Sunday, March 17, 2013


 Subash Agarwal, Advocate

(A)    Supreme Court

1.       I.C.D.S. Ltd. vs. CIT 350 ITR 527 (SC)
Where assessee, engaged in business of hire purchase, leasing etc., having purchased vehicles from manufacturers, leased out those vehicles to customers, it was entitled to claim depreciation in respect of vehicles so leased out
Assessee was engaged in business of hire purchase, leasing and real estate etc. It purchased vehicles from manufacturers and thereupon leased out those vehicles to customers. Assessee's claim for depreciation on said vehicles was rejected on ground that it had merely financed purchase of these assets and was neither owner nor user of these assets.
(i)                 It was apparent from records that assessee was exclusive owner of vehicles at all points of time and, in case of default committed by lessee, assessee was empowered to re-possess vehicle.
(ii)               Moreover, at conclusion of leased period, lessee was obliged to return vehicle to assessee
(iii)             It was also undisputed that assessee was a leasing company and income derived from leasing of vehicles had been assessed as its business income.
(iv)             Section 32 imposes a twin requirement of 'ownership' and 'usage for business' for a successful claim of depreciation.
(v)               As long as asset is utilized for purpose of business of assessee, requirement of section 32 will stand satisfied, notwithstanding non-usage of asset itself by assessee.
(vi)             Assessee satisfied both requirements of section 32, i.e., ownership and usage of vehicles for purpose of business, and, thus, its claim for depreciation was to be allowed.

2.       CIT vs. Monnet Industries Ltd. 350 ITR 304 (SC)

Interest paid on borrowed fund for mere extension of existing business, is allowable as deduction under section 36(1)(iii)

Assessee was having a ferroalloys manufacturing plant. It set up a sugar plant at a different place out of its borrowed fund. There was a unity of control and management in respect of ferroalloys plant as well as sugar plant and there was also intermingling of funds and dove-tailing of business. Since there was mere extension of existing business of ferro-alloys plant, interest paid on funds borrowed for purposes of setting up of sugar plant was allowable as deduction under section 36(1)(iii)

(B)     High Courts

1.       CIT vs. Kamal Wahal 351 ITR 4 (Del.)

In order to get exemption u/s. 54F new residential house need not to be purchased by the assessee in his/her own name or exclusively in his/her name
For the purposes of Section 54F, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no contribution from the assessee's wife.
Having regard to the rule of purposive construction and the object which Section 54F seeks to achieve and respectfully agreeing with the judgment of this Court, we answer the substantial question of law framed by us in the affirmative, in favour of the assessee and against the revenue.
2.       CIT vs. Amit Jain 351 ITR 74 (Del.)

The record reveals that the amount in question, which formed the basis for the assessing officer to levy penalty was in fact truthfully reported in the returns. In view of this circumstance, that the assessing officer chose to treat the income under some other head cannot characterize the particulars or reported in the return as inaccurate particulars or as suppression of facts. 

3.       Khanna And Annadhanam vs. CIT 351 ITR 110 (Del.)

Compensation to CA Firm for loss of referral work is a non-taxable capital receipt

The assessee, a firm of Chartered Accountants, was one of the “associate members” of Deloitte Haskins & Sells for 13 years pursuant to which it was entitled to practice in that name. Deloitte desired to merge all the associate members into one firm. As this was not acceptable to the assessee, it withdrew from the membership and received consideration of Rs. 1.15 crores from Deloitte. The said amount was credited to the partners’ capital accounts & claimed to be a non-taxable capital receipt by the assessee. The AO rejected the claim. The CIT (A) reversed the AO. The Tribunal reversed the CIT (A). On appeal by the assessee to the High Court HELD reversing the Tribunal:

(i) There is a distinction between the compensation received for injury to trading operations arising from breach of contract and compensation received as solatium for loss of office. The compensation received for loss of an asset of enduring value would be regarded as capital. If the receipt represents compensation for the loss of a source of income, it would be capital and it matters little that the assessee continues to be in receipt of income from its other similar operations (Kettlewell Bullen 53 ITR 261 (SC) & Oberoi Hotel 236 ITR 903 (SC) followed);

