2. 1. Sec. 29 . The income returned to in section 28 shall be computed in accordance with provisions of Sec. 30 to 43 D. Claiming under the wrong provision
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1. 1 R.K. Doshi Business Expenditure under Income-tax Act
3. 3 Loss through highway robbery or by theft.
Such loss must spring directly from the “assessee” business.
It is immaterial whether the theft was committed during or outside officers by employee or a stranger.
A dealer of semiprecious stones was robbed when carrying them from office to his house . Held allowable. Mohamed 74 ITR 100.
Cash kept in bag taken to home for safe custody at night. The bag fall from scooter & lost allowable – Gore & Company 143 ITR 922.
Amount kept at home for making purchasing on next day which was a Sunday and amount was kept at Partners House and loss due to theft – Allowable 146 ITR 167.
Mere dispossession is not a loss. It would be a loss only after recovery becomes impossible or the chances of recovery become very remote.
Taking of proceeding against wrongdoers not essential for allowing of loss – employee responsible for theft was worth nothing and a civil action against them would result in to no benefit to “A” – not necessary to “A” to pursue a useless remedy and waste money in such proceeding. 2. Trading Loss
4. 4 Acquittal of the accused no bar to allowance – also failer of criminal proceeding for want of evidence is no bar to allowance.
So long as there is a reasonable prospect of recovery, loss can not be claimed.
Circular No. 13 Dt. 24.5.44
Circular No. 35 (D) Dt. 24.11.65
Loss by embezzlement by employee should be treated as incidental to business and loss should be allowed in the year in which it discovered.
5. 5 3. Exchange Fluctuation – Loss Business Loss-Advance Form Customer – Exchange Fluctuation
Assessee received advance amount from overseas customer towards supply of particular commodity. Before the assessee could export the commodity, the Government imposed a ban on the export of that commodity and as a result of which the assessee could not supply and had to refund the advance amount. But due to exchange rate fluctuation, the assessee had to incur a higher amount and claimed the same as business loss. Held the loss is eligible for deduction as a business loss. Loksons Pvt. Ltd. vs. ACIT(2010)187 Taxman 55(Bom.)
Losses of illegal business :
Assessee carrying lawful business
Not entitled to get deduction for expenses incurred in connection with execution of some illegal activity. Loss incurred due to confiscation for infraction of law is not allowable as trading loss. (Satyanarayan Rice Mill 155 ITR 676)
6. 6 But the assessee carrying on an illegal business is entitled to get deduction of losses incurred engaging on such business. (S.C. Kothari 82 ITR 749)
Thus assessee carrying on smuggling activity is entitled to get deduction of loss arising from confiscation of goods or monies (Pyrasingh 124 ITR 40)
Gold seized from Smuggler’s car can be treated as income from undisclosed source but loss on account of confiscation is allowable as deduction.
When bad debt is otherwise allowable as trading loss
A bad debt may also be a trading loss but trading loss need not be a bad debt. There may be bad debt which may not fall within the purview of section 36(1) (VII) but May well be regarded as one eligible for deduction. For example commission agent selling goods on behalf of principal some times make advance payments to the principal. In such case if the debt get bad, it may successfully by claimed as a trading loss.
Pendency of litigation no bar to allow ability
7. 7 4. DEPRECIATION OWNERSHIP :
Depreciation admissible even if building is not Registered in the name of assessee.
239 ITR 775 (SC) Mysore Minerals
243 ITR 825 (Guj.) Dipak Nitrite Ltd.
24 ITD 135 (AHD) Narendra Ceramics Pvt. Ltd.
Depreciation admissible on vehicle used for the purpose of assessee’s business even though the same are not Registered in the name of assessee.
45 TTJ 31 (AHD) Lalitchandra M. Patel
143 ITR 39 (Cal) Salkia Transport Associates
8. 8 Depreciation admissible on machinery purchased under hire purchase agreement - Board Circular to be followed
155 ITR 430 (Del) General Industries Corporation
Owner is a person who is entitled to receive income from the property in his own right. In order to claim benefit of sec.32 it is not necessary that the assessee should be a complete owner. The buses on which the assessee had claimed depreciation were not registered in her name, however the assessee producer all the documents relating to loans obtained, insurance etc. relating to the business to establish that she was beneficial owner and received income. It was held she was entitled to depreciation. CIT vs. A. Sivakami & Anr. (Smt.)(2010)322 ITR 64(Mad.)
