Practice Problems

Amount received deferred from income recognition on account of the obligations to be discharged

2011-12-15T13:40:00.001+05:30

Issue

CLL is an educational institution run by CLL Charities. The institution collected fees from students for two years (consisting of four half-yearly terms) and in the event of students discontinuing, they are eligible for refund of fees for the remaining half-yearly terms. The educational institution consistently follows cash system of accounting. The fee received for the subsequent year was not recognized in the income and expenditure account of the institution for the reason that in the case of any dropout of any student the fee had to be refunded. The Assessing Officer in assessment held that the assessee having admitted that it is following cash system of accounting cannot defer such actual receipt to the subsequent year. Decide the correctness of action.

Opinion

The facts of the case show that the assessee is following cash system of accounting and has collected fees in advance for two years consisting of four half yearly terms. In the event of any student dropping out, the fee relating to the unexpired term or terms has to be refunded and on this condition only the amounts were collected upfront by the institution.

The apex court in CIT v. Shoorji Vallabhdas & Co (1962) 46 ITR 144 (SC) has held that the income tax levy, is on income. The Act takes into account two points of time at which the liability to tax is attracted viz. the accrual of income and its receipt. The substance of the matter is the income which is chargeable to tax regardless of an entry or no entry in the books of account. When the income is received and subsequently given up it remains income though it is given up and similarly an item of income for which an entry though made would not be an income unless it has accrued in favour of the assessee. When the income has not resulted at all there is neither accrual nor receipt of income even though an entry to that effect is passed in the books of account.

Advance amount received will not have the character of income till the obligation embedded with the advance is discharged. Case laws such as Lakshminarayana Films v. CIT (2000) 244 ITR 344 (Mad); CIT v. Shah Construction Co Ltd (1999) 237 ITR 814 (Bom) are relevant in this context.

In K.K.Kullar v. Dy.CIT (2009) 23 DTR (Delhi)(Trib) 231 the assessee an advocate received retainership fee in advance and admitted only a part as income of the year and did not offer the balance as income. The Revenue contended that the assessee following cash system of accounting had not offered the entire receipt as income which is contrary to the method of accounting followed by him. The tribunal held that the amounts not offered as income relate to the services to be rendered subsequently. The amount received in advance, represents the debt pertaining to services to be rendered subsequently. The excess amount had to be returned in the event of non –performance in future. Therefore, the amount received did not become the income of the assessee. The amount received hence could not be subjected to tax.

In Career Launcher (India) Ltd v. Asstt. CIT (2011) 56 DTR (Del) (Trib) 10 similar such issue was decided where a part of the coaching fees received was treated as advance of the next accounting year. The tribunal held that the entire receipts could not be taxed as income of the year and held that even non-refundable advance money could not be subjected to tax. It held that the amount of fee which accrued to the assessee as income during the relevant previous year is only chargeable to tax and not the entire receipt.

Position under DTC: Section 90 to section 103 of the DTC deal with computation of total income of non-profit organizations. Section 92(1) says that non-profit organizations have to account receipts and payments in accordance with cash system of accounting. In spite of following cash system of accounting it is possible that all the receipts could not be treated as income if the obligation to perform is embedded in the receipt and in the event of non-performance, the obligation to repay / refund remains therein. Hence these decisions might be relevant even in DTC regime.

Source: The Tax Referencer, Volume 120, Issue no.3, Dt.18.07.2011
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Deduction in respect of advance payment of duties and taxes

2011-12-15T13:38:00.001+05:30

Issue

BP & Co engaged in manufacture of commodities liable for excise duty made advance payment of Rs.15 lakhs before the goods were removed from factory premises. The assessee excluded the value of duty on closing stock but claimed the advance payment as allowable expenditure. The Assessing Officer contested both the claims of the assessee and held that the closing stock must be inclusive of duties and taxes and the actual payment is not eligible for deduction under section 43B. Decide.

Opinion

Section 145A deals with valuation of inventory. It says that the valuation of purchase and sale of goods and inventory shall be in accordance with the method of accounting regularly employed by the assessee and it should be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Section 145A inserted by the Finance (No.2) Act, 1998 has provided for inclusive basis of closing stock valuation as a mandatory measure. Thus the valuation of the assessee by excluding the value of duty on closing stock is not in consonance with the provisions of law. The value of inventory and the applicable amount of duties and taxes are to be aggregated and disclosed in the tax statements.

Section 43B provides for deduction in respect of statutory payments which are allowable on actual payment basis. The amount so paid is eligible for deduction irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him. Hence, even for an assessee following mercantile system of accounting these statutory payments are deductible on actual payment basis regardless of the year in which the liability to pay such sum was incurred as per regular method of accounting employed by him.

In Dy.CIT v. Glaxo Smithkline Consumer Health Care Ltd (2007) 107 ITD 343 (Chd) (SB) similar such issue came up before the tribunal. It was held that the deduction for excise duty is allowable on payment basis even though such payment is made before incurring liability in respect of such amount. It was held that it is not necessary that the liability to pay is incurred first and only on such payment the deduction could be made on actual payment basis.

In CIT v. Modipon Ltd (2011) 334 ITR 106 (Del) the assessee made advance payment of excise duty to the extent of Rs.14.71 lakhs even before the goods were removed from the factory premises. The contention of the Revenue that only on removal of goods that the amount remitted could be claimed as deduction under section 43B was rejected by the court. Contrary view holding that when the payment is in advance and it does not relate to the year it will not be eligible for deduction was the decision in Gopi Krishna Granites India Ltd v. Dy.CIT (2001) 251 ITR 337 (AP).

Hence, it is possible to claim that the advance payment of excise duty is eligible for deduction regardless of the fact that the liability to pay was not incurred prior to such payment.

Position under DTC: Section 35(1)(xxxv) says that tax (not being a tax under this Code), duty, cess, royalty or fee by whatever name called is deductible as operating expenditure if the amount is actually paid. Therefore, the position in DTC is the same as it exists now under the Income-tax Act, 1961. It seems that incurring of liability is not a pre-condition for allowance of the claim in the DTC.

Valuation of inventory on the closing date is not specifically given in DTC however, section 33(1)(iii) dealing with computation of gross earning from business says that “the value of inventory as on the close of the financial year” is to be adopted. The opening stock of inventory, purchase of raw materials, stores, spares and consumables or stock in trade are dealt with in operating expenditure contained in section 35 of the DTC do not also specify that the tax paid thereon are to be included.

Source : The Tax Referencer, Volume 120, Issue No.3 Dt.18.07.2011
www.tpcc.in

2011-12-15T13:28:00.002+05:30

Issue

TCL Private Limited had filed its return of income for the assessment year 2006-07 and the assessment was completed under section 143(3) in March 2008. The assessee had claimed deduction under section 80-IA which was also accepted in the assessment. The Assessing Officer issued a notice under section 148 dated 31st March, 2011, which was served on the assessee on 7th April 2011. The assessee sought the reason prompting reopening of assessment made by the Assessing Officer. The Assessing Officer informed the assessee that wrong claim of deduction under section 80-IA was the reason for reopening the assessment.

The assessee claims that (a) the notice issued was barred by limitation and (b) there was no sufficient cause for reopening the case. Decide.

Opinion

Proviso to section 147 says that where an assessment has been made under section 143(3), no action for reopening the case shall be taken after the expiry of 4 years from the end of the relevant assessment year unless the income chargeable to tax had escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, for that assessment year. In Kanubhai M.Patel (HUF) v. Hiren Bhatt Or His Successors to Office and Others (2011) 334 ITR 25 (Guj) it was held that the expression ‘issue’ in the context of issuance of notices, writs and process would mean, to send out; to place in the hands of proper office for service. The court accordingly held that the expression ‘shall be issued’ used in section 149 must be read in that manner.

For the assessment year 2006-07 the time period of 4 years expired on 31.03.2011. The service of notice on 07.04.2011 is thus is barred by limitation.

Assuming the case is contested on the sufficiency of cause prompting the reassessment, provisions of section 147 have to be applied. In Titanor Components Limited v. CIT (Writ No.71 of 2005 decided on 09.06.2011) the assessment was completed for the assessment year 1997-98 under section 143(3), the Assessing Officer reopened the assessment for the reason that the assessee had wrongly claimed deduction under section 80-IA of the Act which was also allowed by him.

On writ, the court held that the Assessing Officer for invoking reassessment provisions must show that there was failure on the part of the assessee to disclose fully and truly material facts necessary for assessment. It held that section 147 does not provide a fresh opportunity to the Assessing Officer to correct an incorrect assessment unless the mistake in the assessment is due to the failure of the assessee to fully and truly disclose all material facts necessary for assessment. The Assessing Officer had not recorded any such failure and merely had claimed that the assessee had claimed certain deductions which he was not entitled to. The court held that there is a difference between a wrong claim made by the assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts fully and truly.

It may be recalled that in Hindustan Lever Ltd v. R.B.Wadkar, Asstt.CIT (2004) 268 ITR 332 (Bom) it was held where the reasons of the Assessing Officer for reopening the assessment do not show any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, he cannot invoke jurisdiction for reassessment. In a case of the same assessee (i.e.) Hindustan Lever Ltd v. R.B.Wadkar, Asstt.CIT (2004) 268 ITR 334 (Bom) the assessee had claimed expenditure towards stamp duty which was allowed in original assessment. Reassessment after four years for disallowing the same was held as invalid for the reason that there was no failure on the part of the assessee to disclose material facts at the time of original assessment.

In view of the above, though the Assessing Officer may invoke reassessment provisions upto 6 years from the end of the relevant assessment year, since there was no failure on the part of the assessee in disclosing fully and truly all material facts the time limit got curtailed to 4 years. As the disclosure of the assessee was full and true, no reassessment could be made for disallowing a wrong claim allowed earlier.

Position under DTC: Section 159 deals with reopening of assessment and the proviso to section 147 of the present dispensation giving some relief to the taxpayers now is not incorporated into the DTC. Therefore, the Assessing Officer in DTC regime need not have to prove that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for initiating a reassessment proceeding. Thus the proposal in DTC is in favour of the Revenue.

Source : The Tax Referencer Vol 120 Dt.18.07.2011

Retrospective amendment and subsequent judgment prompting action under section 154.

2011-12-05T10:38:00.001+05:30

Issue:

XYZ & Co filed its return of income for the assessment year 2008-09 on 10.06.2008. The return was processed and subsequently assessment under section 143 (3) was completed in December 2009. During the course of assessment, certain deductions and claims were disallowed by the Assessing Officer. The assessee based on the retrospective amendment made subsequently claimed that the order of the Assessing Officer has defect apparent on record which requires rectification under section 154. Also decide whether a subsequent Supreme Court judgment prompt a rectification under section 154?

Opinion

The claim of the assessee in respect of certain deductions was disallowed by the Assessing Officer based on the law prevailing on the date of assessment. A subsequent amendment of law, may be retrospective, whether would make the order liable for rectification under section 154, is to be decided.

If the issue is debatable the provisions of section 154 cannot be invoked in spite of a subsequent retrospective change of law (CIT v. M.S.Aggarwal (2009) 308 ITR 69 (Del)).

An amendment though retrospective will not unsettle an order if it was made earlier as per the provisions of law prevailing at that time. The apex court in CIT v. Max India Ltd (2007) 295 ITR 282 (SC) has held that when the order was consistent with the law at the time it was passed notwithstanding it was amended retrospectively at a later point of time, will not entitle a revision under section 263. When revision under section 263 is not possible, the question of invoking section 154 is also impossible. This is because section 154 allows only rectification of errors apparent on record and whereas section 263 empowers revision by looking into the correctness of assessment. The time limit for section 263 is less than the time limit prescribed under section 154. Thus when section 263 could not be invoked, it is not possible to conceive a situation where section 154 could be applied.

The apex court in Mepco Industries Ltd v. CIT (2009) 319 ITR 208 (SC) has held that the right to rectify mistake apparent on record under section 154 cannot be made on mere change of opinion. Subsequent judgment of the Supreme Court and rectification based on such judgment would only amount to rectification prompted by a change of opinion. Therefore, rectification based on Supreme Court judgment is not permitted since the order passed by the Assessing Officer originally would have been in consonance with the law as interpreted at that time.

Position under DTC: Section 161 of the DTC deals with rectification of mistake and the time limit is four years from the end of the financial year in which the order sought to be amended was passed. It also says that any mistake apparent on the face of the record is eligible for such rectification. It seems that the present position with regard to rectification of mistake apparent on record will continue without any change in the DTC regime also.