(ii) On facts, the compensation was for loss of a source of income, namely referred work from Deloitte because it is somewhat difficult to conceive of a professional firm of chartered accountants entering into such arrangements with international firms of CAs, as the assessee in the present case had done, with the same frequency and regularity with which companies carrying on business take agencies, simultaneously running the risk of such agencies being terminated with the strong possibility of fresh agencies being taken. In a firm of chartered accountants there could be separate sources of professional income such as tax work, audit work, certification work, opinion work as also referred work. Under the arrangement with DHS there was a regular inflow of referred work from DHS through the Calcutta firm in respect of clients based in Delhi and nearby areas. There is no evidence that the assessee had entered into similar arrangements with other international firms of chartered accountants. The arrangement with DHS was in vogue for a fairly long period of time -13 years- and had acquired a kind of permanency as a source of income. When that source was unexpectedly terminated, it amounted to the impairment of the profit-making structure or apparatus of the assessee. It is for that loss of the source of income that the compensation was calculated and paid to the assessee. The compensation was thus a substitute for the source and the Tribunal was wrong in treating the receipt as being revenue in nature.

4.     CIT vs. C.S. Srivatsan 30 423 (Mad.)
Where company in which assessees were directors, paid franchise commission to franchiser, owned by HUF of directors, and such franchises met personal expenses of directors, same could not be brought to tax under section 2(24)(iv)

·                  The assessees were directors of the company 'CRS' which was engaged in the business of retail-selling of silk sarees and other textiles.
·                  'CRS' effected its sale through franchisees which were owned by different HUFs of the assessee. Said franchisees were paid commissions for the sale effected by them.
·                  The Assessing Officer treated the personal expenses of the assessees and their family members (Franchisee commission paid to different HUF) paid by the company as the income of the Directors, by invoking the provisions of section 2(24)( iv).
·                  The Tribunal held that the personal expenses met out of the company's money could not be treated as income in the hands of the assessees under section 2(24)(iv ) as the money had not been paid directly to them, but to the franchisees, which their HUF owned.


The Tribunal has taken note of the following aspects and has given the specific findings:-

·        CRS paid franchise commission to various firms owned by HUF of Directors.

·        This has been done on the basis of agreement entered into which were in force.

·        The payment by CRS on the basis of franchise agreement to various persons cannot be treated as payment to Directors who have substantial interest in the company and section 2(24)(iv ) cannot be invoked.

·        If the receiver of franchise commission has met the personal expenses of the Director, it is not the responsibility of the company for such act of the receiver of franchise commission.

·        The findings rendered by the Tribunal do not warrant any interference, as it is supported by factual matrix and legal reasoning.

5.     CIT vs. Abhinav Kumar Mittal 30 357 (Delhi)

Where reference made by Assessing Officer to DVO for valuation of properties of assessee was not in accordance with law and DVO's valuation was based on incomparable sales, addition made to income of assessee under section 69 on basis of DVO's valuation was wrong


No material was found in the search and seizure operations, which would justify the Assessing Officer's action in referring the matter to the DVO for his opinion on valuation of the said properties. If that be the case, then the valuation arrived at by the DVO would be of no consequence. In any event, the Tribunal has also held that the DVO's valuation was based on incomparable sales, which is not permissible in law.

6.     R.N. Gupta Co. Ltd. vs. CIT 30 424 (Punj. & Har.)

Scrap being by-product of manufacturing activity, there are no expenses which could be excluded from sale of scrap for computing deduction under section 80HHC

The assessee is engaged in manufacturing of goods for export. In the process of manufacturing, the scrap is generated, which is a bi-product of manufacturing activity. The Assessing Officer has not accepted the explanation of the assessee that no expenses are incurred for generation of scrap, and therefore, expenditure should be taken as nil for not accepted. The Assessing Officer has disallowed the deductions claimed by the assessee under Section 80 HHC of the Income Tax Act, 1961.