9. 9 USER :
The term ‘used’ for the purpose of business is to be given a wide meaning and it includes both active as well as passive user.
123 ITR 404 (Del) Capital Bus Service Pvt. Ltd.
128 ITR 675 (Mad) Vayithri Plantations
209 ITR 993 (Guj.) Khimji Vishram & Sons
If income from letting out of an asset is taxable as income from property no Depreciation can be allowed in respect of such an asset.
201 ITR 308 (Guj.) New India Industries
If income derived by an assessee from hiring of machinery is business Income assessee must be considered as having used the machinery for the purpose of his business.
231 ITR 308 (SC) Shaan Finance Pvt. Ltd.
Assets provided by employer at residence of employees should be considered to be Wholly used for employers’ business – Board Circular F.No. 10/14/66-IT (AI) dated 12.12.1966.
Panchmahal Steel Ltd. – ITA NO. 4253/94 Dated 1.3.2000
10. 10 PLANT – FUNCTIONAL TEST :
Intention of legislator is to give a wide meaning to the term ‘Plant’. In determining whether an article is Plant, the enquiry must be as to what operation it performs in assessee’s business and whether it fulfills the function of a plant.
151 ITR 75 (Guj.) Tarun Commercial Mills Ltd.
Theater building and Hotel building specially equipped for the purpose of business are still buildings and not entitled to depreciation at the rate applicable to Plant.
244 ITR 192 (SC) Anand Theaters
Depreciation – Earth Moving Equipment
Earth moving equipment namely JCB is eligible depreciation at 40% which rate is provided for “Motor Buses, Motor Lorries, Motor Taxis” which is used in the business of running them on hire. CIT vs. Gaylord Construction, Kachappilly House, Angamaly (2010)40 TAX L.R. 85(Ker.)
Assessee is entitled to higher rate of depreciations per Appendix I, Income Tax Rules, 1961 Entry III(3)(ii) in respect of motor cars used in the business of running them on hire. Magma Fincorp Ltd. vs. ACIT (2010)35 DTR 76(Kol.)
11. 11 ACTUAL COST :
Grant of subsidy by Government as an incentive for setting up an Industry in backward area is not to be deducted in computing the actual cost under section 43(1) of the Act for the purpose of calculation of depreciation.
210 ITR 830 (SC) P.J. Chemicals Ltd.
The assessee entitled to depreciation on additional liability resulting from exchange rate fluctuation as on the last day of accounting year, though the liability is to be discharged in installments which becomes due and payable from the subsequent accounting year.
203 ITR 933 (Guj.) New India Industries
Assets received as grant in aid including conditional assistance or gift in kind are eligible for depreciation and covered within the ambit of Explanation (2) to section 43 (1) of the Act.
Panchmahal District Co.Op. Milk Producers Union Ltd. – ITA No. 1638/91 Dated 26.9.1995
116 ITR 125 (SC) Groz – Beckert Saboo Ltd. - applied in above case.
141 ITR 712 (Cal) Simon Carves India Ltd. – applied in above case.
12. 12 TRIAL PRODUCTION :
Depreciation is available on Plant and Machinery used for trial production/sample production even though the assessee begins commercial production in subsequent years.
Gujarat Themis Biosyn Ltd. – ITA NO. 457/90 Dated 27.7.1994
159 ITR 524 (Cal.) Kanoria General Dealers Pvt. Ltd.
58 TTJ 767 (AHD) Bollard Oil Field Pvt. Ltd.
13. 13 5. Interest Sec 36 (1) (iii)
The amount of interest paid in respect of capital borrowed for the purpose of business.
Pre – Condition
Money must have been borrowed by the Assessee.
It must have been borrowed for the purpose of business.
Assessee must have been born interest on the borrowed amount.
Section 36(1) (iii) of the Income-tax Act, provides for a deduction of interest on capital borrowed for the purposes of business or profession. The section does not make any difference as regards the utilization of the borrowed funds for the acquisition of a capital asset or a revenue asset. In India Cements Ltd. V/s. C.I.T. 60 ITR 52 (S.C.) the Supreme Court held that the loan obtained cannot be treated as an asset or advantage for the enduring benefit of a business that the interest on borrowed capital for acquiring a capital asset can be of revenue nature. In principle, there is no distinction between interest paid on capital borrowed for the acquisition of a new business and that the interest on borrowed capital for acquiring a capital asset can be of revenue nature. The provision allows deduction of interest on capital borrowed for the purposes of business irrespective of utilization of such capital for revenue expenditure or for the acquisition of capital asset.
