 Charitable trust : Registration u/s.12A
and u/s.12AA of Income-tax Act, 1961 : Assessee, a marketing committee eligible
for exemption u/s.10(29) : Exemption withdrawn w.e.f. 1-4-2003 : Assessee not
disentitled to registration 12A and 12AA and exemption u/s.11.
[CIT v. Krishi Upaj Mandi Samiti, 215 CTR 54 (MP)]
The assessee, a marketing committee, was entitled to
exemption u/s.10(29) of the Income-tax Act, 1961. The exemption was withdrawn
w.e.f. 1-4-2003. The assessee made application for registration u/s.12A and
u/s.12AA of the Act. The Commissioner rejected the application, on the ground
that the exemption u/s.10(29) has been withdrawn. In appeal the Tribunal
directed the Commissioner to permit the registration.
On appeal by the Revenue, the Madhya Pradesh High Court
upheld the decision of the Tribunal and held as under :
“(i) The first contention raised by the counsel for the
appellant is that the intention of the legislature in deleting S. 10(29) and
introduction of S. 10(20) itself shows that the legislature did not want to
extend the benefit of exemption to Krishi Upaj Mandi Samiti. This argument is
without any force because S. 10(20) and S. 10(29) provide for exemption to all
the local authorities and exemption under this section was a blanket exemption
without fulfilling any condition. S. 11 provides for exemption on certain
conditions. Thus, the intention behind the amendment was to remove the blanket
exemption to the local authorities and provide exemption only if they fulfil
the conditions u/s.11.
(ii) As per S. 11, the exemption can be granted to the
marketing committees provided that they spend amount for charitable purposes
as required by S. 11(2). Marketing committees are bound to spend their income
as per S. 39 of the 1972 Adhiniyam and as per said Section, the amount could
be spent only for public amenities like construction of roads, market, etc. S.
2(15) provides that if the amount is spent towards public amenities, it will
be deemed that the amount is spent for charitable purposes. Hence, by virtue
of S. 2(15), it will have to be deemed that the amount spent by the marketing
committees is spent towards public purposes.
(iii) Respondent marketing committees fulfil all the
requirements of S. 11 to get exemption and therefore, are entitled to
registration u/s.12A and u/s.12AA and hence, the Tribunal has rightly allowed
the appeals and set aside the orders passed by the CIT.
New Page 1
II. Reported :
16 Capital gains : Computation : Deduction :
A.Y. 1996-97 : Sale of property received under will : Expenditure incurred on
obtaining probate and travel expenses of executors are deductible.
[Mrs. June Perrett v. ITO, 298 ITR 268 (Kar); 215 CTR
267 (Kar.)]
In the A.Y. 1996-97, the assessee had sold a property
inherited by her under a will. While computing capital gain, she claimed
deduction of the expenditure incurred on obtaining probate and travel expenses
of executors. The claim was disallowed by the Assessing Officer. Disallowance
was upheld by the Tribunal.
On appeal by the assessee, the Karnataka High Court allowed
the claim and held as under :
“(i) While computing the capital gains u/s.48(i) of the
Income-tax Act, 1961, any expenditure incurred wholly and exclusively in
connection with the transfer of the property has to be deducted, and similarly
the cost incurred by the assessee for any improvement thereto is deductible.
(ii) The executors who were residing in London were
required to obtain probate and letters of administration and any expenses
incurred by the executors in order to obtain probate and letters of
administration were to be treated as expenses incurred by them in connection
with the transfer of property in question, since the executors could not sell
the property to any party without letters of administration.
(iii) Similarly, without paying the court fee, no letter of
administration would be issued by the court. Therefore, Rs.1,23,000 paid by
the executors as court fee at the time of obtaining the letters of
administration had to be treated as expenditure incurred in connection with
the transfer of property.”
New Page 1
A. Unreported :
13 Income/capital receipt : Principle of
mutuality : A.Y. 1992-93 : Assessee is a sports club : Entrance fees : Commuted
value of subscription for life members : Is capital receipt not chargeable to
tax as principle of mutuality applies ?
[CIT v. Willingdon Sports Club (Bom.); ITA No. 121 of
2005; dated 18-3-2008 (Not reported)]
The assessee is a sports club. Its members are described as
gymkhana member, corporate member, short-term member all of whom are entitled to
the advantages or privileges of membership of the club except that of being
present or of voting at the general body meetings of the club or of serving on
the general committee and of proposing or seconding for elections as members of
the club. Apart from these members, there are life/founder/ordinary/super number
members. For the A.Y. 1992-93, the Assessing Officer assessed the total income
at Rs.15,75,900. In appeal, the Commissioner (Appeals) noted the two distinct
kind of members and held that the first category of members who were not allowed
to vote during the general body meeting were also not eligible to participate or
share in the surplus of the club on its winding up, and relying on the judgment
of the Bombay High Court in CIT v. WIAA Club; 136 ITR 569 (Bom.), held
that entrance fees and commutation of fees both have to be taken as revenue
receipts and dismissed the appeal. The Tribunal held that the entrance fees is
capital receipt not chargeable to tax in view of the decision in the case of
CIT v. WIAA Club; 136 ITR 569 (Bom.), which has been followed in CIT v.
Diners Business Services Pvt. Ltd.; 263 ITR 139 (Bom.). Accordingly, the
Tribunal allowed the appeal.
In appeal by the Revenue, the following questions were
raised :
“(a) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was right in holding that the entrance fees
received by the assessee is capital receipt not chargeable to tax as the
principle of mutuality applies ?
(b) Whether commuted value of subscription for life members
has to be taxed or treated as capital receipts in the light of the decision of
the Bombay High Court in CIT v. WIAA Club, 136 ITR 569 (Bom.) ?”
Following the judgment of the Supreme Court in CIT v.
Bankipur Club; 226 ITR 97 (SC), the Bombay High Court held as under :
“(i) The Revenue it appears have based their submission on
the judgment of this Court in CIT v. WIAA Club; 136 ITR 569. The
membership of the club consisted of ordinary members and life members. The
ordinary members were paying entrance fees and annual subscription. The life
members were paying larger entrance fees without any liability to pay annual
subscription. The club was extending similar facilities both to ordinary and
life members. The issue of mutuality was neither argued nor raised or was on
issue before the learned Bench of this Court. It is on the facts there and
without considering the principle of mutuality that the learned Bench
proceeded to hold that the amount paid by the members had two elements in it.
The part of the amount paid was entrance fees which were paid to the club with
a view to acquiring the right to avail of the services and facilities extended
by the club. The other part was a consolidated commuted payment in lieu of
annual subscription. The Court held that that part of the entrance fees which
was a compounded payment for annual subscription would be income and the
balance would be capital receipt. In our opinion, considering the judgment of
the Supreme Court in Bankipur (supra) and the issue of mutuality which
has been raised in the present appeal, the judgment in WIAA Club (supra)
is clearly distinguishable. Even otherwise, in our opinion, it is doubtful
whether it would be correct law considering the judgment in Bankipur (supra).
(ii) From the principles which have been set out above and
more so in the judgment in Bankipur (supra), even if there be temporary
or honorary members who are not entitled to vote, the assessee would not cease
to be governed by the principle of mutuality. Once the assessee is governed by
the principle of mutuality, its income earned would not be income which would
be assessable to tax.
(iii) For the aforesaid reasons, we are of the view that
there is no infirmity in the judgment and consequently the questions as raised
are devoid of merit and consequently appeal dismissed.”
New Page 1
33 Income : Business income : S. 28(iv) read
with S. 23 of Income-tax Act, 1961 : A.Ys. 1995-96 and 2000-01 : Assessee
received interest-free deposit in respect of shops given on rent : Notional
interest on interest-free deposit can-not be treated as benefit or perquisite
u/s. 28(iv) : Notional interest not income.
[CIT v. Asian Hotels Ltd., 168 Taxman 59 (Del.)]
The assessee company had received interest-free deposit in
respect of shops given on rent. For the A.Ys. 1995-96 and 2000-01, the Assessing
Officer added notional interest on the said deposit to the assessee’s income on
the ground that by accepting the interest-free deposit, benefit had accrued to
the assessee, which was chargeable to tax u/s.28(iv) of the Income-tax Act,
1961. The Tribunal deleted the addition and held that notional interest on the
interest-free deposit received by the assessee in respect of a shop let on rent
was neither taxable as business profit u/s.28(iv), nor as income from house
property u/s.23(1)(a).
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“(i) A plain reading of the provisions of S. 28(iv)
indicates that the question of any notional interest on an interest-free
deposit being added to the income of an assessee on the basis that it may have
been earned by the assessee if placed as fixed deposit, does not arise. S.
28(iv) is concerned with business income and is distinct and different from
income from house property. It talks of the value of any benefit on perquisite
whether convertible into money or not from the business or the exercise of a
profession.
(ii) S. 23(1)(a) is relevant for determining the income
from house property and concerns determination of the annual letting value of
such property. That provision talks of the sum for which the property might
reasonably be expected to let from year to year. This contemplates the
possible rent that the property might fetch and not certainly the interest on
fixed deposit that may be placed by the tenant with the landlord in connection
with the letting out of such property. It must be remembered that in a taxing
statute, it would be unsafe for the Court to go beyond the letter of the law
and try to read into the provision more than what is already provided for. The
attempt by the Revenue to draw an analogy from the Wealth-tax Act, 1957 was
also to no avail. It is an admitted position that there is a specific
provision in the Wealth-tax Act, which provides for considering of a notional
interest, whereas S. 23(1)(a) contains no such specific provision.”
New Page 2
II. Reported :
58.
Appellate Tribunal : Powers : Search : Block assessment : S. 132 and S. 158B of
Income-tax Act, 1961 : Tribunal cannot go into validity or otherwise of
administrative decision for conducting search and seizure.
