Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

Income from Capital Gains

SEC 2(14) Benarshilal Katarika (Cal.) Silver utensils consisting of Thalis, Kaloris, Tumblers, etc. meant for personal use although they may not be used daily. Therefore the gains arising on sale of such utensils cannot be taxable. Maharaja Rana Hemant Singhji (SC) Gold, Silver coins and bars used for pooja are treated as capital assets. Therefore, the capital gains are taxable on the sale of such assets. G.M. Omer Khan (SC) In the consideration as to whether a land falls under urban area, the population of municipality has to be taken into account and not the population of any are within the municipality. Therefore if any land is situated in the area having population less than 10,000 but the area is situated within municipality having population 10,000 or more, the land is considered as urban land. d C. Hanumantha Rao (2009) (Mad). Sale proceeds of silver oak trees (shade trees) standing in the coffee estate is taxable as capital gains and not exempt as agricultural income. Sec 2(47) BPL Sanyo Finance LTD. (2009) (Karn.) Where the share allotted to the assessee were forfeited by the company upon the assessees failure to pay the call money, the cancellation of allotment was held to be transfer within the meaning of section 2(47) of the Act and the consequent forfeiture of earnest money amounted to short term capital loss. Geetadevi Pasari (2009) (Bom) Capital gain on sale of immovable property was chargeable to tax in the year in which actual physical possession of the property is given to the purchaser even though the agreement is entered into in earlier year. Anarkali Sarabhai vs. CIT (SC) Redemption of preference shares amount to transfer u/s 2(47) G. Narasimhan (SC.) Reduction of share capital amounts to transfer and will subject to Capital Gain. Vania Silk Mills (P) Ltd. (SC)] Insurance claim received on account of destruction of asset is not chargeable to tax as Destruction does not amount to transfer. The above Judgement has been nullified in some specified cases by inserting section 45(1A) 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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Case Laws (Nov 2010) Sec 55

FCA

R anjeet K unwar

B.C. Srinivasa Setty (SC) In respect of self generated asset, the cost of acquisition is indeterminate. Therefore if a self generated asset is transferred, the capital gain cannot be computed and sales proceed will be a capital receipt not chargeable to tax. The above Judgement has been nullified in by inserting section 55(2) on the self generated assets defined u/s 55(2). Hitashi Estates Ltd. (2009) (Del) . Assessee dealing in real estate, tenancy right in respect of a building occupied by it for a long time constituted capital asset in its hands, notwithstanding that it was shown as stock in trade in its books of accounts and receipts from surrender thereof in favour of the owner gave rise to capital gains/loss. Sec 45(4) ALA Firm (SC) Where a firm is dissolved, the stock shall be valued at FMV at the time of dissolution of the firm and the surplus shall be taxable in the hands of firm as business income. Shakti Trading CO. (SC) Upon retirement or death of a partner, if the business of firm continues, or upon reconstruction of firm, the stock in trade shall be valued at book value (i.e. Cost or FMV whichever is lower). A.N. Naik Associates (Bom.) If a firm undergoes change in constitution and a capital asset is transfer to the retiring partner in settlement of his capital balance, section 45(4) would be applicable to the firm. The expression or otherwise should be understood as distribution before dissolution as well as after dissolution. R. Lingmallu Raghu kumar (SC) Upon retirement or death of a partner, if partner or his legal heir receives his share from partnership firm in net value of assets after deduction of liabilities as per the partnership deed, it cannot be said that the retiring partner or deceased partner has transferred his share in firm to other partners. Therefore, the excess amount over his capital balance (i.e. goodwill) received by the retired partner on his retirement is not chargeable to tax and the same is capital receipt. Sec 45(5) K.S. Krishna RAO (SC) Interest on enhanced compensation u/s 45(5) will be treated as Income from other sources

C.P. Lonappan & Sons (Ker.) 1/53, 1 Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

Facts:The assessees land was to be acquired by the State Govt. on 30-08-91, the assessee received Rs. 27,08,000 as advance towards compensation payable. On 18-12-92 a award was passed by land acquisition officer and under the award, the total compensation was declared Rs. 38,11,604. After the adjustment of advance money the balance was paid to assessee on 11-01-93. The A.O. contended that the entire compensation received should be subject to capital gains in A.Y. 1992-93.

Decision:HC observed that where an advance has been received, such advance cannot obviously be treated as nature of compensation, since it may be returnable in case the acquisition does not take place. Therefore it held that the entire award amount should be assessed only during the A.Y. 1993-94. Sec 47 Kalindi Investment Pvt. Ltd. (Guj.) Section 47(iv) and (v) cannot be applied, where any capital asset transferred by Holding co. to Subsidiary of a Subsidiary Company or vis-a-visa. Therefore if any capital loss arise on such transaction, it is eligible for set off. Definition of Holding company in Companies Act is wider and cannot apply for the purpose of Income tax Act. Gautam Sarabai Trust (GUJ.) If the consideration consists of something more than the share/shares in the amalgamated company then the assessee is not entitled to exemption u/s 47. Sec 48 and 49(1)

Facts:

Lalitben Hariprasad vs. CIT (2009) (Guj.)

HUF owned an immoveable property which came to be divided amongst members of HUF, in the process of partition, karta and HUF his wife (assessee) took one half share each of immovable property as property admitted of such physical partition. On partition karta and his wife had undertaken to pay certain amount to one of his sons for acquisition of his one forth share in immovable property Both the assessee claimed the amount as deduction in their respective returns while computing the capital gains. The said claim was disallowed on the ground that the property being HUF the only cost of acquisition in hands of original owner which could be allowed under section 49 whereas amount paid by each of assesses to other two members of HUF would not be covered under section 49.

