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From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 M.K.Overseas Pvt. Ltd. Vs. Pr.Commissioner Of Income Tax-06
 Arshia Ahmed Qureshi Vs. Pr. Commissioner Of Income Tax-21
 CHAUDHARY SKIN TRADING COMPANY Vs. PR. COMMISSIONER OF INCOME TAX-21
  Sushila Devi vs. CIT (Delhi High Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 Deputy Director Of Income Tax Vs. Virage Logic International
 Commissioner Of Income Tax-3 International Taxation Vs. Virage Logic International India
 Pr. Commissioner Of Income Tax-06 Vs. Moderate Leasing And Capital Services Pvt. Ltd.
 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Digest of important case law January 2013 to September 2013
November, 22nd 2013

S.2(14): Capital asset–Agricultural land–Municipal limit-Date of notification is relevant for assessing capital gains.[S.45,54F]
Agricultural land, though located beyond 8 kms. from municipal limits of Jaipur municipality as on date of impugned CBDT notification No. 9447 dated 6-1-1994, but subsequently fell within distance of 8 kms from municipal limits due to expansion of municipal limits would still be regarded as agricultural land not falling in definition of capital asset in terms of section 2(14)(iii)(b). (A.Y.2008-09)
Subha Tripathi (Smt.)(Dr.) v. DCIT (2013) 58 SOT 139 (Jaipur) (Trib.)

S.2(15): Charitable purpose – Conducting coaching classes and campus placements for a fee by the Institute of Chartered Accountants of India cannot be held as business u/s. 2(15). [S. 10(23C)(vi), 11, 13]
The assessee institute was constituted under the ICAI Act, to regulate the profession of Chartered Accountants in India. Its activities included imparting education in the field of accountancy and conducting coaching classes. Assessee also charged fees for holding interviews with respect to campus placements. The assessee applied for registration u/s. 10(23C)(vi), which was rejected by the DGIT (Exemption) on ground that assessee was charging fees for holding coaching classes and campus placements, which amounted to carrying on business. As the assessee had not maintained separate books of account with respect to the activity of coaching students, the AO denied assessee’s claim u/s. 11 of the Act. On appeal, the matter was remanded back to the DGIT (Exemptions) to consider the submissions of the assessee that its expenses were greater than the income from providing coaching to the students. The DGIT (Exemptions) once again rejected assessee’s claim.
On a writ petition to the High Court it was inter-alia held that –

Indisputably, substantial activity of the assessee revolves around providing education to students for the purposes of feeding the profession of Chartered Accountancy in India.
b. The conduct of the courses by the assessee cannot be equated or categorized as coaching classes conducted by private institutions for students to appear in entrance examination or for pre-admission in examinations being conducted by universities and other Institutions.
c. The reasoning of the DGIT(E) that holding interviews for a fee for the purposes of campus placement of its students amount to carrying on a business, is not acceptable. Campus placement is only a small incidental activity carried on by the assessee institute like several other universities for placement of their students in gainful employment. This too is an activity ancillary to the educational programme being conducted by the assessee institute and cannot be considered as a business being carried on by a placement agency. The object of the assessee institute is not to carry on such business, but to assist its students in securing employment. In this case, the object with which the activity of campus placement is carried on would determine its nature and the same is not business, trade or commerce.
d. Although, it is not essential that an activity be carried on for profit motive in order to be considered as business, but existence of profit motive would be a vital indicator in determining whether an organisation is carrying on business or not. The functions performed by the assessee institute are in the nature of public welfare and not for any private gain or profit and in this view, it cannot be said that the assessee is involved in carrying on any business, trade or commerce.
Accordingly, the High Court allowing the Writ Petitions directed the DGIT(E) to recognize the assessee as eligible u/s. 10(23C)(iv) as an institution established for charitable purposes having regard to its object. (A.Ys. 2006-07 to 2011-12)
Institute Of Chartered Accountants Of India v. DGIT (2013) 217 Taxman 152/260 CTR 1 (Delhi.)(HC)

S.2(15): Charitable purpose – Society formed with an object to provide accommodation and facilities for marriages and other auspicious functions to members of a particular community – cannot be regarded as society formed with charitable purpose. [S.12AA]
The assessee a society, registered under the Tamil Nadu Societies Registration Act, 1975, filed an application for registration u/s. 12AA. The DIT(Exemptions) observed that the assessee-society was formed to benefit only a particular community and did not fall within the purview of section 2(15). The Tribunal confirmed the decision of the DIT(E).
On appeal by the assessee, the High Court observed that the Scheme Award which contained the objects of the assessee society was pending before the District Court and hence it could not claim to be a society formed with charitable purpose. The contention of the assessee that the Tribunal had erroneously reached the conclusion that the objects are targeted towards a particular choultry alone was not accepted by the High Court, since as per the Scheme Award, it was clear that choultry and the assessee-society i.e. Gowri Ashram are one and the same. Accordingly, the High Court confirmed the Order of the Tribunal for not granting registration u/s. 12AA and dismissed the assessee’s appeal, however, the High Court gave an opportunity to the assessee-society to renew its application once its objects are approved by the District Court.
Gowri Ashram v. DIT (Exemptions) (2013) 356 ITR 328 / 217 Taxman 97 (Mad.) (HC)