14. 14 Commencement of business :
Deduction of interest u/s. 36 (1) (iii) is allowable in computing the income from business. This presupposes the commencement of business, without which there would be no income from business. Prior to the commencement of business, there is no question of deduction of interest. Therefore, for the prior period, interest is capitalized. During the construction or establishment of the new business the interest is capitalized and forms the part of cost of acquisition. In case of expansion of existing business the interest on borrowed capital is allowable u/s 36 (1)(iii) of the Act, as revenue expenditure.
User for non-business purposes :
Section 36(1) (iii) allows deduction of interest on capital borrowed for the purposes of business. Where the borrowing is utilized for non-business purposes it would attract disallowance since the basic requirement of capital borrowed for the purposes of the business would be missing in that case. Therefore, to the extent the borrowed fund is utilized for non-business purposes, the interest on such borrowed fund would be liable to be disallowed. However, such a disallowance will be possible only if there is a nexus between the borrowed funds and the use of the funds for the non-business purposes. This is consistently accepted view and in particular in the following cases:
15. 15 R.D.Joshi & Co. v/s. C.I.T. 251 ITR 332 (M.P.)
I.T.O v/s. Bharat Motors 68 TTJ 431 (Jd).
Gujarat Narmada Valley Fertilizers Co. Ltd. v/s. Dy. C.I.T. 108 Taxman 213 (Ahd)
Varinder Agro Chemicals Ltd. v/s. Asstt. C.I.T. 120 Taxman 150 (Chd)
Meenakshi Synthetics (P) Ltd. v/s. Asstt. C.I.T. 84 ITD 563 (Lucknow)
Purbanchal Stores v/s. I.T.O. 125 Taxman 35 (Gau)
I.T.O v/s. Naresh Fabrics 75 TTJ 386 (Jodh)
Oswal Industries v/s. Asstt. C.I.T. 109 Taxman 279 (Mum) (SMC)
Smt. Tara Devi v/s. I.T.O. 68 TTJ 361 (Jodh)
The question that is debated is, as to whether the assessee is required to establish that there is no nexus between the borrowed funds and the funds used for non-business purpose or the burden lies on the authority to establish the nexus between the borrowed funds and the user for such funds for non – business purposes. In most of the above cases the view taken is that the burden is on the revenue. A reasonable view seems to be that the assessee is required to furnish the evidence available with him and the burden to establish the nexus is on the revenue. In the absence of the establishment of the nexus the disallowance of interest would not be justified.
16. 16 Capital asset : Explanation 8 to section 43 (1):
As per the accounting principle, interest on borrowing directly relating to a capital asset is required to be capitalized and accordingly, the assessee would be entitled to depreciation on such capitalized amount. However, Explanation 8 to section 43(1) puts a bar and provides that the interest on capital borrowed for acquisition of an asset in respect of the period after the asset is put to use shall not be capitalized. The said Explanation reads as under :
“Explanation 8 – For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset.”
As seen above, once the business is commenced the interest on borrowed capital is allowable as deduction irrespective of whether the borrowed capital is utilized for acquisition of a capital asset or revenue asset. If the interest is capitalized it will not be allowed as deduction u/s. 36 (1) (iii).
17. 17 Proviso to section 36 (1) (iii) :
A.Y. 04-05 on wards proviso to section36(1)
‘Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not ; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.”
This proviso puts a restriction on the option available to an assessee for claiming interest on capital borrowed for acquisition of asset in respect of the period up to date on which the asset is put to use. The restriction applies only in respect of the capital asset acquired for extension of the existing business. The only option left to the assessee is to capitalize the interest for the period up to date on which the asset is put to use and to claim depreciation. The assessee is not eligible to claim deduction u/s. 36 (1) (iii) in respect of such interest.
19. 19 Case Laws
No need to show that the borrowing of the capital was necessary for the business.
C.I.T. V. Bombay Samachar – 74 ITR 723
Argument that the assessee could have decreased borrowing by controlling is outstanding & there by reduce interest burden can not be sustained.
The AO should give clear finding that the borrowed money or part of it has been utilized for non-business purpose.