Decision:
The Court held that the amount paid to other two members of HUF would be termed to be cost of acquisition of additional interest or additional shares acquired by them at the time of partition allowable deduction under section 48 of the Act.

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA Sec 51

R anjeet K unwar

Travancore Rubber and Tea Co. LTD. (SC) Advance money forfeited shall be deducted from the COA only when the capital assets will be sold and to extent of original cost of acquisition Where the advance money forfeited exceeds the cost, the excess shall be a capital receipt not taxable at all. Sec 54 V. Pradeep Kumar (Mad.) Mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated u/s 54. Therefore exemption would not be available if there has been a mere extension of an existing building. Decisions for cost of acquisition and Improvement V.S.M.R. Jaagadishchandran (SC) In case of transfer of mortgaged capital assets and the mortgage was created by the assessee himself, then any amount paid by the buyer to clear of the debts doesnt form part of COA or COI. Subramanium (Ker.) Where the assessee purchases a composite capital asset at on consolidated price, he is entitled to split the same. Therefore, where a building, which is constructed on a land (purchased more than 3 years back), is sold through a composite agreement, the assessee is entitled to bifurcate the sales consideration on the basis of fair market value and compute the two capital gains separately. The gain relating to land is LTCG, whereas the gain relating to building is STCG. Rm. Arunachalam (SC) If any property inherited by the assessee was placed under mortgage by previous owner and where such mortgage is cleared by the assessee, the amount paid by assessee for discharge is to be treated as cost of acquisition. Attili N. Rao. (SC)

Facts:Assessee mortgaged a property to State Govt. for securing payment of dues State Govt. sold the property by auction and realised the dues. After deducting the dues balance sale proceeds was paid to the assessee.

Decision:The entire sale proceeds shall be taken for the computation of capital gains. Amount dues shall not be deducted from sale proceeds for computing capital gains. Miss Piroja C. Patel 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

Compensation paid for eviction (removal) of hutment dwellers from land which is sold would be allowable as cost of improvement.

T axation of Dividend
Sec 56(2): chargeability about dividend Western States Trading Co. (P) Ltd. (SC) If the assessee is a dealer in shares then in respect of dividend income (not covered u/s 1150), he will be assessable under the head IFOS but the said dividend income shall be treated as Business Income for all purpose of the Income tax act and accordingly brought forward of the loss can be set off against such dividend. Sec 46(1) Sri Kannan Rice Mills LTD Where the liquidator sells the assets and distributes the cash realised to the shareholders, then Sec 46(1) shall not apply. The Co. shall be liable to tax on the capital gains arising from the sale of the assets. Sec 46(2) N. Bagavathy Ammal (SC)

Query / Issue:Company goes into liquidation; the assessee was shareholder in such company. The company distributes the assets of company including agricultural land to the assessee. The assessee claims that since agricultural land was given hence it has to be excluded while computing capital gains on assets received by the shareholder from a company.

Decision:SC held that the word Capital Asset has been used in section 45(1), 47, 48 but not in section 46. Hence the intent of law was to bring the all assets within scope of charge. Therefore the section 2(14) which defines capital assets cannot be apply in this case and the FMV of agricultural land shall be considered for determine the Sales Consideration of shares of liquidating company under section 46(2). Sec 2(22)(d) with capital gains G.Narasimhan (SC) On reduction of share capital the sale price of the share reduced shall be computed for the purpose of capital gain in the hands of shareholders ,as under:FMV of assets received on reduction of Share Capital Add: cash received Less: amount deemed as dividend u/s 2(22)(d) 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458 xxx xxx (xxx) xxx

Bright Professionals (P) Ltd.

Case Laws (Nov 2010) Sec 2(22)(e)

FCA

R anjeet K unwar

Query / Issue:-

P.K. Abubucker (Mad.)

Whether the advance given by the company to Managing Director (having more than 10% voting power) to repairs the damaged building which was given on rent to the company by MD, can be treated as deemed dividend under section 2(22)(e)

Decision:HC held that advance paid by company to MD will be deemed dividend under 2(22)(e). The fact that the advance is to be set-off against the future rents does not effect section 2(22)(e), hence amount paid to MD to reconstruct the damaged building is clearly as advance and to be treated as deemed dividend under section 2(22)(e).

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

Income from PGBP

Sec 32(1) :- Depreciation CIT vs. Doom Dooma India Ltd. (2009) (SC) The Supreme Court held that in case of manufacturer of tea, by virtue of rule 8D, only 40% of the income is taxed and consequently in deciding liability only proportionate depreciation is required to be taken in to account as that is the depreciation actually allowed. Dinesh Kumar Gulabchand Agrawal (Bom.) Held that the Depreciation will be allowed only when asset is actually put to use and if asset is only kept as ready for use and not put to actual use then depreciation will not be allowed. Nidhi Transport Corporation (Ker.) Ownership in respect of motor vehicle is determined by possession of the vehicle and the assessee has to prove that it is used for his business, even though the same were not registered in the name of the assessee under Motors Vehicles Act. Mysore Minerals Ltd. (SC) Where the assessee has taken the possession of a house in pursuance of an agreement to sell and it is not registered in his name, then he is deemed as owner of the house for claiming depreciation. Anand Theatres (2000) (SC) Theatre building and hotel building are treated as building and can not be treated as plant for the purpose of claiming depreciation. Madan and Co. (Mad.) A higher rate of depreciation is available for vehicles used in the business of running them on hire. Running on hire need not necessarily in assessee own business. If assessee carries on leasing business and as part of such business purchases Lorries and gives them on lease, such vehicles will qualify higher rate of depreciation. Dr. B. Venkata Rao (SC) Where the building is specifically designed to function a nursing home with equipments fitted to the wall in operation theatre, then that portion or the building can be regarded as plant. Sec 43(1) : Actual Cost

Facts:

Bokaro Steel Ltd. (Supreme Court)

Assessee-company received the following during the year, under which company was in process of constructing and erecting its plant and had not started any business

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

(i)

Rent charged by assessee from its contractors for housing workers and staff employed by contractor for construction work of assessee,

(ii) Hire charges for plant and machinery given to contractors for use in construction work of assessee, (iii) Interest from advances made to contractors for purpose of facilitating work of construction, and (iv) Royalty for excavation and use of stones on assessee's land for construction work.