Source: The Tax Referencer, Volume 120 dt.01.08.2011
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Levy of penalty when one business is audited under section 44AB and the rest are not audited.

2011-12-05T10:36:00.001+05:30

Issue:

Raj is engaged in the business of trade in textiles and also manufacture of certain industrial items. The units are located at different places and there is no interlacing or intermixing of funds. The assessee has made annual turnover of more than Rs.100 lakhs in both the businesses. While the accounts of textile business were audited under section 44AB of the Act, the account books of the other business was not audited. The Assessing Officer computed 0.5% of the turnover of both the businesses and levied maximum penalty of Rs.1 lakh. Is he justified?

Opinion

Section 44AB mandates that every person must get his books of account audited where the turnover, sales or gross receipt exceeds Rs.60 lakhs in a year. Section 44AD being a presumptive provision will apply where the turnover does not exceed Rs.60 lakhs. If the assessee covered by section 44AD does not offer income at 8% or more of the turnover, sales etc., then also the books of account are to be audited as per section 44AB(d).

Factually, the assessee in this case, has two businesses located at different places and both having turnover exceeding Rs.100 lakhs. The presumptive provision contained in section 44AD hence cannot be applied.

The assessee has obtained his books of account of the textile business audited as per section 44AB and whereas the unit engaged in manufacture of some industrial items was not subjected to audit under section 44AB.

The Assessing Officer has aggregated the turnover of both the businesses and levied 0.5% of the turnover or Rs.1 lakh whichever is less as penalty. In this case, the monetary limit of Rs.1 lakh is the penalty leviable since the turnover of both the businesses had exceeded Rs.100 lakhs.

When the assessee has subjected the books of account liable for audit under section 44AB such business could not be made liable for penalty under section 271B. In Asstt. CIT v. Smt.Bharti Sharma (2011) 44 SOT 230 (Del) the assessee had carried on two businesses of which only one of them was subjected to audit under section 44AB but the Assessing Officer aggregated the turnover of both the businesses and levied penalty. The tribunal held that since the assessee had failed to get the books of account audited in respect of one business, she could be made liable to pay penalty only in respect of such business and not on the total turnover of both the businesses.

The tribunal held that nothing has been provided in law or rules where the assessee having more than one business but gets books of account audited in respect of one business and fails to get the accounts audited in respect of others. Section 271B is also silent about such a situation. The tribunal referred to R.B.Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 (SC) and held that equitable considerations though not applicable in interpreting tax laws yet it has to be interpreted reasonably and in consonance with justice. The tribunal accordingly held that penalty under section 271B must be confined to the business for which audit was not conducted as per section 44AB and such penalty cannot be levied in respect of business for which such audit under section 44AB was made.

Position under DTC: Section 88(1) prescribes the monetary limit for getting the books of account audited. The limits are Rs.25 lakhs in the case of persons carrying on any profession and Rs.100 lakhs for persons carrying on business. The penalty provision is contained in section 232(1)(a) and the quantum is, not less than Rs.50,000 but which shall not exceed Rs.2 lakhs. This would mean that some discretion is vested with the Assessing Officer for levy of penalty. The procedure for levy of penalty is contained in section 233 of the DTC.

Source: The Tax Referencer, Volume 120 dt.01.08.2011
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Disallowance under section 14A would not arise unless there is income chargeable to tax.

2011-12-05T10:32:00.001+05:30

Issue:

ABC (P) Ltd has paid up share capital and reserves and surplus of Rs.500 lakhs. During the year 2009-10 it had borrowed Rs.1000 lakhs from various financial institutions and invested Rs.1200 lakhs in shares of companies. For the financial year 2010-11 it has not received any dividend from the companies but proposes to claim interest on monies borrowed from financial institutions as a deduction. Decide whether the provisions of section 14A would be applicable for disallowing the interest claim of the assessee.

Opinion

Section 14A has the title “Expenditure incurred in relation to income not includible in total income”. It says for computing total income under Chapter IV (consisting of five heads of income) no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income.

The Assessing Officer has to determine the amount of expenditure incurred in relation to such income which does not form part of the total income, in accordance with rule 8D of the Income-tax Rules if he is not satisfied with the correctness of the claim made by the assessee.

Section 14A(3) says that such amount of expenditure to be disallowed shall be determined by the Assessing Officer even where the assessee claims that no expenditure was incurred by him in relation to such income, which does not form part of the total income under the Act.

From the above, the conditions for applying section 14A are (i) no expenditure will be allowed as a deduction where the income does not form part of total income; (ii) the Assessing Officer will determine the amount of expenditure incurred in relation to such income when he is not satisfied with the correctness of the claim of the assessee; and (iii) such disallowance of expenditure will apply even where the assessee claims no expenditure was incurred in respect of such income i.e. exempt income.

In M/s. Siva Industries & Holdings Ltd v. Asstt. CIT (ITA No.2148/Mds/2010 decided on 20.05.2011) the aspect of disallowance of expenditure under section 14A, when could be made, was discussed in detail. The assessee filed its original return disallowing the interest expenditure to the extent of Rs.42 crores. Later, a revised return was filed wherein the disallowance to the extent of Rs.30.90 crores was withdrawn. The Assessing Officer accepted the claim of interest payment to the extent of Rs.8.14 crores and the balance of Rs.33.86 crores was disallowed by him. The assessee explained in detail the various transactions of borrowings and investments and fairly agreed that out of borrowings only Rs.8.68 crores was connected to investment in shares. Some of the borrowings made and for which interest was charged to revenue account did not show any nexus to the investment in shares. The assessee explained that it had not claimed any dividend income as exempt from tax and therefore the provisions of section 14A could not be invoked. It was also contended that only when there was an income which did not form part of total income under the Act during any relevant assessment year, no deduction in respect of expenditure incurred for earning such income which does not form part of total income, was allowable. During the relevant assessment year the assessee did not have any income which did not form part of total income and therefore no disallowance under section 14A could be made.

In CIT v. Winsome Textile Industries Ltd (2009) 319 ITR 204 (P&H) the assessee engaged in manufacture and sale of cotton yarn made investment in shares. The Assessing Officer disallowed interest on the amount of investments on the ground that the dividend income was exempt from tax and the provisions of section 14A are applicable. The court held that since the assessee did not make any claim for exemption, the provisions of section 14A would not be applicable.

The tribunal while deciding M/s.Siva Industries (Supra) also referred to the apex court decision in the case of CIT v. Walfort Share & Stock Brokers (P) Ltd (2010) 326 ITR 1 (SC) and enunciated the following principles which emerged from the decision.

a) the mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee;

b) section 14A is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed;

c) the principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business;

d) the basic principle of taxation is to tax net income. This principle applies even for the purposes of section 14A and expenses towards non-taxable income must be excluded;

e) once a proximate cause for disallowance is established – which is the relationship of the expenditure with income which does not form part of the total income – a disallowance has to be effected.

The tribunal held that for application of section 14A there must be (i) income which is taxable under the Act for the relevant assessment year; and (ii) there should also be an income which does not form part of the total income under the Act during the relevant assessment year. If either one is absent, section 14A(1) has no applicability.

If we assume that section 14A would apply even when the assessee does not have any income which does not form part of total income, then it would lead to conclusion that the expenditure in relation to investment would stand for disallowance. If this would continue and go on accumulating, when the assessee liquidates the investment and derives gain that will also be taxed. These are not contemplated under section 14A.

Thus once there is no claim of income which does not form part of the total income, there cannot be any disallowance in relation to an investment which may or may not give rise to any income which does not form part of total income. Since the investments made have not generated any dividend income, the disallowance of interest expenditure would not arise in this case.

Position under DTC: Section 18(1)(a) of the DTC says that any expenditure attributable to income which is not included in total income shall not be allowed deduction. Incomes which are not to be included in the total income are listed in the Sixth Schedule. It contains any dividend declared, distributed or paid to a company or a non-resident in respect of which dividend distribution tax has been paid under section 109 of the DTC.

Source: The Tax Referencer, Volume 120 dt.01.08.2011
www.tpcc.in

Bank FD interest income for a club and application of mutuality principle

2011-11-28T15:47:00.000+05:30

Issue

Mount View Club having 200 members received annual subscription from the members and also provided services to the members by way of recreation in its premises. The surplus funds were deposited in a bank which fetched some interest income to the club. The assessee claimed that it operates on mutuality principle and hence the surplus including bank interest is not chargeable to tax. The Assessing Officer however held that the bank interest earned by the trust had affected its status of mutual association and taxed the entire income of the club. Decide.

Opinion

The apex court in CIT v. Bankipur Club Ltd (1997) 226 ITR 97 (SC) referred to Halsbury’s Laws of England, fourth edition, Reissue Volume 23, paragraphs 161 and 162, (pages 130 and 132), relevant law is stated thus:

“Where a number of persons combined together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax.

Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.

Members clubs are an example of a mutual undertaking; but where a club extends facilities to non-members, to that extent the element of mutuality is wanting”.

In CIT v. Kumbakonam Mutual Benefit Fund Ltd (1964) 53 ITR 241 (SC) it was held that the essence of mutuality is the complete identity of contributors and participants to the common fund. However, it is not necessary that in what capacity such member is contributing or participating in the mutual concern (CIT v. Indian Paper Mills Association (1994) 209 ITR 281 (Cal)). The arrangement or the relationship between the club and members should be of non-trading character (CIT v. Bankipur Club Ltd (1997) 226 ITR 97 (SC)). Even a company form of organisation could satisfy the test of mutuality (CIT v. Royal Western India Turf Club (1953) 24 ITR 551 (SC)). The concept of mutuality and exempting income from tax is based on the principle that no man can make profit out of himself, just as he cannot enter into a trade or business with himself (CIT v. West Godavari District Rice Millers Association (1984) 150 ITR 394 (AP)).

Revenue generated by means of incidental activity will not be defeating the concept of mutuality provided the dominant object of the assessee was to render assistance to the members and incidental revenue generation will not affect its mutuality status. (CIT v. Standing Conference of Public Enterprises (2010) 186 Taxman 142 (Del).

However, where members are admitted on temporary basis when the hall is let out to them for rent and later such temporary membership ceases, it could be viewed as a conduit adopted for availing tax benefit in the guise of mutual association. Such case would fail and the tax exemption could be denied (CIT v. Trivandrum Club (2006) 153 Taxman 481 (Ker.)).

Surplus funds deposited with institutional members and interest income thereon was held as breach of the principle of mutuality and hence was held as chargeable to tax in Madras Gymkhana Club v. Dy.CIT (2010) 328 ITR 348 (Mad). Similar such view was taken in favour of revenue in CIT v. Common Effluent Treatment Plant, (Thane-Belapur) Association (2010) 328 ITR 362 (Bom); Sports Club of Gujarat Ltd v. CIT (1988) 171 ITR 504 (Guj).

Recently, in Madras Cricket Club v. ITO (2011) 334 ITR 238 (Mad) following the decision in the case of Madras Gymkhana Club (Supra) it was held that the interest income from fixed deposits in a bank was chargeable to tax and such portion of income will not be eligible for tax relief.

Decision in favour of the assessee could be found in Canara Bank Golden Jubilee Staff Welfare Fund v. Dy.CIT (2009) 308 ITR 202 (Karn) in which it was held that interest on investments and dividend income on shares as non-taxable incomes applying the principle of mutuality in spite of such incomes flowing from outsiders i.e. non members.

Since the club has no dealing with outside body, the income or surplus earned from the members could not be subjected to tax. However, the interest income earned by parking surplus funds is a prudent decision for earning income which might be subjected to tax. Decisions favouring assessee and revenue show that the issue has not attained finality.

However, it is opined that only such interest income would be chargeable to tax in any case and the income earned from services provided to the members will fall within the concept of mutuality and hence would not be liable to tax.

Position under DTC: The principle of mutuality is not separately dealt with in DTC. However, the principles enunciated with regard to mutuality by means of various court judgments would continue to remain applicable in the DTC regime also.

Source: The Tax Referencer, Volume 120 dt.25.07.2011
www.tpcc.in

Net consideration on sale of depreciable assets kept in capital gain deposit account vis a vis its validity for tax exemption:

2011-11-28T15:45:00.002+05:30

Issue

Raj Industries owned by Shri.Raj sold entire plant and machinery for Rs.40 lakhs in December 2010. The written down value of the machinery was Rs.15 lakhs at the time of sale. All the plant and machinery were acquired way back in April 2004. Raj owns one residential house which is self occupied by him. He deposited the net sale consideration in capital gain deposit account in March 2011 and claimed that the amount so deposited is meant for acquiring a residential house and thus eligible for exemption under section 54F. Is the amount of capital gain exigible to tax?

