SOME LATESTJUDGMENTS UNDER THE INCOME TAX ACT

SOME LATESTJUDGMENTS UNDER THE INCOME TAX ACT CA Gautam Nayak Coimbatore Branch of SIRC of ICAI One day Conference 24th November 2012

Some Latest Judgments • Disallowance u/s.14A – Maxopp Investment Ltd v CIT 347 ITR 272 (Del) • Depreciation on Goodwill arising on Amalgamation – CIT v Smifs Securities Ltd 348 ITR 302 (SC) • Allowability of Bad Debts to a Broker – CIT v. Shreyas S Morakhia 342 ITR 285 (Bom) • Deductibility of Lease Premium – KrishakBharati Co-op. Ltd v ACIT 210 Taxman 123 (Del) • Disallowance u/s.40(a)(ia) of expenses not outstanding as at year end – Merilyn Shipping & Transports v ACIT 136 ITD 23 (Vishakh)(SB) CNK

Some Recent Judgments • Profits u/s.40(b) for remuneration to partners – Md. Serajuddin & Brothers v CIT 210 Taxman 84 (Cal) • Taxability of amount received by partner on dissolution of firm –Prashant S Joshi v ITO 324 ITR 154 (Bom), CIT v Abid A Kalvert 76 DTR 109 (Bom) • Indexed cost of acquisition on Inheritance – CIT v Manjula J Shah 204 Taxman 691 (Bom), Arun Shungloo Trust v CIT 205 Taxman 456 (Del) • Negative Net Worth in case of Slump Sale for s.50B – Dy CIT v Summit Securities Ltd 15 ITR (Trib) 1 (Mum)(SB) CNK

Some Recent Judgments • TDS on Commission to Non-Resident Agent – CIT v Eon Technology Pvt Ltd 343 ITR 366 (Del) • Credit for TDS and Tax Credit, Adjustment of Refunds – Court on Its Own Motion v CIT 210 Taxman 452 (Del) • Penalty u/s.271(1)(c) – clerical error - Price Waterhouse Coopers Pvt Ltd 348 ITR 306 (SC) • Penalty u/s.271(1)(c) – revised return – CIT v Usha International Ltd 27 taxmann.com 227 (Del) CNK

Maxopp Investment Ltd. v CIT 347 ITR 272 (Del) • Disallowance under Section 14A read with rule 8D • AO has to record dissatisfaction with claim of expenditure made by assessee on objective analysis and for cogent reasns • Only when AO rejects assessee’s claim can he invoke rule 8D • Rule 8D is prospective in nature • Even for earlier period, if AO not satisfied with correctness of claim of assessee, amount of expenditure in relation to exempt income to be determined on basis of reasonable & acceptable method of apportionment CNK

Maxopp Investment Ltd. v CIT 347 ITR 272 (Del) • Shares held as stock in trade - acquired for acquiring & retaining control of operating co – no dominant & immediate connection with dividend income – whether s.14A applicable? • Section 14A does not read “main object of earning exempt income” • Narrow meaning cannot be ascribed to the term “in relation to” • Means “in connection with” or “pertaining to” • “Expenditure incurred” means actual expenditure incurred • If no expenditure incurred in relation to exempt income, no disallowance u/s.14A CNK

Smifs Securities Ltd v cit 348 itr 302 (SC) • Allowability of depreciation on goodwill arising on merger • Amalgamation of another co with assessee • Difference between value of assets & liabilities acquired on merger and value of shares issued pursuant to amalgamation accounted for as goodwill • Deprecation claimed on such goodwill u/s.32 • Finding of fact by ITAT that assessee co had acquired a capital right in form of goodwill on amalgamation & market worth of c increased on account of such merger CNK

Smifs Securities Ltd v cit 348 itr 302 (SC) • “any other business or commercial rights of similar nature” to be read ejusdem generis • Goodwill would fall under that expression • Goodwill is an intangible asset eligible for depreciation CNK

CIT v. Shreyas S Morakhia342 ITR 285 (Bom) • Bad Debts of a sharebroker in respect of dues of clients for transactions effected on their behalf • Allowability of deduction u/s. 36(1)(vii) read with s.36(2) • Condition u/s.36(2)(i) - no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year CNK

CIT v. Shreyas S Morakhia342 ITR 285 (Bom) • Debt comprises of two portions – value of shares transacted & brokerage • Brokerage taxed as business income – taken into account in computing income of broker in that year or earlier year • Value of shares transacted by stock broker on behalf of its client is as much a part of the debt as is the brokerage which is charged by the broker on the transaction • Requirements of Section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income • Write off allowable as bad debt CNK