Query: What should be the tax treatment of these receipts? Decision:

It was held that, all these receipts being basically connected with construction of assessee's plant, and therefore it would be reduced from the cost of the plant and could not be taxed as income. Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supreme Court) Interest paid during construction period is to be capitalised to the cost of the assets to which it relates. Interest earned during construction period cannot be reduced from the interest paid during construction period and the same is taxable as I/O/S Set off of interest paid and earned after construction period is possible and balance will be taxed.

Facts:

Funskool (India) Ltd. (Mad)

The assessee paid the additional customs duty in the subsequent period of acquisition and claimed depreciation during the period when the machinery was imported. The Tribunal allowed the claim of the assessee towards depreciation holding that the payment of additional customs duty had to be added to the cost of machinery imported.

Decision:
The Madras High Court allowed the assessee's claim for depreciation during the year in which the machinery was imported. Loyal Super Fabrics (Mad.)

Facts:
The assessee-company, engaged in the business of dyeing and processing of cloth, had claimed in its return a sum of Rs.6,80,908 being the expenses incurred for shifting the factory as revenue expenditure. The Assessing Officer disallowed the claim and treated it as capital expenditure. The Commissioner (Appeals) confirmed the order of the Assessing Officer. The Tribunal considering the reason for shifting the factory held that the expenditure incurred was revenue expenditure.

Decision:
The High Court held that the assessee did not have any option but to shift the factory due to opposition by the public against letting out of the sewage water. If the very survival of the assessee factory in the existing place itself was at stake, the question of applying the test of enduring 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

advantage did not arise. The test of enduring benefit was not certain and conclusive test and it could not be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. Therefore, the expenditure incurred by the assessee on shifting the factory was revenue expenditure. Sec 43(6) Kasturi & Sons Ltd. (1999) Money payable means only cash/cheque/bank overdraft etc. Sec 35 ARXET Manufacturing Co. If the scientific research asset sold without having been used for other purpose, AND Sales Proceeds more than Actual Cost Then; sales proceeds Less Indexed COA/COA = Capital Gains CIBA of India Ltd. (SC)

Where the scientific research is carried out by other person for the business of the assessee, then amount paid to other person will be treated as expenditure incurred by assessee on scientific research for its business. Sec 36(1)(iii) Indian Shavings Products Ltd. (Raj.)

Facts:The assessee was running its business in huge losses in the A.Y. 1989-90 and 90-91. During these years assessee had taken huge amount of loan from financial institutions and given advances (free of intt.) to its subsidiaries. The assessee paid the interest on such loan and claimed deduction on the ground that the assessee wanted to have control over another company after purchasing its shares.

Decision:Held that interest paid on huge amount borrowed in case of assessee business suffering huge losses and then advancing these loans free of interest to its subsidiaries cannot be claimed as deduction at it was not the business of the assessee to purchase and sale shares. Caldern Pharmaceuticals Ltd. (Cal.)

Facts:In the instant case, the assessee was a manufacturer of drugs, medicines etc. and was marketing the same. However, finding it difficult to look after both manufacturing and marketing, he entered it an agreement with its sister concern, appointing it as its selling agent. Since collection of outstanding 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

dues was slow, the assessee had to take a loan from market for the purpose of business and it had to pay interest which it claimed as deduction under section 36(1)(iii). The A.O. disallowed the claim.

Decision:Interest paid on capital borrowed for business purposes will be allowable under section 36(1)(iii) and will not be disallowed on the ground that the assessee had willfully and deliberately chosen not to collect its outstanding dues. Section 36(1)(iii) does not contemplate a situation where an assessee is required to take positive steps for realizing its dues in order to be eligible for the claim for deduction of interest under this section. Sec 36(1) T. Veeradhadra Rao. (SC) The Successor of a business is entitled to claim deduction in respect of debt created by the predecessor even though the debt does not relate to business of assessee but to the business he succeeded. Network Limited (Del.) On issue of partly convertible debentures, the expenditure will be allocated on prorata basis as capital and revenue. Expenditure incurred in connection with the issue of share is directly relatable to the expansion of capital base, so it is capital expenditure. Expenses related to non convertible portion will be claimed as revenue expense. Star Chemicals (Bombay) P. Ltd. (2009) (Bom.)

Facts:
The Assessing Officer disallowed the claim of bad debt which was written off by the assessee. But the CIT(A) deleted the said disallowance. Further, the Honble ITAT confirmed the said deletion. On appeal by the Department in High Court.

