Monday, October 12, 2015

Recent Reported Judgments

(a)  Where revised return filed by assessee was declared invalid, tax and interest amount offered by assessee based on such invalid return had to be refunded by authorities.

K. Nagesh vs. ACIT 376 ITR 473 (Kar.)

The assessee filed his return on 31-8-1992 declaring total income of Rs. 57,810/- and paid tax at Rs. 9,216/- plus interest of Rs. 302. Thereafter, the assessee filed revised return on 30-12-1993 and paid a sum of Rs.2.75 lakhs including interest as admitted tax subsequent to the department detecting the said transaction which was not declared in the original return. The A.O, considering the said revised return filed by the assessee, framed the assessment under section 143(3). On appeal, the CIT (A) held that a revised return filed by the assessee under section 139(5) subsequent to the discovery of the said undisclosed income by the Income-tax department cannot be treated as a valid return under section 139(5) and, accordingly, allowed the appeal directing the AO to proceed with section 148. On further appeal, the Tribunal confirmed said order and held that the revised return filed by the assessee on 30-12-1993 was an invalid return, which had reached finality. On appeal to the High Court, the assessee contended that the revised return filed on 30-12-1993 was an invalid return and claimed refund of tax and interest paid on the revised return under section 240. However, the revenue contended that authorities and the Tribunal having held that the revised return filed by the assessee on 30-12-1993 was an invalid return, Assessing Officer could not process such invalid return; but, the admission of taxes made by the assessee based on such invalid returns did not cease, income admitted in a return, whether it was valid or invalid could not be refunded if, it was chargeable under section 4.
Held : In the instant case, the taxes paid on the basis of an invalid return, as held by the authorities were being considered. If the tax and interest amount offered by the assessee was based on an invalid return, and, if that return itself was non est in the eye of law, then there was no basis for the authorities to withhold the said tax collected and the only course open to the authorities was to refund the said amount considering the original return as the return furnished and the amount whatever was paid in excess under the original return had to be refunded subsequent to the annulment of assessment by the authorities.
The declaration of income furnished by the assessee under the revised return was declared to be invalid. In such circumstances, the provisions of self assessment under section 140-A, were not attracted. If the AO was barred from framing a fresh assessment based on any invalid return, nonest in the eye of law, though was chargeable under section 4, department, retaining that amount of tax paid on the basis of an invalid return without there being any self assessment/assessment made by the authorities under the Act, would violate article 265.
Any admitted tax paid on the basis of the valid return amounts to admission of tax, deemed to be assessed under section 140-A (self-assessment) but in so far as an invalid return, the provisions of section 140A were not attracted. Since the tax amount paid on the invalid return had to be refunded the same analogy applies to the interest portion also.

(b)  Refund or drawback of duty claimed u/s. 28(iii)(c), which was paid for the goods or material used at the pre-commissioning phase of the project, is to be treated as capital receipt and should be reduced from the cost of the capital asset.

CIT vs. Maithon Power Ltd. 376 ITR 414

The asseesee  company , a joint venture, incorporated with the principle object of operating and maintaining electric power generating stations based on conventional and non-conventional resources. The assessee, in the A.Y 2009-10, was in the process of setting up a thermal power generation plant. It applied to the Ministry of Power, GOI, for grant of mega power status in the A.Y 20009-10. The project was at the stage of construction and installation of power plants. The actual dates of commencement of commercial operation of the thermal power plant were Sept 11, 2011 and July 24, 2012.  During the A.Y 2009-10, the assessee was required to pay excise duty and custom duty on goods and material. The assessee lodged a claim for a sum of duty paid, with the Director General of Foreign Trade of FTP as “deemed export benefit”. However, DGFT admitted only a partial claim of the assessee but the same was not reimbursed to the assessee during the year. The revenue referred to the sec 28(iii)(c) which refers to “ ant duty of customs or excise repaid and repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules 1971” and treated the excise duty drawback claimed by the assessee as income of the assessee in the year of the claim itself.
Held : High court relied on the finding of the CIT(A) and Tribunal that the business of the assessee had yet not been set up during the A.Y 2009-10 and that all the cost incurred by it would have to be taken as capital WIP cannot be faulted. Where there was a refund of excise duty it would go to reduce the project cost/capital WIP since it was relatable only to the capital assets. Even for the purpose of sec 28(iii)(c) of the Act, the excise duty repaid to the assessee as drawback would have to relate to the business income of the assessee in order to be chargeable to tax under the head “Profit and Gain of business”. In the present case, however, it was related to the cost of acquisition of a capital asset which form part of the overall project cost incurred in the pre-commissioning phase of the project. Therefore, that any refund or drawback would go to ultimately reduce the cost of the project and had, therefore, to be treated as a capital receipt.