[CIT v. Paras Rice Mills, 313 ITR 182 (P&H)]
In an appeal before the Tribunal against a block assessment order the assessee
raised the ground that the search and the consequent block assessment order were
not valid. The Tribunal held that the search and seizure was illegal as no
material was produced to show that the requirements of S. 132 (1) of the Act
were complied with.
On appeal by the Revenue, the Punjab & Haryana High Court held as under :
“While hearing an appeal against the order of assessment, the Tribunal could not
go into the question of validity or otherwise of any administrative decision for
conducting search and seizure. It could be challenged in an independent
proceeding where the question of validity of the order could be gone into. The
appellate authority was concerned with the correctness or otherwise of the
assessment.”
New Page 2
I. Unreported :
52.
Business expenditure : S. 37 of Income-tax Act, 1961 : Expenditure incurred on
issue of convertible debentures : Is revenue expenditure allowable as
deduction ?
[CIT v. M/s. Secure Meters Ltd. (Raj.), ITA No. 8 of 2007, dated
20-11-2008 (Not reported)]
The assessee incurred expenditure on issue of convertible debentures : The
assessee’s claim for deduction of the expenditure was rejected on the ground
that it is capital expenditure. The Tribunal held that the expenditure is
revenue expenditure and allowed the deduction.
In appeal, the Revenue contended that convertible debentures were akin to shares
and that in line with the judgment of the Supreme Court in Brooke Bond India
v. CIT, 225 ITR 798 (SC), the expenditure was capital in nature.
The Rajasthan High Court upheld the decision of the Tribunal and held as under :
“A debenture, when issued, is a loan. The fact that it is convertible does not
militate against it being a loan. In accordance with the judgment of the Supreme
Court in the case of India Cement v. CIT, 60 ITR 52 (SC), expenditure on
loan is always revenue in nature even if loan is taken for capital purposes.
Consequently the expenditure on convertible debenture is admissible as revenue
expenditure.”
New Page 1
II. Reported :
35. Appeal : ITAT : Reference to Third Member : S. 255(4) of
Income-tax Act, 1961 : A.Y. 1990-91 : S. 155(4) does not empower the
President/Third Member to go beyond the reference and to enlarge, restrict and
modify and/or formulate any question of law on his own on the difference of
opinion referred to by the Members of Tribunal.
[Dynavision v. ITAT, 217 CTR 153 (Mad.) :
In this case, when the appeal was heard by the Tribunal,
the Accountant Member and the Judicial Members differed in their opinions.
While referring the matter to the President for constituting Third Member
Bench u/s.255(4) of the Income-tax Act, 1961, there was no unanimity between
them in identifying the point of difference. The President, with a view to
identify the point of difference, reframed the questions and decided the
appeal as Third Member.
The assessee filed writ petition challenging the order of
the Third Member. The Madras High Court quashed the order of the Third Member
and held as under :
“(i) From a reading of S. 255(4), it is clear that the
order of reference to the Third Member shall contain the difference of
opinion between the Members of the Bench. The President or the Third Member
has no right to go beyond the scope of reference and they have to consider
only the difference of opinion stated by the Members of the Bench. S. 255(4)
does not vest such power with the President or the Third Member. They have
also no right to formulate the question on their own. Framing the question
on their own goes beyond the jurisdiction.
(ii) The Third Member must confine himself to the order
of reference. Therefore, he has no right to enlarge, restrict and modify
and/or formulate any question of law on his own on the difference of opinion
referred to by the Members of the Tribunal. In this case, the JM and the AM
had the difference of opinion and formulated the questions. The President
had no right to go beyond the scope of reference. For the foregoing reasons
and in the interest of justice, the order of the Third Member is set aside
with a direction to rehear only on the difference of opinion referred to by
the Members of the Division Bench and consider and pass orders in accordance
with law.”
New Page 1
II. Reported :
34 Appeal to CIT(A) : Condition precedent :
Scope of ‘tax’ u/s.249(4) of Income-tax Act, 1961 : ‘Tax’ does not include
interest.
[CIT v. Manojkumar Beriwal, 217 CTR 407 (Bom.) :
In this case while filing appeal before the CIT(A), the
assessee had paid disputed tax, but the amount paid was not sufficient to cover
the interest u/s.234B and u/s.234C of the Act. The CIT(A) dismissed the appeal
filed by the assessee on the ground that the condition of payment of tax
u/s.249(4) of the Income-tax Act, 1961 is not satisfied. He was of the view that
tax u/s.249(4) includes interest u/s.234B and u/s.234C of the Act. The Tribunal
allowed the assessee’s appeal and held that for the purposes of S. 249(4), the
deposit of tax which is a condition precedent, does not include interest
u/s.234B and u/s.234C of the Act.
On appeal filed by the Revenue, the Bombay High Court upheld
the decision of the Tribunal and held as under :
“(i) It is well settled that when the Legislature seeks to
make a law denying a remedy on failure to comply with deposit, the Courts
would save the remedy, if possible by the interpretative process. Further, in
taxing statute, if a view can be taken in favour of an assessee, that view is
ordinarily preferred.
(ii) On the literal reading of S. 249(4), the language used
by the Legislature is ‘has paid tax dues’. The expression tax has been defined
in S. 2(43). Tax as per the definition does not include interest which has
been independently referred to u/s.2(28A). When the Legislature itself has
used two different expressions and defined separately, then whilst considering
the language of a Section, the Courts are bound to look at the definitions in
the legislation for the purpose of interpreting and construing the expressions
and words under the Act. The object being to avoid conflict and have a
harmonious interpretation, unless the context otherwise requires.
(iii) In these circumstances, the expression ‘tax’ does not
include interest for the purpose of s. 249(4).”
New Page 1
I. Unreported :
33 Compulsory purchase of property : Chapter
XX-A/Chapter XX-C of Income-tax Act, 1961 : Agreement dated 15-9-1986 for
purchase of bungalow to be constructed : Competent Authority held that it is not
a fit case for acquiring under Chapter XX-A : Appropriate Authority passed order
of purchase under Chapter XX-C : Not valid : Chapter XX-A applies and not
Chapter XX-C.
[Mr. Jaipal Jain and Ors. v. Appropriate Authority and
Ors. (Bom.) : W. P. 680 of 1993; Dated 1-12-2008 : (Not reported)]
Under an agreement dated 15-9-1986, the petitioners had
agreed to purchase from the builder a residential bungalow to be constructed. On
13-10-1986 the petitioners filed a declaration in Form 37EE seeking NOC from the
Competent Authority under Chapter XXA of the Income-tax Act, 1961. By an order
dated 30-12-1992 passed u/s.269UF(7) of the Act, the Competent Authority held
that the property in question is not a fit case for acquiring under Chapter XX-A
of the Act. On the other hand, on a declaration filed in Form No. 37-I by the
vendors, the Appropriate Authority passed an order of purchase u/s.269UD(1) of
Chapter XX-C of the Act on 26-12-1986. The Bombay High Court set aside the said
order on 16-12-1992 with a direction to pass a fresh order in accordance with
law. The Appropriate Authority once again passed an order u/s. 269UD(1) on
24-2-1993, directing purchase of the property.
On a writ petition filed by the petitioner challenging the
validity of the order, the Bombay High Court quashed the said order dated
24-2-1993 and held as under :
“(i) In the case of Hiten R. Mehta v. Union of India,
(2008) 167 Taxman 338 (Bom.), this Court in a similar case held that the
provisions of Chapter XX-A would apply to the transactions entered into prior
to 1-10-1986 relating to transfer of immovable property as also transactions
where a person acquires any right in or with respect to any building or part
of a building by becoming a member or acquiring shares in a cooperative
society.
(ii) In the present case, the agreement in question was
entered into on 15-9-1986 i.e., prior to the introduction of Chapter
XX-C of the Act. Thus the issue raised in this petition is squarely covered by
the judgment of this Court in the case of Hiten R. Mehta (supra)
against the Revenue and, therefore, the impugned order passed under Chapter
XX-C of the Act cannot be sustained.”
New Page 1
Reported :
49 MAT credit : Interest
u/s.234B and u/s.234C r/w S. 115JAA of Income-tax Act, 1961 : A.Y. 1999-00 : MAT
credit has to be given before charging interest u/s.234B and u/s.234C of the
Act.
[CIT v. Salora
International Ltd., 329 ITR 568 (Del.)]
For the A.Y. 1999-00, the
income of the assessee company was assessed u/s.115JA of the Income-tax Act,
1961. Interest u/s.234B and u/s.234C was charged without reducing the MAT credit
u/s. 115JAA. The assessee contended that the interest has to be computed after
allowing the MAT credit. The Tribunal accepted the assessee’s claim.
On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under :
“Before charging interest u/s.234B and
u/s.234C of the Income-tax Act, 1961, credit of minimum alternative tax was to
be first allowed to the assessee.”
New Page 1
I. Unreported :
32 Business deduction : Bad debts : S.
36(1)(vii) of Income-tax Act, 1961 : After amendment w.e.f. 1-4-1989 writing off
of bad debt in account is sufficient for allowing deduction. It is not necessary
to prove that debt has become bad.
[CIT v. M/s. Star Chemicals (Bombay) P. Ltd. (Bom.);
ITAL No. 1915 of 2007; Dated 27-2-2008]
The following question was raised before the High Court in
the appeal filed by the Revenue u/s.260A of the Income-tax Act, 1961.
“Whether on the facts and in the circumstances of the case
and in law, the Tribunal is right in confirming the order of CIT(A) in
deleting the disallowance of Rs.79,27,211 on account of bad debt despite the
debt has not become bad ?”
The Bombay High Court held as under :
“The issue arises from the amendment to S. 36(1)(vii) of
the Income-tax Act. Subsequent to the amendment the Board has issued Circular
551, dated 23-1-1990. The issue pertained to bad debt in para 6.6. The
relevant portion of the direction reads as under :
“In order to eliminate the disputes in the matter of
determining the year in which a bad debt can be allowed and also to
rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of
Ss.(1) and clause (i) of Ss.(2) of the Section to provide that the claim for
bad debt will be allowed in the year in which such a bad debt has been written
off as irrecoverable in the accounts of the assessee.”