20. 20 Where the Assessee has both, his own money as well as borrowed money assumption can arise that the money lent came out of his own funds.
Hotel Savera 148 CTR 585
“A”had ample funds at his disposal, need not have borrowed is not a relevant ground.
Annabay 51 ITR 835
“A” used the borrowed money for giving loans on interest to others in normal course of business. Subsequently it waived interest in respect of certain such loan held subsequent waiver did not alter the nature of loans.
City Motors 61 ITR 426
Interest on borrowed funds invested in partnership business & earning interest there on - allowable.
Shantikumar Narrotam 27 ITR 69
21. 21 Payment as well as receipt of interest by partner – only the net amount to be Consider.
Keshavji Ravji 183 ITR I (SC)
Circulate No. 33 – D, Dt. 8.11.65
“C” Female member of HUF was partner of the Assessee firm. She made a gift of Rs. 35000 to her HUF. The “A” firm took loan from HUF. of Rs. 35000 for the purpose of business & paid interest on it. Held that the gift made by “c” to the HUF was the valid Gift & Interest paid by the firm to the HUF was allowable.
Ramlal & Sons. 124 ITR 157
No power to question the rate of interest in a bonafide transaction. Pudu Comp. 84 ITR 788.
Interest not covered under Sec. 36 (1) (iii) may still be allowable under Sec. 37 (1).
Interest on Debentures
Interest on unpaid price of P & M.
Interest on discounting of sale document.
Interest to creditors.
23. 23 Tingri Tea. (Cal.) HC 79 ITR 294
Torrent Financiers. 73 TTJ (Ahd.) 624.
Manjal Sales Corp. (Sc.) 168 Taxman 43
Advances to sister concern.
Current years profit more then the interest free advance.
United Agency 37 TTJ (Ahd.) 374
Amount advanced to siter concern were made out of creditors balance.
Rajvikas Queries 42 TTJ (Del.) 262
Continuous out flow & inflow of funds. The funds given to keep the sister concern live.
Advance was a commercial expediency. Premier Brass 51 ITD (Mah.) 114.
SA Builders (SC) 158 Taxman 74.
Advance to sister concerns a Measure of commercial expediency.
24. 24 “However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purpose, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”
25. 25 6. P.F. Sec. 36 (IV) & (V)
Any sum paid by “A” as an employer.
By way of contribution towards a recognized P.F.
Subject to such limit.
The due date in case of contribution to P.F is 20th each succeeding month Including grace period of 5 days as per (PDC’s circular No. E 128 (1) 60. III dt. 19.03.64 as modified by circular no. E-11/128/73 dt. 24.10.736. Also refer Hunsar plywood works ltd. 5 ITD 394 Ganpathy Mills Co. Ltd. 243 ITR 849.
If last day Bank holiday, a payment can be made on next day.
Only if check 15 realized within 15 days from due date.
26. 26 7. Bad Debt Sec. 36 (i)(vii)
For & from assessment yrs. 1989-90 the conditions requisite for allowance of a debt as bad debt are
It must be a proper debt, or a part thereof
Of a revenue nature contra distinguished from capital nature
Which has been written off as irrecoverable in the accounts of the assessee for the previous year or
Which represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee.
Section 36 (1) (vii) read with section 36 (2) provides for deduction of bad debts. One of the conditions that has been is that debt or part thereof has been taken into account in computing income of the assessee or represents money lent in ordinary course of business or money lending carried on by the assessee. Not all and every debt as understood by an accountant is allowable and it is only those debt which have been taken into account in computing income is eligible as deduction on write off.
27. 27 Mere Write-Off Sufficent
After 1st April, 1989 it is not necessary for the assessee to establish that the debts in fact have became irrecoverable. It is sufficient if they are written off as irrecoverable in the accounts of the assessee. T.R.F. Limited vs. CIT (2010) 35 DTR 156(SC)/230 CTR14(SC).
In Cawnpore Sugar Works Ltd. V. CIT 243 ITR 345 [All], the assessee had advanced money to controller of a sugar mill, which it had acquired in an auction. Major part of advance had been received back and a small amount was written off as bad debt. The High Court affirmed the decision of the ITAT holding that the said sum was not debt and therefore cannot be allowed as bad debt.
In Turner Morrison and Co. Ltd. V. CIT, 245 ITR 724 [Cal] it has been held that irrecoverable amount advanced to the subsidiary company is allowable as deduction as bad debts.