(c)   Part of manufacture outsourced but under supervision of assessee, the assessee is entitled to the exemption u/s 10B


The ‘a’, a 100% EOU, was engaged in manufacture of “ballistic helmet” and “bullet proof (bullet resistant) Jackets”. It claimed the benefit u/s. 10B which was denied by the AO on the alleged ground that the ‘a’ had got the manufacture outsourced. The CIT(A) allowed the appeal by observing that only a part of the manufacturing activity of “ballistic helmets and “bullet proof (bullet resistant) Jackets” was outsourced. The entire raw material needed for the job work was procured by the ‘a’ and sent to the site of the job worker with due permission of the excise authorities. The job work was carried out under the supervision of the staff of the ‘a’ and after the job work the final product was assembled in the factory of the ‘a’. However, the ITAT restored the order of the A.O.
The ‘a’ was entitled to get the exemption u/s. 10B since only a part of the manufacturing activities was got done by the ‘a’ from the outside agency and that too under the direct control and supervision of the managerial and technical staff available with the ‘a’.

(d)  Advance received by the lawyer or solicitor firm cannot be treated as income.

CIT vs. Om Prakash Khaitan 376 ITR 390 (Del)

The assessee is a solicitor firm. It follows cash system of accounting since its inception. It received advances from its clients for various legal matters for meeting out of pocket payments towards expenses in travelling, preparation of cases, engaging lawyers, etc. Such advance receipts were kept in a separate ledger account in the name of the client where all the expenses were debited from time to time. At the end of the year, the credit balances in the accounts, where the matters were settled, were transferred to the profit & loss account. Where the cases were pending, the credit balances were carried forward to the next year as sundry creditors. Further, the monies were kept invested by the assessee in the mutual funds in the name of the assessee. This system of accounting was consistently accepted by the Department. For the year under consideration the A.O. added the amount represented as balances outstanding stating that since the assessee adopted the cash system of accounting, the taxing of the income could not be deferred to the subsequent years.


The Tribunal dismissed the appeal of the department following the principle of consistency. The same was upheld by the Hon’ble High Court. The High Court further observed that given the manner and functioning of the lawyers and law firms, it is correct that the categorisation of a receipt can take place only at the appropriation, i.e., in case of fees only when the matter is over or as when the assessee decides on the quantum of fees. This will not be the entire advance received as at the time it is received it does not bear any particular characterisation for the purposes if treating it as income.

(e)  Specific purpose of accumulation of income by Charitable Trust can be given before the completion of assessment.

Samaj Seva Nidhi vs. Asst. Commissioner of Income Tax 376 ITR 507 (T & AP)

The assessee is a trust formed and registered u/s 12A of the Act. For the A.Y. 1996-97 was filed declaring nil income. The case was selected for scrutiny and notices u/s 142(1) and 143(2) were issued. The assessee-trust accumulated Rs. 3,00,000/- and enclosed Form 10 to the return of income and also enclosed copy of resolution depositing the said amount with Indian Overseas Bank for a period of three years for future utilization. Further, the assessee filed a letter dated March 10, 1997 (during the assessment proceeding) requesting that the amount accumulated may be allowed for the purpose of utilising the fund for the welfare of Scheduled Castes, Scheduled Tribes, Vanvasis, socially and economically weaker sections of the society. The A.O. passed an order on March 12, 1997, disallowing the benefit of accumulation under section 11(2) of the Act for the amount of Rs. 3,00,000/- stating that information relating to the accumulation of income submitted during the assessment proceeding ought to have been furnished by September 30, 1996 i.e. last date for filing of the return.

The High Court held that the furnishing of the required information through Form no. 10 along with the return and submission of letter to the A.O. intimating specific purpose for which the amount was sought to be utilized by indicating that they want to utilize the amount for the objects mentioned in clause 3(a) of the trust deed during the course of assessment proceeding is sufficient for claiming the exemption u/s 11 of the Act.

(f)  Purchases made by the assessee cannot be held bogus purchases on the ground that the suppliers did not appear before the A.O. or the CIT(A). Confirmation letters by purchasers, copies of invoices for purchases, bank statement and reconciliation statement for the purchases has been filed along with the books of accounts of the assessee and a substantial part of the sales were made to the Govt. Department. Merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them, the deduction on account of purchases cannot be disallowed.

Commissioner of Income-Tax vs. Nikunj Eximp Enterprises Pvt. Ltd. (2015, 372 ITR 619, Bombay High Court)

The assessee claimed expenditure on account of purchases from seven parties. The assessee filed letters of confirmation of suppliers, copies of bank statement showing entries of payments through account payee cheques to the suppliers, copies of invoices for purchases and a stock statement i.e., stock reconciliation statement. Reconciliation statement gave entire details of opening stock, purchases, sales and closing stock. The books of account filed by the assessee have been accepted by the department. Moreover, a substantial part of the sales made by the assessee was to the Govt. Department. The suppliers did not appear before the A.O. or the CIT(A) and one of them denied to have any business dealings with the assessee.

It was held that all the details was filed before the A.O. and the CIT(A). The reconciliation statement gave entire details of opening stock, purchases, sales and closing stock and no fault with regard to it was found. The books of account of the assessee have not been rejected. Besides, substantial sales were made to the Govt. Department and such sales cannot be bogus.  Merely because the suppliers have not appeared before the A.O. and the CIT(A), one cannot conclude that the purchases were not made by the assessee. Merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them, the deduction on account of purchases cannot be disallowed. Therefore, the disallowance is deleted.