The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is bi-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap. Since the question of law stands answered by this Court in favour of assessee.

7.       Association of Corpn. & Apex Societies of Handlooms vs. ADIT 30 22 (Delhi)

Form No. 10 could be furnished by assessee-trust for purposes of section 11(2), i.e., for accumulation of income, during reassessment proceedings

The Tribunal rejected the assessee's claim for accumulation of income on the ground that Form No. 10 had not been furnished along with the return but was filed during the course of reassessment proceedings

·        One has to keep in mind the fact that while reopening of an assessment cannot be asked for by the assessee on the ground that it had not furnished Form No. 10 during the original assessment proceedings, this does not mean that when the revenue reopens the assessment by invoking section 147, the assessee would be remediless and would be barred from furnishing Form No. 10 during those assessment proceedings.
·        Therefore, Form No. 10 could be furnished by the assessee-trust during the reassessment proceedings.

8.       Zafa Ahmad & Co. vs. CIT30 267 (All.)

In course of proceedings under section 68, assessee could not be asked to prove source of source or origin of origin

The assessee was a partnership firm, in which 'K' and 'Z' were partners, who had deposited amounts in their capital accounts in the firm. During assessment proceedings, assessee was asked to explain the source of the deposits. It was explained that 'K' had received the amount from six persons and 'Z' from five persons by way of gift and all of them had filed their income-tax return and gift-tax returns. The Assessing Officer did not accept the assessee's plea and added the whole amount as unexplained deposit under section 68.

·        It is not in dispute that the amounts have been deposited by the two partners in their capital account. The partners are income tax payees. They have explained the source as having received gift from various persons, who have also filed their Income-tax returns and have been assessed accordingly.
·        Merely because, the donors are weavers and they own only one loom would not make any difference. They have filed their Income-tax returns and have also filed the return under the Gift-tax Act. They have paid the gift-tax also. Assessment under the Gift-tax Act had also been made, though the assessments made were summary in nature.
·        The Tribunal had erred in holding that the amount deposited by the two partners is liable to be added under section 68 on the ground that the gifts received by the respective partners from the various persons could not be explained as the creditworthiness of the donors had not been established.
·        The Tribunal had wrongly drawn an adverse inference upon the fact that the donors had filed their Income-tax returns on a single day and, further, the return for the Gift-tax was filed well within the due date.
·        Thus, the assessee had explained the nature and source of the deposit and discharged its burden. The order of the Tribunal on this ground cannot be sustained and is liable to be set aside.

9.       CIT vs. Hindustan Equipment (P.) Ltd 30 295 (MP)

Once net profit rate is applied to compute income, there is no scope of disallowance under section 40A(3)
Assessing Officer disallowed 20 per cent of purchase price alleged to be paid in cash. He also rejected books of account of assessee and estimated six per cent extra profit in respect of such purchases. Held, since profit was estimated by applying net profit rate, there was no scope for further disallowance under section 40A(3) in respect of such purchases.

10.     CIT vs. Avinash Jain 30 133 (Delhi)

Where assessee engaged in purchase and sale of shares, maintained two separate portfolios i.e. an investment portfolio and a trading portfolio, income arising from sale of shares out of investment account was to be treated as 'capital gain' and not 'business income' of assessee

Assessee, engaged in sale and purchase of shares, maintained two separate portfolios; an investment portfolio and a trading portfolio. During relevant assessment year, assessee declared certain income arising from sale of shares under head 'capital gains'. A.O. treated income from sale of shares as 'business income. CIT(A) and Tribunal set aside assessment order holding that short-term capital gains and long-term capital gains were out of investment account and were not related to trading account of assessee. Hon’ble High Court upheld the order of the Tribunal.