Opinion

Section 50 deals with computation of capital gains in the case of depreciable assets. Excess of sale consideration over written down value is chargeable to tax as capital gain from the transfer of short term capital asset. It is apparent that the sale consideration exceeded the written down value of entire block of plant and machinery by Rs.25 lakhs and is chargeable to tax as capital gain.

In CIT v. Assam Petroleum Industries (P) Ltd (2003) 262 ITR 587 (Gau.) the assessee received compensation from the Dy.Commissioner, Kamrup for acquisition of its land and building. The assessee invested the entire compensation by purchasing IDBI bonds and claimed exemption of the capital gains under section 54E of the Income-tax Act. The Revenue rejected the claim of the assessee. The court held that section 50 is a special provision where the mode of computation of capital gain is substituted where the assessee has claimed depreciation on capital assets. Section 50 does not say that depreciated asset shall be treated as short term capital asset. Section 54E is meant for providing exemption in respect of the amount deposited in specified avenues on sale of long term capital asset. Section 54E is an independent provision which is not controlled by section 50 of the Act. It has application where long term capital asset is transferred and the amount is invested or deposited in any specified asset mentioned in section 54E. Capital gain received on sale of depreciable asset which was held for more than 36 months when invested or deposited under section 54E, the assessee is eligible for the benefit contained therein. The decision hence was in favour of the assessee.

In CIT v. Ace Builders (P) Ltd (2006) 281 ITR 210 (Bom) the assessee was a partner in a firm and got allotment of flat on dissolution of the firm. The assessee had claimed depreciation in respect of the flat. On sale of flat, the net sale consideration was deposited in `UTI Capital Gain Scheme’ with a view to claim exemption under section 54E. The court held that there is nothing in section 50 to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. Secondly, that it is a well established law that a fiction created by the Legislature has to be confined to the purpose for which it was created. Thus section 50 is confined to computation of capital gains only and cannot be extended beyond what is not stated in the statute. Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset and therefore the exemption available under section 54E cannot be denied to depreciable asset by referring to the fiction created in section 50. The court accordingly held that the benefit of section 54E is available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50.

Similar such decision could be found in CIT v. Delite Tin Industries in ITA 1118 of 2008 dated 26.09.2008. The special leave petition of the Revenue against the order passed in Delite (Supra) was dismissed by the Supreme Court on 21.08.2009 (see 322 ITR (St.) 8 (SC)).

The assessee Raj had deposited the net consideration in capital gain account scheme within the prescribed time and seeks exemption under section 54F. Since the assessee has only one residential house at the time of transfer of long term capital asset, he is not hit by the disqualification contained in the proviso to section 54F(1). The amount deposited hence is eligible for exemption subject to the conditions to be satisfied as per section 54F(1) viz. acquisition of residential house within 2 years from the date of transfer or construction of residential house within a period of 3 years after the date of transfer of capital asset (though the subject matter of transfer was an asset on which depreciation was claimed earlier).

Readers may note a recent decision in CIT v. Rajiv Shukla (2011) 334 ITR 138 (Del) in which it was held that the deposit of sale proceeds from depreciable asset in capital gain account scheme was sufficient enough for claiming exemption under section 54F.

Position under DTC: In DTC, depreciable assets are subject to tax as per the provisions contained in sections 37 to 42. Any excess of sale consideration over the written down value of depreciable assets is chargeable to tax as business profit as per section 42. Where the sale consideration is less than the written down value of depreciable assets, such deficiency is deductible as terminal allowance under section 40 of the DTC. Parking of sale consideration on transfer of depreciable asset will not be considered whatsoever under the head ‘capital gains’ and therefore the controversy discussed above would not arise in DTC regime.

Source : The Tax Referencer Volume 120 dt. 25.07.2011
www.tpcc.in

Gift from HUF to a coparcener and the taxability of the same

2011-11-28T15:41:00.001+05:30

Issue

Vijay received a cash gift of Rs.5 lakhs from his father Ramji, Karta of HUF. The amount received belongs to HUF consisting of Karta Ramji, Vijay and two more coparceners. Vijay claims that the amount received from HUF is as good as receipt of gift from ‘relatives’ hence not liable to tax. The Assessing Officer held that the term ‘relative’ as per Explanation to section 56(2)(vi) does not include HUF and therefore the amount received is chargeable to tax as income of Vijay. Decide.

Opinion

Section 56(2)(vi) says that any sum of money which exceeds Rs.50,000 received without consideration by an individual or HUF is chargeable to tax as income. However, such gift is not liable to tax in the following cases:

(a) from any relative; or
(b) on the occasion of marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to section 10(20); or
(f) from any fund or foundation or university or educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C); or
(g) from any trust or institution registered under section 12AA.

The term ‘relative’ for this purpose would mean the following:

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;
(i.e. brothers-in-law and sisters in law)

(iv) brother or sister of either of the parents of the individual;
(i.e. maternal and paternal uncles and aunts of the individual)

(v) any lineal ascendant or descendant of the individual;
(i.e. parents and grandparents of the individual)

(vi) any lineal ascendant or descendant of the spouse of the individual;
(parents and grandparents of the spouse of the individual)

(vii) spouse of the person referred to in clauses (ii) to (vi) given above.

In Vineetkumar Raghavibhai Bhalodia v. ITO (ITA No.583 / Rajkot/2007 decided on 17.05.2011) the assessee (individual) received a gift of Rs.60 lakhs from Raghavjibhai Bhanjibhai Patel (HUF) in which he was a coparcener. The Assessing Officer held that the term ‘HUF’ is not covered in the definition of ‘relative’ and therefore taxed the entire amount of gift as income of the assessee. The Commissioner (Appeals) confirmed the view by observing that the definition of the term ‘relative’ does not cover any amounts received by a member from the HUF. The alternative plea that the amount received from HUF is exempt under section 10(2) was also negatived in appeal.

The tribunal held that it is true that the term ‘HUF’ is not included in the definition of ‘relative’. However, the expression ‘HUF’ must be construed in the sense in which it is understood under the Hindu law as was the case in Surjit Lal Chhabra v. CIT (1975 ) 101 ITR 776 (SC). The term ‘HUF’ denotes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these persons fall in the definition of ‘relative’ as provided in the Explanation to section 56(2)(vi) of the Act. The tribunal rejected the observation of the CIT (Appeals) who held that HUF is as good as ‘a body of individuals’ and cannot be termed as ‘relative’.

It held that HUF is a group of relatives and a gift from group of relatives of the HUF could not be excluded from the tax exemption. It gave an example to drive home the point that a gift given by a secretary of the club represents the gift given by him on behalf of the members of the club and it is the collective gift from all the members of the club and not of the secretary in his individual capacity. It held that the term ‘relative’ whether individual or from a group of relatives such as ‘HUF’ fall within the Explanation to section 56(2)(vi) of the Act. Accordingly, it held that the amount received by a member of the HUF could not be subjected to tax.

It also upheld the alternative plea of the assessee that an amount received by a member from HUF could fall under section 10(2) of the Act. It held that receiving anything in consideration of his pre-existing right in a property or income is also covered by section 10(2) of the Act.

Position under DTC: The term ‘relative’ in DTC is defined in section 314(214) which is a total reproduction of what is contained in the Explanation to section 56(2)(vi) of the present law. Such gift from non-relative is chargeable to tax under the head ‘income from residuary sources’ as per section 58 of the DTC. Thus gift received from relatives would continue to remain tax-free under the DTC regime also.

Source: The Tax Referencer Volume 120 dt.25.07.2011
www.tpcc.in

Important Decisions reported in 327 and 328 ITRs

2010-12-10T15:22:00.001+05:30

Bid amount disbursed in chit is not money lending

In CIT v. Sahib Chits (Delhi) Pvt Ltd (2010) 328 ITR 342 (Del) it was held that chit agreement would not fall under “money lending” and the amount disbursed on bidding is not to be treated as money lent / borrowed. Accordingly, disbursement is not liable for deduction of tax at source in terms of section 194A of the Act.

Addition solely based on statement recorded at the time of survey

In CIT v. Dhingra Metal Works (2010) 328 ITR 384 (Del) based on the statement recorded at the time of survey, some additions were made to the income of the assessee. The assessee was able to explain the discrepancy noticed at the time of survey. It was held that since the assessee had reconciled the discrepancy subsequently which was sufficient enough, the statement recorded at the time of survey under section 133A cannot be a conclusive proof for sustaining the addition. Accordingly, the additions were deleted by the court.

Stock exchange membership card is eligible for depreciation

In Techno Shares & Stocks Ltd v. CIT (2010) 327 ITR 323 (SC) it was held that the membership card of Bombay Stock Exchange is an “intangible asset”, which is eligible for depreciation.

Freight subsidy cannot form part of profit derived from industrial undertaking

In CIT v. Kiran Enterprises (2010) 327 ITR 520 (HP) the assessee who was eligible for deduction under section 80-IA of the Act, claimed that the freight subsidy received from Government must also be treated as profit “derived” from eligible undertaking. The court held that the profit “derived” from industrial undertaking would not include freight subsidy received from Government. Accordingly, it was held that the amount received by way of freight subsidy is to be excluded while computing the special deduction under section 80-IA.

Tax is deductible only when the remittance to non-resident contains wholly or partly taxable income

In GE India Technology Centre (P) Ltd v. CIT (2010) 327 ITR 456 (SC) it was held that mere remittance of money would not warrant deduction of tax at source. Only when the remittance includes any income, the provisions relating to tax deduction under section 195 could be applied.

Valuation report cannot be the basis for reopening the assessment

In CIT v. Dhariya Construction Co (2010) 328 ITR 515 (SC) it was held that the opinion of the District Valuation Officer cannot be the basis for reopening the assessment.

In CIT v. Naveen Gera (2010) 328 ITR 516 (Del) it was held that reference to Valuation Officer for valuation is not permissible where the assessment is made before 30.09.2004.

Gist of cases reported in SOT 40

2010-10-24T12:47:00.003+05:30

Tribunal cannot decide on issues which are not subject matter of appeal: In Linklaters LLP v. ITO (2010) 40 SOT 51 (Mum) it was held that the tribunal cannot increase the scope of subject matter of appeal as much as to make disallowance of an expenditure not made by the lower authorities nor make any addition of income, not made by the lower authorities. However, the tribunal can look into the subject matter of appeal and can examine any aspect of the matter regardless of whether it was examined by the lower authorities or not.

Section 194 H is not attracted in respect of principal- to-principal transactions: In ITO v. Mother Dairy Food Processing Ltd (2010) 40 SOT 9 (Del) the assessee entered into agreement with its concessionaires (vendors) for selling milk and milk products. The goods were sold to vendors at a price less than MRP on principal-to-principal basis. No commission was paid separately except the reduction in price from the MRP. The tribunal accordingly held that the transaction was not that of principal and commission agent and thus the provisions of section 194H were not attracted.

Time limit for imposition of penalty (Section 275):

In Silicon Graphics Systems (India) (P) Ltd v. Asstt. CIT (2010) 40 SOT 1 (Del) (URO) the tribunal analyzed the period of limitation prescribed in section 275 which is as under.

Category I
Cases were the relevant assessment or other order in the course of which action for imposition of penalty has been initiated is the subject matter of appeal before Commissioner or tribunal, which is governed by section 275(1)(a).

Time limit for imposition of penalty
(i) The financial year in which the proceedings in the course of which action for imposition of penalty has been initiated, are completed; or
(ii) Six months from the end of the month in which the order of the CIT (Appeals) or ITAT is received by the Chief Commissioner or the Commissioner
- whichever period expires later.

Category II
Where the relevant assessment order or other order is the subject matter of revision under section 263 or section 264 which is governed by section 275(1)(b).

Time limit for imposition of penalty:
Six months from the end of the month in which the order of revision is passed.

Category III
All other cases not falling in the preceding categories governed by section 275(1)(c).

Time limit for imposition of penalty:
(i) The financial year in which the proceedings in the course of which action for imposition of penalty has been initiated, are completed; or
(ii) Six months from the end of the month in which the action for imposition of penalty is initiated
- whichever period expires later.

