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Judicial Decisions

Judicial Decisions. Business/Profession. What is business. 2(13)-includes trade/commerce/manufacture or adventure/concern in nature thereof. Supreme Court- Karnani Properties 82 ITR 547-activity carried on continuously in organised manner with a set purpose to earn profits

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Judicial Decisions

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  1. Judicial Decisions Business/Profession

  2. What is business • 2(13)-includes trade/commerce/manufacture or adventure/concern in nature thereof. • Supreme Court-Karnani Properties 82 ITR 547-activity carried on continuously in organised manner with a set purpose to earn profits • Common controversies-transactions in shares/commercial complexes/development of real estate/sale of capital assets.

  3. Shares • Supreme Court: Associated Industrial Development (82 ITR 586): Whether investment/stock-within knowledge of assessee who should produce evidence of having maintained the distinction • Large number of decisions, without any clear direction-[2011] 16 taxmann.com 204 (Ahmedabad - Trib.)-Sugamchand C. Shah looks like a treatise on the subject. • Various criteria stated. Number of transactions and period of holding appear to be dominating.

  4. Shares : Other considerations • Frequency of transactions • Whether staff and office maintained • Whether used own or borrowed funds • How asset shown/valued in books-stock or investment • Objects in Memorandum of Association • Treatment in previous years. • Occupation of assessee-say broker

  5. Commercial complexes • Supreme Court-S. G. Mercantile Corporation P. Ltd.-83-ITR -700- Ownership and leasing-can be as a part of business or as land-owner depending on the object. • In that case: Object clause-lease/acquire property and deal with it commercially- Took property on lease, repaired/remodelled and let out portions as shops etc-held business.

  6. Activity/business Following may constitute single business • Trading combined with manufacturing • Different products manufactured by same company. • Manufacturing units at different locations. • Veecumsees(SC-220 ITR 185)

  7. Undertaking/business • Although part of same business, new factory may be New undertaking for incentive provisions like 80IA/IC-HindusthanMalleables And Forgings Ltd-(191)-ITR -0070 -PAT • Substantial expansion could be new undertaking. Textile Machinery case [1977] 107 ITR 195 (SC)-Indian Aluminium -(108)-ITR -0367 -SC

  8. Suspension period • Suspension for a temporary period (could be many years) –business considered continued: -Prayshwin Patel(240 ITR 931) -Vellore Electric Corporation Ltd.(243 ITR 529) -Bhagwati Rerolling Mills(211 ITR 227) -Medley Pharmaceuticals Ltd.(109 TTJ 328).

  9. Profit • Receipt escaping tax net when: • It is on transfer of capital asset (Although relating to business) –Carbon credits- Hyderabad Bench in case of My Home Power Ltd. 21 ITR (TRIB) 186 • It is not a revenue receipt-Reliance Industries Ltd. 2011-(339)-ITR -0632 -BOM /Ponni Sugar(306 ITR 392) (SC)/Inox Leisure (351)-ITR -0314 -GUJ

  10. Profit • Deductions not listed in Act allowable under section 28: • Embezzlement 34 ITR 10-SC • Advances for raw materials written off-46 ITR 639 • Loss or decline in value of stock in trade- 55 ITR 707 • Stocks acquired by gift/Conversion 45 ITR 152 • Discounted value of gratuity/leave/warranty-SC-73 ITR 53-Metalbox, Rotork Controls India P. Ltd. (314 ITR 62) • Damages for breach of contract-144 ITR 57

  11. Accrual • Export incentives- only after claim verified by authorities. Sriyansh Knitters P. Ltd.(336 ITR 235) and Manav Tools(India) P. Ltd. (336 ITR 237) . Contrary to earlier decisions including Bajaj Auto Limited( 322 ITR 29). • Department should not agitate as no effect if taken in one or other year Nagri Mills Ltd. -33 ITR 681

  12. Stocks in Balance Sheet and bank statement -CIT V. Veerdip Rollers P. Ltd. 323 ITR 341 (Guj)-SLP of Department dismissed 307 ITR St. 3 -Ashok Kumar V. ITO 201 CTR 178 (J & K) -Commissioner Of Income Tax V. Das Industries. 2008-(303)-ITR -0199 –ALL -CIT V. N. Swamy-242 ITR 363(Madras) -CIT V. Relaxo Footwear- 259 ITR 744(Rajasthan) -CIT V. Sidhu Rice and General Mills- 281 ITR 428(Punjab and Haryana) - Commissioner Of Income-Tax V. Acrow India Ltd. 298 ITR 0447 -BOM

  13. Income found in Survey • May be considered to be business income for 40(b)/ 80IA etc. • Income-tax Officer V. JamanadasMuljibhai (99 TTJ 197)-Rajkot • Royale Sunrise V. Income-tax Officer (99 TTJ 1305)-Bangalore.