11.     CIT vs. Elgin Mill Co. Ltd 29 391 (All.)

Where assessee unilaterally wrote back amount of retirement gratuity in assessment year 1976-77 which was allowed as expenditure in assessment year 1972-73, same would not be treated as remission or cessation of liability so as to attract provisions of section 41(1)


·        The assessee unilaterally wrote back the amount of retirement gratuity (i.e. Rs. 32, 99, 929) in assessment year 1976-77 which was allowed as expenditure in assessment year 1972-73.
·        The Assessing Officer made addition of said amount by invoking section 41(1).
·        On appeal, the Commissioner (Appeals) held that there was no cessation or remission of the liability and by writing back the amount, no benefit had been derived by the assessee. He, therefore, held that the addition by invoking the provisions of section 41(1) could not be sustained and, therefore, the addition of Rs. 32,99,929 was deleted.
·        On further appeal, the Tribunal confirmed order of CIT(A).


·        The provisions of section 41(1) would be applicable only where there has been a remission or cessation of trading liability and if such liability has been allowed as an expenditure in any of the assessment years. It is not in dispute that the amount of Rs. 32,39,929 towards gratuity has been allowed as trading liability during the assessment year 1972-73. The question is whether the said amount can be added back under section 41(1) on the ground that there liability has been by way of remission or cessation as an unilateral act of writing back in the books of account by the assessee. In the present case by an unilateral act of the assessee in writing back the amount of gratuity of Rs. 32,39,929 which was allowed as expenditure in the assessment year 1972-73 would not be treated as remission or cessation of the trading liability so as to attract the provisions of section 41(1). It may be mentioned here that from the Assessment year 1997-98 even unilateral act of writing off a trading liability attracts section 41(1) as Explanation (1) to section 41(1) has been inserted by the Finance (No.2) Act, 1996 with effect from 1-4-1997 which provides that the expression 'loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof' shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a ) of section 41(1) or by the successor in business under clause (b) of section 41(1) by way of writing off such liability in his accounts. Thus, this Explanation has been made effective from 1-4-1997 i.e., it shall be applicable from the Assessment year 1997-98 onwards and cannot be pressed into service for the Assessment year 1972-73.
·        In view of the foregoing discussion, the Commissioner (Appeals) and also the Tribunal had rightly held that the sum of Rs. 32,39,929 cannot be taxed during the assessment year in question by invoking the provisions of section 41(1).

12.     CIT vs. Sudeep Goenka 29 402 (All.)

Penny stock: Where assessee proved sale transaction of shares by filing mass documentary evidence and payment of sale price was made through bank channel, sale transaction could not be disbelieved only because assessee could not give identity of purchasers

·        Assessee showed long term capital gains on sale of shares in his reply to notice under section 142(1).
·        The Assessing Officer treated the sale price of shares as income of the assessee from undisclosed sources, holding it a bogus transaction, as the shares were sold for more than 30 times of the purchase price.
·        On appeal, the Commissioner (Appeals) deleted the addition as the assessee had filed purchase bills of shares, letters of transfer, sale bills, accounts of brokers, purchase and sale chart, copy of quotations of Stock Exchange showing the rate of shares at relevant times and letters from broker confirming sale. On an independent inquiry, ICICI Bank informed that payment of sale price of shares was made through bank draft. Thus, documentary evidence proved that the transactions were actual and not fictitious accommodation entries.
·        On appeal, the Tribunal upheld the order of Commissioner (Appeals).

·        The Commissioner (Appeals) after considering entire evidence of record found that purchase and sale transactions were proved. He further, found that payment of the sale price was made to the assessee through bank channel and not in cash as such the transactions are actual transactions and not a fictitious accommodation entries.
·        The sale transactions cannot be disbelieved only for the reason that the assessee could not give the identity of the purchasers

(c)      Tribunal

1.       ACIT vs. Kiran Constructions 30 235 (Hyd.)

Mere providing of machinery on hire without any manpower cannot be termed as carrying out of any work by plant and machinery owners and, thus, no tax is required to be deducted under section 194C


·        For carrying out any work, as per provisions of section 194C, manpower is sine qua non and without manpower it cannot be said that work has been carried out.