(g)  The amalgamation reserve consequent to the merger of four companies would not fall within the ambit of profits and gains of business or profession, more particularly u/s 28(iv) of the Act. The amalgamation reserve is not in the nature of business but is capital in nature.

Commissioner of Income Tax vs. Stads Ltd. (373 ITR 313, Madras High Court)

Four companies amalgamated with the assessee-company. The difference between the combined share capital of four companies before amalgamation and the equity share capital of the company post-amalgamation was shown under the category “reserves and surplus” in the balance sheet. A.O. treated the difference of amount as profit and gains or profession, more particularly a value of benefit or perquisite from business or exercise of profession u/s 28(iv).

It was held that a plain reading of Section 28(iv) makes it clear that the amount reflected in the balance sheet under the head “reserves and surplus” cannot be treated as a benefit or perquisites arising from business or exercise of profession. The difference between the combined share capital of four companies before amalgamation and the equity share capital of the company post-amalgamation was the amalgamation reserve and it could not be said that it is out of normal transaction of the business. The present transaction is capital in nature arose on account of amalgamation of four companies and is not taxable under the head “Capital Gains”, reliance has been placed on ITO vs. Shreyans Investments (P.) Ltd. (ITA No. 1485/k/2011, Calcutta Bench). Therefore, the difference amount will not be treated in consonance with section 28(iv) of the Act.

(h)  The substance in challenge in the Writ Petition is in regard to the jurisdiction of the CIT(A) under Section 55A of the Act to make a reference to the District Valuation Officer (DVO) in an appeal before it for determining the Fair Market Value. The other question is whether the CIT(A) is entitled to make a reference to the DVO u/s 250(4) of the Act to determine the Fair Market Value.

Rallis India Ltd. vs. Commissioner of Income Tax (374 ITR 462, Bombay High Court)

Assessee sold a land on the basis of valuation report submitted by a registered valuer. The resultant difference between the sale price and the fair market value (FMV) of the land is subject to capital gain tax. The A.O. did not accept the FMV as claimed and he estimated the FMV at a lower price. The assessee received notices issued u/s 55A of the Act from the DVO. In the notices information is been sought to determine the FMV in view of the view of the reference made to it by the CIT(A). The assessee submitted that the jurisdiction u/s 55A can only arise if at the relevant times, the A.O. or CIT(A) is of the opinion that the value of the land estimated by the registered valuer is less than its fair market value. In the instant case the dispute was not in regard to the value of the land declared by the registered valuer. It was contested by the Revenue that the reference by the CIT(A) to the DVO is not made u/s 55A rather in exercise of his powers u/s 250(4) of the Act. The revenue submitted that the reference to Section 55 in the notice of the DVO is by mistake and has to be ignored.


The Bombay High Court first dealt with the exercise of power of the CIT(A) u/s 250(4) to refer to the DVO. It is held that the CIT(A) can make further enquiries into the FMV as on April 1, 1981, in view of the A.O. failing to make such enquiry u/s 55A. Further, it was held that the CIT(A) before making reference to the DVO in terms of Section 55A of the act, he should be of the opinion that the value determined by the registered valuer is less than the FMV of the property as on April 1, 1981. Only on having informed the above opinion, the CIT(A) is entitled to call upon the DVO to submit a report in regard to the valuation of the FMV.
Further it was held that enquiry made by the CIT(A) u/s 250(4) cannot be outside the scope. Hence, as the reference is made u/s 250(4) of the Act, the reference cannot be sustained. However, the CIT(A) is at liberty to exercise powers u/s 250(4) r.w.s 55A of the Act, if he is of the opinion that the conditions for its invocation are satisfied after hearing the petitioner’s on the above aspect.

Note: The other provisions to make reference to the Valuation Officer is Section 142 of the Act introduced by the Finance (No.2) Act, 2004. Section 142 deals with the determination of the FMVof investments referred to in section 69 or Section 68.

(i)  The deduction u/s 80IB of the Act can be availed of by an undertaking developing and building housing projects approved before March 31, 2008, by the local authority. Such undertaking should have embarked on construction of the housing project on or after October 1, 1998. 100% deduction can be availed of, of the profits derived from construction of such housing projects. The Explanation introduced later clarifies that nothing contained in that provision applies to an undertaking that executes the housing projects as a works contract awarded by any person including the Central and State Govt. “Development” and construction of a housing project is an undefined phrase of wide import. Hence, undertaking which does not own developing and building housing projects but executes the contract work is also entitled to 100% deduction u/s 80-IB(10).