S.2(15):Charitable purpose-Object of general public utility- Charging service fee from customers for obtaining approval of competent authorities, such activity could not be considered charitable in nature within meaning of section 2(15) and consequently, assessee could not be entitled to registration under section 12A. [S.12A]
Assessee society was engaged in providing services to the public to facilitate them in obtaining different kinds of licences, permission and registrations like birth, death, marriage certificates, driving licences, ration cards, arms licences senior citizen card, etc., by charging a fee for each type of services. The Tribunal held that, as assessee-society was charging service fee from customers for obtaining approval of competent authorities over and above prescribed amount, such activity could not be considered charitable in nature within meaning of section 2(15) and consequently, assessee could not entitled to registration under section 12A.
Sukhmani Society for Citizen Services v. CIT (2013) 36 Taxmann.com 326 / 144 ITD 381 (Asr.)(Trib.)

S.2(47): Transfer–Capital gains-Firm-Reduction of share of partners-Reconstitution of firm cannot be considered as transfer. [S.45(3),45(4)]
It cannot be said that the land owned by a firm was transferred when firm was reconstituted and new partners were admitted and there was reduction in the shares of erstwhile partners. Capital gains did not arise on reduction of share of partners. (A.Y. 1996-97)
CIT v. P. N. Panjawani (2013) 356 ITR 676 (Karn) (HC)
CIT v. Usha K. Panjkanai (2013) 356 ITR 676 (Karn) (HC)

S.2(47): Transfer-Date of transfer-Transfer of possession of property and not on date of sale agreement. [S.45, 54EC, Transfer of Property Act, S.53A ]
Assessee entered into sale agreement on 16-3-2005, but transferred possession of property on 20-9-2005. Assessee claimed that the capital gain is taxable in the assessment year 2006-07 and claimed deduction under section 54EC for investment made in December, 2005. The A.O. held that transfer took place on date of agreement and therefore, disallowed deduction under section 54EC as amount was not invested within six months from date of transfer. However A.O. taxed capital gain in assessment year 2006-07.Commissioner (Appeals) upheld the order of Assessing Officer. The ITAT held that Transfer of property under section 2(47) took place on date of transfer of possession of property and not on date of sale agreement and therefore deduction under section 54EC was allowable. (A.Y. 2006-07)
Azad Zabarchand Bhandari v. ACIT (2013) 58 SOT 347 (Mum.)(Trib.)

S.4:Charge of Income-tax–Accrual-Res-Judicator-Year of taxability- Acceptance of view in earlier year- Income has accrued must be considered from a realistic & practical angle (ii) If Dept has accepted adverse verdict in some years, it cannot be allowed to challenge verdict in other years (iii) disputes as to the year of taxability with no/ minor tax effect should not be raised by Dept. [S. 5, 28(iv)]
Pursuant to the import-export policy of the Government, the assessee was entitled to make duty free imports of raw materials in respect of the exports made by it. The assessee accounted for the benefit of the entitlement to make duty free imports in the year of export but claimed that the benefit was not chargeable to income-tax in the year in which the exports were made but it was chargeable to tax only in the year in which the imports were availed of and the raw materials consumed. The AO rejected the contention and held that as the assessee was following the mercantile system of accounting, the right to receive the benefit accrued as soon as the export obligation was fulfilled and it was chargeable to tax in that year u/s 28(iv). On appeal, the CIT(A), Tribunal and High Court upheld the assessee’s stand. On appeal by the department to the Supreme Court, HELD dismissing the appeal:
(i) Three tests have been laid down by various decisions of the Supreme Court to determine when income can be said to have accrued: (a) whether the income is real or hypothetical; (b) whether there is a corresponding liability of the other party to pay the amount to the assessee & (c) the probability or improbability of realisation of the income by the assessee has to be considered from a realistic and practical point of view. Applying these tests, on facts, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. Also, from a realistic and practical point of view (the assessee may not have made imports), no real income accrued to the assessee in the year of exports and s. 28(iv) would be inapplicable. Essentially, the AO is required to be pragmatic and not pedantic . (ii) Further, as in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further, it cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it.