  14. Gross profit decline • Narendra Mafatlal Mehta V. Income Tax Officer- 59-TTJ -0165 Mumbai Bench-gross profit bound to change • Ahmedabad Bench Pushpanjali Dyeing and Printing Mills P. Ltd.(72 TTJ 886). –No addition when no defect in books • -Delhi Securities Printers V. Deputy Commissioner Of Income-Tax, Circle 33(1), New Delhi 2007-(015)-Sot -0353 -Tdel • -Commissioner Of Income-Tax V. Rajni Kant Dave. 2006-(281)-ITR -0006 –All • -AshokeRefractories P. Ltd. V. Commissioner Of Income-Tax. 2005-(279)-ITR -0457 -Cal

  15. Depreciation • Car in name of Directors-Not allowed in case of Edwise Consultants Pvt Ltd- ITA No.391/Mum/2011-Mysore Minerals Ltd. v. CIT (1999) 106 Taxman 166 (SC) distinguished • Car purchased last day of the year but not registered- allowed as `ready to use’ [2013] 31 taxmann.com 228 (Delhi) -K and Co. • Additional depreciation allowed in case of windmill when power used for manufacturing unit- I.T.A. No.1945 / Ahd/2010- Power build Ltd

  16. Interest free loans to relatives • No disallowance when capital and reserves in case of a company exceed the loans: - Supreme Court in case of Munjal Sales Corporation V. CIT (298 ITR 298). - Ahmedabad Bench of ITAT in case of Torrent Financiers(73 TTJ 624). - Allahabad High Court in case of CIT V. Motor Sales Ltd.(304 ITR 123). - Madras High Court in case of Commissioner Of Income-tax V. South India Corporation (AGENCIES) LTD. 290 ITR 217. -Allahabad High Court in case of CIT V. RadicoKhaitan Ltd.(274 ITR 354). 2009-(029)-SOT -0531 -TBOM - Metro Exporters Ltd. V. Income-tax Officer, ). 2009-(029)-SOT -0531 –TBOM No addition when borrowed funds not used  [2013] 36 taxmann.com 14 (Gujarat) -Arihant Avenue & Credit Ltd.

  17. Bad Debts • T. R. F. LIMITED, APPELLANT V. Commissioner Of Income Tax -2010-(323)-ITR -0397 –SC- not necessary to establish irrecoverability. It is enough if the bad debt is written off • Anil H. Rastogi (86 ITD 193)- bad debt within short period from the date of sale.

  18. Capital/Revenue expenditure • Advance for capital expenditure written off- not revenue 231 ITR 842-SC-Hasimara • Expenditure to ward off competition for 15 years-not revenue-221 ITR 299-MP-Grover • Total renovation resulting in enduring benefit-capital –Supreme Court - Ballimal Naval Kishor V/s. CIT 224 ITR 414

  19. Capital/Revenue • Feasibility report for converting coke plant to cement plant-Revenue-221 ITR 90-Patna • Raychem RPG Ltd. (346 ITR 138)-Bombay: Expenditure on ERP package -Revenue • Repairing increases life of existing asset-not capital expenditure [2013] 36 taxmann.com 19 (P & H) -Vishal Paper Industries • Gujarat High Court -Indian Ginning & Pressing Co. Ltd. V. CIT (170 CTR 122- change in flooring/ sheets of roof, removal of pillar, new cabin, etc allowed as no new asset came into existence.