Decision:
The Court held that the provisions of section 36(1)(vii) of the Income-tax Act, 1961 were to be read with the Board Circular No. 551 dt. 23-1-1990 and if the assessee had written off the debt as a bad debt, that would satisfy the purpose of the section. The High Court dismissed the appeal. Amendment to section 36(1)(vii) of the Income-tax Act, 1961. Whether obligatory for the assessee to prove that debt has become bad as long as writing off was bonafide. The High Court held that to treatment of the debt as a bad debt had to be a commercial or business decision of the assessee depending on the relevant material in possession of the assessee. Once the assessee records debts as bad debt in the books of account that would prima facie prove that it was a bad debt unless the Department for good reasons holds to the contrary. Once that is accepted, then the assessee would not be called upon to discharge any further burden. After the amendment, it was neither obligatory nor the onus on the assessee to prove that the debt written off it was in reality a bad debt as long as it was bonafide and based on commercia l wisdom or expediency. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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Case Laws (Nov 2010)

FCA

R anjeet K unwar

Suresh Gaggal vs. ITO (2009) (HP). As per amended provisions of section 36(1)(vii), once the assessee has written off debt in his books of account, it is not requirement of law that he should establish that debt has, in fact become bad. Sec 37(1) Woodward Governor (2009)(SC). Where the assessee carrying on the mercantile system of accounting claimed that: (i) The additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes was allowable as deduction u/s 37(1) in the year of fluctuation in the rate of exchange and not in the year of repayment of such loans; and (ii) The actual cost of imported assets acquired in foreign currency is entitled to be adjus ted u/s 43A (prior to the amendment by the FA 2002) on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the different liability, HELD approving the claim that: (a) The term expenditure in s. 37 covers an amount which is a loss even though the said amount has not gone out from the pocket of the assessee. The loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure u/s 37(1) ; (b) Profits and gains are required to be computed in accordance with commercial principles and accounting standards (AS-11);

(c) Accounts and the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits; (d) The fact that the department taxed the gains on fluctuation on the basis of accrual while disallowing the loss is important and indicates the double standards adopted by the Department;

(e) U/s 43A (pre-amendment), the change in the rate of exchange subsequent to the acquisition of asset triggers the adjustment in the actual cost of the assets. Actual payment of the liability as a consequence of the exchange variation is not required. The amendment of s. 43A by the FA 2002 w.e.f. 1.4.2003 is not clarificatory. Microsoft Corporation of India (2009) (Del). Amount paid to landlord for premature termination of lease is an expenditure on account of commercial expediency and hence entitled for deduction under section 37. Polyplex Corpn. Ltd. (2009) (Delhi) Expenses incurred for development of website to promote various business activities of assessee and 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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Bright Professionals (P) Ltd.

Case Laws (Nov 2010)

FCA

R anjeet K unwar

for display of its information, products were allowable as revenue expenditure. Indian Visit Com. (P) Limited. (2009) (Del.)

Facts:
The Assessee engaged in travel business, incurred certain expenditure towards development of website for the purposes of its business. This expenditure was claimed as revenue expenditure. The AO treated the same as capital expenditure. Tribunal accepted the claim of the Assessee.

Decision:
The Honble High Court upheld the Tribunals Order with the observation that merely because a particular expenditure may result in an enduring benefit would not make such an expenditure of capital nature as what is to be seen is real intent and purpose of expenditure and as to whether there is accretion of fixed capital of Assessee. As expenditure on website would not change the fixed capital of an assessee, even though website might provide enduring benefit to Assess ee, expenditure incurred has to be regarded as revenue expenditure. Brooke Bond India Ltd (Supreme Court) Where any expense is incurred for issue of share capital, the same is in the nature of capital expenditure and is not allowable as deduction. Fascel Ltd. (2009) (Delhi ITAT) Fees paid to Registrar of Companies for increasing share capital falls within the ambit of S. 35D and allowable as deduction. Mamta Enterprises (2004) (Ker.) In this case assessee was builder. He constructed the 8th floor in building which against the local municipal laws. He made request to authority to compound the offence. The authority demands compounding fine and assessee paid the fine and claimed the same as business expense under section 37. It is held that the assessee was not entitled to claim such deduction. S.M. Holding & Finance (Pvt.) Ltd. (Bom.)

Query /Issue :Debenture issued by company is to be redeemed at 100% premium after 10 years, hence assessee claimed equitable deduction. Every year for the premium payable A.O. saying that it was contingent liability hence A.O. added back the figure to the income of the assessee.

Decision:Bombay HC held that the auditor certified that Zero-interest unsecured redeemable convertible debentures, hence accepting the certification of auditor. In view thereof the assessees claim is allowable. Assam Brook Ltd. (Cal.)

Facts:The assessee company (situated in remote are) and its employees were the member of a club. The assessee company paid a sum of Rs. 5 lakhs to the club for renovation and repairs of the club 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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Case Laws (Nov 2010)

FCA

R anjeet K unwar

building which had been damaged. The assessee claimed such payment as business expenses. The said claimed was rejected by A.O. as well as Tribunal on the ground that the club was not owned by the assessee company.

Decision:Held that since the company was situated in remote area and club was the only source of recreat ion for its employees, so if the assessee paid some amount for renovation and for running of the club in an effective way, it will be said the such payment is made in the interest of the assessee, so that its employees remains happy and therefore said payment must be held to be business expenditure. And it will be allowed under section 37. Sambandam Spinning Mills Pvt. Ltd. (Mad.)

Facts :The assessee claimed the medical and travelling expenses incurred by the assessee-company for providing medical aid to its managing director in the USA in a sum of Rs. 5,34,655 as a revenue deduction treating the expenditure as solely for the business cons ideration. Likewise the air fare of the managing directors wife and another director, who accompanied the managing director, was also claimed. The assessing officer rejected the claim.