Commissioner of Income Tax vs. VRM Indi Ltd. (375 ITR 414, Delhi High Court)

The assessee is engaged in the business of building and developing of housing projects. In its ROI the assessee has claimed deduction u/s 80-IB(10) for the profits derived from these projects. The Assessee-company had been undertaking construction activity since 1996-1997. The assessee-company had been allotted plot of land on one acre land by the Indian Railway Welfare Organisation (IRWO) as well as by the Delhi Development Authority (DDA) for constructing housing units. The IRWO and the DDA paid for development of the housing project carried out by the assessee. The copies of approval of the projects from the local authorities were duly submitted. The nature of work of the assessee company as per the scope of work assigned on turnkey basis included planning, designing, soil-testing, civil works including electrification, services like street lighting, sewerage, water supply drainage, roads, horticulture, landscaping, as also construction of community hall, shopping centre, etc. and installation of transformers and equipment and all other acts which are necessary for making the houses habitable and ready for occupation. A.O. observed that the housing project belonged to and is owned by IRWO and DDA and the assessee merely executed the contract work and did not develop. A.O. observed that the assessee was a contractor as the assessee did not pay for the development of the housing complex. CIT(A) and ITAT ruled against the A.O.’s order and allowed assessee’s claim.

It was held that the assessee was awarded both contracts as turnkey projects. The conceptualisation, overall planning and execution, oversight of entire execution, deployment of personnel at various stages, etc. was with the assessee.
Reliance has been placed on Katira Construction Ltd. vs. Union of India (2013) (352 ITR 513, Gujarat High Court) and it was held that the assessee developed an infrastructure facility/project and was not required to maintain or operate, it was entitled to cost, plus the margin of income or profit; not to expect this treatment would render one who develops an infrastructure facility project, unable to realise its cost. If the infrastructure facility is, after its development, transferred to the Govt, naturally the cost would be paid by the Govt. Therefore, the mere circumstance that the IRWO and DDA paid for development of a housing project carried out by the assessee, did not mean that the assessee did not develop the residential complex. If the Revenue’s interpretation is accepted, no enterprise, carrying on the business of only developing the infrastructure facility, would be entitled to deduction u/s 80-IB(10).
As the words “developer” and “contractor” have not been defined in Section 80-IB(10) and nor in the General Clauses Act, we can consider the dictionary meaning. The assessee falls under the definition of “developer” and not “contractor” as per the Chambers 21st Century Dictionary, in terms of the scope of work assigned to the assessee.
Hence, the assessee’s claim u/s 80- IB(10) is allowed.

(j)  Explanation 2A of Section 64(1)(iii) of the Act is not applicable on the assessee as the income from trust is not given or used for the benefit of the “beneficiaries” until they attain majority. The income of trusts from the partnership firm will not be included in assessee’s income.

Kapoor Chand (Dead) vs. ACIT (2015, 376 ITR 450, S.C.)

The brother-in-law of the assessee created two trusts for the benefit of two minor children of the assessee. The trust deeds provided that the income earned by the trusts shall not be received by the two minors during their minority and was to be spent for their benefit only once they attained majority. In case either of them dies before majority, his or her share will be given to the other sibling. The trustees of the trust became partners in a firm. The firm earned profits and the share of the trusts was given to them. A.O. included the profits in the income of the assessee and taxed it u/s 64(1)(iii) read with Explanation 2A. CIT(A) held against the Revenue. On appeal, the Tribunal set aside the order of the  CIT(A) and held against the assessee. On further appeal, the High Court of Uttaranchal upheld the order of the Tribunal.

The two minor children of the assessee were the beneficiaries under the two trusts, the trustees were the partners in the firm for the benefit of the beneficiaries and had their shares in the income as partners in the firm. The income that had been earned by the trustees was not available to the two minor children nor was it to be spent for the benefit of the minor children till they attained majority and the money was to be handed over to them on their attaining majority. The receipt of income was contingent upon the eventuality that in case of demise of any of the minor, the income would accrue on the other child. Explanation 2A would not be attracted when the income earned by the trust cannot be utilised for the benefit of the minor during his minority. The language of Section 64(1)(iii) is that the share of the income was at the hands of the minor child which requirement was not satisfied. On attaining the majority when money in the form of income is received by the two individuals it would be open to the Department to tax the income at that time or the Dept. could take up their case u/s 166 of the Act, if permissible.

NOTE: The Apex Court in CIT vs. M.R.Doshi (1995) (211 ITR 1) following the judgment of the Bombay High Court in Yogindraprasad N. Mafatlal vs. CIT (1977) (09 ITR 602), discussed about Section 64(1)(v) of the Act that the income which is not to be given or spent for the benefit of the child so long as he is minor, his income cannot be treated as income of  “minor child” and taxed at the hands of an individual. One of the reasons to support is that the benefit receivable by the child must be certain and vested. It cannot be the mere possibility of a benefit or benefit available on the fulfilment of a contingency.
Explanation 2A has employed the expression “benefit” and not the “immediate or deferred benefit”, the provision cannot be invoked for the A.Y.s 1980-81 to 1992-93, where under the trust deed, the income has to be accumulated beyond the date of minority as such a case is of deferred benefit of a person who becomes major subsequently and not of deferred benefit for a minor child.
Where the minors, who are beneficiaries under a trust, are entitled to benefit only after they attain majority and not during the period of their minority as per the terms of the trust deed, share income of the trust from the firm cannot be clubbed with the total income of the assessee-the father of the minor.

(k)  The claim which is found to be legally unacceptable but does not amount to furnishing of inaccurate particulars/concealment of income does not attract penalty u/s 271 (1) (c).