Slump sale cannot be treated as itemized sale: In J.B.Electronics v. Joint CIT (2010) 40 SOT 176 (Pune) (TM) the assessee transferred its business unit as a going concern to its sister concern. The unit was transferred in a fully functional state along with assets, employees and all contracts. The amount excessively realized was credited to profit and loss account. It was claimed as exempt from tax (assessment year 1997-98 – during which section 50B was not inserted). The AO treated the difference as nothing but goodwill chargeable to tax and it was confirmed by CIT (Appeals). The tribunal held that when the assets were transferred on a going concern basis, it could not be regarded as itemized sale. Since it is a slump sale, it fell outside the provisions of section 50. Readers may note that presently section 50B provides for taxing such transactions (i.e. from assessment year 1998-99 onwards).

Payment for mere passing of information cannot be called as ‘royalty’: In ITO v. Patwa Kinariwala Electronics Ltd (2010) 40 SOT 148 (Ahd) it was held that royalty means consideration (including lump sum consideration) paid for imparting any information concerning working of or use of a patent, invention, model, design, secret formula or process or trademark or similar property. Mere passing of information concerning design of a machine which is tailor made to meet the requirements of a buyer will not amount to transfer of any right of exclusive user so as to term the payment made as “royalty”.

Liabilities in books of account could not be presumed as non-existent: In Nitin S.Garg v. Asstt. CIT (2010) 40 SOT 253 (Ahd) the AO made additions in respect of the amount shown as liabilities representing the expenditure incurred during the earlier years. The liabilities were to the extent of Rs.129.83 lakhs shown as subsisting on the opening date of the assessment year 2001-02. The AO made addition on the ground that the assessee had not given the details of the addresses of the parties and the details were not verifiable. He presumed that the liabilities claimed in respect of the expenditure incurred had ceased and was liable to be taxed under section 41(1). The Commissioner (Appeals) also confirmed the additions made by the AO. The tribunal held that the liabilities reflected in the balance sheet could not be treated as cessation of liabilities. Merely because the liabilities were outstanding for so many years, it could not be presumed that they ceased to exist. Section 41(1) is attracted only when there is cessation or remission of a trading liability. The AO had to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Accordingly, the tribunal decided the case in favour of the assessee.

Routers and switches to be classified as computer when they are used along with computer: In Dy.CIT v. Datacraft India Ltd (2010) 40 SOT 294 (Mum) (SB) it was held that the definition of the term ‘computer’ given in Information Technology Act, 2000 cannot be applied in the context of section 32. Accordingly, it was held that when routers and switches are used along with computer, their functions are integrated with computer. Accordingly, they are to be included in the block of “computer” for the purpose of determining the applicable depreciation rate.

Amounts receivable from clients by share broker are eligible for write off as bad debt: In Dy.CIT v. Shreyas S.Morakhia (2010) 40 SOT 432 (Mum) (SB) it was held that the amounts receivable by a share broker from the clients is a trading debt and thus any amount not realizable from clients when written off as bad debt, it is deductible.

Nexus between sale consideration and asset acquired for exemption

2010-10-12T07:07:00.003+05:30

In Milan Sharad Ruparel V. Asst. CIT (2010) 5 ITR (Trib)570 (Mumbai) the assessee had chargeable long-term capital gain . Earlier, the assessee availed bank loan to acquire a residential house property. The capital gain exemption was claimed for the residential house so acquired previously by the assessee. The revenue negatived the claim of exemption.

The tribunal held that the house was acquired out of the bank loan availed and the sale proceeds were utilised for various other purposes. Obviously, the assessee did not have personal funds to acquire the said property for which exemption was claimed. Since the sale proceeds were not appropriated for acquiring the property, it was held that the assessee could not be granted exemption under section 54F of the Act in respect of the chargeable capital gain.

Actual cost or cost of acquisition of assets obtained on dissolution of firm by a partner

2010-10-10T20:16:00.002+05:30

On what value the depreciation would be computed in the case of assets obtained on dissolution of a partnership firm by an erstwhile partner is to some extent an unresolved issue by means of a direct legal decision.

Explanation 3 to Sec.43(1) enables the AO to determine the actual cost of asset but the rider is that he must take the prior approval of the Joint Commissioner before so doing. Where the valuation of asset is fair and reasonable and is supported by valuer's report with other documents to justify the basis, the AO may accept the value of assets as declared by the firm upon its dissolution and consequent distribution of such assets.

Recently, in Dy.CIT v. Smt. Leelavati S. Mehta (2010)44DTR(Mumbai)(Trib) 34 in which though the said issue was not dealt with directly yet, the observation of the tribunal and reasoning for the decision throw some light on this aspect of law.

In this case, the assessee erroneously adopted the fair market value as on 01.04.1981 though the asset was obtained consequent to dissolution of the firm i.e on 10.09.1990. This resulted in assessee admitting more capital gain than what it would have been if the FMV as on 10.09.1990 was adopted. The tribunal approved the decision of CIT(Appeals) since the gain admitted by the taxpayer was more than the correct amount and the CIT(Appeals) had held that there is no need to reduce the gain when the taxpayer had admitted excess gain on voluntary basis in the return.

This decision in the context of sec 45(4) read with explanation 3 to sec.43(1) though indirect, could be followed as guidance on this aspect of law.

Bank interest is exempt by applying the principle of mutuality for mutual associations

2010-10-10T17:20:00.003+05:30

In CIT v.Talangang Co-op Group Housing Society Ltd (2010) 44 DTR (Delhi)58 the assessee a housing welfare society collected money from the members for construction of houses and flats.Later, it allotted the flats to its members.There was some difference in contribution of money amongst the members viz. those who joined later paid more than those who joined earlier. Some shops were also constructed for the members in the complex and no benefit was given to outsiders even from the shops so constructed.

The court held that the benefit of the association was for members only and it is therefore a mutual association.As regards interest income from bank deposits held by the society it was held that in the absence of a finding that the funds of the society were diverted for any other purpose, the principle of mutuality was not violated by the act of making or keeping bank deposit. Thus it was held that the society was eligible for the benefits of mutuality. The decision accordingly went in favour of the assessee.

Tax is deductible only if the remittance made to non-resident is chargeable to tax under the Act

2010-10-09T20:47:00.003+05:30

In GE India Technology Centre (P) Ltd v. CIT (2010) 44 DTR (SC)201 it was held that section 195(1) contains an important expression viz. "chargeable under the provisions of the Act" which means only where the payment to non-resident is chargeable to tax, tax is to be deducted at source. If the sum paid to non-resident is not chargeable to tax under the Act, no tax is deductible at source.

Sec.195 also covers composite payments in respect of which tax is deductible at source but the obligation is limited to the extent of appropriate fraction which is taxable embedded in such payment.

Where the payer is not sure about the portion of income chargeable to tax,he has to make an application to the AO for determining the amount. Only in such situation order under sec.195(2) would arise.It rejected the view of the Department that on every payment tax is deductible at source by holding that in such case the payer cannot seek refund nor the payee liable to tax in respect thereof, with the result the deduction at source sum goes out of pocket of the payer.

It held that the Act has enough safeguards such as non-deduction of payment as expenditure while computing the income of the payer for failure to deduct tax at source etc. The apex court set aside the decision of the High court for de novo consideration of the case on merits.

Forfeiture of security deposit due to premature termination of agency is not a revenue receipt

2010-10-09T19:36:00.003+05:30

Whether forfeiture of security deposit due to premature termination of agency is taxable as revenue receipt came up before the tribunal in Asst.CIT v. Das & Co (2010) 44 DTR (Mumbai)(trib)124. The tribunal held that the agency was cancelled as the licensee wanted termination of licence before the lock-in-period and such premature termination of leave and licence agreement would not convert the deposit receipt in to trading receipt. Thus the case was decided in favour of the assessee-licensor who forfeited the deposit amount.

Yet another issue came up before the tribunal viz. receipt of compensation by the lessor for the inconvenience and hardship due to premature cancellation of the agreement. The tribunal held that the amount paid is in lieu of income otherwise might have been earned by the licensor and hence taxable as revenue receipt.

CIT has no power to cancel registration granted before 01.10.2004

2010-10-08T21:02:00.003+05:30

In Kapoor Educational Society v. CIT (2010)44 DTR (Lucknow)(Trib)97 the commissioner vide his order dated 06.05.2010 cancelled the registration granted to the appellant trust on 01.03.1999 (w.e.f.01.01.1998).

The tribunal held that at the time of granting registration there were only two powers vested with CIT viz. either to grant registration or refuse to grant registration.The power to cancel registration was inserted in to the statute only w.e.f. 01.10.2004 by incorporating sec.12AA(3). Since the object of insertion of the provision was not clarificatory or explanatory,the authorities who had powers to grant registration or refuse registration did not have the power to cancel registration granted previously.

The amendment brought in by the Finance Act 2010 empowering cancellation of registration granted even under sec.12A is effective from 01.06.2010. Thus the order passed by the CIT on 06.05.2010 still has no sanction of law. Thus the decision was in favour of the assessee.

MAT provisions do not apply to Banking Companies

2010-10-08T20:43:00.002+05:30

Book profit tax is one of the artificial provisions meant to tax of corporates on deemed basis. Whether MAT provisions are applicable to banking companies came up before the Mumbai 'G' Bench of the tribunal in respect of Krung Thai Bank PCL v. Joint DIT (ITA No.3390/Mum/09),which was decided on 30.09.2010.

The facts relate to assessment year 2004-2005. The assessee admitted Rs.78.33 lakhs as profit in P&L account. The income for the year after adjusments was Rs.94.74 lakhs. Due to set off of brought forward losses,the total income returned was 'Nil'. The AO initiated reassessment proceedings and issued notice under sec 147 on the ground that the assessee did not apply sec.115JB provisions.

The tribunal upheld the contention of the assessee by holding that the MAT provisions are not applicable for banking companies. The reason being-the profit and loss account of the banks are not prepared in terms of the provisions of Part II and III of Schedule VI to the Companies Act,1956 and the banking companies are specifically exempted under the proviso to sec.211(2) of the Companies Act,1956. Since the Profit and loss account of the banks are prepared under the Banking Regulation Act,1949 the provisions of section 115JB(2) will not apply.

Thus the decision was rendered in favour of the assessee-bank.

Proving the genuineness of the receipt of share application money

2010-10-07T20:04:00.002+05:30

Incorporating a corporate entity gives some benefit in tax matters such as large capital base and tax-free change of ownership.One of the issues to be tackled by corporates relate to proving receipt of share capital. In CIT v.Prayag Hospital & Research (2010) 44 DTR (Del)94 the AO resorted to adding the receipt of share application amount as cash credit taxable under section 68 of the Act. Out of 42 shareholders 39 appeared before the AO and gave statement affirming their capital contribution. They furnished affidavits, bank account details and copy of ration card.

The court accordingly held that the credits to the extent proved no addition could be made under sec.68 of the Act. However,the AO was free to proceed against such shareholders to verify and tax any sum so contributed to the extent not proved with proper income source.

Stock exchange membership card is an asset eligible for depreciation

2010-10-07T18:23:00.002+05:30

In Techno shares & Stocks Ltd & Ors V. CIT (2010)44 DTR (SC)65 the apex court held that stock exchange membership card is a commercial or business right covered by Explanation 3 to sec.32(1)(ii) of the Act.

The court held that the right of membership vests with the exchange only when a member defaults and otherwise a member would continue to be a member with all rights therein. As per rule 5 of BSE Rules, membership is a permission from the exchange which is like licence enabling the member to exploit the rights and enjoy the privileges attached to it.The membership is akin to licence which falls within the coverage of items mentioned by sec.32(1)(ii).

Thus it was held that the stock exchange membership is an asset eligible for depreciation under sec.32 of the Act.

When agricultural income could be taxed as income from undisclosed sources?.

2010-10-07T06:42:00.004+05:30

We all know that agricultural income is exempt from tax . However,there are instances where the tax officers resort to verify whether the quantum of agricultural income is real or not. In Vijay Kumar Sharma & Ors v. CIT (2010)44 DTR(P&H)88 similar such issue was discussed and decided.

In this case the the AO estimated the agriculture income and added the agriculture income admitted by the assessee less the same income estimated by him as 'income from undisclosed sources'. The tribunal held that the addition on account of inflated agriculture income is possible only if the assessee had taken credit for the said amount in explaining any expenditure or investment out of the said amount or had taken any credit in the balance sheet. The tribunal accordingly restored the matter to AO for fresh decision by looking in to these aspects.