  20. Capital/Revenue expenditure • CIT V. Chowgule and Co. P. Ltd. (214 ITR 523), Bombay -allowed large expenditure of Rs. 9952440/- about 25 years earlier • Expenditure on replacement of certain parts allowed (CIT vs. Mahalakshmi Textile Mills Ltd. 66 ITR 710)-SC. • Renovation and reconditioning allowed- KalyanjiMavji & Co. vs. CIT 122 ITR 49). SC • Expenditure on Pipelines, Installations which belong to Government –allowed-1988-(172)-ITR -0257 -SC -Associated Cement Companies

  21. Bogus bills of suppliers • Allowed if the goods received and sold but the supplier is not identifiable. • CIT V. M K. Brothers(163 ITR 249), Gujarat High Court • Shreeraj Industries, ITA NO.2341/Ahd/1996, the Ahmedabad Bench • Vijay proteins 58 ITD 428 • J R Solvent 63 TTJ 165 • Bansal Steel 92 Taxman 314 • Ghanshyam 107 Taxman 126

  22. Lumpsum disallowances • Self made vouchers sufficient- Delhi Bench of ITAT in case of ACIT V. Allied Construction (106 TTJ 616) • Lumpsum disallowances deleted: -Mahendra Oil Cake Industries (P.) Ltd. v. Asstt. CIT (55 TTJ (Ahd) 711) disallowance of 1/4th of foreign tour expenditure -GeetanjaliWoollens (P.) Ltd. (050)-TTJ -0019 –TAHD -Monach Foods Pvt. Ltd. -(054)-TTJ -0405 –TAHD -Coca-Cola India Ltd. 2006-(104)-TTJ -0254 –TPUN -Hughes Escorts Communications Ltd. 106)-TTJ -1065 -Nodi Exports 2008-(117)-TTJ -0913 –TDEL

  23. Section 14A • No disallowannce for expenses relating to investment in companies for commercial purpose -Oriental Structural Engineers, Delhi ITA 605/2012 • Large investments in mutual funds- ½ % under Rule 8D confirmed by ITAT Ahmedabad in case of Munjal Auto Industries. • Expenses relating to shares held as stock in trade ITA No.3029/Mum/2012- Damani Estates & Finance - disallowance to be scaled down to 20% considering that the shares will give rise to income which is taxable as well as not taxable. 20% considering that the turnover would be about 5 times. • [2013] 32 taxmann.com 370 , High Court Of Gujarat in case of UTI Bank Ltd: where assessee had sufficient interest free funds, tax free investments presumed interest free funds

  24. 40a(ia) • Delhi High Court- Appeal No. 65/2013 -Rajinder Kumar –relaxation allowing payment upto due date for return-retrospective. • APPEAL No. - 122 of 2013-Vector Shipping Services(P) Ltd, Allahabad High Court –no disallowance when the expenditure is paid and not payable

  25. 40(a)(ia) • No allowance if tax not deducted originally but later debited to the party or paid from own pocket. ITAT Rajkot Bench in case of  Bhoomi Construction in IT APPEAL NO. 601 (RJT.) OF 2012 • TDS by agent-no TDS again by principal. Also no TDS on reimbursements 35 taxmann.com 638 (Gujarat) -GNFC • Deduction at lower rate : No/proportionate/full disallowance

  26. 40A(2) and Interest • Empire Motors in ITA No. 1272/AHD/2007 -21% allowed. • In Manisha Dyeing & Printing Works: I.T.A. No. 3600/AHD./2007 18% allowed. • In case of Kamalnayan S. Shah V. ACIT [I.T.A No. 3130/Ahd/2008], market rate is considered to be between 20% and 24%.

  27. 40A(3) • Cash deposit by assessee in bank account of supplier: allowed in Smt. Shelly Passy-Punjab 350 ITR 227 but not allowed in Venkatadhri Constructions (2012) 80 DTR 363 (Mad) • Applies even if income is estimated- Sai Metal Works-Income-tax Appeal No. 125 of 2004-Punjal

  28. Late deposit of PF of employees • Commonly added and deleted in appeal. • Large number of decisions of Ahmedabad Bench of ITAT and High Courts. Example: Gujarat Containers Limited (ITA NO.2609/Ahd/2008 ) • Sabari Enterprises -2008-(298)-ITR -0141 -KAR • CIT V. P.M. Electronics Ltd.- 220 CTR 635-Delhi High Court

  29. 43B • Taxes not debited to profit and loss account - no disallowance under section 43B in case of • Electricity duty 329 ITR 91 • Service tax 305 ITR 324 • Luxury tax 35 taxmann.com 565

  30. Various • Discovery Estates P. Ltd. 356 ITR 159-sale of different shops on same floor at different rates, ranging from Rs.2300/- to Rs.6000/-. No addition in absence of evidence • Section 80IB(10)- new conditions with effect from 1-4-2005. Not applicable to projects approved prior to that date- Gujarat High Court- Manan Corporation (356 ITR 44)

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