It is thus clear from the reading of the Section itself and
the Circular that if the assessee has written off the debt as bad debt, that
would satisfy the purpose of the Section. Considering the law as stated in so
far as the view taken by the Tribunal cannot be faulted.”
New Page 1
Reported :
48 Income : Receipt without
consideration : Income u/s.56(2)(v) of Income-tax Act, 1961 : A.Y. 2006-07 :
Loan received without interest and repaid : Not a receipt within the meaning of
S. 56(2)(v) of the Act.
[CIT v. Saranapal Singh (HUF),
237 CTR 60 (P&H)]
The assessee had received
short-term loan without interest in the relevant year and the same was repaid.
The Assessing Officer added the said amount of loan to the total income treating
the same to be the receipt within the meaning of S. 56(2)(v) of the Income-tax
Act, 1961. The Tribunal deleted the addition and observed as under:
“(i) There is no dispute
regarding the nature and source of the impugned unsecured loans.
(ii) Merely because the
amount of loan has been raised without involving payment of interest, cannot
be seen to have vested the impugned amount with characteristics of an
income, within the meaning of S. 56(2)(v) of the Act.
(iii) The existence of
the expression ‘without considerstion’ in S. 56(2)(v) cannot distract from
the fact that in the impugned case, the sum of money received in question
carried a liability of its repayment and the same was not received by the
assessee with an absolute unfettered right of possession.”
On appeal by the Revenue,
the Punjab and Haryana High Court upheld the decision of the Tribunal and held
as under :
“(i) The amount
contemplated u/s.56(2)(v) of the Act cannot include loan which is shown to
have been repaid.
(ii) In the facts and
circumstances of the present case, a concurrent finding of fact has been
recorded that the amount received was a short-term loan which was duly
repaid. The said amount cannot be treated as income of the assessee
u/s.56(2)(v) of the Act. Thus, no substantial question of law arises.”
New Page 1
31 TDS : Consequences of failure :
Limitation : Ss. 153, 201(1), (1A) of Income-tax Act, 1961 : A.Y. 1990-91 :
Period of limitation not prescribed : Reasonable period is 4 years : Proceedings
initiated in 1999 for A.Y. 1990-91 : Barred by limitation.
[CIT v. NHK Japan Broadcasting Corporation, 305 ITR
137 (Del.)]
The assessee is a Government-company of a foreign country and
is carrying on the business in India. In respect of its employees in India it
pays salary in Indian Rupees and also pays something called ‘global salary’ to
the employees in the home country. In respect of the salary paid to the
employees in India, the assessee deducted tax at source, but with respect to the
global salary, the assessee did not deduct tax at source. On November 19, 1998,
a survey was conducted by the Revenue in the premises of the assessee and these
facts came to light for the first time. The assessee did not dispute its
liability to deduct tax at source in respect of global salary and the tax due
thereon was paid by the assessee and interest was also paid. In December 1999,
the Assessing Officer issued show-cause notice, and thereafter passed an order
treating the assessee as being in default for the purposes of S. 201 of the
Income-tax Act, 1961. The Tribunal cancelled the order holding that the
proceedings have not been initiated within a reasonable period of time.
The Delhi High Court dismissed the appeal filed by the
Revenue and held as under :
“(i) There is no dispute that S. 201 of the Act does not
prescribe any limitation period for the assessee being declared as an assessee
in default.
(ii) S. 153(1)(a) prescribes the period of two years from
the end of the assessment year for completing the assessment. Therefore, the
time limit would be three years from the end of the financial year. Even
though the period of three years would be a reasonable period as prescribed by
S. 153 of the Act for completion of proceedings, we have been told that the
Income-tax Appellate Tribunal has, in a series of decisions taken the view
that four years would be the reasonable period of time for initiating action
in a case where no limitation is prescribed. The rationale for it seems to be
quite clear — if there is a time limit for completing the assessment, then the
time limit for initiating the proceedings must be the same, if not less.
Nevertheless the Tribunal has given a greater period for commencing or
initiation of proceedings. We are not inclined to disturb the time limit of
four years prescribed by the Tribunal and are of the view that in terms of the
decision of the Supreme Court in Bhatinda District Co-op. Milk Producers Union
Ltd. (2007) 9 RC 637; 11 SCC 363, action must be initiated by the competent
authority under the Income-tax Act, where no limitation is prescribed as in S.
201, within a period of four years.
(iii) It appears that the assessee paid the tax voluntarily
as well as interest thereon, but the acceptance of the liability by the
assessee would not by itself extend the period of limitation, nor would it
extend the reasonable time that is postulated by the scheme of the Income-tax
Act. The assessee cannot be put, in a sense, in a worse position merely
because it has admitted its liability. The fact that the assessee agreed to
pay the tax voluntarily cannot put the assessee in a situation worse than if
it had contested its liability.”
New Page 1
30 Profits and gains from foreign projects :
Deduction u/s.80HHB of Income-tax Act, 1961 : A.Ys. 1997-98 and 2000-01 :
Project in Iraq : Payment held up due to war in Iraq : Payment received in terms
of agreement between Governments of India and Iraq in terms of RBI bonds and
interest on RBI bonds : Deduction u/s.80HHC allowable on interest component
also.
[CIT v. Arvind Construction Co., 172 Taxman 5 (Del.)]
The assessee carried out certain construction work in two
different projects in Iraq as a subcontractor of the Indian Railway Construction
Corporation (IRCON). On account of the outbreak of war in Iraq, the payments to
IRCON were held up. Subsequently, by an agreement between the Governments of
India and Iraq, a settlement was arrived at by which the payment would be made
to IRCON on the deferred basis. The total sum due to the assessee together with
interest was calculated at Rs.54.93 crores for the A.Y. 1997-98 and the said sum
was settled as under :
(i) RBI Bonds Rs. 42,69,91,452
(ii) ECGC Bonds Rs. 5,61,12,153
(iii) Interest on RBI Bonds Rs. 6,61,83,046
The assessee claimed deduction u/s.80HHB of the Income-tax
Act, 1961, inter alia in respect of interest on RBI Bonds. The Assessing
Officer rejected the claim on the ground that the interest on RBI Bonds was not
an income derived from the business activities of the assessee. The Tribunal
allowed the claim.
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“We find that as regards the interest on the RBI Bonds,
this was part of the total settlement package by which the assessee was to
receive Rs.54.93 crores for the works undertaken in Iraq as a sub-contractor
of IRCON. In the facts and circumstances of the case, it is not possible to
view the interest received on the RBI Bonds as payment de hors the
activity of the assessee pursuant to the execution of the contract.”
New Page 1
29 Investment allowance : S. 32A of
Income-tax Act, 1961 : A.Y. 1986-87 : Computation : Actual cost to be determined
in each year : Agreement providing for escalation of price : Extra amount paid
in relevant year to be taken into account.
[DCIT v. Official Liquidator, 305 ITR 418 (Mad.)]
The assessee had imported machinery from Italy for polynostic
staple fibre plant and installed it in the accounting year relevant to the A.Y.
1981-82. The agreement for purchase provided for an escalation clause. In
pursuance of the escalation clause, the assessee made certain payments towards
cost of escalation of the machinery and escalation in the customs duty and
technical consultancy fees. The total payments amounted to Rs.1,40,60,651. For
the A.Y. 1986-87, the assessee filed a revised return wherein the investment
allowance was enhanced to Rs.47,20,648 from Rs.10,55,608 as originally claimed.
The Assessing Officer allowed the claim, but the Commissioner acting u/s.263
rejected the claim. The Tribunal set aside the order of the Commissioner.
New Page 1
28 Hotel in a place of pilgrimage :
Deduction u/s.80-IA(4)(iii) of Income-tax Act, 1961 : Hotel granted
certification by prescribed authority : Income-tax authority has no jurisdiction
to decide on basis of his own criteria that assessee is not entitled to
deduction u/s.80-IA(4)(iii).
[Gujarat JHM Hotels Ltd. v. DGIT (Exemption), 305 ITR
386 (Guj.)]
The petitioner’s hotel was located at S, which is an
important place of pilgrimage as required u/s.80-IA(4)(iii) of the Income-tax
Act, 1961. The petitioner made an application for exemption u/s.80-IA(4)(iii) of
the Act. In support of the necessary conditions the petitioner filed a
certificate issued by the Director, Tourism, Gujarat Govt., dated 18-6-1996 and
a certificate issued by the Department of Tourism, Govt. of India, dated
11-6-1996. The Director General of Income-tax (Exemption) rejected the
application. He observed that it was a well-known fact that S was an important
industrial town, having existent infrastructure/tourism facilities, to promote
industrial and tourism development and that a place like S did not require the
additional benefit of S. 80-IA(4)(iii).
The Gujarat High Court allowed the writ petition filed by the
petitioner and held as under :
“(i) A bare perusal of the documents furnished by the
petitioner vis-à-vis S. 80-IA(4)(iii) of the Act and Rule 18BBC made it
clear that the petitioner had fulfilled all the necessary conditions for grant
of the approval.
(ii) The authority had only considered that the petitioner
did not fulfil the pilgrimage test without dealing with the two certificates
issued by the prescribed authorities. Once the prescribed authorities grant
certificates, if the authority wants to reject it, valid and justifiable
reasons must be given therefor. Rejecting the application on merely
considering the fact whether S is a place which could be considered as
requiring approval for notification for promotion of pilgrimage, was an
extraneous consideration to the provisions of the Act and the Rules and the
benefit could not be refused to the petitioner on this ground.”
New Page 1
27 Export Profit : Deduction u/s.80HHC :
Computation : S. 80HHC Expl. (baa) of Income-tax Act, 1961 : Manufacture and
export including job works for others : Investment in raw materials, labour,
etc. by assessee on own account alone includible in total profit.