The court upheld the view of the tribunal and declined to interfere. Thus the decision was in favour of the assessee. It is therefore possible for us to understand that agriculural income if opined as exaggerated or inflated by the assessee, no tax consequence would follow if such agri income is not used for proving any expenditure or investment or taken credit in any balance sheet.

Admission at the time of survey is retractable

2010-10-06T20:40:00.004+05:30

In CIT v. Dhingra Metal works (decided by Delhi High Court on04.10.2010) it was held that an admission given at the time of survey under section 133A is not binding on the tax payer. In this case the assessee firm admitted Rs.45 lakhs as income due to non-tally of stock at the time of survey. Later, the assessee tallied the stock and claimed that there was no stock discrepancy as much as to tax the admission of Rs.45 lakhs. The AO ignored the assessee's submission and simply relied on the statement recorded at the time of survey and taxed the disputed sum. Both CIT(Appeals) and tribunal decided the issue in favour the taxpayer. The court held that the statement recorded at the time of survey did not have evidentiary value and the statement recorded at the time of survey was not taken on oath.

Accordingly, the court held that the AO was not justified in solely relying on the statement recorded at the time of survey without controverting the records and details furnished by the assessee for claiming that there was no inflated/ unaccounted stock holding at the time of survey. Precedent for the decision could be found in Paul Mathews & Sons v. CIT (2003) 263 ITR 101 (Ker) and CIT v. Khader Khan (2008) 300 ITR 157 (Mad)

Unabsorbed depreciation not eligible for set off against salary income

2010-10-06T06:46:00.003+05:30

In Chandrakumar v. Asst.CIT (2010) 5 ITR(Trib)540 (Chennai) the assessee who had income by way of salary from a spinning mill, income from house property and income from other sources filed his return of income with reduction towards unabsorbed depreciation which originated under the head 'income from business or profession'.

The tribunal held that unabsorbed depreciation is to be treated as current depreciation in the subsequent year which means it is part of income or loss that year under the head 'business or profession'. It was held that once unabsorbed depreciation becomes current depreciation by virtue of sec.32(2), the net result of computation under the head 'business or profession' would be inclusive of such unabsorbed depreciation. The loss under the 'head business or profession' inclusive of such unabsorbed depreciation therefore is not eligible for set off against income from salary in view of the explicit bar contained in sec 71(2A) of the Act. The decision thus was in favour of the Revenue.

Specific information from the investigation wing of the department is sufficient for invoking section 148

2010-10-05T19:07:00.004+05:30

In ITO v. Nova Promoters & Finlease (P) Ltd (2010) 44 DTR (Del)(Trib) 9 the tribunal held that a specific information from the investigation wing of the Department such as the details about share capital mobilised by the company viz the cheque amounts, dates of cheques, names of persons issuing cheques and reasons for doubting the genuineness of transaction as sufficient to trigger the provisions of section 148 (i.e) reassessment proceedings. It was held that there was rational connection between the facts of the case and reopening of assessment.

Issue of notice under section 148 when time is available for issue of notice under section 143(2)

2010-10-05T17:55:00.004+05:30

In CIT v. TCP Ltd (2010) 44 DTR (Mad) 31 it was held that notice under section 148 cannot be issued when time is available for issue of notice under section 143(2) for making scrutiny assessment under section 143(3). While deciding the case the court made reference to apex court decision in the case of Trustees of H.E.H. THe NIzam's Supplemental Family Trust v. CIT (2000 ) 159 CTR (SC) 114; (2000) 242 ITR 381 (SC) in which the Supreme court observed as under.

"It is settled law that unless the return of income already filed is disposed of, notice for reassessment under section 148 cannot be issued, i.e. no reassessment proceedings can be initiated so long as assessment proceedings pending on the basis of the return already filed are terminated".

Is it possible to make reassessment of a case completed in block assessment?

2009-11-17T19:18:00.002+05:30

In CIT v Peerchand Ratanlal Baid ( ITA No. 19 of 2006) decided on 15.05.2009 the Gauhati High Court held that even block assessments made could be subjected to reassessment by invoking secs. 147 and 148 of the Act. This judgment dissented from Gujarat HC decision in the case of Cargo Clearing Agency (307 ITR 1) in which it was held that the block assessment could not be reopened by resorting to reassessment provisions. In Western India Bakers (87 ITD 607) the decision was similar to Gujarat HC decision. The Supreme Court in Suresh Gupta case 297 ITR 322 held that reassessment is possible even for block assessment. However in Vatika Township 314 ITR 338 due to doubt the same matter was referred to larger Bench by the Apex Court.

If search warrant is issued in joint names, the assessment must be in the status of AOP or BOI

2009-11-16T16:22:00.003+05:30

In CIT v Vandana Verma [ ITA no 21 of 2009) the Allahabad High Court held that if the search warrant is issued in joint names the block assessment cannot be made in the individual names of the parties. It was held that the assessment must be made in the status of AOP or BOI since the presumption is - the undisclosed income or asset is jointly owned or earned by the searched parties.

Application of section 14A for disallowance of expenses

2009-11-15T20:44:00.003+05:30

In CIT v Hero Cycles Ltd(P&H) (ITA 331 of 2009) the revenue perferred appeal against decision of the tribunal deleting disallowance of expenditure made by the AO. The court held that the tribunal had factually found that the assessee had made investments from own funds . Since the borrowed funds were not applied for making investments in tax exempt schemes, the disallowance made by the Revenue was held as unjustified. Accordingly, the appeal of the revenue was dismissed by the court.

Depreciation on roads

2009-08-10T10:34:00.001+05:30

Our company incurred expenditure of Rs.50 lakh towards laying roads within the factory premises. We wish to claim the expenditure towards laying of roads as revenue expenditure. Is it possible?

Taxability of private trust specifying definite share to beneficiaries

2009-08-10T10:32:00.000+05:30

I created a private trust for my children (all aged above 18 years) by allotting a shopping complex fetching rental income. As per trust deed, 40% of the income is given to beneficiaries equally and the balance is accumulated. The future descendants of my children by birth would also become automatic beneficiaries with equal share. The AO has initiated proceedings for assessment of income of the trust under section 164. Is he correct?

Rectification under section 154 after issue of notice under section 143(2)

2009-08-10T10:22:00.000+05:30

Return of income filed by me for the assessment year 2008-09 was processed under section 143(1) and I got refund also. The AO issued a notice under section 143(2) in May 2009 and when the scrutiny assessment was pending, he passed an order of rectification in July 2009 to deny depreciation in respect of some assets. Is the AO justified in passing an order of rectification under section 154 after a notice under section 143(2) has been issued and the scrutiny assessment was pending?

Claim of deduction in respect of payment for acquisition of leasehold right for 99 years

2009-08-10T10:20:00.000+05:30

Our firm having textile showrooms throughout the State of Tamilnadu entered into lease agreements for 99 years with various land owners for acquiring lease right. The idea is to construct showroom buildings in those sites. We paid lump sum advance rent towards 99 year leasehold right in addition to monthly rent. We claimed the lump sum advance lease rent payments as revenue expenditure and whereas the AO wants the lease rent (including advance lease rent) to be spread over the lease term for allowance of deduction. Who is correct?

Rectifying defect in the order while giving effect to appellate order

2009-08-10T10:16:00.002+05:30

The appeal pending before the tribunal was decided in our favour. While giving effect to the order of the tribunal, the AO rectified an apparent error in the original assessment order. The error relates to excess allowance of depreciation in the assessment. Is the AO justified in rectifying his order, while passing an order giving effect to the appellate order?

Tax on unexplained expenditure

2009-08-10T10:12:00.001+05:30

Our firm, having a turnover of more than Rs.3 crore was subjected to scrutiny assessment for the assessment year 2007-08. At the time of assessment, the assessing officer (AO) found that no transport charges were debited in the books of account. It was explained that the suppliers gave delivery of goods at their own cost and hence no expenditure was incurred towards transport charges. The AO however estimated the expenditure towards transport charges and made an addition under section 69C. Is he justified?

Depreciation on intangible assets

2009-08-03T10:10:00.000+05:30

Our company paid Rs.30 lakh to our competitor as non-compete fee as per the agreement. We want to claim depreciation on the amount paid by treating it as commercial asset though intangible. Is it possible?

Credit under section 115JAA and interest under section 234B

2009-08-03T10:09:00.000+05:30

Our company eligible for tax credit under section 115JAA computed interest under sections 234B and 234C after deducting the tax credit available. The AO is of the opinion that it should be the other way around viz. interest under sections 234B and 234C have to be added to the tax and only on the resultant the tax credit under section 115JAA is to be reduced. Who is correct?

Allowance of expenses under section 37 when not allowed under section 30

2009-08-03T10:08:00.001+05:30

Our company incurred Rs.3 lakh towards repairs to rental premises and Rs.50,000 on plumbing work. The entire expenditure was claimed as deduction which was negatived by the AO. Even if the expenditure is not deductible under section 30, is it not deductible under section 37, being the residuary provision?

Whether change in constitution takes place on minor attaining majority and becoming a full fledged partner

2009-08-03T10:06:00.000+05:30

Our firm consisting of 3 partners and a minor was constituted 5 years ago. The minor attained majority in March 2007. We have not executed a new partnership deed to admit the minor as a full fledged partner. For the assessment 2008-09, the AO wants to deny us the benefit of firm status for the reason that a deed effecting the change in constitution was not executed nor filed as per section 184. Is the AO correct?

Taxability of interest accrued but not due

2009-08-03T10:05:00.000+05:30

Our company has certain securities for which interest accrued and became due on 30^th June and 31^st December of every year. We admitted the interest as income when it accrued and became due. At the time of assessment, the AO added interest for the period from January 1 to March 31 by stating that as per the accrual system of accounting such interest which has accrued is taxable. Is he correct?

Taxability of let out residential building

2009-08-03T10:02:00.000+05:30

A residential building owned by our company and occupied by the director for 4 months during the year was later let out for residential purposes. Since the property was let out on the valuation date, we are of the opinion that it is not liable for wealth tax. Is our contention valid in law?

Tax impact of insurance money received for repairs, reconstruction of machineries

2009-07-04T16:14:00.001+05:30

In J.R.Enterprises v.Asstt. CIT (2009) 24 DTR (Mum) (Trib) 311 the assessee who received insurance compensation capitalized the net expenditure on damaged assets. The AO on the other hand reduced the insurance compensation from the block of assets and thereby reduced the depreciation claim.

The assessee received insurance claim in respect of damages to tanks and terminals at Kandla. The assessee incurred expenditure of Rs.383 lakhs towards repairs, reconstruction and refurbishing of damaged tanks and terminals but received insurance amount of only Rs.125 lakhs from the insurance company. The assessee hence disclosed the balance amount of Rs.258 lakhs on the assets side of the balance sheet. In the subsequent year, the assessee received Rs.32.28 lakh and hence capitalized the net amount and thus increased the WDV of the block and depreciation claim. The AO disallowed the depreciation on the capitalized value and also reduced the insurance compensation of Rs.157 lakhs from the block value and reduced the claim of depreciation.

It may be noted that the assessee had received insurance compensation less than the expenditure incurred and hence the provisions of section 45(1A) could not be applied. The tribunal held that the assessee had capitalized the expenditure without legal support. So also the Revenue had adjusted the WDV of the block and thereby restricted the depreciation claim contrary to the provisions contained in the statute.

The tribunal hence held that the AO erred in restricting the depreciation claim by reducing the insurance compensation from the block value without the sanction of law. It disapproved the assessee’s action of increasing the block value and resultant claim of depreciation in violation of the definition of written down value contained in section 43(6)(c) of the Act.

The tribunal held that the assessee has some remedy through the provisions of section 31 or section 37 but declined to interfere on the matter. The tribunal in effect disapproved the action of both the assessee and the AO in this case.

Levy of interest under section 201(1A) not valid in respect of any tax deduction brought in by means of retrospective amendment

2009-07-03T17:46:00.001+05:30

In Canara Bank v. ITO (2009) 24 DTR (Nag.) (Trib) 476 consequent to amendment of section 17(2)(ii) and insertion of sections 192(1A) and 192(1B) by the Finance Act, 2007 and amendment of rule 3 to the Income-tax rules w.e.f. 01.04.2002, the validity of treating the employer as assessee in default under sections 201(1) and 201(1A) came up before the tribunal.

It was held that section 192 required the assessee - employer to deduct tax at source at the time of making payment and at the time of making payment tax was deducted at source in accordance with the provisions of law. Rule 3 amended subsequently with retrospective effect could not make the employer as assessee in default. At the time of tax deduction and at the time of filing TDS return the assessee had not violated the provisions of law nor deviated from the legal requirements. A change of law with retrospective effect cannot be applied to treat the assessee as assessee in default for charging penal interest for no fault committed therein.