·        Mere providing of machinery on hire without any manpower cannot be termed as carrying out of any work by plant and machinery owners and, thus, provisions of section 194C cannot be applied and as such no disallowance can be called for under section 40(a)(ia).

2.       Rainy Investments (P.) Ltd. vs. ACIT 30 169 (Mum.)

Section 14A is not applicable in respect of share application money
·        The assessee-company was engaged in the business of investment in shares and securities. As the profit and loss account, filed along with, disclosed dividend income which had been claimed exempt by the assessee per its return, section 14A, read with rule 8D was attracted.
·        The Assessing Officer made disallowance accordingly and same was confirmed by the Commissioner (Appeals).
·        There is much force in the assessee's argument that 'share application money', to the extent it is actually so, so that it only represents amount/s paid by way of application for allotment of shares, the same cannot be regarded as an investment in shares, or an asset (or asset class) yielding tax-free income, and neither is it capable of yielding any tax-free income. The same would, therefore, have to be excluded in working out the disallowance under rule 8D.
·        Further it is clarified that the exclusion of 'share application money' is not in the least for the reason that it did not yield any tax-free income for the relevant year, but for the reason that it is incapable of any such income.
·        Accordingly, the Assessing Officer shall restrict the disallowance under section 14A to the amount so determined subject to verification of share application money.

3.     Thomas Muthoot vs. JCIT (TDS) 30 354 (Coch.)

Since partners and firm are not two separate legal entities and exemption is available in respect of TDS liability on interest paid by firm to its partners, assessee-partner's belief that he had no TDS liability on interest paid by him to firm, is a 'reasonable cause' for non-imposition of penalty

The assessees were partners in a firm and paid interest on drawings to the firm, without deducting tax at source under section 194A.
The Joint Commissioner imposed penalty under section 271C for failure to deduct tax at source, which was confirmed by the Commissioner (Appeals).


The penalty under section 271C shall be levied if there is failure on the part of a person to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B.
The assessees have not deducted tax at source under section 194A on the interest on drawings paid by them to the partnership firm in which they are partners. There is no dispute with regard to the fact that the provisions of section 194A has provided exemption from deduction of tax at source only in respect of interest credited or paid by a partnership firm to its partners. The provisions of section 194A do not provide such kind of exemption to the interest paid by a partner to the partnership firm in which he is a partner.
The rigours of provisions of section 271C is softened by the provisions of section 273B, which provide that the penalty under that section shall not be imposable on the person, if he proves that there was reasonable cause for the said failure.
In the instant cases, the fact remains that the assessees, being individuals, had paid interest to the partnership firm, in which they were partners. In view of the legal position that the partners and firm are not two legal entities and further in view of the exemption provided in section 194A in respect of interest credited or paid by a partnership firm to its partners, the assessees were under the belief that they were not liable to deduct tax at source. Hence, the said view entertained by the assessees cannot be altogether be discounted with as untenable, since the issue that the TDS provisions shall not apply to the payment made by a partner to the partnership firm is a debatable one.
Considering the explanation furnished by the assessees, the belief entertained by the assessees that they were not liable to deduct tax at source on the interest paid by them to the partnership firm in which they are partners, can be considered as a 'reasonable cause' in view of the legal position existing between a partner and the partnership firm. The partners and partnership firm are not two different legal entities, though they are two different taxable entities. Further, it is stated that the partnership firm, which received interest from the assessees, duly included the same in its return of income filed before the department and the said partnership firm was not liable to pay any tax, since it declared loss. Hence, as observed in the case of Muthoot Financiers, no loss is caused to the revenue.
The explanation offered by the assessee fits in the category of 'reasonable cause' in terms of section 273B. Therefore, the Assessing Officer is directed to delete the penalty levied under section 271C

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