[William Goodacre and Sons India Ltd. v. CIT, 305 ITR
365 (Ker.)]
The assessee was engaged in the business of manufacture and
export of products. The assessee was also engaged in doing job works for others
particularly exporters. The Assessing Officer excluded 90% of the job work
receipts from the business profit in the computation of the export profit by
referring to clause (baa) of the Explanation to S. 80HHC(4B) of the Income-tax
Act, 1961. The Tribunal confirmed the order of the Assessing Officer.
On appeal by the assessee, the Kerala High Court remanded the
matter back to the Assessing Officer and held as under :
“(i) The scheme of S. 80HHC of the Income-tax Act, 1961
provides for computation of the export profit of an assessee engaged in local
business and export business based on the formula provided in the Section to
find out the proportionate profit on export with reference to the total
turnover and total profit. Under the formula, eligible export profit is the
total profit divided by the total turnover and multiplied by export turnover.
(ii) The scheme of exclusion of certain items of income
which come within the description of business profits by virtue of the
inclusion clause contained in S. 28 of the Act, is to ensure that in the
course of working out the eligible export profit on a proportionate basis with
reference to the total turnover and export turnover, the net result should not
be a distorted figure. In other words, the formula seeks to achieve
determination of export profit as realistically and as near as possible. The
purpose of clause (baa) of the Explanation to S. 80HHC(4B) of the Act, is to
exclude such items of receipts which are not derived from business turnover.
Brokerage, commission, interest and rent, etc. are items which are essentially
in the nature of net receipts and are not derived out of total turnover of the
assessee. Besides the four items enumerated in clause (baa)(1), the charges or
any other receipt of a similar nature should also be excluded. If charges are
not comparable to any of these items, then such items cannot be excluded from
the business profits in terms of clause (baa) of the Explanation.
(iii) If raw materials are supplied by the awarder or if
the assessee purchased the raw materials separately in its name and claimed
separate re-imbursement, then the turnover of the transaction does not get
included in the total turnover and the receipt is net receipt, 90% of which
has to be excluded as charges under clause (baa).
(iv) The rubber backing charges and rubber edging charges
could not be excluded from the total profit by referring to clause (baa) of
the Explanation to the Section. The authorities below failed to consider the
claim of the assessee that it purchased raw materials on its own account and
used them in manufacture of the final product leading to value addition at the
assessee’s cost on the awarder’s raw material like doormats and coir carpets.
Unless the cost of the raw material is borne by the assessee in its own
account forming its sale value as total turnover, the assessee could not claim
the benefit of inclusion of full charges so collected in the total profit.
(v) If the entire raw material cost is borne by the awarder
and the assessee did only job work with machinery and employed its own labour,
such charges were comparable to commission or brokerage which were income
earned by incurring labour and other charges covered under clause (baa) of the
Explanation.”
New Page 1
26 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1997-98 : Funds of educational institution
need not be invested in modes specified in s. 11(5) : Effect of CBDT Circular
No. 712, dated 25-7-1995.
[DI (Exemption) v. Dalmia Shiksha Pratishthan, 305 ITR
327 (Del.)]
The assessee trust was imparting education through four
educational institutions. Up to the A.Y. 1996-97 the assessee was allowed
exemption u/s.10(22) of the Income-tax Act, 1961. For the A.Y. 1997-98, the
Assessing Officer denied the exemption for the reasons that (i) the assessee had
let out a property owned by it on rent; (ii) the assessee had earned some amount
on sale of books and thus it existed for purposes of profit, and (iii) the main
ground was that the assessee had invested its funds with a non-Governmental
body. The Tribunal allowed the claim for exemption u/s.10(22).
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“(i) A perusal of the CBDT Circular No. 712, dated
25-7-1995 would show that there is no restriction regarding the mode of
investment of funds by an educational institution. There is no obligation that
an educational institution must invest its funds in the modes specified in S.
11(5) of the Act.
(ii) The rent from the property let out is only Rs. 4,500.
This amount was far too insignificant for taking a decision against the
assessee and denying it exemption u/s.10(22). The assessee had earned only an
amount of Rs.9,603 through sale of books. This could not be construed to mean
that the assessee did not exist solely for educational purposes but had a
profit motive. The assessee invested its funds and the intention was to use
the funds and any interest earned thereon for educational purposes.
(iii) For the subsequent assessment year, that is, A.Y.
1998-99, without there being any change in circumstances, the contention of
the assessee that it continued to be an educational institution and was
entitled to exemption u/s. 10(22) of the Act was accepted. The present A.Y.
1997-98 was the only odd assessment year for which the assessee has been
denied exemption and that too for reasons that were not at all germane to the
issue. The assessee was entitled to exemption.”
New Page 1
25 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1993-94 : Registered society with object
of educating public in safety : Entire income used for promotion of objects of
society : Society entitled to exemption.
[DI (Exemption) v. National Safety Council, 305 ITR
257 (Bom.)]
The assessee was a society registered with the principle
object of educating the public concerning safety. For the A.Y. 1993-94, the
Assessing Officer denied the assessee exemption u/s.10(22) of the Income-tax
Act, 1961, on the ground that the assessee is not a university or other
educational institute existing solely for educational purposes. The Tribunal
allowed the assessee’s claim holding that the assessee was covered within the
meaning of the term ‘any other educational institution’ u/s.10(22) of the Act.
The Bombay High Court dismissed the appeal filed by the
Revenue and affirming the decision of the Tribunal held as under :
“The return filed for the A.Y. 1993-94 revealed that the
entire income has been utilised for the purpose of its objects. Therefore, the
finding of the Tribunal was not perverse and there was no substantial question
of law.”
New Page 1
Reported :
34. Depreciation : WDV : S. 32 and S. 43(1) of Income-tax
Act, 1961 : A.Ys. 2001-02 and 2002-03 : Depreciation is a privilege : WDV can
only be on basis of depreciation ‘actually allowed’ and not ‘notionally
allowed’.
[CIT v. Hybrid Rice International (P) Ltd., 185
Taxman 25 (Del.)]
The assessee company was engaged in the business of
producing superior-quality hybrid seeds of rice for supply to farmers. For
that purpose, it was using germplasm seeds. Prior to the A.Y. 2001-02, the
assessee had not claimed depreciation on the germplasm seeds. In the relevant
years, the assessee claimed depreciation on the germplasm seeds on the basis
of the actual cost taking it as the WDV. The Assessing Officer found that the
germplasm seeds were purchased in the preceding years and therefore held that
even though depreciation was not claimed or allowed in the preceding years,
the WDV for the relevant years has to be determined after reducing the
notional depreciation for the preceding years. The Tribunal allowed the
assessee’s claim.
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“(i) In the instant case, in the earlier assessment
years, there did not arise any question of calculation of actual cost,
because no depreciation was claimed in the earlier years. Therefore, it
could not be understood as to how the assessee was taking advantage of his
own wrong as contended by the Revenue. Once it was held that depreciation is
a privilege and can only be on the basis of ‘actually allowed’ and not
‘notionally allowed’, there did not remain any issue of any wrong by the
assessee. There was no wrong and as held by the Supreme Court in CIT v.
Mahendra Mills, 243 ITR 56 (SC), it is only a privilege which the
assessee may choose to exercise or not.
(ii) Therefore, the Tribunal was correct, in law, in
allowing depreciation to the assessee on the actual cost of the germplasm
seeds and the actual cost incurred by the assessee much before becoming an
assessee could still be treated as an actual cost to the assessee when
depreciation had to be claimed.”
New Page 1
Reported :
33. Company in liquidation : Director’s liability : S. 179 of
Income-tax Act, 1961 : Liability of director u/s.179 is limited to tax and it
does not extend to penalty and interest.
[H. Ebrahim v. Dy. CIT, 185 Taxman 11 (Kar.)]
Dealing with the scope of the director of a company u/s.179
of the Income-tax Act, 1961, the Karnataka High Court held in this case as
under :
“The phrase ‘tax’ as contemplated u/s.179 does not
include penalty and interest, insofar as the directors of the company are
concerned. However, this interpretation of phrase ‘tax would not be’ is
u/s.179 and does not encompass the company. Indeed the company was liable to
pay all the three components, i.e., ‘tax’, ‘interest’ and ‘penalty’
and any other sum due or recoverable from it as contemplated u/s.222.”
New Page 1
II. Reported :
43. TDS : Fees for technical services : S. 9(1)(vii) and S.
195 of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee using Internet bandwidth
of US party T and providing access to its subscribers : Payment for use of
Internet bandwidth is not fees for technical services : No obligation to deduct
tax at source from payment.
[CIT v. Estel Communications (P) Ltd., 217 CTR 102
(Del.)]
The assessee was using Internet bandwidth of US party,
Teleglobe, for providing access to its subscribers. For the services
rendered by the assessee to the subscribers in India, it levies a charge and
out of this, some amount is paid to the US party. The Assessing Officer
invoked the provisions of S. 9(1)(i) and S. 9(1)(vii) of the Income-tax Act,
1961 and held that the assessee is liable to deduct tax at source from the
payments made to the US party. The Tribunal held that the assessee is not
liable to deduct tax at source.
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“(i) The Tribunal considered the agreement that had been
entered into by the assessee with Teleglobe and came to the conclusion that
there was no privity of contract between the customers of the assessee and
Teleglobe. In fact, the assessee was merely paying for an Internet bandwidth
to Teleglobe and then selling it to the customers.
(ii) The use of Internet facility may require
sophisticated equipment, but that does not mean that technical services were
rendered by Teleglobe to the assessee. It was a simple case of purchase of
Internet band width by the assessee from Teleglobe. No technical services
were rendered by Teleglobe to the assessee.
(iii) The Tribunal has rightly dismissed the appeal after taking into
consideration the agreement between the assessee and Teleglobe and the
nature of services provided by Teleglobe to the assessee.”