Rave Entertainment Pvt. Ltd vs. CIT (2015, 376 ITR 544, Allahabad High Court)

Assessee was engaged in the construction of a multiplex theatre but the theatre could not become commercially operational and functional even after the “trial runs”. The assessee filed a return of income showing “nil” income where no depreciation was claimed on capital expenditure. However, the A.O. suo moto allowed the depreciation taking the view that “trial runs” having been carried out by the assessee, so that the project was complete. Then the assessee for the A.Y.: 2003 – 04 onwards, claimed deduction u/s 80IB(7A) though there was no positive income. Similarly, assessee claimed deduction u/s 80IB(7A) for A.Y. 2004-2005, the same was denied by the A.O. However, the assessee was advised to claim deduction 80IB(7A) for the relevant year i.e, A.Y.: 2006 – 2007 for the reason that the AO considered the completion of the project , the assessee was advised to claim deduction u/s 80IB(7A) for the reason that the A.O. himself in the A.Y. 2002-03 considered the completion of the project. However, the said claim was rejected by the AO and the assessee also accepted it by not filing any further appeal. Later penalty u/s. 271(1)(c) was imposed against such wrong claim.

The claim of the assessee was the legal claim. The AO had not given any finding that the claim to deduction was bogus. Teh AO had only stated that such claim was not allowble as the conditions envisaged u/s. 80 – IB(7A) were not fulfilled. Thus, the claim was found to be legally unacceptable but it did not amount to furnishing of inaccurate particulars or concealment of income. It was a simple case of non allowance of the legal claim. There was no concealment of income and penalty could not be levied.

(l)  If the previous owner has acquired the property prior to 1.04.1981,  indexation benefit to the assessee will be computed on the FMV as on 1.04.1981 until the date of transfer

CIT Vs Smt. Mina Deogun (2015) 375 ITR 586 (Cal)

Where capital asset is acquired by the assessee by inheritance, indexed cost of acquisition will be computed with reference  to the year in which the previous owner  acquired asset and not from the year in which the assessee inherited  the asset. Further, if the previous owner has acquired the property prior to 1.04.1981, the law gives option to the assessee  to take the FMV as on 1.04.1981.


That being the position of law, indexation on the FMV as on 1.04.1981 until the date of transfer has to be allowed. Any other interpretation will only lead to absurd results and cause immense prejudice to the assessee.

(m)  Where the land was acquired by the husband and the building thereon was constructed by the joint funds of the husband and wife, rent earned will be treated as Income from House Property and not Income from other sources in the hands of husband and wife though wife was not the owner of land.

CIT Vs Smt. Mina Deogun (2015) 375 ITR 586 (Cal)
It was held as under-

Section 27 provides an inclusive definition of the expression “owner”. An inclusive definition is not an exhaustive definition in law. We can imagine a situation where a person can be the owner of the land and another can be the owner of the structure. This is permissible in law because in joint ownership unity of title is not required. In the case before us the land admittedly belonged to the husband. He has raised the building with the joint funds belonging to himself and his wife. Therefore, one inference which can be drawn is that the land belonging to the husband has been thrown into the common stock of the joint property between the husband and the wife. Both of them thus became the joint owners by operation of the doctrine of blending. They admittedly have borne the cost of construction in the ratio of one-third and two-third. Therefore, the income arising out of the property is in fact an income arising out of house property which has to be taxed under section 22 rather than as an income arising out of other sources under section 56.

(n)  Prize money received from third person and not employer for excellent performance in work is not assessable as income being capital receipt.

Aroon Purie vs. CIT (Delhi) 375 ITR 188

The assessee is Editor in Chief of a reputed English magazine. He derived income from salary, interest, dividend and property. While filing return for the relevant year, the assessee claimed exemption in respect of Rs.1 lakh received by him as award from B.D. Goenka Trust for Excellence in Journalism.
Assessing Officer was of the view that the award given to the assessee was not covered by the exemption provisions of sec. 10(17A) of the Act and accordingly he added the said amount of Rs.1 lakh to the income of the assessee.

Held: The term 'income' would include payments of a recurring and periodical nature which are made from time to time. When this happens it would be plausible and right to infer that the recipient is carrying on a vocation and the receipts relate and have a causal connection with the said activity. It has ceased to be a mere hobby. Such payments therefore, have periodicity and regularity and they disclose some sort of obligation, which may be even moral, social or customary.
In the instant case, the award received is not directly relatable to the carrying on of vocation as a journalist or as a publisher but is directly connected and linked with the personal achievements and personality of the person i.e. the appellant. Further, it is to be noted that the payment in this case was not of a periodical or repetitive nature. The payment was also not made by an employer; or by a person associated with the 'vocation' being carried on by the appellant; or by any of his client. The prize money has in the instant case been paid by a third person, who was not concerned with the activities or associated with the 'vocation' of the appellant. It being a payment of a personal nature, it should be treated as capital payment, being akin to or like a gift, which does not have any element of quid pro quo. The aforesaid prize money was paid to the assessee on a voluntary basis and was purely gratis. Therefore, the amount received would be a capital receipt, being purely in the nature of a testimonial.