KrishakBharati Co-op. Ltd v ACIT 210 Taxman 123 (Del) • Allowability of amortisation of premium paid for lease of land • Lease for a period of 90 years – office complex could be constructed on the land • Premium of Rs.2.54 crore paid at time of allotment in 1989 • Further, annual lease rent to be paid at 2.5% of premium • Annual lease rent could be increased after 12 years • Amortisation of 1/90th of lease premium allowed in earlier years – claimed in current year as well • Whether capital expenditure not allowable? CNK

KrishakBharati Co-op. Ltd v ACIT 210 Taxman 123 (Del) • Madras High Court decision in Gemini Arts case 254 ITR 201 distinguished by ITAT – savings in rent in that case, rent to be paid separately in this case & could be increased • CIT v Panbari Tea Co Ltd 57 ITR 422 (SC) relied upon by Court • S.105 of TP Act draws distinction between price paid for transfer of a right to enjoy property (premium) and rent to be paid periodically to lessor • May be circumstances where parties may camouflage real nature of transaction by using clever phraseology – in some cases, so-called premium is in fact advance rent and in others rent is deferred price • Not the form but the substance of the transaction that matters CNK

KrishakBharati Co-op. Ltd v ACIT 210 Taxman 123 (Del) • Nomenclature used may not be decisive or conclusive but helps the court to ascertain the intention of the parties • If the premium represents the whole or part of the price of the land it cannot be rent • Decision is fact dependant – to be discerned from conduct of parties or surrounding circumstances • Advantage in form of highly depressed or nominal rent would indicate that premium is in nature of advance rent • No material to support fact that rent is depressed and does not reflect market rent • Premium held to be capital expenditure – amortisation not allowable as deduction CNK

Merilyn Shipping & Transports v ACIT 136 ITD 23 (Vishakh)(SB) • Disallowance u/s.40(a)(ia) – applicability to expenditure not outstanding at end of the year where TDS not deducted • As enacted - any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid, ………. • At Bill stage - Any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts credited or paid to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour), on which tax has not been deducted or, after deduction, has not been paid before …………. CNK

Merilyn Shipping & Transports v ACIT 136 ITD 23 (Vishakh)(SB) • Argument that conscious change – where payment already made, TDS cannot be deducted • Indicates intention of legislature • Conscious use of different words in different sections relating to TDS • Deeming fiction – to be limited to area for which created • “Payable” to be assigned its normal meaning • Circular No.5 of 2005 - intention to introduce this provision was brought to curb bogus payments by creating bogus liability • S.40(a)(ia) not applicable to payments made during the year CNK

Md. Serajuddin & Brothers v CIT 210 Taxman 84 (Cal) • Disallowability of remuneration to partners exceeding percentage of book profits • Income from Other Sources – consultancy fees, bank interest, profit on sale of assets, interest on advance tax - whether part of book profit for determination of allowable remuneration • “Book Profits” defined in expln 3 to s.40(b)(v) - net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit CNK

Md. Serajuddin & Brothers v CIT 210 Taxman 84 (Cal) • Chapter IV-D nowhere provides that method of accounting for the purpose of ascertaining net profit should be income from business alone and not from other sources • For purpose of Section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book-profit • Reference to Apollo Tyres Ltd v CIT 255 ITR 273(SC) – so long as in the course of its eligible business, to be included in profits of eligible business for s.32AB even if shown under other heads of income • Income of business taxable under other sources forms part of book profits for purposes of s.40(b)(v) CNK

Prashant S Joshi vITO 324 ITR 154 (Bom), CIT vAbid A Kalvert76 DTR 109 (Bom) • Taxability of amount received by a partner of a firm over and above his capital account on retirement from a firm • Partner of a firm carrying on construction business • Partner retired from firm, receiving Rs.50 lakh over and above balance standing to credit of his capital account • Claimed receipt of Rs.50 lakh as capital receipt, not subject to tax (assessment years 2005-06 & 2006-07) CNK

Prashant S Joshi vITO 324 ITR 154 (Bom), CIT vAbid A Kalvert76 DTR 109 (Bom) • During subsistence of partnership, partner does not possess interest in specie in assets of firm • Right to obtain share in profits • On dissolution/retirement, entitled to valuation of his share in net assets of partnership • Amount paid to partner on retirement after taking accounts does not involve element of transfer – CIT v MohanbhaiPamabhai 91 ITR 393 (Guj), affirmed in 165 ITR 166 (SC), CIT v R LingmalluRaghukumar 247 ITR 801 (SC) • When partner retires & amount paid towards his share in assets, exempt transfer u/s 47(ii) – Tribhuvandas G Patel v CIT 236 ITR 515 (SC) CNK