New Page 1
Unreported :
31. Refund : Delayed return claiming refund : On facts
refusal to condone delay not justified : Order of rejection set aside for fresh
disposal as per directions.
[Sitaldas K. Motwani v. DGIT (International Taxation) (Bom.);
W.P. No. 1749 of 2009, dated 15-12-2009]
The assessee petitioner is a non-resident Indian. In the
previous year relevant to the A.Y. 2000-01, the assessee had invested in
shares of Indian companies and earned short-term capital gains of Rs.
2,09,05,250. The concerned bank deducted tax at source at the rate of 30%. The
said short-term capital gain was taxable at the rate of 20% and accordingly
the assessee was entitled to a refund of Rs. 20,78,871. The assessee filed
belated return on 24-9-2003 and claimed refund. Along with the return the
assessee had filed an application u/s.119(2)(b) of the Income-tax Act, 1961
for condonation of delay in filing of return. The DGIT (International
Taxation) rejected the application for condonation of delay relying on the
CBDT Instruction No. 13 of 2006, dated 22-12-2006. Accordingly, he refused to
grant refund.
The Bombay High Court allowed the writ petition filed by
the assessee and held as under :
“(i) The Board Circular prescribes that at the time of
considering the case u/s.119(2)(b) of the Act, it is necessary for the
authorities to consider that the income declared and the refund claimed are
correct and genuine and that the case is of genuine hardship on merits and
correctness of the refund claim.
(ii) While considering the genuine hardship, the
respondent No. 1 was not expected to consider a solitary ground as to
whether the petitioner was prevented by any substantial cause from filing
return within due time. Other factors ought to have been taken into account.
(iii) The phrase ‘genuine hardship’ used in S. 119(2)(b)
should have been construed liberally even when the petitioner has complied
with all the conditions mentioned in Circular dated 12th October, 1993. The
Legislature has conferred the power to condone delay to enable the
authorities to do substantial justice to the parties by disposing of the
matters on merit.
(iv) The expression ‘genuine’ has received a liberal
meaning and while considering this aspect, the authorities are expected to
bear in mind that ordinarily the applicant, applying for condonation of
delay does not stand to benefit by lodging its claim late.
(v) Refusing to condone delay can result in a meritorious
matter being thrown out at the very threshold and cause of justice being
defeated. As against this, when delay is condoned the highest that can
happen is that a cause would be decided on merits after hearing the parties.
When substantial justice and technical considerations are pitted against
each other, cause of substantial justice deserves to be preferred for the
other side cannot claim to have vested right in injustice being done because
of a non-deliberate delay.
(vi) There is no presumption that delay is occasioned
deliberately, or on account of culpable negligence, or on account of mala
fides. A litigant does not stand to benefit by resorting to delay. In
fact he runs a serious risk. The approach of the authorities should be
justice-oriented so as to advance cause of justice. If refund is
legitimately due to the applicant, mere delay should not defeat that claim
for refund.
(vii) Whether the refund claim is correct and genuine,
the authority must satisfy itself that the applicant has a prima facie
correct and genuine claim, does not mean that the authority should examine
the merits of the refund claim closely and come to a conclusion that the
applicant’s claim is bound to succeed. This would amount to prejudging the
case on merits. All that the authority has to see is that on the face of it
the person applying for refund after condonation of delay has a case which
needs consideration and which is not bound to fail by virtue of some
apparent defect. At this stage, the authority is not expected to go deep
into the niceties of law. While determining whether the refund claim is
correct and genuine, the relevant consideration is whether on the evidence
led, it was possible to arrive at the conclusion in question and not whether
that was the only conclusion which could be arrived at on that evidence.
(viii) The Respondent No. 1 did not consider the prayer
for condonation for delay in its proper perspective. As such, it needs
consideration afresh. In the result, we set aside the impugned order and
remit the matter back to the respondent No. 1 for consideration afresh, with
the direction to decide the question of hardship as well as that of
correctness and genuineness of the refund claim in the light of the
observations made hereinabove.”
New Page 1
II. Reported :
42 Speculative loss/business loss : S. 28(i)
and S. 43(5) of Income-tax Act, 1961 : A.Y. 1990-91 : Transaction of purchase
and sale ultimately settled by actual delivery : Not speculative transaction:
loss arising is business loss and not speculative loss.
[Sripal Satyapal v. ITO, 217 CTR 337 (Raj.)]
The assessee is a cotton merchant and carries on business
of purchase and sale of cotton bales. In the previous year relevant to A.Y.
1990-91 the appellant purchased certain cotton bales from one R through the
commission agent J, but however did not take delivery. He subsequently sold
the said goods to Os Co. through commission agent Om. The ultimate purchaser
Os Co. took delivery of the goods from R. The Assessing Officer treated the
loss arising out of the transaction as speculative loss on the ground that the
appellant had not taken delivery of the goods. The Tribunal upheld the
decision of the Assessing Officer.
In appeal the following question was raised before the
Rajasthan High Court :
“Whether the Tribunal was justified in disallowing the
claim for set-off of business loss of Rs.2,54,068 in the hands of the
appellant by applying S. 43(5) of the IT Act, 1961 and treating the same as
speculative loss merely for the reason that transportation charges were not
shown to be paid by the appellant ?”
The Rajasthan High Court reversed the decision of the
Tribunal and held as under :
“The fact of taking physical delivery of the goods by the
assessee is not the test for determining the speculative transaction in
terms of S. 43(5), but the test is settlement of the transaction entered
into by the assessee or on his behalf otherwise than by actual delivery of
the commodity. Even though the assessee itself or its agent did not obtain
actual delivery of the goods, but the goods having been specifically
identified at the godown and actual delivery to purchaser from the assessee
having been effected by transport of goods directly from the godown,
transaction entered into by the assessee could not be termed as speculative
transaction.”
New Page 1
II. Reported :
40 New industrial undertaking in backward
area : Deduction u/s.80HH of Income-tax Act, 1961 : A.Y. 1999-00 : Interest
received for belated settlement of bills by sundry debtors : Directly relatable
to business of assessee : To be included as profit and gains derived from
business and considered for deduction u/s.80HH.
[CIT v. Bhansali Engineering Polymers Ltd., 306 ITR
194 (Bom.)]
The assessee had an industrial undertaking in backward area,
eligible for deduction u/s.80HH of the Income-tax Act, 1961. For the A.Y.
1999-00, the assessee included the interest received for belated settlement of
bills by sundry debtors for computing deduction u/s.80HH. The Assessing Officer
excluded the amount of interest. The Tribunal allowed the claim of the assessee.
On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :
“The Tribunal was right in holding that the interest
received on belated payments from sundry debtors to whom the industrial unit
of the assessee had sold goods could be treated as interest income derived
from the industrial undertaking, even though the assessee had realised income
from other sources and in directing the Assessing Officer to recompute the
deduction u/s.80HH.”
New Page 1
II. Reported :
38 Deemed dividend : S. 2(22)(e) of
Income-tax Act, 1961 : Partners of assessee firm shareholders of company :
Assessee firm not a shareholder of company : Company advanced loan to firm :
Loan not to be treated as deemed dividend in hands of firm.
[CIT v. Hotel Hilltop, 217 CTR 527 (Raj.)]
In the scrutiny assessment u/s.143(3) of the Income-tax Act,
the Assessing Officer made an addition of Rs.10,00,000 as deemed dividend
u/s.2(22)(e), being advance received from M/s. Hilltop Palace Hotels (P) Ltd. in
which the two partners of the assessee firm held 48.33% of the shares. CIT(A)
deleted the addition holding that the assessee firm is not a shareholder of the
company, and therefore, the amount of Rs.10,00,000 cannot be assessed to tax in
the hands of the assessee firm. The Tribunal dismissed the appeal filed by the
Revenue.
On appeal by the Revenue the Rajasthan High Court upheld the
decision of the Tribunal and held as under :
“(i) The important aspect, being the requirement of S.
2(22)(e) is, that “the payment may be made to any concern, in which such
shareholder is a member or the partner, and in which he has substantial
interest, or any payment by any such company, on behalf, or for the individual
benefit of any such shareholder . . .” Thus, the substance of the requirement
is, that the payment should be made on behalf, or for the individual benefit
of any such shareholder. Obviously, the provision is intended to attract the
liability of tax on the person, on whose behalf, or for whose individual
benefit, the amount is paid by the company, whether to the shareholder, or to
the concerned firm, in which event, it would fall within the expression
‘deemed dividend’.
(ii) Obviously, income from dividend is taxable as income
from other sources u/s.56, and in the very nature of things, the income has to
be of the person earning the income. The assessee in the instant case is not
shown to be one of the persons, being shareholder. Of course the two
individuals being ‘R’ and ‘D’ are the common persons, holding more than
requisite amount of shareholding and are having requisite interest in the
firm. But then, thereby the deemed dividend would not be deemed dividend in
the hands of the firm, rather it would obviously be deemed dividend in the
hands of the individuals, on whose behalf, or for whose individual benefit,
being such shareholder, the amount is paid by the company to the concern.
(iii) Thus the significant requirement of S. 2(22)(e) is
not shown to exist. The liability of tax as deemed dividend could be attracted
in the hands of the individuals, being the shareholders, and not in the hands
of the firm.”
New Page 1
II. Reported :
39. Income or capital receipt : Non-compete fees : S. 10(3)
and S. 45 of Income-tax Act, 1961 : A.Y. 2000-01 : Payment for loss of office as
director with freedom to carry on other employment without involving in software
development: Is capital receipt not liable to tax.
[Rohitasava Chand v. CIT, 306 ITR 242 (Del.)]
The assessee, a shareholder and director of a company
entered into non-compete agreements with a foreign company and received
certain sums under the agreements from periods relevant to A.Ys. 1998-99 to
2000-01. During the currency of the non-compete agreements, the assessee was
restrained from soliciting, interfering, engaging in or endeavouring to carry
on any activity, including supply of services or goods concerning software
development. For the A.Y. 1998-99 the Assessing Officer accepted the claim of
the assessee that the receipt is a capital receipt not liable to tax. However,
for the A.Y. 2000-01 the Assessing Officer rejected the claim of the assessee
and included the amount in the income of the assessee. The Tribunal upheld the
addition.