On the alternative submission of the revenue that all prizes or awards in cash or kind would be income except those specifically covered and exempted under sub-section (17A) to section 10. Therefore, the correct legal position is that section 10 exclusively deals with the exempt income not exigible to tax and should not per se be relied upon to ascertain whether the receipt would be a revenue receipt i.e. income chargeable to tax under sub-section (24) to section 2 read with the charging provisions. The question of exemption under section 10 would only arise if at the first instance, the receipt is found to be a revenue receipt. It would be incorrect to first examine whether a particular receipt has been exempted and then on the said reasoning and ratio proceed to decipher and hold that the amount/receipt is income for the purposes of the Act.

(o)  Fees paid to the authorized dealers for the protection from fluctuation of foreign exchange rates is a revenue expenditure.

CIT vs. Britannia Industries Ltd. (Cal.) 376 ITR 299

The assessee availed of a foreign currency loan for acquisition of plant and machinery. In order to ensure the availability of foreign currency at a pre-determined rate, the assessee entered into a forward contract with the bank to obtain the foreign currency on a specified date at a specified rate. To obtain this facility a sum of money was paid to the bank and the same was debited as bank charges in the profit and loss account. The revenue disallowed the claim of bank charges by treating the same as capital expenditure and held that it should be added to the cost of capital asset as per the explanation 3 to section 43A.

The instant case is not concerned with the difference arising on account of change in foreign exchange rates but, is concerned with the consideration paid/payable to the authorized dealers was for obtaining protection against change of the foreign exchange rates.

Held :  The bank charges claimed by the assessee are not relatable to the fixed assets but is a consideration paid for the risk undertaken by the bank. Thus, the payment is in the nature of a fee for the guarantee provided by the banker. Therefore, the consideration paid by the assessee to the authorized dealers of the foreign exchange, which in the present case is the bank, in order to obtain protection from fluctuation of foreign exchange rates is  to be treated as revenue expenditure. 

(p)  Incomes which are exempted u/s. 10 has to be excluded while computing income of charitable institutions exempt u/s. 11
DIT(Exemption) vs. Jasubhai Foundation(Bom.) 374 ITR 315
Assessing Officer was of the view that sections 11, 12, and 13 were governing provisions and related to exemption claimed by charitable institutions and, thus, assessee had no option to choose whether it wanted to avail the exemption under section 10 or section 11.  The Hon’ble High Court held as under : -

Section 10 deals with income not included in total income whereas section 11 deals with income from property held for charitable or religious purposes. The income which is not to be included in computation of the total income is a matter dealt with by section 10 and by section 11 the case of an assessee who has received income derived from property held under trust only for charitable or religious purposes to the extent to which such income is applied to such property in India and that any such income is accumulated or set apart for application for such purposes in India to the extent of which the income so accumulated or set apart in computing 15 per cent of the income of such property, is dealt with. Therefore, an assessee who is in receipt of such income as is falling under clause (a) of sub-section (1) of section 11 who would be claiming the exemption or benefit, that is, an income derived by a person from property. It is that which is dealt with and if the property is held in trust for the specified purpose, the income derived therefrom is exempt and to the extent indicated in section 11(1)(a). There is nothing in the language of sections 10 or 11 which says that what is provided by section 10 or dealt with is not to be taken into consideration or omitted from the purview of section 11. If we accept the argument of the Revenue, the same would amount to reading into the provisions something, which is expressly not there. In such circumstances, the income that the assessee trust has not included by virtue of section 10 cannot be considered under section 11.

However, a amendment has been made by the Finance Act, 2014 by inserting a new proviso no. 7 to section 11, which states that -

Where a trust or an institution has been granted registration under clause (b) of sub-section (1) of section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and the said registration is in force for any previous year, then, nothing contained in section 10 [other than clause (1) and clause (23C) thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year.]”
Thus, if the assessee earn any income under section 10[other than clause (1) and clause (23C) thereof] will be included in the computation of total income of the trust and institution as income earned from property held under trust and, accordingly, 15% of the income will accumulated or set apart and remaining 85% of the income will be applied for charitable or religious purpose.

(q)  Ratio: Sec 2(22)(e) is not applicable when the assessee-company, not being a share-holder in the sister  company, receives loan or trade advance from its sister concern notwithstanding the fact that both the companies have a common shareholder holding substantial interest in them.

Commissioner of Income Tax vs. Printwave Services (P) Ltd 373 ITR 665 (Mad)
The assessee-company, a private company, received a sum from its sister concern, another private company. The assessee-company showed the said sum as trade advance in its books of accounts. The assessee-company, on the same day, paid a sum, equivalent to the amount received from its sister concern, to one of its directors. The said director was holding 10% of the shareholding in the assessee-company and 44% of the shareholding in the assessee’s sister concern. Further, the amount paid by the assessee to the director was utilized by him for repayment of the housing loan. The A.O. stated that even though the amount received by the assessee-company from Front Line Printers, sister concern, was shown as trade advance, the same was effectively been utilized by the director, having substantial interest in the sister concern, towards repayment of the housing loan.[s1]  The A.O. invoked the provisions of sec (22)(e) and added the sum received from the sister concern in the hands of the assessee-company stating the following:
“the use of nomenclature for the receipt of advance from Front Line Printers as ‘trade advance’ or ‘printing advance-cum-general advance’ is to divert the attention of the Assessing Officer and nothing but the loan received from the company. Therefore, the provision under section 2(22)(e) is attracted in this case.”
The High Court dismissed the appeal of the Revenue stating that the provisions of sec 2(22)(e) are applicable only when the payment is made to a person who is the beneficial owner of the shares holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. In the instant case, the assessee-company was neither a beneficial nor registered owner of the shareholdings in the sister company and thus the provisions of sec 2(22)(e) was not applicable on the assessee-company.