Decision :Held that where the employer is not obliged to meet such medical expenses under the terms of employment, the payment so made cannot be regarded as having been made on the ground of commercial expediency. Therefore the expenditure was not allowable as business expenses. Madras Industrial Investment Corporation Ltd. (SC) Where a company issues debentures at a discount, it incurs a liability to pay a huge amount that what it was borrowed. The liability to pay the discounted amount is a liability which has been incurred by the company for the purpose of its business. Therefore the discount allowed of Rs. 10 lakhs will be deductible spread over a period of the life of the debentures. Bombay Dyeing & Manufacturing Co. Ltd. (Supreme Court)

Facts:
The assessee caompany contributed Rs.2,25,000/- to Maharashtra Housing Board for construction of flats for company workers. The ownership of the flats was to remain with the Housing Board and the assessee's workers were allowed to occupy the flats.

Decision:
It was held that the company cannot claim depreciation since the flats are not owned by it. The said expenditure is exclusively for the welfare of the employees and is allowable as revenue expenditure u/s 37(1) Section 40(a)(i) Indian Alluminium Co Ltd. (Supreme Court) Assessee failed to deduct TDS on fees paid to foreign collaborator and subsequently the collaborator refused to pay the same. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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Case Laws (Nov 2010)

FCA

R anjeet K unwar

Assessee paid TDS from his own pocket and claimed deduction of the same. It was held, fees paid to foreign collaborator, on which assessee failed to deduct TDS, will not be allowed. Sec 40(ba) Rashik Lal & Co. (SC) Salary paid by an AOPs to Individual who is the member of AOPs as representative capacity will be disallowed even if such salary is attributable to his personal skill. This is because explanation 2 to section 40(ba) is applicable only for interest and not remuneration. Sec 40A(2) CIT vs. Amrit Soap Co. (2009) (P&H). Where the interest paid by assessee to close relative and associate concern is not more than the rate at which interest was paid to other creditors the interest so paid cannot be disallowed by invoking the provisions of s. 40A(2). Sec 41(1) Chemicals (P) Ltd. (Guj.)

Facts:The assessee company had obtained unsecured loans from various creditors, due to financial difficulties faced by company; a compromise was reached between the assessee company and its creditors. As per the terms of the compromise, certain creditors remitted unsecured loans amounting to Rs. 1,77,052 and interest amounting to Rs. 2,96,171. Such remitted interest had been shown by assessee as income from PGBP under section 41(1) in its ROI. The A.O. look the view that the remittance of unsecured loan was also a benefit accruing to the company and brought the same to tax. CIT(A) confirmed the A.O. order. ITAT held that the remission of unsecured loans could not be taxable by invoking the provision of section 28(iv) read with section 41(1).

Decision:The HC observed that section 41(1) can be invoked only when any deduction has been allowed during the course of assessment for any year in respect of loss, expenditure or trade liability and subsequently, the assessee obtains any amount in respect of such trading liability by way of remission or cessation of such liability. In the present case since there had been no deduction in respect of the unsecured loan, the provision of section 41(1) cannot be applied. Sec 41(4) P.K. Kaimal Assessee must be the same for recovery of Bad debts u/s 41(4).

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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Case Laws (Nov 2010) Sec 43B

FCA

R anjeet K unwar

McDowell & Co. Ltd (2009) (SC). Furnishing of bank guarantee is not actual payment of tax or duty as required under section 43B of the Income-tax Act. McDowell & Co. Ltd. (2009) (SC). Bottling fee payable by the assessee under the Rajasthan Excise Act, 1950 and rules framed there under receivable by the State for parting with its exclusive privilege to deal in portable liquor, is not in the nature of any sum payable by way of tax, duty cess and, therefore it cannot be disallowance under section 43B. Chowrangee Sales Bureau (HC) The sales tax must be routed through P&L A/c. If the assessee has not routed the sales tax through P&L A/c than the A.O. should assume that the sales tax has been routed through P&L A/c. Sec 44 General Insurance Corporation (SC) Amount set apart by GIC for redemption of preference shares is treated as expenditure under Rule 2(2)(a) of General Insurance Business Rules, shall be allowed and can not be added back for computing profits and gains of business. Sec 44A Bankipur Club Ltd. (Supreme Court) Income of mutual concern is exempt from tax only if it is received from its members. A club is a mutual concern and is entitled to claim exemption in respect of receipt from members and includes the followings:

Surplus arising from sale of drinks, refreshments etc. or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature. Sec 44B + Sec 172 A.S. Glitter (SC)

It has been held that payment of tax u/s 172 is at par with advance tax instalments and therefore in case of a regular assessment u/s 172(7) the assessee is entitled to refund as well as a interest on such refund. Sec 44AD Brij Bhusan lal parduman (SC) For the purpose of section 44AD, Gross receipts will not include the value of material supplied by Contractee or Government as there is no element of profits. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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R anjeet K unwar

General concept / miscellaneous issues in PGBP City Mills Distributors Pvt. Ltd. (Supreme Court) Where any income is earned by the promoters of a company for any period prior to incorporation cannot be taxed in the hands of the company since at the time of accrual of income, the assessee company was not in existence. The same shall be taxable in the hands of promoters in the status of AOP/BOI. Balchand Ajit Kumar (MP)

Facts:There was a search operation conducted at the business and residential premises of the assessee. During search operation, the credit sales not reflected in books of account were found. The A.O. added Rs. 8,19,255 towards the sales profit. The CIT(A) made conclusion that entire credit sale could not constitute the total income, and accordingly followed the method of adding a net profit rate of 5% on sales i.e. 40,960. The ITAT in its order came to hold that the recourse adopted by CIT(A) was reasonable.

Decision:HC held that the amount of sales by itself could not represent the income of the assessee who had not disclosed the sales. The entire sales can be taken as income only if it is proved that purchases and other cost (in respect of such sale) had been claimed as expense. In other words, if purchases made had not been claimed as expense then %of net profit approach is to be followed and if purchases already claimed but not sales, sales- income approach is to be followed. V.P. State Industrial Development Corporation (SC) Any underwriting commission received by the underwriters on the shares subscribed by them goes to reduce the cost of shares and hence shall not be treated as income.