28. 28 Assessee having valid reason for judging that amount was not recoverable though assessee had obtained a decree to recover debt. Assessee entitled to deduction of bad debt. CIT vs. Punjab Tractors Ltd.(2010)320 ITR 153 (P&H).
Assessee is not required to prove that the debt has become bad. Assessee only to write off the debt as bad its books. Law with effect from Assessment Year 1989-90. Lawlys Enterprises Pvt. Ltd. vs. CIT(2010)214 Taxation 256(Patna).
Where share broker purchasing shares for its clients and paying money against purchase and money receivable from client becoming bad and treated as bad bed. Held that brokerage payable by client is part of bad debt to be taken into account. CIT vs. Bonanza Portfolio Ltd.(2010)320 ITR 178 (Delhi).
29. 29 Amount paid by assessee (a stock broker) on behalf of sub-broker, which could not be recovered, is eligible for being claimed as bad debt. CIT vs. DB(India) Securities Ltd. (2010)187 Taxman 161(Del.)
30. 30 8. Section 37 (1) Any Expenditure:
Not being capital expenditure
Not being expenditure of the nature described in section 30 to 36.
Not being personal expenditure of the assessee Laid out wholly and exclusively for the purpose of business.
Wholly and exclusively for the purpose of business
Though the question must be decided on the facts of each case, the final conclusion is one of law.
It is not necessary to show that the expenditure was profitable one or that any profit was earned.
It is enough to show that money was spent.
Not out of necessity and with a view to direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency and in order to indirectly facilitate carrying on the business.
31. 31 Nexus between expenditure and business is essential
Doctrine that the business man is the best judge of the business expediency does not affect the right of A.O. to know whether it was incurred for business purpose and not for other extraneous consideration.
(Jaipur Electro 223 ITR 535)
The test is whether the assessee has reasonably in the interest of business incurred the expenditure in question.
Foregoing interest on loan to raw material suppliers.
Foregoing of higher charges recoverable from a contractor.
Tea samples and complimentary tea distributed to Directors, Shareholders and friends at the AGM of the assessee company.
Expenditure incurred for construction of fountain resulting into beautification traffic island.
32. 32 Positive and Negative Test
In CIT v. Navsari Cotton & Silk Mills [(1982) 135 ITR 546, 554-6 (Guj)], Thakkar J., has formulated two types of tests, positive and negative. If an expenditure falling into the phraseology of section 37(1) fits in any one of the positive tests and none of the negative tests apply to it, then only it can be allowable as a business expenditure. The positive tests are :
‘If It is Incurred
with a view to bring profits or monetary advantage either today or tomorrow,
to render the assessee immune from impending or reasonably apprehended litigation,
in order to save losses in foreseeable furture,
for effecting economy in working which may pay dividends today or tomorrow,
for increasing efficiency in working,
for removing inefficiency in the working,
where the expenditure incurred is such as a (i) wise, (ii) prudent, (iii) pragmatic, (iv) ethical man of the world of business would consciously incur with an eye on promoting his business prospects subject to the expenditure being genuine and within reasonable limits,
33. 33 where it is incurred solely by way of a civil duty owed by the assessee to the society having regard to the nature of his business which brings him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limit.’
The Negative Tests are:
‘If it is incurred
for a mere altruistic consideration
mainly in order to satisfy his philanthropic urges.
Explanantion ,- Factors (1) and (2) are laudable but the altruistic or philanthropic urges can be satisfied at one’s own cost or sacrifice (and) not at the cost of public exchequer or other taxpayers and those living below the poverty line,
mainly in order to win applause or earn garlands or public appreciation,
for illegal, immoral or corrupt purposes or by any such means or for any such reasons,
34. 34 mainly in order to oblige a relative or an official,
mainly in order to earn the goodwill of a political party or a politician,
mainly in order to show-off or impress others with his affluence or for ostentatious purposes,
apparently for a factor listed as a positive factor…but in reality for one of the obnoxious purposes listed hereinabove.
On a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future or promoting business prospects but really for one or the other of the above-mentioned purposes.
It must not be a bogus, fictitious or sham transaction.
It must not be unreasonable and out of proportion
It must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith.
The advantage to be secured by incurring the expenditure must not be of the nature of a remote possible advantage depending on “ifs” and “buts”, and if at all, to be secured at an uncertain future date which may be considered too remote.’