On appeal by the assessee, the Delhi High Court reversed
the decision of the Tribunal and held as under :
“(i) Where an amount is received by way of compensation
under a restrictive covenant or under a non-compete agreement, it would
amount to a capital receipt in the hands of the recipient, but a lot would
depend on the agreement entered into between the parties.
(ii) The non-compete agreement incorporated a restrictive
covenant on the right of the assessee to carry on his activity of
development of software. While it might not alter the structure of his
activity, in the sense that he could carry on the same activity in an
organisation in which he had a small stake, it certainly impaired the
carrying on of his activity. To that extent it was a loss of a source of
income for him and it was of an enduring nature, as contrasted with a
transitory or ephemeral loss. The covenant was an independent obligation
undertaken by the assessee not to compete with the new agents in the same
field for a specified period, which came into operation only after the
agency was terminated and was wholly unconnected with the assessee’s agency
termination. Therefore, that part of the compensation attributable to the
restrictive covenant was a capital receipt not assessable to tax.
(iii) The non-compete agreement was independent of the
first agreement whereby the assessee agreed to transfer his shares to the
foreign company. The receipt in the hands of the assessee was a capital
receipt inasmuch as it denied his profit making capabilities.”
New Page 1
II. Reported :
37 Capital gains : Exemption u/s.54F of
Income-tax Act, 1961 : A.Y. 2001-02 : Construction of new house : Requirement is
that assessee has to construct a residential house within a period of three
years after date of transfer : If assessee has invested net consideration before
specified period, exemption cannot be denied on ground that construction is not
completed within that period.
[CIT v. Sardarmal Kothari, 217 CTR 414 (Mad.)]
For the A.Y. 2001-02, the Assessing Officer disallowed the
claim of the assessee for exemption of the capital gain u/s.54F of the
Income-tax Act, 1961 on the ground that the construction of the new house was
not completed. The CIT(A) allowed the claim observing that the assessee had
invested the capital gain in the land and the construction was substantially
completed. The Tribunal upheld the decision of the CIT(A).
On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held as under :
“(i) There is no dispute about the fact that the assessee
has invested the entire net consideration of sale of capital asset in the land
itself and subsequently the assessee has invested large sums of money in
construction of the house. The one and only ground on which the Assessing
Officer has non suited the assessee for the claim of exemption was that the
house has not been completed. There remains some more construction to be made.
(ii) The requirement of the provision is that the assessee,
within a period of three years after the date of transfer, has to construct a
residential house in order to become eligible for exemption. In the case on
hand, it is not in dispute that the assessee has purchased the land by
investing the capital gain and he has also constructed residential house.
(iii) On a reading of the Board Circular No. 667, dated
18-10-1993, relied on by the Revenue, we are of the view that the Circular
would not in any way advance the case of the Revenue to come to the conclusion
that in order to have the benefit u/s.54F of the Act, the construction should
have been completed.
(iv) The Tribunal has also taken note of its own earlier
orders, wherein the Tribunal has held that in order to get the benefit
u/s.54F, the assessee need not complete the construction of the house and
occupy the same. It is enough if the assessee establishes that the assessee
had invested the entire net consideration within the stipulated period. The
said view taken consistently by the Tribunal has been applied in this case
also.
(v) There is no material to entertain this appeal. The
appeal fails and the same is dismissed.”
New Page 1
II. Reported :
36 Business expenditure : Amortisation of
preliminary expenses : S. 35D of Income-tax Act, 1961 : Interest received on
share application money : Can be set off against public issue expenses :
Interest accrued not taxable.
[CIT v. Neha Proteins Ltd., 306 ITR 102 (Raj.)]
The assessee had claimed set-off of the interest earned on
the share application money against the public issue expenses which were to be
amortised in future under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961. The assessee had therefore claimed that the interest
income is not taxable. The Assessing Officer disallowed the claim for set-off
and added the interest amount to the income of the assessee. The Tribunal held
that the assessee was entitled to set-off of the interest against the public
issue expenses and deleted the addition.
The Rajasthan High Court dismissed the appeal filed by the
Revenue and held as under :
“(i) The amount of interest accruing on the share
application money could not be used by the assessee for any purpose whatever,
other than those mentioned in S. 73(3) and S. (3A) of the Companies Act, 1956,
and on the allotment of shares, the assessee was to take stock of things about
the expenditure incurred by it, being the public issue expenses, and the
interest accrued did reduce that expenditure and it was rightly required to be
adjusted against the expenditure, i.e., the assessee was entitled to
claim amortisation of the public issue expenses only on the figure so reduced,
after setting off, or adjusting.
(ii) The interest accrued on the share application money
lying with the bank under the mandate of S. 73 of the Companies Act was not
taxable as ‘Income from other sources’ and was required to be set off or
adjusted against the public issue expenses, so as to reduce the amount of
public issue expenses, for the purpose of enabling the assessee to claim
amortisation, under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961.
(iii) The assessee had not claimed adjustment of
this interest against other liability of the assessee to pay interest on the
borrowed money and it was nobody’s case that this was to be taxed as income
from “Profits and gains of business or profession”. It could not be said to be
a short-term deposit either.”
New Page 1
24 Capital gains : Immovable property : Cost
of acquisition : S. 50C of Income-tax Act, 1961 : A.Y. 2003-04 : Constitutional
validity : Complete safeguard provided for assessee in Stamp Act and Income-tax
Act : Provision not arbitrary or violative of Article 14 : Provision
constitutionally valid.
[K. R. Palanisamy v. UOI, 306 ITR 61 (Mad.)]
The assessee sold his capital assets for a price lower than
the market price. The Assessing Officer applied S. 50C of the Income-tax Act,
1961 for computation of capital gain. The assessee filed a writ petition
challenging the constitutional validity of S. 50C.
The Madras High Court upheld the validity of S. 50C and held
as under :
“(i) S. 50C of the Act was incorporated to prevent
large-scale undervaluation of the real value of the property in the sale deed
so as to defraud the Government of revenue it was legitimately entitled to by
pumping in black money.
(ii) Article 246 of the Constitution of India gives
exclusive power to Parliament to make laws in respect of the matters
enumerated in List I of the Seventh Schedule. The legislative competence of
Parliament to insert a provision for arresting leakage of income had been
considered by the Supreme Court in several cases and the uniform opinion in
all those cases was that the entries in the legislative Lists should be
construed more liberally and in their widest amplitude and not in a narrow or
restricted sense. Every safeguard had been provided under the provisions of
the Stamp Act to the assessee to establish before the authorities the real
value for which the capital asset had been transferred.
(iii) Thus, what was stated in S. 50C as real value
could not be regarded as a notional or artificial
value and such real value is determinable only after hearing the assessee in
accordance with the statutory provisions. There was no indication either in
the provisions of S. 50C of the 1961 Act, or S. 47A of the Stamp Act or rules
made thereunder about the adoption of the guideline value. Hence, the
contention that S. 50C was arbitrary and violative of Article 14 of the
Constitution of India could not be accepted.
(iv) The principle of determining the market value of the
assets had been stated in detail in rule 5 of the Tamil Nadu Stamp (Prevention
of Undervaluation of Instruments) Rules, 1968. Hence the question of the
guideline value forming the basis for determination of the full value did not
arise.
(v) Capital assets and trading assets or stock-in-trade
were treated differently under the scheme of the Act. They could not be
compared on par with each other by considering them as a class of assets. The
discrimination on the ground of valid consideration which answers the test of
intelligible differentia did not attract Article 14 of the Constitution of
India.
(vi) A provision could be rendered inoperative only when it
was found to be violative of the constitutional mandate. The provision could
not be rendered inoperative on the ground that the speech of the Finance
Minister or the administrative instructions issued by the Central Board of
Direct Taxes had not explained the reasons for incorporation of the provision
when the object was evident from the provision itself.
New Page 1
Reported :
37. Tax audit : S. 44AB of Income-tax Act, 1961 : In the case
of individual carrying on business as a sole proprietor, it is necessary to
comply with the provisions of S. 44AB only in respect of his business income and
not in respect of his other income.
[Ghai Construction v. State of Maharashtra, 184
Taxman 52 (Bom.)]
In this case the question for consideration before the
Bombay High Court was as to whether an individual who has income from
different sources including income from business is bound to have his income
from sources other than the business also audited u/s.44AB of the Income-tax
Act, 1961 ?
The Bombay High Court held as under :
“(i) The recommendation for the presentation of the
audited account was in all ‘cases of business or profession’ and not in
respect of the entire income of a person carrying on a business or a
profession. It is these recommendations which were accepted in the form of
S. 44AB of the Income-tax Act.
(ii) In the case of an individual carrying on business as
a sole proprietor, it is necessary to comply with the provisions of S. 44AB
only in respect of his business income. It would not be necessary to comply
with the provisions of S. 44AB in respect of his other income. In the case
of a professional, it is his professional income and not his income from
other sources which would be covered by the provisions of S. 44AB.”
New Page 1
Reported :
36. Income : Deemed dividend : S. 2(22)(e) of Income-tax Act,
1961 : A.Y. 1996-97 : Trade advance to shareholder, etc. : Not assessable as
deemed dividend.
[CIT v. Raj Kumar, 318 ITR 462 (Del.)]
The assessee was in the business of manufacturing
customised kitchen equipments. He was also the managing director and held
nearly 65% of the paid-up share capital of a company C. A substantial part of
the business of the assessee, was obtained through C. For this purpose, C
could pass on the advance received from its customers to the assessee to
execute the job work entrusted to the assessee. The Assessing Officer held
that the advance money received by the assessee is in the nature of the loan
given by C to the assessee and accordingly is deemed dividend within the
meaning of the provisions of S. 2(22)(e) of the Income-tax Act, 1961. He
therefore made the addition by treating the advance money as the deemed
dividend income of the assessee. The Tribunal deleted the addition.