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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R anjeet K unwar

Set-off and carry forward of losses

Madhukant M. Mehta (SC) Where the Individual was carrying on proprietary concern and on death of the individual, the business is carried on by legal heirs by forming a partnership firm the firm has succeeded to the business of the deceased and was entitled to carry forward and set of the losses of deceased as per sec. 78(2). Shri Subhulaxmi Mills Ltd. (SC) The provisions of section 79 are applicable only in case of carry forward of los ses. The carry forward of depreciation is covered u/s 32(2) and therefore sec.79 will not restrict the carry forward and setoff of depreciation. J.H. Gotla (SC) Loss can be set off against income included under section 64.

Deduction from GT I
Jyoti Jain (2009) (Raj) For the purpose of claming deduction u/s. 80-IA of the Act, the prescribed audit report in Form No. 10CCD is to be furnished along with the return of income itself. Deduction cannot be allowed to the assessee if the same is filed during the course of assessment proceedings before the AO. Contimeters Electicals (P) Ltd. (2009) (Del.) Requirement of filing the audit report along with the return is not mandatory and if the audit report is filed at any time before the framing of the assessment, requirement of section 80IA(7) would be met. Seeyan Plywoods If assessee is not entitled to claim deduction under section 80IA, 80-IB etc, in any year because of the value of old machinery exceeds 20% of value of total machinery, the assessee will be entitled to claim deduction in the subsequent years if the value of old Plant and Machinery does not exceed 20% of value of total Plant and Machinery in subsequent years.

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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R anjeet K unwar

T axation of Firm
Sec 40(b) Bagyalakshmi &CO.(SC) Held that HUF cannot be a partner, therefore if an individual represents HUF, he may be accountable to the HUF for the FUNDS only but he is a partner in his individual capacity as far as the firm and partners are concerned. Accordingly any remuneration paid to him shall be governed by section 40(b) as it governs any other working partners. Therefore Firm can claim salary paid to such a partner subject to the terms of the deed and conditions u/s 40(b). Sec 188 Empire Estate (SC)

If there is no provision in partnership deed that the firm would not be dissolved on the death of a partner,

the firm gets dissolved on the death of a partner. When surviving partner or partners continue the business of the firm with or without admitting a new partner, it is covered under section 188 (treated as succession) and not in section 187 (change in constitution).

Two assessments are required to be made. One on the old firm, up to the date of the death of the partner, and another on the new firm formed thereafter. Sec 189 Banyan and Berry (Guj.)

If there is dissolution of a firm, section 189 creates a legal fiction of deeming the dissolved firm to be in existence for the purpose of making assessment including the pending proceedings. But it does not extend to income or profits which accrue the dissolution of the firm. Therefore if any income covered under section 176(3A) is received by the partners of erstwhile firm, the only person who could be assessed are the partner who actually received the income and the firm.

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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R anjeet K unwar

T axation of Company
Explanation to Sec 115JB Veekaylal Investment Co. (P) Ltd. While computing the book profits v/s 115 JB, the capital gains on sales of capital asset as investments should be included.

SEC 139(5) Dhampur Sugar Mills Ltd. The revised return substitutes the original return from the date of the original return was filed. Therefore, if the assessee discovers any omission or wrong statement in a revised return he is entitled to furnish revised return. Kumar Jagdish Chandra Sinha (SC.) Where belated return is filed u/s 139(4), the assessee cannot file a revised return u/s 139(5). Periyar District Co-Op. Milk Produces union Ltd. (Mad.)

If the return of loss filed under section 139(3) within time allowed under section 139(1), all provisions of the Act shall apply as if such return has been filed under section 139(1). Hence if assessee files revise return u/s 139(5) and increase his loss, the same will be allowed to set off and carry forward. Goetze (India) Ltd. (SC) Facts: The assessee filed its return of income for the relevant assessment year without claiming a particular deduction. Later on, it sought to claim the deduction by way of a letter addressed to the Assessing Officer. The deduction claimed by assessee was disallowed by Assessing Officer on the ground that there was no provision under the Act to amendment the return of income by making an application at the assessment stage and the only way to claim the deduction which was not claim in original return is revised return. Decision: The Supreme Court held that this decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. Therefore, the assessee can claim deduction only by filing a revised return. The Supreme Court further clarified that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254. SEC 142(2A to2D) West Bengal State Co-operative Bank Ltd. (Cal.) 1/53, 1 Floor, Lalita Park, Laxmi nagar, Delhi -92 19 Phone 47665555 (30Lines), 9811136987, 9811042458
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Bright Professionals (P) Ltd.

Case Laws (Nov 2010) Query:(i) (ii)

FCA

R anjeet K unwar

Can A.O. direct the assessee for special audit, without examining books of accounts? What is the duty of Commissioner before giving approval for special audit under section 142(2A)?