The tribunal also placed reliance on the decision in the case of P.V.Rajagopal v. Union of India (1998) 233 ITR 678 (AP) wherein it was held that the revenue cannot force the employer to deduct tax on an amount which was in dispute as a perquisite by the employer.

A retrospective amendment would not bring responsibility for deduction of tax at source on retrospective basis when the impugned expenditure has been disbursed and has gone out of the control of the paying employer.

Article 20 of the Constitution imposes two limitations on retrospective application of penal laws. They are (i) the making of an act an offence for the first time and making the law retrospective - is prohibited; and (ii) in the infliction of penalty greater than what was in force when the act was committed - is not permitted.

Thus the decision was rendered in favour of the assessee.

Validity of write off of debt in one year and claim in next year

2009-07-02T17:37:00.001+05:30

In Dy. CIT v. EDS Electronic Data Systems (India) (P) Ltd (2009) 23 DTR (Del) (Trib) 10 the assessee wrote off Rs.314.90 lakh as bad debt by making provision in the profit and loss account in the account year relevant to the assessment year 2000-2001. However, the claim of deduction was made in the assessment year 2001-02. The AO disallowed the claim for the reason that the provision was made in the previous year and the claim was made in the subsequent year. The Commissioner (Appeals) allowed the deduction.

The Revenue placed reliance on the decision in the case of South India Surgical Co Ltd v. Asstt. CIT (2006) 287 ITR 62 (Mad) and contended before the tribunal that the claim of deduction is not allowable. The tribunal held that the assessee had written off the amount in the assessment year 2000-2001 and it was not the case of the revenue to claim the write off as not being bonafide. Apart from the plea of non-debit to profit and loss account in the year of claim of deduction there was no other argument placed by the AO or by the Departmental Representative. Factually the amount was written off in the immediate preceding year and it does not exist in the books of the assessee in the year of claim of deduction. It is a case of postponement of claim by one year to which there could possibly be no objection by the Revenue. Accordingly, the claim was allowed by the tribunal. Thus the decision was in favour of the assessee.

Spread over of expenditure and admissibility

2009-07-01T18:08:00.001+05:30

In Asstt. CIT v. Delhi Dermatology Group (2009) 24 DTR (Del) (Trib) 383 the assessee incurred in an earlier which was claimed by spreading over to various years. It was akin to deferred revenue expenditure claim. The AO disallowed the same by contending that there is no provision in the IT Act for allowing deferred revenue expenditure. The CIT (Appeals) allowed the claim of the assessee.

The tribunal held that the expenditure was related to professional activities of the assessee firm and it was incurred in an earlier year which was spread over to the year under appeal. The tribunal held that the practice consistently followed in the past should continue in the subsequent years also unless there is material change in the facts of the case. In this case, the expenditure was related to the business of the assessee. It was not a capital expenditure or expenditure of personal nature. The fact that the spread over was allowed in the earlier years fortifies the stand of the assessee for claim of allowance and the principle of res judicata could not be invoked to dismiss the claim. Accordingly, the decision was rendered in favour of the assessee.

Similar decision could be found in Hindustan Aluminium Corpn Ltd v. CIT (1983) 144 ITR 474 (Cal.) for approving the spread over of expenditure to more than one accounting year.

Validity of reassessment without disposing of the objections of the assessee

2009-06-30T21:11:00.002+05:30

In MGM Exports v. Dy. CIT (2009)23 DTR (Guj) 356 the Assessing Officer issued notice under section 148 for reopening the completed assessment. The assessee asked for the reasons based on which the reopening was resorted to by the AO. The assessee also gave his objections for the reasons furnished by the AO for initiation of reassessment proceedings. The AO without passing a speaking order in response to the objections should not have proceeded with the reassessment. The court hence held that the AO must dispose of the objections raised by the assessee and thereafter undertake the reassessment proceedings, if necessary. Precedent for the decision could be found in GKN Driveshafts(India) Ltd., v. ITO (2003) 259 ITR 19 (SC).

Within four years the AO can resort to reassessment even where the assessee had disclosed all material facts:

In Lakshmi Machine Works Ltd V. Asstt.CIT (2009) 23 DTR (Chennai) (Trib) 443 the assessment was completed under section 143(3) of the Act. Later it was found that the provisions of clause (iii) of the Explanation to section 115JA was not correctly applied. The AO hence initiated proceedings under section 147 and issued notice under section 148. The tribunal held that the notice issued under section 148 within 4 years from the end of the relevant assessment year is valid notwithstanding full and complete disclosure of all material facts by the assessee at the time of assessment or in the return furnished. The decision hence was in favour of Revenue.

Amount received towards advance for supplies not taxable under section 2(22) (e)

2009-06-28T18:12:00.000+05:30

In CIT v.Raj Kumar (2009)23 DTR (Del) 304 the assessee having more than 10% of the shares in a company disclosed Rs.14.60 lakh as ‘advance received from customers’. On enquiry, the assessee offered explanation that nearly 90% of his sales were to the said company and the closing stock disclosed in the balance sheet (Rs.18.44 lakh) was subsequently sold to the company. The assessee thus contested the view of the Assessing Officer who wanted to tax the receipt as deemed dividend in terms of section 2(22) (e) of the Act. The court interpreted the terms ‘loan’ vis a vis ‘advance’ and held that while ‘loan’ involves positive act of lending with acceptance by the other side i.e. borrower and whereas the term ‘advance’ may or may not include lending. The court applied the rule of nosciter a sociis which was explained by the Privy Council in the case of Angus Robertson v. George Day (1879) 5 AC 63 (PC) by observing “ it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them”. Accordingly it was held that the term advance has more than one meaning depending on the context of its use. Trade advance given in the course of regular commercial transaction would not fall within the ambit of section 2(22)(e) of the Act. Applying the purposive interpretation as was done in LIC of India v. Retd.LIC Officers Association (2008) 3 SCC 321 it was decided in favour of the assessee. Precedent could be found in CIT v. Nagindas M.Kapadia(1989) 177 ITR 393 (Bom).

Amount received to indemnify the payer against claims of parties - taxable under the head ‘other sources’

2009-06-28T18:10:00.000+05:30

In Manoj B.Joshi v. ITO (2009) 23 DTR (Bom) 292 the assessee entered into an MOU with a person for development and construction of flats for a consideration of Rs.29.11 lakh. Since the party failed to keep his commitment as per MOU, the assessee received Rs.29.11 lakh (being amounts collected made from prospective buyers) and a sum of Rs.2 lakh being his own contribution. The assessee yet received sum of Rs.29.11 lakh as compensation and executed a release deed. The receipt of the additional sum of Rs.29.11 lakh was the subject matter of dispute before the court. The revenue taxed the receipt as capital gain. The court held that the amount received was meant to safeguard the party (who failed to keep his commitment) in the event of any claim being made by the parties who booked the flats. Accordingly, it was held that the amount received by way of compensation is taxable as ‘income from other sources’. The contention of the assessee that the said receipt is not taxable as income at all was rejected by the court.

Depreciation claim in respect of leased asset, when used by the lessee after the end of the year

2009-06-28T18:09:00.000+05:30

In CIT v. Kotak Mahindra Finance Ltd., (2009) 23 DTR (Bom) 299 the assessee engaged in the business of leasing, purchased breakers from ABB Ltd., and leased the same to Tata Electric Company Ltd. The assessee claimed depreciation though it was installed and used by the lessee after the end of the year. The admissibility of depreciation in the hands of lessor was the subject matter of dispute before the court. The court followed the apex court decision in the case of Mcorp Global (P) Ltd., v. CIT (2009)19 DTR (SC) 153 and held that the assessee (lessor) is eligible for depreciation notwithstanding the lessee had actually used the asset after the end of the year. The apex court held in Mcorp Global’s case (supra) held that the aspect of the actual use of machinery by the lessee was irrelevant so far as the allowance of depreciation in the hands of the owner – lessor is concerned. Since the machineries were given on lease before the end of the financial year, for the lessor it should be taken as usage of asset for business viz. leasing.

Cost of acquisition includes amount paid to acquire fractional ownership in property

2009-06-28T18:07:00.000+05:30

In Lalitaben Hariprasad v. CIT (2009) 23 DTR (Guj) 371 the assessee a HUF consisting of karta and his wife having one-half share in an immovable property, further acquired the other half portion from two sons by paying Rs.14.33 lakhs each. It was found that the assessee’s HUF had undergone partition which was accepted by the Revenue and recorded in terms of Section 171 of the Act. The Assessing Officer declined to treat the amounts paid as additional cost of acquisition. The court held that the partition of HUF was already recorded by the Assessing Officer and the payment made for acquiring additional fraction of ownership in the property is to be treated as cost of acquisition. The contention of the Revenue that the amounts paid to the sons as self created charge was negatived by the court. Thus the decision went in favour of the assessee. Precedent for the decision could be found in Narendra N.Chauhan v. CIT (2003) 261 ITR 185(Guj).

Amount paid for course study material by franchisee - not covered by section 194 J.

2009-06-28T18:05:00.000+05:30

In Asstt.CIT v. Frontline Software Services (P) Ltd (2009) 24 DTR (Ind)(Trib) 232 the assessee a franchisee of NIIT paid amounts towards course study materials which were different and in addition to, fees paid for technical know-how. The issue in dispute was as regards its coverage under section 194J of the Act as ‘technical fee’. The Commissioner (Appeals) held that the payment towards course materials is not liable for tax deduction under section 194J. The tribunal held that section 9(1)(vii) covers any consideration paid for managerial, technical or consultancy services and it would not apply to payments made for purchase of course study materials. Accordingly it was held that the payment is not liable for tax deduction at source. Thus the decision was in favour of the assessee.

Deductibility of the amount kept as ‘allocable surplus’ under section 15 of the Payment of Bonus Act, 1965

2009-06-28T08:27:00.001+05:30

In Ingersoll-Rand (India) Ltd., v. CIT (2009) 24 DTR (Bom) 11 the assessee kept Rs.24.74 lakhs as reserve being ‘allocable surplus’ to meet, future liability for payment of bonus in the event of any deficit in the next 4 years. The issue before the tribunal was whether, it is a provision for ascertained liability or unascertained liability. It was held that the quantum of liability could not be estimated with reasonable certainty and the amount kept is a reserve and not a provision for a definite ascertained liability. In case, the amount so set apart is not utilized within the prescribed time, the assessee is free to use the same in any other manner and hence it is not setting apart of money for ascertained liability. Accordingly, the amount was held as not eligible for deduction. Similar decisions could be found in Malwa Vanaspati & Chemical Co.Ltd v. CIT (1985) 154 ITR 655(MP); Rayalaseema Mills Ltd v. CIT (1985)155 ITR 19(AP) ; P.K. Mohammed (P) Ltd v. CIT (1986) 162 ITR 587 (Ker). Contrary view could be found in India Carbon Ltd v. CIT(1989) 180 ITR 117 (Gau).

Appeal fee, where the appeal was dismissed by CIT(A) on the ground of non-maintainability.

2009-06-28T08:25:00.001+05:30

In Dr.A.Naresh Babu v. ITO (2009) 24 DTR (Hyd) (Trib) 41 the appeal of the assessee was dismissed by the Commissioner (Appeals) as not maintainable. The assessee appealed against the order of the Commissioner (Appeals) before the tribunal. The issue was about the quantum of appeal fee to be paid under section 253(6) of the Act. The tribunal held that the Commissioner (Appeals) without deciding the matter on merits had dismissed the appeal as not maintainable. Hence it held that the appeal against the dismissal is covered by clause (d) of Section 253(6) and hence the appeal fee payable was only Rs.500 regardless of the quantum of income computed by the Assessing Officer.

Seizure of laptop of audit firm in the course of search of client

2009-06-28T08:20:00.002+05:30

In S.R.Batliboi & Co., v. DIT (2009) 24 DTR (Del) 74 during the course of search the laptops of the two employees of the audit firm were seized by the Department. The electronic data relating to the companies searched together with printed copies were given to Dy. Director of Income tax. The Revenue insisted on securing total information available in the laptop which contained data of some other clients of the audit firm. It was held that Section153 C does not empower seizure of all articles, valuables or documents found during the course of search without regard to their relevance or purpose of assessment of the assessee searched. Section 132(1)(iib) contemplates access to books and materials to the search team which are in the possession of any person and the failure thereon is punishable under section 275B. Accordingly, it was held that the revenue cannot make fishing enquiries to initiate proceedings against other companies who are clients of the audit firm based on the information contained in the laptop. The court directed the Revenue to return the laptops to the audit firm. The decision hence went in favour of the assessee.