Prashant S Joshi vITO 324 ITR 154 (Bom), CIT vAbid A Kalvert76 DTR 109 (Bom) • S.47(ii) omitted & simultaneously s.45(4) inserted wef AY 1988-89 • S.45(4) – deals with situation where transfer of capital asset by way of distribution of capital assets on dissolution of firm or otherwise • On payment of additional amount, no transfer of capital asset on distribution of capital assets • Also, s.45(4) taxes firm, and not partner • S.28(iv) also not applicable as benefit paid in money – Mahindra & Mahindra Ltd v CIT 261 ITR 501 (Bom) • Excess amount not taxable CNK

CIT vManjula J Shah 204 Taxman 691 (Bom), Arun Shungloo Trust v CIT 205 Taxman 456 (Del) • Cost indexation in respect of property received by way of gift • S.2(42A), expln 1(i)(b) – period of holding of previous owner to be included • S.49(1)(ii) – cost to previous owner • S.48, expln (iii) - … the first year in which the asset was held by the assessee • Whether “assessee” to include previous owner? • Property received by way of gift – sold within 6 months • Normally ST capital asset – deemed to be LT by s.2(42A) CNK

CIT vManjula J Shah 204 Taxman 691 (Bom), Arun Shungloo Trust v CIT 205 Taxman 456 (Del) • “Held by assessee” not defined in s.48 – to be understood as defined u/s.2 • Expln 1(i)(b) to s.2(42A) deems assessee to have held asset from date acquired by previous owner • If considered as LTCG u/s.2(42A), naturally to be regarded as having held asset since date of acquisition of previous owner, and cost inflation indexation to apply accordingly • Object of treating period of holding as including that of previous owner cannot be defeated by excluding such period for cost indexation • Dept argument contrary to scheme of computation of capital gain CNK

CIT vManjula J Shah 204 Taxman 691 (Bom), Arun Shungloo Trust v CIT 205 Taxman 456 (Del) • S.55(1)(b)(2)(ii) – cost of improvement of previous owner also to be deducted • Possible only if period of holding of previous owner also included for purposes of computation • CBDT Circular No.636 dated 31.8.1992 [198 ITR (St)1] – fair method of allowing relief by indexation is to link it to period of holding the asset • Indexation of cost from first year in which previous owner held asset CNK

Dy CIT v Summit Securities Ltd 15 ITR (Trib) 1 (Mum)(SB) • Computation of capital gains on slump sale in case of negative net worth – whether negative net worth to be ignored or added to sale consideration? • Assets of Rs.1360 cr, liabilities of Rs.1517 cr, negative net worth of Rs.157 cr, sale consideration Rs.143 cr • For computing capital gain, cost of acquisition may undergo change vis-à-vis actual cost – indexation, reduction in WDV • In slump sale, though no price assigned to individual assets, current value of all assets and liabilities (disclosed or not) to arrive at composite price CNK

Dy CIT v Summit Securities Ltd 15 ITR (Trib) 1 (Mum)(SB) • If assets sold separately & liabilities discharged by transferor, then gross consideration to be considered • If liabilities also transferred, consideration reduced to net amount – result in both cases is same • Full value of consideration is aggregate value of all assets minus all liabilities • To match with consideration, cost is net book value of all assets minus all laibilities • Full value of consideration is amount actually received or accrued, except unless specifically provided – s.50C, s.45(2) • Full value of consideration for slump sale is Rs.143 cr CNK

Dy CIT v Summit Securities Ltd 15 ITR (Trib) 1 (Mum)(SB) • Cost is net worth – all assets minus all liabilities • Only part liabilities cannot be considered – incorrect computation of capital gain • Cost can be negative – cost is net worth – defined as difference between aggregate value of all assets and value of liabilities • Negative net worth concept known in auditing standards – SA570 • Deducting from vs. adding to – negative amount to be automatically added • Capital gain can exceed full value of consideration, since liability is embedded in and reduces full value of consideration CNK

CIT v Eon Technology Pvt Ltd 343 ITR 366 (Del) • Whether TDS to be deducted from commission to non-resident agent • Software co paid commission to parent UK co for export contracts procured by parent co • Dept stand that earning of right to receive situate in India – business connection situate in India • Mere making of entries in books in India does not amount to receipt by non-resident – CIT v Toshoku Ltd 125 ITR 525 • Business Connection – not mere business but relationship with business of non-resident & activity in India with some degree of continuity – CIT v R D Aggarwal & Co 56 ITR 20 (SC) CNK

CIT v Eon Technology Pvt Ltd 343 ITR 366 (Del) • Business connection not established • No tax liability in India • Not subject to TDS u/s.195 CNK

Court on Its Own Motion v CIT 210 Taxman 452 (Del) • 2 types of problems faced by taxpayers • failure & difficulty in getting credit of TDS • adjustment of past demands or arrears from tax payable • To be addressed & tackled separately • Centralisedcomputerisation of records, filing, processing of returns & issue of refunds laudable • Problem on account of wrong/incorrect data uploaded in centralised computer system • AOs were to have verified and corrected arrears before uploading CNK