Facts:Assessee was in banking business. Books of Account and documents were regularly audited by Co. Operative Audit Directorate under section 44AB. The A.O. decided to reopen the assessment for the relevant period. While the assessee was exchanging correspondence, meeting queries and supplying information, it was directed by A.O. to get its accounts audited under section 142(2A). Commissioner approved the said proposal of the A.O. for special audit. HC in the present case observed the following points:Under section 142(2A), A.O. must understand the nature and complexity before issuing any proposal for special audit and if A.O. has not examined the books of account then how he can say that he was not able to understand the nature and complexity of business. It is must for A.O. to form opinion as regards the complexity of account and for this he must examined the books of account but in this case he never asked for books of account to be produced. A.O. in his proposal to Commissioner had not stated the reasons for special audit. And as regards the duty of Commissioner, the law has imposed the duty on Commissioner under section 142 that he should exercise this power as a approving authority the proposal of A.O. under section 142(2A) and before approving he should examine that whether the proposal of A.O. deserved to be approved. In the present case Commissioner had not done any attempt to do that. Hence the Commissioner approval is not within the law and so, HC, set aside the order for special audit under section 142(2A). SEC 143(1) S.R. Koshti (Guj.) An intimation served to the assessee under section 143(1) will not constitute an assessment. Therefore if an assessee files a revised return after the service of intimation under section 143(1) but before the time allowed u/s 139(4), it will be duly considered by the Assessing Officer.

SEC 143(2) Vishnu and Co. P. Ltd. (2009) 319 ITR 151 (Delhi). Notice u/s. 143(2), served after office hours on last date, no authorised person was present at the premises to receive, notice was affixed. Notice affixture not valid, though the assessee appeared in person not relevant. Assessment not valid.

SEC 145(3) 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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British Paints (India) Ltd. SC. The assessing officer has the power to adopt the correct method of valuation of closing stock instead of wrong method adopted by the assessee, for a long period.

V.K.J. Builders & Contractors (P) Ltd. (2009 ) 318 ITR 204.(SC) Closing stock of earlier year has to be treated as opening stock of current year and therefore where the opening stock of current year shows a lower value than the value of closing stock of earlier year as finally determined by the AO, the same is willing to rectification under s. 154.

SEC 147 ICICI Bank Ltd. Vs. K. J. Rao (Bom.) Where the original assessment was made either under section 143(3) or section 147, such assessment cannot be reopened beyond a period of 4 years by virtue of proviso to section 147 if the assessee has disclosed fully and truly all material facts necessary for the purpose of such assessment. If assessee had disclosed all material facts but claimed higher depreciation erroneously, it will not be a case of failure to disclose fully and truly all material facts. Therefore notice issued u/s 148 after the expiry of 4 years is invalid. JhunJhunwala Vanaspati Ltd. (All.) Facts:The A.O. assessed the income of A.Y. 1990-91 at Rs. 62.47 lakhs as against loss of Rs. 24.62 lakhs claimed by the assessee. The CIT(A) set aside the assessment order and referred back to A.O. to make fresh assessment. However the A.O. subsequently issued a notice under section 148 to the assessee. Decision:HC held that once CIT(A) passed an order of remand, the assessment proceedings became pending before the A.O. and notice under section 148 cannot be issued during pendency of assessment proceedings. Therefore the notice under section 148 issued to the assessee was invalid. Syal Leasing Ltd. Vs. Assistant Commissioner of Income tax (P & H) Query:If A.O. has sufficient Reason to believe that income of the Assessee had escaped assessment. Can A.O. issue notice under section 148. Facts:Assessee claimed depreciation on certain vehicles, which it claimed that they were leased but later on A.O. investigate to read the Agreement and concludes that these are not lease Agreement but finance agreement. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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R anjeet K unwar

As per A.O. assessee was not entitled to claim the depreciation as assessee cant claim depreciation in case of finance agreement, assessee can claim in case of lease agreement. Consequently, the A.O. issued a notice under section 148 to the assessee. Hence assessee had escaped income from assessment. HC held that A.O. had rightly defined agreement as finance agreement and not leased agreement, and this was also affirmed by CIT (A). Hence HC held that A.O. has sufficient reason to believe and he had acted within law to issue notice under section 148. Juhi Metal Works (All.) Query/Issue:To decide whether any information regarding law which is provided by the Audit Party can be used to reopen the case under section 147 by the Assessing Officer. Decision:In this case the condition to claim deduction under section 80J (omitted by finance Act 1989) is get the account audited but the assessee did not comply the audit condition and claim the deduction, at this point party has raised the query. The HC held that it is a valid case for reassessment proceeding. However it was decided by the SC that an opinion by the internal audit party could not constitute information and reason to believe and therefore the A.O. could not re-open the assessment under section 147. In nutshell if any query raised by the audit party needs further drill down and investigation then query/objection of audit party cannot be treated as reason to believe for section 147. There is still door open for department which is section 263 Garden silk Mills Pvt. Ltd.(Guj.) Audit party cannot express an opinion on the admissibility of an item of expenditure, since it should be decided by the A.O. having regard to the facts of the case. Therefore in the given case Audit Objection cannot be the basis for reopening the assessment under section 147. Sun Engineering work Pvt. Ltd. (SC) Assessee can make a fresh claim during the course of reassessment proceedings only if the same relates to the income sought to be taxed as escaped income by the A.O. in the reassessment proceeding. He cannot allowed a claim which he either failed to make or which was otherwise rejected during the original assessment. SEC 153 Purushotam Das T. Patel The court held that the assessment can be said to be complete when the total income is determined and tax is levied thereon through a notice of demand u/s 156. SEC 154 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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R anjeet K unwar

Hind Wire Industries Limited (SC.) If any re-assessment is done, the time limit of 4 years for rectification counted from the date of reassessment order and not from the original assessment order. SEC 254(1) Mcorp Global (P) Ltd. (2009)309 ITR 434(SC). The Tribunal has no power enhancement and not empowered to take back the benefit granted to the assessee by AO. AO having granted depreciation in respect of 42,000 bottles leased out by the assessee, that benefit could not be withdrawn by the Tribunal. SEC 119 Oman International Bank (2009) 313 ITR 128 (Bom). that only brought forward losses of past Though the Circulars issued by the CBDT are not binding on the court, it is binding on the authorities and while it is for the Court to read the section in its proper context, while so reading the Court will bear in mind the circular issued by the CBDT. Circulars are sometimes issued to obviate difficulties in the operation of the provisions and these are aspects which Courts do bear in mind while considering the Circulars. Accordingly, Circulars have to be taken into account.