(iii) Further, as the dispute was only as to the year of taxability and as the rate of tax remained the same the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. It is hoped that the Revenue implements its litigation policy a little more practically and a little more seriously.(A.Y.2001-02)

CIT v. Excel Industries Ltd( 2013) 262 CTR 261(SC)
CIT v.Mafatlal Industries Ltd( 2013) 262 CTR 261(SC)
S.4: Charge of Income-tax-Dharmada receipts-Capital receipt or revenue receipt – Reference to Full Bench is uncalled for.
Held, that the Division Bench did not decide the issue nor did it lay down any law in respect of the issue of Dharmada but simply stated that the finding of the Tribunal and the issue raised before it was a question of fact and no question of law arose for decision. In other words, the court did not lay down any law or take any decision which could be said to be contrary to or in derogation of the law laid down by the Supreme Court. Thus, the reference made to the Full Bench was uncalled for. (A.Ys. 1981-82, 1984-85, 1985-86, 1986-87)
Lilasons Breweries Ltd. v. CIT (2013) 356 ITR 671 (FB)(MP)(HC)

S.4: Charge of Income–tax–Excise duty refund which is not a production or operational incentive is a capital receipt not chargeable to tax.
The High Court following its own decision in the case of Shree Balaji Alloys v. CIT (2011) 333 ITR 335, dismissed the departmental appeal and held that where the excise duty was refunded for creation of industrial atmosphere and environment, which would provide additional source of employment, such incentive designed to achieve public purpose could not be construed as production or operational incentive but was a capital receipt not chargeable to tax.
CIT v. Tripti Menthol Industries (2013) 35 taxmann.com 515 (Guj.)(HC)

S.4: Charge of Income-tax-Nodal agency-Disbursement of funds for development-Interest earned cannot be assessed as income.
Assessee was a State Government Undertaking and was only acting as nodal agency for receiving funds from Central as well as State Governments and disbursement of funds for development and infrastructure projects as per directions of Government from time to time. The Assessee earned interest on funds so advanced for projects and such interest was again invested in various development projects as per Government instructions. For relevant assessment year, the Assessing Officer added the accrued interest on the funds lent by the assessee on soft terms to local bodies and Mega City/IDSMT funds programme to the assessee’s income. On appeal, CIT(A) deleted the addition holding that interest on IDSMT fund would not be taxable income. The ITAT held that Interest earned is again utilized for implementation of the mega-city scheme, the same cannot be treated as income of the assessee. (A.Y. 2003-04)
Tamil Nadu Urban Finance & Infrastructure Development Corporation Ltd. v. ACIT (2013) 58 SOT 53(URO) (Chennai)(Trib.)

S.4: Charge of income-tax-Mutuality-Housing societies-TDR of members could not be taxed as dividend in hands of assessee.
Money received by assessee from society under an agreement entered into between developer, society and members as consideration was payable to members by developer for transfer of respective entitlements of TDR of members could not be taxed as dividend in hands of assessee on the grounds of ‘principle of mutuality’ between society and its members. (A.Y.2005-06)
ACIT v. IGE India Ltd. (2013) 58 SOT 62 (Mum.)(Trib.)

S.4: Charge of Income-tax-Capital or revenue-Transfer of business undertaking-Merchant banking business-Capital receipt.
Assessee company received a sum of Rs. 25 crore from transfer of its intangible assets of merchant banking business. It claimed that amount so received was capital receipt. Assessing Officer treated said receipt as revenue in nature and taxed same as business income. It was noted from records that assessee had received sale consideration for transfer of its business of merchant banking in form of employees, contracts in form of customer and client relationship, a list of ten largest clients and certain know-how related to merchant banking business of assessee. subject matter of transfer resulted in loss of enduring trading assets and, therefore, amount received in respect of same was to be treated as capital receipt not chargeable to tax. (A.Y. 2001–02)
IGFT Ltd. v.ITO [2013] 144 ITD 57/ 36 taxmann.com 241 (Mum)(Trib.)

S.4: Charge of Income-tax-Capital or revenue-Non-compete fee-Capital receipt.
The sole and main business or revenue earner i.e. merchant banking has been discontinued. And Amount received by assessee as non-compete fee for not carrying on merchant banking activities for a period of three years was to be regarded as capital receipt and thus same was not liable to tax. (A.Y. 2001–02)
IGFT Ltd. v.ITO (2013) 144 ITD 57/36 Taxmann.com 241 (Mum.)(Trib.)