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“(i) The word ‘advance’ has to be read in conjunction
with the word ‘loan’. Usually attributes of a loan are that it involves the
positive act of lending, coupled with acceptance by the other side of the
money as loan : it generally carries interest and there is an obligation of
repayment. On the other hand in its widest meaning the term ‘advance’ may or
may not include lending. The word ‘advance’ if not found in the company of
or in conjunction with the word ‘loan’ may or may not include the obligation
of repayment. If it does, then it would be a loan.
(ii) The word ‘advance’ which appears in the company of
the word ‘loan’ could only mean such advance which carries with it an
obligation of repayment. Trade advances which are in the nature of money
transacted to give effect to a commercial transaction would not fall within
the ambit of the provisions of S. 2(22)(e) of the Act.
(iii) The trade advance given to the assessee by C could
not be treated as deemed dividend u/s. 2(22)(e) of the Act.”
New Page 1
Reported :
35. Educational institution : Exemption u/s. 10(23C)(vi) of
Income-tax Act, 1961 : A.Y. 2007-08 : Assessee, deemed university, modified its
MOA as per the UGC guidelines to include in the objects clause extra mural
studies, extension programmes and field outreach activities to contribute to the
development of society : Assessee entitled to approval for exemption
u/s.10(23C)(vi).
[Jaypee Institute of Information Technology Society v.
DGIT (Exemption), 185 Taxman 110 (Del.)]
The assessee was a registered society. It was imparting
formal education by running an institute of information technology. On its
request, the UGC conferred on it the status of deemed university, subject to
the condition that the institute would revise/amend its Memorandum of
Association (MOA)/Rules as per the UGC model/guidelines. Accordingly the
assessee amended the MOA to include in the object clause extra mural studies,
extension programmes and field outreach activities to contribute to the
development of society. The assessee’s application for grant of approval for
exemption u/s.10(23C)(vi) of the Income-tax Act, 1961 was rejected on the
ground that education was not the only objective of the assessee-institute
inasmuch as the objective clause in the MOA mentioned that the institute was
also established for undertaking extra mural studies, extension programmes and
field out reach activities to contribute to the development of society.
On a writ petition filed by the assessee challenging the
said rejection, the Delhi High Court held as under :
“(i) In the instant case, the assessee was running an
educational institute imparting education in a systematic manner. The very
fact that it was granted the status of ‘Deemed university’ by the UGC, would
be a clinching factor insofar as institutionalised education conducted by
the assessee was concerned. It was imparting education in an organised and
systematic manner and was accountable to UGC even for maintaining the
standard of education. Further, in the assessee-institute, teachers were
employed and students enrolled were taught by these teachers; and they
remained under their control and supervision.
(ii) The main reason given by the respondent in rejecting
the application of the assessee was that the assessee-institute was having
multiple objectives and education was only one of them. In coming to that
conclusion, the respondent had been swayed by the so-called other
objectives, namely, ‘greater interface with society through extra mural,
extension and field action-related programmes’ stipulated in MOA. What was
perceived by the respondent was that those objectives were independent of
each other and it could not be said that the main object was education and
others were related to it. The first aspect which was totally ignored was
that said object was included at the instance of UGC, without which the UGC
would not have entertained the application of the assessee-institute for
grant of status of ‘Deemed university’. Obviously, the UGC would not insist
on including an objective, which was unrelated to ‘education’. There was a
clear purpose behind it. The aforesaid activity/objective was stated by the
UGC as a part of education. Normal schooling was provided by the assessee-institute.
What was emphasised by the UGC by necessitating incorporation of the
aforesaid objective was that imparting education was not limited to seeking
knowledge through textbooks alone. The UGC also wanted students to have
greater interface with society. That was necessary because of the modern
concept of education which needs to be imparted at schools’ and
universities’ levels.
(iii) If pure learning, which is one of the purposes of
the universities, is to survive, it will have to be brought into relation
with the life of the community as a whole, not only with the refined
delights of a few gentlemen of leisure. Real education is one which makes a
student socially relevant. For this purpose, his greater interface with
society is required. UGC perceives that this can be achieved through extra
mural, extension and field action-related programmes. These programmes may
include NSS and NCC activities, other social service programmes and
projects. It was with that purpose in mind that the aforesaid objective was
introduced so that students in the assessee-institute were able to get
‘real’ education. The main purpose, therefore, remained ‘education’ which
was imparted in a formal way by the assessee-institute with the status of
‘Deemed university’ through the help of teachers. The aforesaid activities
would only develop the knowledge, skill or character of the students further
by achieving education in true sense.
(iv) Therefore, the assessee-institute fulfilled the
requirement of imparting formal education by a systematic instruction. If an
institute/university introduces the courses with the objective of ‘greater
interface with the society through extra mural, extension and field
action-related programmes’, these are not the objectives independent of
education, but are an aid to the education. Therefore, the assessee-institute
fulfilled all the requirements of S. 10(23C)(vi) and was, thus, entitled to
grant of registration and, consequently, exemption under the aforesaid
provision.”
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23 Business loss : Shares held in subsidiary
company : Subsidiary company ordered to be wound up : Shares became of
insignificant value and written off : Loss to be treated as business loss
eligible for deduction.
[CIT v. H. P. Mineral and Industrial Development
Corporation Ltd., 305 ITR 111 (HP)]
One of the assessee’s subsidiary companies was ordered to be
wound up. The assessee had held the shares as stock in trade. The assessee
decided to write off the value of the shares held by it in the said subsidiary
company and claimed deduction of the same as business loss. The Tribunal allowed
the deduction, holding that there was no question of selling off the shares as
the subsidiary company had gone into liquidation.
On reference by the Revenue, the Himachal Pradesh High Court
upheld the decision of the Tribunal and held as under :
“Once a company had been ordered to be wound up, there was
no question of any party dealing in the shares of that company. The Tribunal
had come to a finding that the shares were stock-in-trade and had therefore,
allowed the loss. The loss had to be treated as a trading loss. The mere fact
that the shares were not sold was of no significance, since in fact the shares
could not have been sold and had become worthless.”
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Assessment : Extension of period of limitation : S. 150
of I. T. Act, 1961 : A. Y. 1993-94 : Grant of probate to assessee would not
extend the period.
Reported :
[CIT vs. Smt. Shobha Rani Shah : 309 ITR 263 (P &
H)]
The assessee had received the probate of her mother on
30.11.2000. On the basis of the probate the Assessing Officer issued notice
u/s. 148 of the Income-tax Act, 1961, on 31.03.2005 for the A. Y. 1993-94. The
Assessing Officer held that the period of limitation would not be applicable
in view of the provisions of Section 150 of the Act. The Commissioner
(Appeals) held that the effective date for invoking Section 150(1) was the
date of probate of the mother and consequently held that the notice u/s. 148
was beyond the period of limitation. The Tribunal dismissed the appeal filed
by the Revenue holding as follows :
” . . . . once I have held that no finding or direction
was given by the Hon’ble Judge in his order, the issue of notice u/s. 148 is
to be regulated by Section 149 of the Income-tax Act as in the order passed
by the Hon’ble Judge there is no finding or direction to be basis for a
notice within the extended period u/s. 150(1).”
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“In the present case, the Tribunal has rightly held that
the grant of probate by the Additional District Judge, Rohtak, had no
consequence to the assessment and that the order dated 30.11.2000, would not
cause the limitation to extend u/s. 150 of the Act.”
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Interest on borrowed funds : Deduction u/s.36(1)(iii) of
I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares
held partly as investment and partly as stock in trade : Shares purchased for
acquiring controlling interest in company : Interest on borrowed funds
allowable as deduction u/s. 36(1)(iii).
[CIT vs. Srishti Securities Pvt. Ltd. (Bom); ITA No.
71 of 2006: Dated 22.01.2009].
The assessee had purchased shares out of borrowed funds.
The shares were held partly as investment and partly as stock in trade. The
assessee’s claim for deduction of interest was rejected by the Assessing
Officer on the ground that the primary object of acquiring shares was not to
earn dividend but to acquire controlling interest in the company. The CIT(A)
bifurcated interest on pro rata basis between investment and stock in
trade and allowed the interest attributable to stock in trade. The Tribunal
allowed the assessee’s claim, holding that the interest is allowable u/s.
36(1)(iii).
On appeal by Revenue, the Bombay High Court followed the
judgment in the case of CIT vs. Lokhandwala Construction Industries Ltd.
260 ITR 579 (Bom), concurred with the judgment of the Calcutta High Court
in CIT vs. Rajeeva Lohana Kanoria 208 ITR 616 (Cal) and upheld the
decision of the Tribunal. The High Court held that the interest which was
disallowed to the extent of investment will have to be allowed as held by the
Tribunal.
Editor’s Note :
This related to an assessment year prior to insertion of
S.14A.
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Cash credit : Undisclosed income : S. 68 of I. T. Act,
1961 : Disclosure of diamonds in declaration under VDIS : Subsequent sale of
diamonds and receipt of consideration by cheque : Receipts shown in books of
account is not undisclosed income.
[CIT vs. Inder V. Nankani (Bom); ITA No. 128 of
2009 : Dated 24.02.2009].
The assessee had disclosed diamonds in a declaration under
VDIS. He subsequently sold the said diamonds and received consideration by
cheque. The amount received was shown in the books of account. The Assessing
Officer treated the sale consideration as undisclosed income and made addition
of the said amount to the total income of the assessee. The Assessing Officer
held that the assessee was unable to prove that he was actually in possession
and ownership of the diamonds. It is the case of the Revenue that these were
hawala transactions which were unearthed on the raid being conducted on the
two chartered accountants. The Tribunal deleted the addition.