Court on Its Own Motion v CIT 210 Taxman 452 (Del) • S.245 requires prior intimation to assessee before adjustment of refund to enable response • Affidavit filed by CBDT • CPC adjusts refunds against existing demands without following procedure u/s.245 • 22.93 lakh cases of adjustment of refunds – Rs.4800 crore • In few cases where prior intimation sent, AOs refused to accept objections, CPC insisted that AOs to rectify CNK

Court on Its Own Motion v CIT 210 Taxman 452 (Del) • Procedure u/s.245 to be followed – advance intimation to be given to assessee, opportunity to file response , response to be considered and examined by AO • AO to intimate CPC regarding his findings, who will then process refund, and adjust any demand payable • Time limit may be fixed for AO to intimate CPC • Where adjustment already made of non-existing, fictitious demands, revenue cannot take stand that adjustment possible contrary to s.245 – liability to interest also arises • Opportunity given to Revenue to rectify & correct records and issue refunds with interest without putting harsh burden & inconveniencing assessees CNK

Court on Its Own Motion v CIT 210 Taxman 452 (Del) • Failure to get credit for TDS – 2 categories • Amount reflected in 26AS, but incorrect entries in return or small mismatch • TDS deducted but TDS return not correctly filled in or uploaded • Taxpayers forced to make double payment • In FY 2010-11 & 2011-12, 43% & 39% of returns filed in Delhi found defective • Demand of Rs.3,000 crore for FY 2010-11 – reduced to Rs.1900 crore after rectification CNK

Court on Its Own Motion v CIT 210 Taxman 452 (Del) • In spite of writing letters to deductors to rectify TDS details, deductors fail & neglect to do so • No adverse consequence or action against such deductors • Deductee is out of pocket & harassed, but deductor does not suffer • CBDT response • deductors are informed on processing u/s.200A of errors – no penal provisions for failure to correct • Communication of mismatch to deductors by CPC – also sent to CIT(TDS) for follow up • Response is unconvincing & unsatisfactory CNK

Court on Its Own Motion v CIT 210 Taxman 452 (Del) • Small & insignificant mismatches, if technical, should be condoned or ignored • Amount reflected in Form 26AS should not be denied credit for small or technical mismatch • AO can subsequently revise, if found incorrect later on CNK

Price Waterhouse Coopers (P) Ltd v CIT 348 ITR 306 (SC) • Whether penalty u/s 271(1)(c) leviable where inadvertent mistake made in return of income • Tax Audit report reflected gratuity provision disallowable u/s 40A(7) of Rs.23.70 lakh • Not added back in computation of income • Assessment completed u/s.143(3) • Notice issued for reassessment – return filed in response • Grounds for initiating reassessment communicated • Revised return filed – letter filed on same day, stating that genuine mistake or ommission CNK

Price Waterhouse Coopers (P) Ltd v CIT 348 ITR 306 (SC) • Reassessment order passed on same day – tax & interest paid • 300% penalty levied u/s 271(1)(c) • Arguments that: • separate accounts dept • person preparing return unaware of fact that services of some employees taken over on acquisition of a business, who were not members of approved gratuity fund • Tax return finalised and filled in by common resource who was not a CA • Return signed by director who proceeded on footing that return correctly drawn up CNK

Price Waterhouse Coopers (P) Ltd v CIT 348 ITR 306 (SC) • Fact that tax audit report filed showed amount disallowable indicates computation error in return of income • Assessee as well as AO did not notice the error • Even a reputed firm could make a silly mistake • Bona fide & inadvertent error – human error which we are all prone to make • Calibre & expertise has nothing to do with inadvertent error • Absence of due care does not mean that assessee is guilty of furnishing inaccurate particulars or attempting to conceal its income • Given peculiar facts, penalty not justified CNK

CIT v Usha International Ltd 27 taxmann.com 227 (Del) • Whether penalty leviable u/s 271(1)(c) where return revised after survey • Revised return filed within 6 months of original return, withdrawing claim for deduction of bogus donation • In between, searches of other parties and survey of assessee showed donations to be bogus – cash book of co impounded • Revised return not filed voluntarily • Only when cornered and tax authorities had collected material showing claim to be bogus CNK

CIT v Usha International Ltd 27 taxmann.com 227 (Del) • Question whether revised return withdrawing claim or offering additional income voluntary or not is question of fact to be decided in light of entire material brought on record • Filing a revised return will not expatiate the contumacious conduct in not having disclosed true income in original return – all relevant facts to be considered – CIT v Ramdas Pharmacy 77 ITR 276(Mad) • On facts, penalty rightly imposed CNK

THANK YOU!

SOME LATESTJUDGMENTS UNDER THE INCOME TAX ACT