35. 35 Expenditure in respect of stopped or discontinued business
Some business continues
One business stopped
The expenses of discontinued business cannot be claimed against other continued business.
This is so because in case of several business each one is of distinct nature though the head business is same, each business is to be taken as separate unit for ascertainment of profit.
(Chhabra & Sons 63 ITR 638)
Where however, more than one business carried on by the assessee are found to constitute one of the same business due to interlacking, interconnect etc. and one of them is closed, the expenditure in relation to such closed business is deductible.
(Bansidhar Ltd. 127 ITR 65)
Business carried on at head office and also at several branches, expenditure for maintaining certain closed branches deductible.
36. 36 Typical Cases
Payment of percentage of profit besides cash consideration for purchasing a business (Travancore Sugar Ltd. 62 ITR 566)
Payment for Goodwill
Use of Quota Rice
Acquisition of Monopoly Rice
Expenses for New Route Permits
Assets purchased for the purpose of advertisement.
Fees paid to Registrar of Companies for increasing authorized capital. (Kishanchand Chelaram 130 ITR 385)
However, in case of Mohan Makin Breveries 117 ITR 505 held that fees are not allowable as increase in capital results in an advantage of enduring nature. Finally Supreme Court in Punjab State Industrial Development Corporation 225 ITR 792 held that it is capital expenditure.
37. 37 Foreign Exchange Fluctuation:
Depreciation on Account of Enhanced Cost
The Supreme Court relying on its earlier decision in the case of CIT vs. Woodward Governor India P. Ltd. 312 ITR 254 (SC) held that the claim for depreciation on account of enhanced cost due to fluctuation in the foreign exchange rate is admissible as a deduction under section 37 of the Act. CIT vs. Maruti Udyog Ltd.(2010)320ITR 729(SC).
Foreign Exchange Fluctuation Loss
The Supreme Court has held that the loss claimed by the appellant on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet was allowable as expenditure under section37(1). Liberty India vs. CIT(2010)28 DTR 73(SC).
Advance payment made for purchase of machinery written off as business loss. Hon’ble Tribunal allowed the Appeal by Relying on the Hon’ble High Court of Rajasthan in the case of CIT vs. Anjani Kumar Co. Ltd. 259 ITR 114(Raj). Pik Pen Pvt. Ltd. vs. ITO(Mum.)(Trib.)
38. 38 Shatlaj Cotton Mills Ltd.(SC) 116 ITR 1
“The law may; therefore, now be taken to be well-settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature.”
Section 37 (1) Explanation:
Any expenditure incurred by an assessee for any purpose which is in offence or which is prohibited by law therefore not be deemed to have been incurred for the purpose of business and no deduction shall be allowed in respect of such expenditure.
A commission agent, incurred expenditure towards gifts to officials and customers for sale of various products, free samples, prizes distribution for the purpose of sales promotion in army/navy/CSD canteens. Held the amounts are deductible as being incurred for the purpose of business and out of business expediency. CIT vs. C.B.K.R. Enterprises (2010)186 Taxman 14(Del.)
39. 39 9. Salary & Remuneration Whether another employee would be available at less salary is not a test.
But if expenses grossly disproportionate to the volume and salary paid to employee is wholly disproportionate to the industries standards the expenditure is not allowable.
(D.N. Sinha 162 ITR 421)
Extra commercial considerations like relatives or friends
Evidence of services rendered
Payment in recognition of long faithful service
Remuneration payable to Karta or member for managing HUF Business.
(Sunderlal Nathalal 151 ITR 25)
40. 40 10. Penalties & Interest Statutory/Contractual. Penalty for infraction not allowable if penal in nature. Except when the business itself is illegal.
Haji Aziz (Sc) 41 ITR 350
Penalty due to bona fide infringement or malafide.
Compensatory penalty is allowable.
Damages/Penalties are Contractual allowable.
It is not relevant that the penalty is in rem or personal.
Penalty for infraction of Central Excise Rule. Goods removed under self clearance scheme without maintaining adequate credit of excise by mistake of clerk. Angle Fench Textiles 8 ITD 161 (Mad.)
Breach of a contract and breach was not dishonest for example breach of a warranty or for failure to performa trading contract – allowable. Dishonest breach – example – payment under a decree passed against company for misfeasance committed by its Directors.