S.4: Charge of Income -tax – Mutual concern-Co-operative Hsg. Society-Mutuality-A Co-op Hsg. Society is not a mutual association because its members can earn income from its property. The transfer fee and TDR premium charged by the Society from its members is a commercial transaction and not eligible for exemption on grounds of mutuality-For deduction of expenditure burdn on assessee to show correlation with income.[S. 2(24)(v), 28(iii)]
The assessee, a co-operative housing society, received transfer fee and TDR premium from its members which it claimed was exempt on the ground of mutuality. This stand was upheld by the Tribunal for the earlier years relying on the judgements in Sind Co-op Housing Society v. ITO (2009) 317 ITR 47 (Bom), Mittal Court Premises Co-op Society Ltd. v. ITO (2010) 320 ITR 414 (Bom) & CIT v. Jai Hind CHS Ltd (2012) 349 ITR 541 (Bom). In the present year, the Department argued that this view was not correct and that the transfer fee and TDR premium were not exempt on the ground of mutuality. HELD by the Tribunal upholding the Department’s plea:
(i) The three perquisites which form the essential conditions for mutuality are (a) complete identity between contributors and participants, (b) the actions of the participants must be in furtherance of the mandate of the society as determined from the memorandum and articles of association & rules & (c) there must be no scope of profiteering by the contributors from the fund made by them, which could only be expended on or returned to them. The principle or the notion of mutuality cannot be extended to a cooperative housing society, be it a flat owner’s society or a plot owner’s society;
(ii) There are three objections to treating a co-op housing society as a mutual concern. The first objection is that while a mutual concern cannot lead to any profit for the members, a member of a co-op housing society can earn income from the property such as by letting. The contributors, by virtue of their membership, obtain a valuable capital asset in their own hands, i.e., the leasehold right in the plots allotted to them, as well as the interest in the super structure. They may encash or capitalize on or even trade on the property. Such valuable rights that inure to the members are separate and distinct from the rights that vest in them as a part of the class of contributors and militates against the very notion of mutuality, which in its concept and operation cannot yield any income to them in their individual capacity. The second objection is that the assessee’s activities of charging premium at one half the amount of the premium received by the transferor-member from the transferee-member is a commercial transaction. As such, not only does the arrangement lead to creation and holding of wealth/property by the individual-members, it allows them to encash or otherwise exploit it, paying the society its share. That is, the society also partakes of the profit arising on the subsequent transfer by a member, to the extent of 50% thereof. The third objection is that the policy of allowing the individual members to purchase TDRs from outside and load them on to their existing structures and of allowing non-members residing in the flats built by the members on their plots to have access to and enjoy the common facilities means that there is a break-down in the identity between the contributors and participants and violates another basic condition of mutuality that there must be no dealings with the non-members;
(iii) Apart from that, transfer fees cannot be considered as tax-exempt because the income arises from the exercise of commercial rights, which is akin to a sale. The judgement in Sind CHS cannot be followed because the decision in CIT v. Presidency Co-op. Housing Society Ltd.( 1995) 216 ITR 321 (Bom) would prevail. Sind CHS was based on the fact that the amount there was reasonable and based on the bye-laws. The decision in Mittal Court PCS Ltd does not apply as it is in respect of non-occupancy charges. The TDR Premium is also not governed by the principle of mutuality. The judgement in Jai Hind CHS Ltd holding TDR premium to be exempt does not apply because the question whether commerciality is involved, or the transaction is guided by profit motive, is a matter of fact. The assessee’s charter as well as its’ operations have been found to be imbued with commerciality and common facilities are being enjoyed by the non-members . ( A. Y. 1996- 1997 & 2000 to 2008.)
Hatkesh Co-op Housing Society Ltd v. ACIT (2013)27 ITR 494(Mum.)(Trib.)

S.4: Charge of Income-tax–Mutual concern–Investment of surplus in Bank–Interest/return on such investment not covered by character of mutuality-hence liable to tax.
When a mutual concern invests its surplus funds or makes deposit in bank, return or interest on such investment/deposits will not be covered by character of mutuality and such an amount will be liable to tax. (AY 1996-97)
Dy.DIT v. Societe International De Telecommunication (2012) 139 ITD 328 /(2013) 153 TTJ55 / 23 ITR 714/84 DTR 219 (Mum)(Trib.)

S.4: Charge of Income- tax – Mutual Concern – Provision of goods/services to non- members – Profit from transaction is liable to tax.
When a mutual concern provides goods and services to non-members also and, some profit flows from said transactions, it is chargeable to tax. (AY 1996-97)
Dy.DIT v. Societe International De Telecommunication (2012) 139 ITD 328/(2013) 153 TTJ 55 / 23 ITR 714 /84 DTR 219 (Mum)(Trib.)

S.5: Scope of total income–Non–resident-Salary income-Accrual of Income from employment could not be taxed in India-DTAA-India-UK [S.90, Art.16]
Where assessee, a NRI, received salary income in India against employment exercised in U.K. and offered same for taxation in U.K. in pursuance of article 16, it could not be taxed in India as per DTAA between India and U.K. (A.Y.2006-07)
ITO v. Sri Sunil Chitranjan Muncif (2013) 58 SOT 356 (Ahd.)(Trib.)