(r)  The trust cannot be denied registration u/s 10(23C)(vi) on the ground that the assessee-trust had the intention to carry out business activity which was not permissible for charitable organisations.

Harf Charitable Trust (Regd.) vs. Chief Commissioner of Income Tax and another
376 ITR 110 (P & H)

The assessee-trust filed an application in Form 56D under sec 10(23C)(vi) of the Act r.w.Rule 2CA to the Chief Commissioner of the Income-Tax seeking exemption from payment of income tax as per the requirements and it also filed audited balance-sheets for the last three years plus the trust deed. Certain information was asked for and a detailed reply was filed clarifying each and every issue. Further, the petitioner-trust also filed replication that a supplementary trust deed had been executed and the objecting words “and any other business as decided by the trustees” had been deleted. But the Chief Commissioner of Income tax rejected the application of the assessee and the predominant reason was that the petitioner-trust had an intention to carry out business activity which was not permissible for charitable organisation. The Chief Commissioner further stated that the trustees were in place for the whole duration of their life and it gave the organisation a look and character of a private body rather than a charitable organisation and the objectives were not related to the promotion of education and the educational trust did not exist solely for educational purposes.


The High Court, relying on decisions taken by various other High Courts as well as Supreme Court held that the impugned order cannot be justified solely on the ground that in view of a clause which provided that the trust can run a business, it would be debarred as such from registration on the ground that it was not existing solely for educational purposes. That merely a conferment of power to do business would not debar the right for consideration to the trust without any finding being recorded that the pre-dominant object of the trust was to do business.

(s)  Merely high frequency of share transactions & high income fm such transactions do not mean transactions are in the nature of business.
Commissioner of Income Tax vs. Merlin Holding P. Ltd. 375 ITR 118 (Cal H.C. )
Girish Chandra Gupta J.
Appellant is a Non-banking financial concern doing business of giving loans and taking loans and investing in shares and securities. The revenue contended that the assessee was in the business of dealing of shares rather than in the business of investment. It has been held that the Legislature has not made any distinction on the basis of frequency of the transactions. It is well accepted principle that an investor can have share transaction with a motive of making investment as well as trading if they are separately shown in the books of account. Therefore, the judgment passed by the Hon’ble Tribunal covers all the requisite grounds and no point was left undecided. Hence, the judgment of the Tribunal is final and upheld.

Appellant is a Non-banking financial concern doing business of giving loans and taking loans and investing in shares and securities. The appellant has applied his own capital and reserves funds to acquire the shares and has earned reasonable dividend on such investment. The Assessing Officer was of the opinion that activity of the assessee amounted to business activity and therefore, he treated the short term capital gains of Rs. 1,01,00,000 approximately as business income. It was contended that there are more than 1000 transactions in the year which is not in consistence with the conduct of the investor.

It was held that frequency alone cannot show that the intention of the appellant was not to make an investment. The benefit of short-term capital gains can be availed of for any period of retention up to 12 months. The investor has proved that some transaction were intended to be business transaction, some by way of investment and some by way of speculation and the Revenue has not been able to find fault from the evidence adduced. Therefore, the frequency of transaction or majority of the income was from the share dealing does not have any decisive value.

(t)   (a)   Mere change of opinion on account of the assessment being made for the subsequent years ( wherein depreciation on teller machines claimed by the assessee @ 60 % was reduced to 15% as teller machines are not computer systems)  would not give assessing officer the jurisdiction to reopen, as he would be reviewing his earlier decision which has been held not to be permissible.
(b)   Further, re-opening proceedings are also liable to be set-aside for the reason that the reasons recorded do not show that there was any failure on the part of the assessee to disclose fully and truely all the material facts .
(c)    Further, failure of the A.O. to require the assessee to produce the P&L A/C and the depreciation charts in the original proceedings for examining the correctness of the claim cannot be treated at par with the failure of the assessee to disclose fully and truly all material facts necessary for its assessment.