Tax deduction on fully exempt gratuity

2009-06-08T09:13:00.000+05:30

I opted for voluntary retirement after serving 20 years in a leading company. I am eligible for gratuity of Rs.2,50,000 in addition to other retirement benefits.

The company says that the tax would be deducted at source on gratuity at 30% as my income from all the sources for the rest of the year is not known to them.

My tax counsel says that no tax deduction is to be made on the gratuity amount as the amount received is less than the taxable limit. Is he correct?

Concealment penalty due to difference in method of computation of capital gains

2009-06-08T09:12:00.000+05:30

Our firm created a goodwill account by crediting the existing partners’ capital account at the time of admission of a new partner.

Subsequently, on outright sale of firm, the computation of capital gain in respect of goodwill was ascertained by deducting the indexed value of the said amount recorded in the books against sale consideration.

The AO computed capital gain by adopting cost of acquisition of goodwill as `nil’ and thus the entire sale price was taxed.

As the method of computation between us and that of the AO differed, he initiated concealment penalty proceedings. Is the AO correct in doing so?

Validity of second notice under section 148 when the proceedings pursuant to first notice were pending

2009-06-08T09:08:00.000+05:30

Our firm filed return of income for the assessment year 2005-06 in September 2005. The AO issued intimation under section 143(1) in March, 2006. He issued a notice under section 148 in July 2008 by stating the reason as ‘excess claim of depreciation’.

Again in December 2008 he gave yet another notice under section 148 and the reason was ‘over-statement of expenses’.

Is the AO correct in issuing second notice under section 148 without completing the proceedings in relation to the first notice?

Time limit for initiation of proceedings under section 201(1)

2009-06-08T09:06:00.000+05:30

Our concern failed to deduct tax at source on contract payments for the financial year 2002-03. The assessment was completed under section 143(3).

Based on fresh information sourced from the recipients of income, the AO initiated proceedings under section 201(1) in August 2008.

We have contested the same as the time limit of 4 years had already expired from the end of the relevant assessment year. Is there any time limit in law for initiation of proceedings in terms of section 201?

Capital gain on sale of land after demolition of building

2009-06-08T09:05:00.001+05:30

I have a land and building acquired about 10 years ago. I have entered into an agreement for sale of land to a builder with a condition that I had to demolish the building before the said transfer. Can I claim the cost of building demolished in computing the capital gains though the building is not transferred to the builder?

Write off of loan given to subsidiary

2009-06-08T09:03:00.000+05:30

Our company engaged in manufacturing gave loan to subsidiary company. The loan was intended for purchase of shares in a joint-venture company. The loan amount due from the subsidiary company was written off as bad debt. Is this eligible for deduction as bad debt? Alternatively, Can it be claimed as capital loss?

Important decisions in ITR- 198

2009-06-02T07:22:00.004+05:30

In Delhi Cloth And General Mills Co. Ltd v. CIT (1992) 198 ITR 500 (Del) it was held that expenditure incurred towards organising the annual sports tournament was allowable as business expenditure.

In CIT v. Development Trust P Ltd (1992) 198 ITR 766(All) where the assessee engaged in development of colonies incurred expenditure towards construction of school building it was held as allowable for the reason that as it helped in persuading the buyers to purchase plots in the colony.

Payment for pre-mature retirement of empolyees incurred on account of commercial expediency and for efficient carrying on of business was held as allowable business expenditure in CIT v. Machinery Mfg. Corpn. Ltd (1992) 198 ITR 559 (Cal).

Cost of acquisition of bonus shares

2009-06-01T10:31:00.000+05:30

I had 1000 equity shares in a limited company. It comprises 500 shares originally acquired and the other 500 allotted as bonus shares in the year 1978. I transferred all the shares in 2008-09. Since the bonus shares were allotted before April 1, 1981 can I adopt market value as on April 1, 1981 as cost of acquisition for computing capital gains. Please note that the shares transferred are not listed in stock exchange now and were listed up to the year 1985-86.

Deduction under section 10B in respect of job work manufacture

2009-06-01T10:30:00.000+05:30

Our firm engaged in manufacture of jewellery items, decided to discontinue own manufacture. However, to keep the machineries engaged, we carried out manufacturing on job-work basis to foreign customers. The gold bars sent by foreign customers were converted into ornaments and sent back to them. We are 100 per cent EOU eligible for deduction under section 10B. Will the activity of job work manufacture deny us the benefit of deduction for the reason that we have not exported during the year by way of own manufacture.

Section 45(3) versus section 92

2009-06-01T10:28:00.000+05:30

Our company in the

became a partner of a firm in

India

with 30 per cent share. It contributed a vacant land at Bangalore as its capital. The value recorded in the books of the firm was Rs.200 lakh towards the vacant land contributed by our company. The AO wants to invoke section 92 for determining arm’s length price. Can the AO invoke section 92 when section 45(3) specifically deals with this kind of transaction? Alternatively, in the absence of registered document can the AO invoke section 50C?

Interest on excess refund under section 234D

2009-06-01T10:27:00.000+05:30

Our company obtained refund for the assessment year 2005-06 with interest under section 244A of Rs.2,30,000 along with intimation issued under section 143(1). Based on audit objection, the AO rectified the order by invoking section 154 in June 2008. He has charged interest under section 234D on the excess refund granted up to the date of rectification. Since the statute uses the word ‘regular assessment’ and not ‘rectification’ we desire to contest the levy of interest on refund already granted. Are we correct in our interpretation of the provision?

Payment of commission to firm with common partners

2009-06-01T10:26:00.001+05:30

Our firm engaged in textiles paid commission of Rs.5 lakh to another firm. Both the firms have common partners having profit-sharing ratio exceeding 50 per cent. The AO disallowed the payment of commission for the reason that it is covered by section 40(b) and the payment is not authorized by the partnership deed. Is the action of AO justified?

Fluctuation gain in debtors realization and relief under section 10A

2009-06-01T10:23:00.000+05:30

For the year ended March 31, 2008 we have credited the profit and loss account by Rs.5 lakh as gain due to fluctuation in exchange rate. The amounts represent the gains from collection of outstandings as on April 1, 2007, which were realized in February 2008.

We have not taken extended time limit from the RBI for realization of export proceeds. Can we claim the fluctuation gain in the debtor realization as export turnover for the purpose of computing relief under section 10A?

Interest on unpaid purchase price relating to capital asset and section 37

2009-05-31T15:20:00.003+05:30

Where on acquisition of a capital asset, the agreement provides for payment of interest for delayed payment of purchase price, whether such interest is deductible under section 36(1) (iii) became an issue in Kerala Roadlines v.CIT (2008) 299 ITR 343(SC).

It was held that such interest is not deductible under section 36(1)(iii) but it is deductible under section 37 of the Act.

Sale of depreciable asset and exemption under section 54 EC

2009-05-31T14:58:00.004+05:30

Generally, it is believed that sale of depreciable asset is chargable to tax as short term capital gain and the taxpayer cannot avoid such tax liability. It may be noted that if a depreciable asset of a block when sold 36 months after its acquisition, it is possible to avail the benefit of exemption by depositing the capital gain in section 54 EC investments.Reference is invited to the decision in the case of CIT v.Assam Petroleum Industries P.Ltd(2003)262ITR587(Gau).

Similarly, when group of assets belonging to a block when held for more than 36 months on sale of all the assets ( i.e.the block ceases to exist), the resultant capital gain could be deposited in section 54 EC investments to avoid or minimize the tax liability.

Income offered in the return post-search and concealment penalty

2009-05-25T10:23:00.000+05:30

One of my clients was subjected to search under section 132. Since all the proceedings pending at the time of search got abated, fresh returns were filed under section 153A. The incomes admitted in the returns were on lump-sum basis without corroborating the same with seized materials. The AO accepted the incomes admitted by the assessee. The AO also has initiated proceedings for levy of penalty under section 271(1)(c). Since the income assessed is reflected in the returns filed, is the AO justified in initiating the proceedings for levy of concealment penalty?

Section 40(b) versus Section 40A(2)

2009-05-25T10:21:00.000+05:30

Our firm authorized working partner salary of Rs.4 lakh each to 5 partners. For the assessment year 2008-09 such salary was claimed in accordance with the deed. The AO wants to invoke section 40A(2) to disallow a portion of salary as being excessive and unreasonable. When working partner salary is authorized by the deed and is allowed subject to the limits of section 40(b), is the AO justified in invoking section 40A (2)?

Exchange rate fluctuation

2009-05-25T10:19:00.000+05:30

Our company took loan from foreign companies for meeting its working capital requirements. There is an exchange difference (loss) due to fluctuation in rate of exchange resulting in additional liability of Rs.30 lakh for the year ended March 31, 2008.

We claimed the exchange loss which the assessing officer (AO) disallowed stating that such loss could be allowed only on actual repayment as per section 43A. Is he correct?

Revision under section 263 in respect of matters considered in appeal

2009-05-25T10:17:00.000+05:30

Our firm claimed deduction under section 80-IB and also set-off of brought forward business loss of the preceding years. The AO disallowed both the claims and the first appellate authority viz. Commissioner (Appeals) allowed our claim made under section 80-IB and he however rejected the claim as regards set-off of brought forward losses.

Both the Revenue and the firm are in appeal before the tribunal. Now the Commissioner wants to assume jurisdiction under section 263 for disallowing the deduction under section 80-IB. Is not the doctrine of merger applicable in order to estop the Commissioner from invoking section 263 in respect of matters considered by Commissioner (Appeals)?

Liaison office solely meant for purchase of goods

2009-05-25T10:13:00.001+05:30

Our company in the UK has opened a liaison office in India for purchase of goods in India and for exporting the same to our branches in various countries in Asia- Pacific region.

We have made payments to suppliers directly from our head-office at UK. Since the liaison office is established only for purchase of goods on our behalf, we claim that no income had accrued from the activities of the liaison office in view of clause (b) of Explanation 1 to section 9(1)(i). Are we correct in our interpretation?

Tax deduction in respect of concessional air tickets purchased and sold by travel agents

2009-05-25T10:09:00.001+05:30

We are travel agents for various leading air carriers. We purchased and sold concessional air tickets of carriers.

Is the transaction of purchase and sale of air tickets liable for tax deduction under section 194H? In respect of regular booking of air tickets as agent, tax was deducted at source out of commission under section 194H by the companies.

In addition to regular commission, we at times retain supplementary commission (more than regular commission) out of the moneys collected from the customers. Is this supplementary commission liable for tax deduction under section 194H?

Time limit for levy of penalty

2009-05-18T10:22:00.000+05:30

I am a wholesale trader of agricultural produce. I took a loan from 2 parties of Rs.2 lakh each. The Assessing Officer (AO) treated one of the loans as my income. He also initiated proceedings for levy of penalty under section 271D for both the loans in August 2008. The order levying penalty was passed in March 2009. The proceedings relating to assessment of income was however completed in December 2008. Is the AO justified in initiating penal proceedings separately instead of combining the same with assessment proceedings? Is the order of AO correct in levying penalty even in respect of amounts taxed as income? Is not the order levying penalty barred by limitation?

TDS in respect of payment made to hotel

2009-05-18T10:21:00.001+05:30

Our company has arrangement with a hotel, whereby the staff and customers are given accommodation on regular basis. During the year 2008-09, we paid Rs.5 lakh to the said hotel towards accommodation. Since we have taken the accommodation on a regular basis, are we governed by section 194C or section 194-I? Please clarify.

Failure by the assessee to disclose full facts and conditions for reassessment

2009-05-18T10:18:00.000+05:30

Return of income of our firm for the assessment year 2005-06 was filed in September 2005 and it was processed under section 143(1) in February 2006. The AO initiated reassessment proceedings by issue of notice under section 148 in December 2008.

The reason for reassessment was stated as ‘wrong claim of depreciation for windmill at higher rate without intimating the option as per further proviso to rule 5(1A)’. We have intimated in the statement accompanying the return by way of a note that we are opting for higher rate of depreciation instead of the rate of depreciation prescribed in Appendix 1A to the rules. Since there was no failure in disclosure of material facts fully and truly, we desire to contest the validity of the initiation of reassessment proceedings. Are we correct in our approach?