S.5: Scope of total income–Method of accounting-Revenue recognition–When work did not commence mere raising the invoice did not constitute income. [S 145]
Where only an invoice had been raised and work had not even commenced, it did not constitute income for that year since revenue recognition on completion of certain milestone of work is an accepted method in mercantile system of accounting. (AY 2008-09)
Davis Langdon & Seah Consulting India (P.) Ltd. v. DCIT (2013) 58 SOT 124 (Bang.)(Trib.)
S.9(1)(i): Income deemed to accrue or arise in India–Business connection- Shipping business–DTAA-India-Cyprus-Place of effective management-Income was not taxable in India. [S.5(2)(a), 90, 44BB, Art.7, 8]
In view of article 8 of DTAA between India and Cyprus, income from shipping business of a non-resident whose effective management was in Cyprus was not liable to be taxed in India. (A.Y. 2003-2004)
Bengal Tiger Line Ltd. v. DCIT (2013) 58 SOT 134 (Chennai)(Trib.)

S.9(1)(i): Income deemed to accrue or arise in India–Business profits-Business of operation of ships-DTAA-India-Belgium- Shipping inland waterways transport and air transport-Inland haulage charges. [Art.8]
Inland transportation is not only incidental but also closely connected with direct operations of ships; and, therefore, inland haulage charges being income from operation of ships in international traffic, is exempt under Article 8.(A.Y.2008-09)
DCIT v. Safmarine Container Lines NV (2013) 58 SOT 222 (Mum.) (Trib.)

S.9(1)(i): Income deemed to accrue or arise in India–Business connection–Sale proceeds of tickets being remitted to it by Indian agent was not liable to tax in India .
On the basis of decisions taken in earlier similar appeals, claim of the non-resident assessee, who was engaged in canvassing business of travel and tour related services, that sale proceeds of tickets being remitted to it by Indian agent was not liable to tax in India could be allowed in relevant assessment year (A.Y.2007-08)
Star Cruise Management Ltd. v. DCIT (2013) 58 SOT 3(URO) (Mum.)(Trib.)

S.9(1)(i): Income deemed to accrue or arise in India–Business connection-Deduction of tax at source- Additional evidence-DTAA-India-UK-Indirect transfer–Capital gains-Matter set aside. [S.195, 201, Art.13]
The assessee, an Indian resident company, acquired 100% stake in a foreign company and, consequently, got acquisition over Indian subsidiary of said foreign company in which the foreign company was holding 49% equity shares. The AO observed that the 49% stake in the Indian subsidiary had got transferred from the foreign company to the assessee-company, on which capital gains tax was payable. Since assessee did not deduct tax at source from said payment, it was liable to be treated as assessee-in-default under section 201 and made addition to income of the assessee. Before the Commissioner (Appeals), the assessee submitted additional evidence on basis of which the Commissioner (Appeals) deleted said addition. Held, since the Commissioner (Appeals) entertained additional evidence and deleted the liability of deducting tax at source by relying on such additional evidence without confronting it to the Assessing Officer, his order cannot be sustained and matter was set aside to the AO. (A.Y.2006-07)
ITO v Infomedia India Ltd. (2013) 58 SOT 31(URO) (Mum.)(Trib.)

S.9(1)(i): Income deemed to accrue or arise in India–Business connection-Air transport business–DTAA-India-Netherland-Ground handling services’ and ‘technical handling services’ is not taxable in India. [S.44BBA, Art.8]
So long as the decision of earlier year is not modified or reversed by the High Court, ordinarily, the same should be followed by the subsequent Coordinate Bench. Merely because the Revenue is not satisfied with the decision of the ITAT in earlier year would not be a sufficient ground for referring the matter to the Larger Bench. In view of the above, respectfully following the decision of ITAT, it is held that the income from ground handling and technical handling services is not taxable in India. (A.Y.2008-09)
KLM Royal Dutch Airlines v DCIT (2013) 58 SOT 207 (Delhi)(Trib.)

S.9(1)(i): Income deemed to accrue or arise in India–Business connection- Interest from overseas branches was not liable to be included in total income- DTAA- India-Belgium.[S.90, Art.7]
Interest received by assessee from overseas branches/head office was not liable to be included in its total income, on the ground that same being a payment received from self could not be treated as income. (A.Y.2000-01)
KBC Bank N.V. v. JDIT (2013) 58 SOT 235 (Mum.)(Trib.)