On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :
“i) The entire submission on behalf of the Revenue is
that the first purchaser has in fact sold the diamonds to the second
purchaser whose whereabouts could not be traced and as such, the sale was
fictitious. The question is whether the order of the CIT(A) and ITAT suffers
from any error of law.
ii) In the instant case, admittedly the diamonds were
declared. The declaration was accepted by the Revenue and thereafter, the
assessee had paid the tax. The assessee thereafter had sold the said
diamonds and received consideration which is also disclosed in the books of
account. In these circumstances, the finding recorded by the Tribunal cannot
be faulted, namely, that the assessee had proved the possession of the
jewellery or diamonds at the time of declaration.
iii) In the instant case, the Assessing Officer was given
an opportunity to produce any material in his possession to hold to the
contrary. The Assessing Officer failed to comply with the said direction. In
these circumstances, CIT(A) proceeded to pass the order which order came to
be subsequently affirmed by the ITAT.
iv) The Tribunal in the instant case has held that the
assessee had disclosed the diamonds in his possession at the time of VDIS
declaration which was accepted. Once that be the case and the consideration
received from the purchaser which has not been doubted, the fact that there
is doubt about the second sale, cannot result in making addition in the
hands of the assessee.
v) In our opinion, considering the findings of facts in
the case, this is not a fit case where question of law would arise.”
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Export profit : Deduction u/s. 80HHC of I. T. Act, 1961
: Export turnover and total turnover : Export sale price to be modified as per
the approval by the RBI for including in the export turnover.
[CIT vs. M/s. Polycot Corporation (Bom); ITA No.
1241 of 2008: Dated 23.01.2009.]
In the appeal filed by the Revenue against the order of the
Tribunal, the Department had raised the following question :
“Whether on the facts and in the circumstances of the
case and law, is the Hon’ble ITAT right in directing the A.O. to compute the
deduction u/s. 80HHC of the Act after the books of account having been
closed/made up with the total export turnover ascertained, holding that the
reduction in the invoice amount having been approved by the RBI, the
original sales price stands modified to this extent and such modified price
only should be included as part of export turnover ?”
The Bombay High Court held as under :
“i) To avail of the benefit of Section 80HHC the proceeds
have to be brought into India within the time prescribed i.e., six
months or such extended period as may be allowed. In the instant case the
RBI granted time up to 30th June, 2001. The proceeds were brought into India
on 30 June, 2001.
ii) Here we may set out the areas of disagreement between
the Revenue and the assessee. It is the contention of the assessee that
while working out total turnover what will have to be considered is the
revenue which has been brought in during the course of that financial year
and if any moneys in respect of export proceeds have come subsequent to the
order of assessment, they will have to be considered in the said financial
year.
iii) The other factual aspect of the matter is that the
buyer proposed deduction in the export price, the respondents agreed to the
same after taking approval of the RBI to the extent of 30%. The respondents
are a totally export oriented unit. Moneys, therefore, in terms of the
approval granted by the RBI were brought in during the period as extended.
iv) The Tribunal in its order observed that once the RBI
has agreed to deduction in the invoice amount, the original sales price
stands modified and such modified price only should be taken as actual
export value. It is further observed that such adjusted export value should
only be included in the export turnover and the total turnover.
v) The contention of the Revenue was that, that should be
excluded from the export turnover.
vi) In our opinion, considering the facts and the
provisions of Section 80HHC, we cannot find fault with the conclusion
arrived at by the learned Tribunal.”
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Business expenditure : Deduction u/s. 37(1) of I. T.
Act, 1961 : A. Ys. 1996-97 and 2001-02 : Expenditure on production of films
for advertisement of products manufactured by assessee : Is business
expenditure allowable u/s. 37(1) ?
[CIT vs. Geoffrey Manners & Co. Ltd. (Bom); ITA No.
789 of 2008: Dated 09.02.2009].
The assessee incurred expenditure on production of films
for the purpose of advertisement for marketing the products manufactured by
it. The Assessing Officer disallowed the claim for deduction of the
expenditure, holding that it is capital in nature. The Tribunal allowed the
claim.
On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :
“i) A similar issue had come up for consideration before
the Punjab & Haryana High Court in CIT vs. Liberty Group Marketing
Division, 2008 (8) DTR Judgments 28. In that case the assessee had
claimed expenditure incurred on glow signboards, as also T. V. Films. The
expendi-ture was held to be revenue in nature.
ii) In our opinion the correct test to be applied in such
a case would be that if the expenditure is in respect of an ongoing business
of the assessee and there is no enduring benefit, it can be treated as
revenue expenditure. However, if it is in respect of business which is yet
to commence, then the same cannot be treated as revenue expenditure, as
expenditure is on a product yet to be marketed.
iii) The Tribunal on the facts of this case was clearly
within its jurisdiction in holding that the expenditure was by way of
revenue expenditure, as it was in respect of promoting ongoing products of
the assessee herein.”
New Page 1
22 Appellate Tribunal : Power of : A.Y.
1990-91 : The Tribunal has power to allow claim for deduction which was not made
in the return of income : Assessee claimed 1/5th revenue expenditure on deferred
basis: Tribunal can allow full revenue expenditure on accrual basis.
[CIT v. Jai Parabolic Springs Ltd., 172 Taxman 258
(Del.)]
For the A.Y. 1990-91, the assessee had written off in the
books certain revenue expenditure over a period of 5 years from the relevant
assessment year and, accordingly, the assessee claimed deduction of 1/5th of the
expenses in the relevant year on deferred basis. The claim was allowed by the
AO. In appeal, the CIT(A) allowed the claim for deduction of the entire revenue
expenditure in the relevant year. The Tribunal restored the matter to the AO to
consider the issue afresh. The AO again disallowed the claim holding that the
same was not claimed in the return of income. The CIT(A) allowed the claim. The
Tribunal upheld the order of the CIT(A).
In appeal before the High Court, the Revenue contended that
the Tribunal was not right, in law, in allowing the deduction when no such claim
was made in the return of income. The Delhi High Court dismissed the appeal
filed by the Revenue and held as under :
“(i) The revenue expenditure, which is incurred wholly and
exclusively for the purpose of business, must be allowed in its entirety in
the year in which it is incurred. It cannot be spread over a number of years
even if the assessee has written it off in his books over a period of a number
of years.
(ii) There is no prohibition on the powers of the Tribunal
to entertain an additional ground which according to the Tribunal arises in
the matter for the just decision of the case. Therefore, there was no
infirmity in the order of the Tribunal.”
New Page 1
Reported :
43 Penalty : Concealment of income : S. 271(1)(c) of
Income-tax Act, 1961 : A.Y. 2004-05 : Incorrect claim for deduction made
u/s.10(36) on the basis of advice from counsel : Claim bona fide : No
concealment : Penalty not justified.
[CIT v. Deepak Kumar, 232 CTR 78 (P&H)]
For the A.Y. 2004-05, the assessee had made a claim for
deduction u/s.10(36) of the Income-tax Act, 1961 on the basis of the advice
given by the counsel. The claim was found to be incorrect and accordingly was
disallowed. As regards the disallowed amount, the Assessing Officer held that
there was concealment of income and accordingly imposed penalty u/s.271(1)(c) of
the Act. The Tribunal cancelled the penalty.
On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :
“(i) The question concerning bona fide mistake or belief is
more or less a question of fact, which has been decided by the CIT(A) on the
basis of the affidavit filed by the counsel. There is no finding of
intentional or motivated mistake which might have been resorted to by the
assessee. It is not unknown that IT returns are filed through the tax experts
in the IT laws and, therefore, the advice given by the counsel can be acted
upon with bona fide belief to be correct.
(ii) There is no rule of law that the aforesaid issue
should have been only before the AO or there was any bar on the assessee not
to raise this issue before the Appellate Authority. The affidavit filed by the
counsel of the assessee has been readily accepted by the CIT(A) as well as the
Tribunal.
(iii) It is well settled that if on the evidence adduced
before the AO or the Appellate forum, a possible view has been taken, then
u/s. 260A, no substantive question of law could be framed merely because
another view is possible.
(iv) The appeal is, thus, without merit and accordingly the
same is dismissed”
New Page 1
Reported :
41 Deduction u/s.80-O of Income-tax Act, 1961 : A.Y. 2003-04
: Supply of architectural designs for use outside India : Receipt of fees in
foreign exchange : Assessee entitled to deduction u/s.80-O.
[CIT v. Charles M. Correa; 232 CTR 61 (Bom.)]
The assessee is an architect. In the A.Y. 2003-04 the
assessee had claimed deduction u/s.80-O of the Income-tax Act, 1961, in respect
of the professional fees received in convertible foreign exchange for providing
design to foreign enterprise. The Assessing Officer disallowed the claim. The
Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :
“(i) The object underlying S. 80-O is to allow a deduction
in respect of incomes received in convertible foreign exchange in
consideration for the use outside India of certain categories of intellectual
property, namely, patents, inventions, designs or registered trademarks. The
fact that the assessee supplies designs is not in dispute.
(ii) The contention that the assessee was providing
professional services and could not regarded as the owner of the intellectual
property has no merit. The income in respect of which a deduction is claimed
u/s.80-O was not income, generally speaking, received for rendering
professional services outside India. The income which was received was
specifically in consideration for use outside of the designs which were
supplied by the assessee.
(iii) For the purposes of S. 80-O, use that is made outside
India may be single or multiple use, which may vary upon the facts and
circumstances of each case. So long as the use has taken place outside India
and the payment which is received in convertible foreign exchange is in India,
the benefit of the deduction would have to be granted.
(iv) The assessee had prepared designs in India and had
supplied them to its foreign counterpart outside India in pursuance of the
contracts. Explanation (iii) to S. 80-O clarifies that services rendered or
agreed to be rendered outside India, would include services rendered from
India but shall not include services rendered in India. There is no dispute
about the fact that the designs were supplied and used outside India. All the
conditions requisite for an exemption u/s.80-O were fulfilled. For the
aforesaid reasons no substantial question of law would arise.”