Depreciation of machinery which has become defective after trial-run

2009-05-18T10:16:00.000+05:30

We installed one machine and had a production trial-run also. We found some defects during the trial-run, and up to the end of the year the said defect was not rectified. We desire to claim depreciation on the machine value as it was put to use for trial-run production. Is it possible?

Validity of addition to income based on the statement made at the time of survey under section 133A

2009-05-18T10:13:00.001+05:30

One of my clients a doctor was subjected to a survey under section 133A of the Act. During the course of survey, the assessee admitted suppression of fee receipts.

A statement was recorded whereby the assessee agreed to offer Rs.10 lakh as income in addition to income recorded in the regular books. At the time of filing the return, since there was no corresponding investment or asset or any other evidence to match the admission of additional income, my client desires to retract the admission. Will such retraction lead to penal consequences? Please advice.

Does agricultural income include sale of jaggery obtained on conversion of sugarcane?

2009-05-18T10:08:00.001+05:30

I am an agriculturist with vast area of land in which I cultivate sugarcane.

Subsequently, I convert the sugarcane into jaggery and sell the same in the market. Is the income from sale of jaggery chargeable to tax? In case it is, can I claim market price of sugarcane consumed as a deduction?

Change in method of stock valuation

2009-05-11T10:27:00.000+05:30

Our company having stockyards in more than 100 centres decided to change the method of stock valuation from FIFO (First in First Out) method to average cost basis. This resulted in under statement of stock as on March 31, 2006 by Rs.35 lakh. We have followed the changed method (new) in the subsequent years also. The Assessing Officer (AO) based on the impact of the change quantified in the annual report, rejected the change in method of stock valuation and added the sum to our income. Is the action of the AO justified?

Conversion of stock in trade into capital asset and tax implication thereof

2009-05-11T10:26:00.000+05:30

I owned a jewellery shop as a proprietor upto June 2007. I closed down my business and the stock at that time was taken by me towards my capital. I desire to sell all those jewellery items in May 2009. The actual cost of those jewellery items could be matched with the purchase invoices, which relate to April 2006. On sale, is the capital gain taxable as short term or long term?

Time limit for issue of notice under section 148 in the case of agent of non-resident

2009-05-11T10:24:00.000+05:30

My brother who is residing in Dubai has rental income from properties in

India

. I have been filing his return of income in the capacity of agent. For the assessment year 2005-06, the Assessing Officer issued notice under section 148 in December 2008. Since the time limit for issue of notice is only 2 years from the end of the relevant assessment year as per section 149(3), I desire to contest the issue of notice as barred by limitation. Am I correct?

Assessment of undisclosed income deployed in construction without rejecting books of account

2009-05-11T10:23:00.001+05:30

Our firm constructed a factory building for Rs.60 lakh. It was referred to Valuation Officer by the AO who valued the building at Rs.75 lakh. The AO adopted the difference of Rs.15 lakh as income from undisclosed source though no defect was found in the regular books of account maintained by us. Is the AO justified in making an assessment without rejecting our books of account?

Co-operative bank lending money to members and non-members and deduction under section 80P

2009-05-11T10:21:00.000+05:30

Our co-operative bank functions under the control and supervision of RBI and as per the licence granted by the RBI, we are eligible to advance money to both members and non-members. However, we inducted all the borrowers as our members before the actual disbursement of the loan. The AO says that at the time of applying for loan, the applicants were not members and only just before disbursal they were given membership and therefore we are not eligible for deduction under section 80-P. What is the correct legal position?

Forfeiture of share application money whether a capital loss?

2009-05-11T10:19:00.000+05:30

I subscribed for 10000 shares in a company and paid Rs.5 per share along with application. Subsequently, I decided not to acquire those shares and when the company after allotment called for the balance amount, I did not pay. The company hence forfeited my shares and a communication was sent to me. Can I claim this loss as capital loss?

Valuation of stock under section 145A

2009-04-30T15:02:00.000+05:30

Our firm engaged in textile trade diversified into manufacture of garments. We paid value added tax on the goods which became raw material subsequent to diversification. The closing stock value as on 31.03.2008 was Rs.20 lakh. When we diversified to manufacture garments we decided to exclude the Vat component from the inventory value and hence credited opening stock by Rs.1 lakh. We followed net method of stock recording and valuation consistently thereafter. Is this correct?

Possibility of sale of buildings without documentation

2009-04-30T15:00:00.000+05:30

Our concern is engaged in development of residential apartments. For the year 2006-2007 we gave possession of 4 apartments and received Rs.40 lakh as consideration. No deed of registration was however executed upto 31^st March 2007. The AO deems such receipt in our turnover for computing our business income. There is no registered deed of conveyance. Is the AO correct?

Time limit for giving effect to appellate order

2009-04-30T14:58:00.000+05:30

Our tax assessment for the year 2000-2001 was decided by the appellate tribunal in December 2004. The AO passed an order giving effect to the order of the tribunal in May 2008. He also added interest on the tax demand up to that date. Since 6 years have elapsed from the end of the assessment year, we are of the opinion that the order passed by the AO consequent to tribunal order is barred by limitation. What is the correct legal position?

Power to recall and review order by ITAT

2009-04-30T14:57:00.001+05:30

Our company made fresh claim of deduction by means of revised return. It was not allowed by the AO and by CIT (Appeals). The tribunal also disallowed the claim of deduction. We preferred a miscellaneous petition before the tribunal by citing error in interpreting the judgment of the jurisdictional high court. The tribunal accordingly passed an order in our favour by invoking section 254(2) viz. rectification of error apparent from the record. The revenue has challenged the order of rectification passed by the tribunal as review and recall of order which is not sanctioned by law. Is the contention of the revenue correct without prejudice to merits of our claim of deduction?

TDS on expenditure for domain registration and server charges for hosting websites

2009-04-30T14:54:00.000+05:30

In Millennium Infocom Technologies Ltd v. Asstt. CIT (2009) 309 ITR (AT) 18 (Del.) the assessee incurred expenditure by way of payment of Rs.5.01 lakhs towards domain registration and website launch expenses. The payments were expenses through credit cards to a foreign company without deduction of tax at source. The assessee claimed Rs.3.26 lakh as revenue expenditure and capitalized the balance of Rs.1.75 lakh. The AO disallowed the expenditure for the reason that the assessee had not deducted at source on payment to non-resident company by applying section 40(a)(i) of the Act read with section 195. The AO applied the tribunal decision in the case of Cheminor Drugs Ltd v. ITO (2001) 76 ITD 37 for disallowing the expenditure. The tribunal held that the payment does not fall within expression ‘fees for technical services’ defined in Explanation 2 to section 9(1)(vii). However, the tribunal found that it falls within definition of the term ‘royalty’ as per clause (iva) to Explanation 2 to section 9(1) which is ‘the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB’.

The tribunal held that the clause (iva) to Explanation 2 defining the term ‘royalty’ was inserted by the Finance Act, 2001 w.e.f. 01.04.2002 and is applicable hence from the assessment year 2002-03 onwards. Therefore the payment did not fit into the definition of the term ‘royalty’.

Section 40(a)(i) was amended by Finance (No.2) Act, 2004 w.e.f. 01.04.2005 and it applies to payments by an assessee outside India to a non-resident only. The term ‘rent’ and ‘royalty’ were inserted in section 40(a)(ia) by the Taxation Laws (Amendment) Act, 2006 w.e.f. 01.04.2006. Since subject matter of appeal related to assessment year 2001-02 these changes could not be applied to uphold the disallowance. The tribunal then went on to analyse the provisions of article 26(3) of DTAA between India and US which neutralized the rigour of section 40(a)(i) and the decision was rendered in favour of the assessee.

Readers may note that Article 26(3) of the DTAA between India and USA however will not be insulating the taxpayers against disallowance as the law has been changed to keep both residents and non-residents on equal footing by prescribing section 40(a)(i) applicable for non-residents and section 40(a)(ia) applicable for residents.

Business income or capital gain?

2009-04-27T10:28:00.001+05:30

I acquired a small piece of agricultural land about 40 years ago. I carried on agricultural operations for about 10 years in the said land. Recently, to sell the land and for getting better price, I took permission from the appropriate authorities for converting and plotting it into residential sites. Ultimately, the sale consideration was rewarding and I offered the long term capital gain to tax. The Assessing Officer (AO) wants to tax the transaction as business income. Is the AO justified in doing show in the background of the fact that I am a retired government servant and I have not done any real estate transaction either before or after this sale?

Exemption under section 54F for housing loan repaid out of sale proceeds of long term capital asset

2009-04-27T10:26:00.000+05:30

I constructed residential house by availing myself of a bank loan. Subsequently, I sold a vacant land and out of the sale proceeds I repaid the housing loan fully. I desire to claim exemption under section 54F on capital gains arising from sale of vacant land as the proceeds were used for repaying the housing loan. Is this valid in law?

Authorisation versus quantification of working partner salary

2009-04-27T10:25:00.000+05:30

The deed of partnership of our firm authorized payment of salary to working partners. It authorized payment of remuneration of Rs.5000 a month for 4 partners. The AO found variation in salary payment between two assessment years and hence perused the deed of partnership. As per the deed, any partner who did not attend to the affairs of the firm was not eligible for salary for the period of absence. The AO held that the deed authorizes working partner salary but does not provide the method of quantification of salary and hence is contrary to CBDT circular No.739 dated March 25, 1996. Is there any decided case law in favour of the assessee?

Reasons justifying expenditures as excessive and liable for disallowance

2009-04-27T10:23:00.000+05:30

Our company passed a resolution in April, 2006 increasing the remuneration of all four directors for the financial year 2006-07 from Rs.36 lakh to Rs.80 lakh. The directors hold the entire share capital of the company. The AO disallowed the payment of Rs.20 lakh as excessive by invoking section 40A(2). It may be noted that the net profit of the company has increased by 40% during the year and the AO has not given any comparable cases or reasons for viewing the remuneration as excessive. Is the AO justified in making the disallowance?

Application of section 50C where there is no registered document

2009-04-27T10:21:00.000+05:30

I became partner in a firm in May 2008. I contributed a vacant land as my capital by means of book entry. The value recorded for the land in the books of the firm was Rs.7 lakh. The AO adopted the guideline value of the land which was Rs.16 lakh and accordingly computed the chargeable capital gains. In the absence of a registered document, is the AO justified in applying section 50C?

Whether damages paid as per arbitration award are contractual in nature?

2009-04-27T10:19:00.000+05:30

Our company entered into a business contract with yet another company. The agreement does not provide for any damages in the event of breach of contract by either of the parties. Our company opted out of the contract and the trade association awarded a sum of Rs.6 lakh to be paid as damages to the other party for the breach of contract. We paid the damages in March 2009 though the award was made in February 2008. We have challenged the award in appeal. We claimed the damages as expenditure for the year ended March 31, 2008. The AO treats the damage as contractual liability and hence says that it is eligible for deduction only for the year ended March 31, 2009. Who is correct?

Loss of advance paid towards capital asset acquisition

2009-04-13T09:08:00.001+05:30

I wanted to buy a vacant land and made advance payment of Rs.1 lakh to the vendor. The sale agreement prescribed 3 months time for payment of the balance of consideration and for registering the conveyance deed. Later, I decided not to proceed with the deal for acquiring the asset. The vendor forfeited the advance money as per the sale agreement. Can I claim the amount lost as capital loss (short-term) eligible for set off and carry forward benefits?

Possibility of postponing recognition of income up to the expiry of bank guarantee

2009-04-13T09:06:00.000+05:30

We are manufacturers and suppliers of generator sets. While supplying to big industries, the contract provides for post-sales service for 2 years and the customers hence can hold back 20% of the sale price. Alternatively we provided bank guarantee for the said sum. After the warranty period, the amount is released or the guarantee is revoked. We, hence, excluded 20% of the sale price (being the amount withheld by the customers) while recording the value of sales. Is this a valid accounting practice?

Direct demand from payee of income is barred

2009-04-13T09:03:00.000+05:30

Our firm is engaged in jobwork activity. For each of the jobwork done by us the payers’ deduct tax at source under section 194C by intimating the fact of deduction by means of debit note. For 2007-08, Rs.2 lakh was deducted out of the payments due to us. Some of the deductors have not given tax deduction at source certificates. The AO, in the absence of certificates and details of tax deduction has raised tax demand on us. Do we have to pay tax, notwithstanding that sufficient sums were deducted at source by the payers of jobwork charges?