S.9(1)(i): Income deemed to accrue or arise in India-Business connection – Any part of business relating to offshore supplies not carried out in India – Income received from offshore supplies not deemed to be taxable in India even if assessee has business connection in India.
The assessee a Hong Kong company was awarded a project by Petronet to develop a terminal for the receipt and storage of liquefied natural gas at Kochi – for which it formed a consortium with CINDA, an Indian company. As per the terms of the contract, the assessee is responsible for offshore supplies and services and CINDA is responsible for onshore supplies and services. Based on the facts, the assessee sought an advance ruling on taxability of the income received/receivable by it for offshore supplies from Petronet in India.
The AAR ruled that the revenue’s contention that the consortium of CINDA and CTCI to carry out the project awarded by Petronetforms an AOP u/s. 2(31) of the Act is valid, but that alone does not govern the taxability of the amounts received by the assessee.
In the absence of there being a Double Taxation Avoidance Agreement between India and Hong Kong, the assessee is excluded from the relief under section 90(2), and the fiscal jurisdiction to tax the offshore supplies would be governed under the Act. Although the assessee has a business connection in India, it has not carried out any part of the business relating to offshore supplies in India. Income has not arisen in India as the right, title, payments, etc., in the supplies have passed on to Petronet outside India and the assessee is not the owner of the supplies in India. Therefore, the amount received/receivable by applicant from Petronet for offshore supplies in terms of the contract is not affected by the deeming provisions of section 9(1) and not liable to tax in India.
CTCI Overseas Corporation Ltd., In Re (2013) 217 Taxman 128 (AAR)

S.9(1)(vii): Income deemed to accrue or arise in India-Fees for technical services-Commission paid to non-residents was not taxable in India, therefore assessee was not required to deduct tax at source. [S.40(a)(i), 195]
Assessee company, engaged in business of manufacture and export of shoe uppers and leather shoes, paid certain commission to non-residents for procuring export orders. Since assessee did not deduct tax at source while making said payments, Assessing Officer disallowed same under section 40(a)(i). It was noted that non-residents were only procuring orders for assessee and following up payments and apart from that no other services were being rendered. Held, since non-residents were not providing any technical services to assessee, payments made to them did not fall under category of royalty or fee for technical services under section 9(1)(vi).Even otherwise, since commission paid to non-residents was not taxable in India, assessee was not required to deduct tax at source while making said payments. Hence, the impugned disallowance was to be deleted. (A.Y.2009-10)
ITO v. Faizan Shoes (P.) Ltd. (2013) 58 SOT 245 (Chennai)(Trib.)

S.9(1)(vii): Income deemed to accrue or arise in India-Fees for technical services-Supply of technical data-DTAA-India-Danish-Matter remanded. [Art.13]
Assessee a Chemical Technology Company in Denmark received certain sum from its Indian client for supply of technical data to meet requirement of plant supplied. Assessee company claimed that receipt was exempt from tax on ground that fees for technical data formed an integral part of price of equipment. Assessing Officer and DRP disallowed claim and treated sum as fees for technical services on ground that separate agreements was entered into for supply of technical know-how and equipment. Tribunal held that certain crucial aspects, facts relating to two separate agreements and provisions of DTAA had not been properly examined, therefore in interest of justice matter was remitted back to Assessing Officer for deciding issue. (A.Ys. 2007-08 & 2008-09)
Haldor Topsoe v. Add.CIT (2013) 58 SOT 88 (URO) (Mum.)(Trib.)

S.9(1)(i)(vi): Income deemed to accrue or arise in India-Royalty- Since assessee did not have any PE in India, income arising could not be taxed in India. DTAA-India-USA. (Art.5, 7, 12)
Assessee is a non-resident company incorporated in USA, entered into collaboration agreements with Indian companies, wherein it was required to provide various services to these three parties. During year the assessee company received certain amounts from these parties and claimed as receipts were not taxable in India in absence of PE in terms of article 5 read with article 7 of DTAA between India and USA. It assessee also claimed that receipts in question were neither in nature of ‘fees for included services’ [FIS] nor as ‘royalty’. It submitted that it had provided health care related services in pursuance of terms and conditions of respective service agreements. The Tribunal following the earlier year order held that, since assessee did not have any PE in India, income arising could not be taxed in India. (A.Y.2004-05)
Harvard Medical International Inc. v Dy.CIT (2013) 58 SOT 329 (Mum.)(Trib.)

S.9(1)(i)(vi): Income deemed to accrue or arise in India-Royalty–Deduction of tax at source- Down loading licenced software-DTAA-India-USA [S.195, 201]
Assessee made payments to foreign companies for downloading their licensed software. A.O. opined that said payments were in nature of royalty and assessee’s failure to deduct tax at source attracted liability under sections 201(1) and 201(1A). Commissioner (Appeals) upheld said order. By following the order passed by jurisdictional High Court in case of CIT, International Taxation v. Samsung Electronics Co. Ltd. [2011] 203 Taxman 477/16 taxmann.com 141 (Kar.) The honorable ITAT held that impugned order passed by authorities below was to be upheld. (A.Ys. 2007-08 to 2010–11).
Cosmic Circuits (P.) Ltd. v ITO (2013) 58 SOT 364 (Bang.)(Trib.)