SEC 132(1)(ii)(b) S.R. Batliboi & Co. (2009) 31 DTR 187 (SC). It is open to the department to copy the data relating to the specified three entities of the assessee group from the two laptops which were seized from the procession of auditor of firm.

SEC 80P Udaipur Sahkari Upbhokta Thok Bhandar Ltd. (2009 ) 315 ITR 21 (SC). The Supreme Court held that the burden is on the assessee to establish that the income comes within the four corners of s. 80P(2)(e). The deduction is available only in respect of income derived from letting of godowns or warehouses, where the purpose is for storage, processing or facilitating the marketing of commodities. The Supreme Court confirmed the order of the High Court where it had held that the assessee was storing the goods in the godowns for its own trading activity and hence not eligible for deduction u/s. 80P. Sec 192 Eli Lilly and Co. (India) P. Ltd. (2009) 312 ITR 225 (SC). TDS on foreign salary is required even though assessee is not the payer Where the assessee-employer obtained expatriate-employees from a foreign company and the said employees, continuing to be employees of the foreign company, received salary and allowance in their home country in foreign currency and the question arose whether the assessee was obliged to deduct tax 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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thereon at source u/s 192 and the High Court held that the assessee was not obliged to deduct tax at source on the ground that the payment was by the foreign company and not by the assessee, HELD, reversing the High Court that:

(i) Though the payment of salary to the expatriate was made by the foreign company outside India, the TDS provisions did apply as the Act had extra-territorial operation as there was a nexus between the said salary and the rendering of services in India; (ii) U/s 9 (1) (ii), salary received abroad is deemed to arise in India if it is for services rendered in India. This charging provision has to be read with the machinery provision of s.192 and both are part of an integrated code; (iii) S. 192 requires the employer to deduct tax after estimating the salary payable to the employee. The act of estimation is akin to computation of income. In making the estimate, s. 9 (1) (ii) has to be taken into account; (iv) On facts, as it was found that the salary paid by the foreign company was for services in India the same was deemed to accrue in India u/s 9 (1) (ii) and the assessee ought to have deducted tax u/s 192 though it was not the payer; (v) Levy of interest u/s 201 (1A) is mandatory and has to be calculated from the date of default to the date of payment either by the assessee or the payee-employee; (vi) However, levy of penalty u/s 271C is not mandatory or compensatory or automatic. Penalty can be levied only if there is no good and sufficient reason for the failure to deduct tax at source. On facts, as the issues were controversial and the assessees acted bona fide, penalty could not be imposed.

194H Singapore Airlines Ltd. & Ors. (2009) 22 DTR 129 (Del). Air tickets sold by assessee, an airline company to its travel agent at a concessional rates was held to be a sale transaction on principal to principal basis, does not amount to payment of commission to the agent as such the assessee is not liable to deduct tax at source (TDS) under the provisions of s. 194H of the Act. 10(5), 192 ITI Ltd. (2009) 183 Taxman 219 (SC). An employer is under no statutory obligation to collect evidence to show that its employee has actually utilised amount paid towards leave travel concession /conveyance allowance for purpose of TDS u/s. 192. 234A Pranoy Roy (2009) 222 CTR 6 (SC). The Supreme Court held even though the return of income is filed late, if the assessee has paid the taxes before the due date of the filing of the return which is not less than the tax payable on the returned income which has been accepted, no interest can be levied u/s. 234A.

1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

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Case Laws (Nov 2010) 271(1)(c)

FCA

R anjeet K unwar

Sangrur Vanaspati Mills Ltd. (2009) 308 ITR 18 (SC). Apex Court dismissed the special leave petition of the department against the order of Punjab and Haryana High Court in ITA No. 470 of 2007 (2008) 303 ITR 53, where by the High Court dismissed the from the order of Tribunal canceling the penalty following 254 ITR 191 and 158 ITR 85 in which the Court had held that provisions of section 271(1)(c) are not attracted when the income of the assessee is assessed on estimate basis and additions are made thereon. SEC 263 Greenworld Corporation (2009) 314 ITR 81 23 (SC). An order passed by the assessing officer cannot be revised only because another view is possible.

SEC 115VC,115VA,115VC(d ) South India Corpn. Ltd. (2009) 180 Taxman 319 26 DTR 36 (Ker.) Concept of the the main object of company in s. 115VC(d), in absence of any provision to contrary in Chapter XII-G, has necessarily to be understood in manner in which that term is understood in common parlance without being tied down to any requirement of Companies Act to classify objects of a company in to principal and ancillary and show them distinctly in object clauses in memorandum of association of company, hence, only on the basis of object clause of company the provisions of tonnage tax cannot be denied. Wealth Tax Miss Deanna J. Jeejeebhoy (2009) 222 CTR 202 (Bom). Refundable security deposit taken by the assessee from the licence of the property being a debt in respect of the property which is chargeable to wealth tax, is fully deductible as debt owed irrespective of the fact that a part of the amount obtained by the assessee was invested in capital investment Bonds which are not chargeable to wealth tax. Lt. Gen. (Retd.) R.K. Mehra (2010) 228 CTR 205 (P&H) Land belonging to the assessee on which he has unauthorisedly constructed a farm house stands excluded from the definition of urban land as per Expln. 1 (b) to s. 2 (ea) as no construction was permissible on said land and therefore, it cannot be treated as an asset under the WT Act.

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