41. 41 Contractual Penalty:
The A failed to export Stanforized Cloth as its obligation to export. The terms of bond provided that the A should pay penalty @ Rs.0.10 per Meter of shortfall of export of cloth to the government. The scheme gave an option either to fulfill the export or to pay the penalty for failure. Court held that exercise of option of non export & payment of penalty may be the result of commercial expediency as well as certain extraneous factors over which the manufacturer might not have control”
Tarun Commercial Mills 107 ITR 172 (Guj.)
Interest on delayed payments of Custom Duty, Purchase Tax Sales Tax. Mahalaxmi Sugar Mills (Sc) 123 ITR 429
But Guj. H.C. in Oriental Trading Co. 208 ITR 216 (Guj.) has taken a contrary view.
Penalty for non compliance with the requirement of notice.
Though every member of National Stock Exchange is obliged to abide by its rules and regulations, fine imposed on the assessee a member of NSE for violation of regulations of NSE cannot be disallowed. Gold Crest Capital Markets Ltd. vs. ITO(2010)36 DTR 177(Mum.)
42. 42 11. Expenditure on Foreign Tour If the object is dominantly commercial the expenditure would qualify for deduction. If however, the advantage made by the assessee’s business was secondary and was a remote consequence the expenditure would not be eligible.
(Dr. B.V. Raman 59 ITR 20)
Expenditure on foreign tour by director of a company to study and get acquainted with new method of production and new machineries allowable.
(Ambica Mills 54 ITR 167)
Expenditure for attending international conference
Expenditure on foreign tour of the managing director’s wife who accompanied her husband as he was keeping indifferent health – held not allowable
(Bombay Mineral 153 ITR 437)
43. 43 Expenditure incurred on bringing back dead body of Chairman who died while on business tour – Allowable.
Expenditure incurred on foreign tour of the director and his wife in connection with medical treatment of the director – held allowable (Still ingots 220 ITR 552)
Board’s circular No. 4 dated 19.6.1950)
The allow ability should not be viewed as to whether such visit results immediately in the earning of profit. All that the law requires is that expenditure should not be in the nature of capital expenditure or personal expenditure of the assessee.
Foreign travel expenditure in relation to existing business or expansion of the same business v/s. new business.
Wife accompanying husband Director held – in modern age, executives as a matter of social custom, accompanied by wife – allowable. Glaps Laboratories – 18 ITD 2 26 (Mumb.)
Foreign travel expenditure on tax consultant of assessee.
Sarabhai Technological Development 254 ITR 84 (Guj.)
44. 44 12. Diwali & Muhurat Expenses Circular No. 17 dated 6.5.1943
Deposit under Tatkal Telephone deposit scheme, OYT scheme, Telex Connection
45. 45 13. Section 40 Amounts not deductible
Section 40 a (i)
Fees for technical services
Or other sum chargeable under 1961 Act
Which is payable outside India on which tax has not been paid or deducted is not allowable.
However, proviso says that if tax has been paid or deducted in any subsequent year the sum will be allowed in the year in which such tax is paid or deducted.
46. 46 14. Section 40a(i)(a) Sum payable to resident as
Commission or brokerage
Fees for professional services.
Fees for technical services.
Contractor or subcontractor for carrying out any work rent.
48. 48 15. Section 40 (b) Interest and salary to partners
Salary to HUF partner or partner in different capacity Brijmohandas Laxmandas (SC) 15CC 352
Whether Salary belongs to Individual or HUF.
Disallowance of Remuneration U/s.40A(2)(b) Chhajed Steel Corp. 77 ITD 419 (Ahd.) …… paid salary of Rs.4,23,000 against earlier year salary of Rs.43,000A.O. recorded the statement of Deed also brought other evidences on record.
If remuneration disallowed for any reason and taxed in the hands of firm, it cannot be taxed twice in the hands of partner. Vikas Oil Mill 95 TTJ (J) 1126.
49. 49 16. Section 40A Section 40 A (2) (a)
Excessive or unreasonable to relatives
Term relative is defined u/s. 2 (41)
Department Circular No. 6 – P dated 6.7.1968
“It should be born in mind provision is meant to check evasion to tax through excessive payments to relatives and should not be applied in a manner which will cause hardship in a bonafide case”.
50. 50 17. Section 40A(3) Proviso – no disallowance under this sub-section shall be made where any payment in a sum exceeding Rs. 20,000 is made otherwise than by Account Payee check in such case and under such circumstances as may be prescribed having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors.