S.9(1)(i)(vii): Income deemed to accrue or arise in India -Fees for included services-Merely facilitation services will not fall within the definition of “FIS”-DTAA-India-USA. [Art. 12]
Assessee received payment from Wockhardt Hospitals Ltd. for services rendered in terms of new Wockhardt Award’s agreement entered into by it with ‘WHL’. Services provided by assessee to ‘WHL’ were merely facilitation services with regard to selection of awardees for Wockhardt Award and ‘WHL’ had not gained any technical knowledge from such services. The ITAT held that assessee was not providing any service which fell within definition of ‘FIS’ as contemplated in article 12(4) of DTAA between India and USA. Deletion by the Commissioner (Appeals was held to be justified.(A.Y.2004-05)
Harvard Medical International Inc. v Dy.CIT (2013) 58 SOT 329 (Mum.)(Trib.)

S.9(1)(i)(vii): Income deemed to accrue or arise in India Fees for technical services-DTAA-India-Japan-DTAA provisions beneficial. [S.90(2), Art.9, 12]
Income from offshore services, though chargeable under section 9(1)(vii) but exempt under DTAA, could not be charged to tax in light of section 90(2). (AY 2009-10)
IHI Corporation v Addtl.CIT (2013) 58 SOT 225 (Mum.)(Trib.)

S.10(5): Exempt Income-Travel Concession or Assistance-Foreign Travel–Exemption is not available. [Rule 2B]
The Assessee employee availed leave travel concession for leave travel package covering Malaysia and Singapore. The A.O. disallowed the same under section 10(5) as tour was undertaken for travel overseas. In appeal the Tribunal held that leave travel concession is exempt under section 10(5), read with rule 2B, only if assessee-employee undertakes journey to any place in India. S. 10(5) r.w. rule 2B no way provides that assessee is at liberty to claim exemption out of his total ticket package spent on his overseas travel and part of journey within India. Accordingly the claim of assessee for exemption was rejected. (A.Y.2007-08)
Om Parkash Gupta v ITO (2013) 58 SOT 304 (Chd.)(Trib.)

S.10(10C): Exempt income-Public sector companies-Voluntary retirement scheme-Ex-gratia payments is exempt.
Ex gratia payments received under voluntary retirement scheme of State Bank of India is exempt. In view of decision in Bikram Jit Passi v. Dy. CIT [IT Appeal No. 925(Chd.) of 2011,dated 9-11-2011]. (A.Y.2007-08)
Om Parkash Gupta v. ITO (2013) 58 SOT 304 (Chd.)(Trib.)

S.10(23G): Infrastructure capital Fund-CBDT approval is mandatory.
Where assessee had not obtained approval from CBDT for purpose of claiming exemption under section 10(23G), it could not be allowed exemption under section 10(23G). (A.Ys. 2003-04, 2005-06 to 2007-08)
Tamil Nadu Urban Finance & Infrastructure Development Corporation Ltd. v. ACIT (2013) 58 SOT 53 (URO) (Chennai)(Trib.)

S.10(38): Exempt income-Long term capital gains from equities – Sale was found genuine when enquiries from stock exchange directly –Denial of exemption on the ground that purchaser was engaged in the fraudulent billing activities was not justified .
Assessee-HUF derived long-term capital gain from sale of shares of two companies and such capital gains was claimed as exempt under section 10(38). During the assessment proceedings the assessee filed all the details. The AO being highly suspicious, enquired from BSE regarding genuineness of purchases of these shares through M/s Vijay Bhagwan Das and BSE vide letter dt. 16th April, 2010 informed that no such transaction of purchases as mentioned in the said bill was made through BSE. Accordingly, the AO finally held that transactions made through Mukesh Choksi via his concern namely, M/s Alliance Intermediatories were accommodating entry in lieu of bogus long term capital gain. The AO proceeded to reject the claim of exemption made under s. 10(38) of the Act, and added the income as income from other sources. The Tribunal held that since entire proof of purchase and sale of these shares were found in books of account of assessee and sale of shares was found genuine when Assessing Officer made enquiries from stock exchange directly, addition on account of undisclosed income and denial of exemption under section 10(38) could not be sustained. (A.Y.2008–09)
Ramesh Kumar Jain (HUF) v. DCIT [2013] 36 taxmann.com 524 / 144 ITD 383 (Jodh.)(Trib.)

S.10A: Free trade zone–Computation of profits-Unabsorbed depreciation and business loss of same unit brought forward from earlier years have to be set off against the profits before computing exempt profits. [S.10B]
The assessee set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred “exemption” for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a “commercial” basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the CIT. On appeal by the department, the High Court (CIT vs. Himatasingike Seide Ltd (2006) 286 ITR 255 (Kar)) reversed the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. On appeal by the assessee to the Supreme Court HELD dismissing the appeal:
Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the Civil Appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly (19th September, 2013)(A.Y.1994-95)
Himatasingike Seide Ltd. v. CIT (SC) www.itatonline.org

S.10A: Free trade zone-Foreign currency expenditure-Onsite development-Export turnover. [S.80HHE]
Foreign currency expenditure incurred on software development is to be excluded from export turnover while computing deduction under sections 10A and 80HHE. Foreign currency expenses which are not related to onsite software development cannot be excluded from export turnover for purpose of computing deduction under sections 10A and 80HHE. (A.Ys. 2004-05 & 2005-06)
Polaris Software Lab v. Add.CIT (2013) 58 SOT 81 (URO) (Chennai)(Trib.)