State Bank of Patiala vs. Commissioner of Income Tax & Anr. (375 ITR 109, P&H High Court)

The petitioner-bank has installed various automatic teller machines (ATMs) for the benefit of its customers. It claimed depreciation at 60% by treating ATMs as computer. In the assessment year 2008-2009 it came to the notice of the A.O. that depreciation has been claimed at 60% instead of claiming 15% by treating it as plant and machinery. The position was same for the relevant assessment year i.e., A.Y. 2005-2006, it was believed that income chargeable to tax has escaped assessment. The Assessing Officer reopened the matter by sending  148 notices stating the failure of the assessee to disclose fully and truly all material facts and that no separate head of ATM was furnished for depreciation in the depreciation chart.
It was held that the notice issued u/s 147 r.w. S. 148 did not fulfil the mandatory requirement of recording that the assessee did not disclose fully and truly all the material facts. Assessee has filed returns in response to the notice and had disclosed all the relevant materials showing that operationalisation of the ATMs had been done by March 2005. The reasons for opening the assessment which has already been concluded, thus, does not show that there was any failure on the part of the assessee to disclose fully and truly all material facts and thus, it was merely a change of the opinion of the A.O. Reliance has been placed on the following judgments:
1) Duli Chand Singhania vs. ACIT (2004) 269 ITR 192 (P&H),
2) Mahavir Spinning Mills Ltd vs. CIT (2004) 270 ITR 290 (P&H).
3) CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC)
Further, it was held relying on Winsome Textiles Industries Ltd. vs. Union of India (2005) 278 ITR 470 (P&H), that failure of the A.O. to require the assessee to produce the P&L A/C and the depreciation charts in the original proceedings for examining the correctness of the claim cannot be treated at par with the failure of the assessee to disclose fully and truly all material facts necessary for its assessment.
[NOTE: Reliance was placed by the assessee’s counsel  on CIT vs. Saraswat Infotech Ltd, ITAL No. 1243 of 2012 (Bombay High Court) and NCR Corporation Pvt. Ltd. vs. ACIT, ITA No. 353 of 2010 (ITAT  Bangalore) to contend that the ATMs are computerised telecommunications and, therefore, eligible for depreciation at 60% but merit of the case was not considered by the court]

(u)  Amendment in sec 2(14) prescribing that the distance to be counted for measuring agricultural land must be aerial or by the straight line distance on horizontal plane and not by shortest road distance applies prospectively.
The Circular No. 3 of 2014, dated January 24, 2014 also clarifies this.
The distance of agricultural land is to be measured in terms of the approach by road and not by the straight line distance on horizontal plane or as per the crow’s flight for the A.Ys. preceding the A.Y. 2014-2015.
The amendment in the taxing statute, unless a different legislative intention is clearly expressed, shall operate prospectively.
Section 11 of the General Clauses Act, which states that in the measurement of any distance, for the purposes of any Central Act or Regulation made, that distance shall, unless a different intention appears, be measured in a straight line on a horizontal plane, will not apply prior to the amendment inasmuch as the need of the amendment itself shows that in order to avoid any confusion, the exercise became necessary and the Parliament noticed the judgments being delivered (in assessees' favour) and therefore, emphatically pointed out aerial distance as the relevant norm.
Therefore, when there is any doubt or confusion in regard to the amendment, the view in favour of the assessee needs to be adopted.

CIT vs. Nitish Rameshchandra Chordia, (2015) (374 ITR 531, Bombay High Court)

The assessee with three other partners has purchased two pieces of land and simultaneously sold them. The proportionate gain out of the sale of the properties were claimed as exempt on the ground that the land was agricultural land and not a capital asset according to section 2(14) of the Act urging that the land was situated beyond 8kms. The claim was rejected by the A.O. holding that the distance for agricultural land must be measured by the shortest distance as per the “crow’s flight or straight line method” and not by the road distance and therefore, the amount of profit was added as a short-term capital gains. It was challenged on the ground that the distance will be measured by the road approach and not by the straight line method. It was contended that section 11 of the General Clauses Act (GCA), 1897 indicates the legislative intention that the distance has to be computed aerially and not by the approach road and therefore the income arising out of urban land is business income and not the agricultural income.

The ruling in the case of D.L.F. United Ltd. vs. CIT (1995) 129 CTR (Delhi) 33, (1996) 217 ITR 333 (Delhi) is relied upon and held that the capital gain arising from the transaction in respect of agricultural land cannot be treated as business income.
The only dispute involved in this appeal relates to the measurement of the distance of the agricultural land. The following citations have been considered:
1) CIT vs. Satinder Pal Singh (2010) 229 CTR (P&H) 82,
2) Laukik Developers vs. Deputy CIT (2007) 108 TTJ (Mumbai) 364, (2008) 303 ITR (AT) 356 (Mumbai),
and it was held that income tax exemptions for agricultural income are bound to promote agriculture in the country. Agricultural lands are already subjected to land revenues and other local taxes need not be over burdened.
It was further held that amendment in the taxing statute, unless a different legislative intention is clearly expressed, shall operate prospectively. The distance between the municipal limits and the property assessed is to be measured having regard to the shortest road distance and not as the crow’s flies i.e., a straight line. 
Further, it was held that the relevant amendment prescribing distance has come into force with effect from April 1, 2014. It is settled law that in such matters, when there is any doubt or confusion, the view in favour of the assessee needs to be adopted. Moreover, the Circular takes effect from April 1, 2014, and therefore, prospectively applies in relation to the A.Y. 2014-2015 and subsequent A.Y.s. Therefore, Section 11 of GCA has no application in the A.Y.s prior to the A.Y. 2014-2015.