Mitigating circumstances of rule 6DD
Rule 6DD(i) is omitted with effect from 1.12.1995 Sub clause (j) provided for exceptional or unavoidable circumstances or genuine difficulty to the payee having regard to the nature of transaction.
51. 51 Rule 6DD
Payment made to Govt. where under the rules framed by it the payment is required to be tendered in cash.
Whether the payment is made by way of adjustment against amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee.
Payment of purchase of agricultural or forest produce dairy, fish, horticulture etc.
Where payment is made for purchase of products manufactured without aid of power in a cottage industry.
Where the village or town is not served by any bank to a person who ordinarily resides in such town.
Gratuity to an employee whose salary does not exceed Rs. 7500/-
Salary after deducting tax to employee temporarily posted for continues period of 15 days or more in a place other than his normal place or duty.
Payment made by person to his agent who is required to make payment in cash for goods. Press Note dt.02.05.2009 issued by ministry of finance.
52. 52 Payment made by an authorized dealer for purchase of foreign currency or travelers cheque.
Though rule 6DD(j) prescribing Mitigating Circumstances with a view to relax the rigors of section 40A(3) effective from A.Y.1996-97, provided exeption of unavoidable difficulty, genuine difficulty etc. But still reference to 40A(3) can be made.
- Payment to Railway, Excise
- Payment to Electricity Board.
- No disallowance under block assessment, assessment u/s.44AF.
53. 53 18. Section 41 Section 41(1)
In the assessment of an assessee, an allowance of deduction has been made in respect of any loss, expenditure or trading liability incurred by him.
(a) Any amount is obtained in respect of such loss or expenditure, or expenditure, or
(b) Any benefit is obtained in respect of such trading liability by way of remission or cessation there of.
Such amount or benefit is obtained by an assessee and
Such amount or benefit is obtained in subsequent year.
54. 54 Section 41(1) have thus two effects, namely:
that although ordinarily the amount of remission or cessation etc. would not be profits and gains, it has to be regarded as such profits and gains and
Such an amount so forgiven by way of remission or cessation etc. has to be regarded as profits and gains of business or profession accruing or arising in the previous year wherein it is obtained.
The benefit need not necessarily be in cash -Even book adjustments are included.
Method of accounting not relevant.
All books can not be called upon for production
Section 41(1) concerns trading liability and not other type of liabilities.
A debt waived by the creditor can not be treated as income of the debtor. (P.Ganesh 133 ITR 103)
A time-bar on liability does not by itself attract u.s. 41(1).
55. 55 When a doctor decides not to show an amount as due to creditor because the debt had become time-barred and proceeds to credit it to his own account, all that it means is that the amount is not recoverable from him and he does not intend to repay it. Nonetheless, his obligation continues though the recovery is barred. This does not by itself show that liability had ceased to exist.
(V.T. Kuttappu & Sons 96 ITR 327)
Cessation-Remission of Liability-Profits Chargeable to Tax – Old Outstanding
The fact that the liability was old would not make any ground for addition. So long as there was no cessation of liability by writing back same no addition could be made under section 41(1). CIT vs. Sita Devi Juneja(Smt.)(2010)187 Taxman 96(P&H). CIT vs. Jaipur Jewellers (Exports)(2010)187 Taxman 169 (Delhi).
56. 56 19. Section 43A Where a capital asset has been acquired from a foreign country, the addition to or deduction from the actual cost of the assets on account of change in exchange rate shall be allowed to be made only in the year actual payment towards cost of assets or repayment of foreign loan or interest irrespective of the method of accounting adopted.
57. 57 20. Adopting of G.P. Rate If the books of account are rejected and profit is estimated, it would take care of all disallowances.
Vikas Trading 61TTJ (Ahd.) 6
Sarawan Singh Contractor 55 ITD 192 (Chd)
Deduction of Depreciation
The gross profit or net profit should be estimated subject to allowance of depreciation and allowable depreciation should be deducted there from.
Jain Construction 245 ITR 527 (Raj).
However in J.P. Raja 143 Taxman 500 (Ker) view is taken that for claiming depreciation, maintenance of proper accounts by the A is required and therefore when books of accounts are separate deduction of Depreciation can be allowed.
Deduction as per section 40(b) to be allowed.
Bharat Construction 258 ITR 140 (Raj)
58. 58 Thank You