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17 TDS : S. 194C(2) of Income-tax Act, 1961 : Payment to
sub-contractors : Assessee a registered co-operative society constituted by
truck operators : Contracts with companies for transportation of their goods :
Contracts executed by member truck operators :
Companies make payment to assessee after deduction of tax u/s.194C : Member
truck operators are not sub-contractors : Assessee not required to deduct tax at
source on payment to member truck operators u/s.194C(2)
[CIT v. Ambuja Darla Kashlog Mangu Transport Co-op. Society,
188 Taxman 134 (HP)]
The assessee was a registered co-operative society
constituted by truck operators. It entered into contracts with companies such
as cement manufacturers for transport of their goods. The company, which had
entered into contract with the assessee, deducted tax at source u/s.194C(1) on
payments made to the assessee. Thereafter, the assessee-society paid that
entire amount to its members, who had actually carried the goods, after
deducting a nominal amount of Rs.10 or Rs.20 for administrative expenses known
as ‘parchi charges’ for running of the society. The Assessing Officer held
that the assessee was liable to deduct tax at source from the amount paid to
the members/truck operators in terms of S. 194C(2). The Tribunal held that
since there was no sub-contract between the society and its members, the
provision of S. 194C(2) was not attracted.
On appeal by the Revenue, the Himachal Pradesh High Court
upheld the decision of the Tribunal and held as under :
“(i) The main contention of the Revenue was that since the
assessee had a separate juristic identity and each of the truck operators, who
were members of the assessee, had separate juristic identity, they were
covered within the meaning of S. 194C(2). It was urged by the Revenue that
since the assessee was a person paying a sum to the member-truck operator who
was a resident within the meaning of the Act, TDS was required to be deducted.
That argument did not take into consideration the heading and entire language
of S. 194C(2) which clearly indicates that the payment should be made to the
resident who is a sub-contractor. The concept of a sub-contract is
intrinsically linked with S. 194C(2) and if there is no sub-contract, then the
person is not liable to deduct tax at source, even if payment is being made to
a resident.
(ii) In the instant case, the assessee-society was created
by the transporters themselves who formed the societies or unions with a view
to enter into a contract with companies. The companies entered into contracts
for transportation of goods and materials with the society. However, the
society was nothing more than a conglomeration of the truck operators
themselves and had been created only with a view to make it easy to enter into
a contract with the companies as also to ensure that the work to the
individual truck operators was given strictly in turn, so that every truck
operator had an equal opportunity to carry the goods and earn income. The
society itself did not do the work of transportation. The members of the
society were virtually the owners of the society. It might be true that they
both had separate juristic entities, but the fact remained that the reason for
creation of the society was only to ensure that work was provided to all the
truck operators on an equitable basis. A finding of fact had been rendered by
the authorities that the society was formed with a view to obtain the work of
carriage from the companies since the companies were not ready to enter into a
contract with individual truck operators but had asked them to form a society.
(iii) Admittedly, the society did not retain any profits.
It only retained a nominal amount as ‘parchi charges’ which was used for
meeting the administrative expenses of the society. There was no dispute with
the submission that the society had an independent legal status and was also a
contractor within the meaning of S. 194C. It was also not disputed that the
members had a separate status, but there was no sub-contract between the
society and the members. In fact, if the entire working of the society was
seen, it was apparent that the society had entered into a contract on behalf
of the members. The society was nothing but a collective name for all the
members and the contract entered into by the society was for the benefit of
the constituent members and there was no contract between the society and the
members.
(iv) For the
foregoing reasons, S. 194C(2) was not attracted and the assessee-society was
not liable to deduct tax at source on account of payments made to the truck
owners who were also members of the society.”
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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.”
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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.”
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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).”
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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.”
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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.
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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.”
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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.”
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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.”
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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.”