S.10A: Free trade zone–Interest income-Assessable as income from other sources-Exemption is not available. [S.56]
Where assessee had kept deposits with Bank and earned some interest income which has nothing to do with business of assessee, same was to be treated as income from ‘other sources’, and benefit of deduction under section 10A could not be given to interest income. (A.Y.2004-05 & 2005-06)
Polaris Software Lab v. Ad.CIT (2013) 58 SOT 81 (URO) (Chennai) (Trib.)

S.10A: Free trade zone–Exchange fluctuation from export activity is eligible for exemption.
Excess sale proceeds received by assessee due to exchange rate fluctuation in foreign currency is income from export activity and is eligible for exemption under section 10A.(AY 2005-06 & 2006-07)
ITO v Electronic Controls & Discharge Systems (P.) Ltd. (2013) 58 SOT 59 (URO)(Cochin)(Trib.)

S.10A: Free trade zone–Deemed export-Deemed export to another Special Economic Zone is not entitled to exemption.
Assessee is not entitled to exemption under section 10A in respect of deemed export to another Special Economic Zone. (A.Ys.2005-06 & 2006-07)
ITO v. Electronic Controls & Discharge Systems (P.) Ltd. (2013) 58 SOT 59 (URO) (Cochin)(Trib.)

S.10A: Free trade zone–Software Technology Park–Relief travels with undertaking-Export turnover-Total turnover-Foreign currency expenses.
Where whole business, along with assets and liabilities, was taken over by assessee as a going concern, deduction under section 10A could not be denied on ground that undertaking was not formed a new, but by transfer of used plant and machinery. Where foreign currency expenses had been excluded from export turnover while computing deduction under section 10A, same was also to be reduced from total turnover to maintain parity between numerator and denominator (A.Y.2007-08)
NDS Services Pay-TV Technology (P.) Ltd. v. Add.CIT (2013) 58 SOT 24(URO) (Bang.)(Trib.)

S.10B: Export oriented undertakings-Exemption cannot be allowed on training fees received from professionals, who were neither employees nor in any way associated with business.
The assessee claimed exemption u/s. 10B on the income received by it by way of training fees – training being imparted to professional who were not associated with the business of the assessee. The AO disallowed the claim on ground that training was given to outsiders who were neither employees nor were associated with the business of manufacture or production of any article or thing of assessee. The CIT(A) allowed the claim of the assessee, which claim was subsequently rejected by the Tribunal.
On appeal by the assessee, the High Court while rejecting the claim of the assessee observed that though the objectives of the Software Technology Park Scheme seeks training of professionals as one of the objects; yet, training to outside professionals would not qualify for exemption. The argument of assessee that at times the trained personnel are employed by it cannot be considered. (A.Y. 1996-97, 1997-98, 1999-2000)
Penta Media Graphics Ltd. v. ACIT (2013) 217 Taxman 117/91 DTR 273 (Mad.)(HC)

S.10B: Export oriented undertakings- Manufacture–Handi craft-Splitting up or reconstruction -Mere presence of 3 directors of the earlier company as partners by itself would not make the assessee-firm as being split up or reconstructed out of the company.
Assessee purchased raw material and handi craft items of dried flowers and parts of plants. It was an admitted fact that what was purchased by the assessee as raw material, and what was ultimately exported, were commercially known as different products. Assessee therefore claimed that it was engaged in manufacture and export. The assessee’s claim u/s 10B was denied by the AO on the ground that assessee was not engaged in manufacture, and further on the ground that the assessee firm was formed by merely splitting up or reconstructing business of an existing company. The assessee’s claim was upheld by the Tribunal. On appeal, held, dismissing the appeal:
The word ‘manufacture’ has to be understood in common parlance. Given the admitted fact that what was purchased by the assessee as raw material, and what was ultimately exported, were commercially known as different products, the Tribunal was right in holding that the assessee was engaged in manufacture. Further, the CIT(A) and Tribunal after looking into the facts had come to the conclusion that mere presence of 3 directors of the earlier company as partners by itself would not make the assessee-firm as being split up or reconstructed out of the company. The company and the firm dealt with differently graded products. The firm was constituted with capital contribution of partners from their personal funds. On these factual findings, the order of the Tribunal was upheld. (A.Ys. 2004-05 to 2006-07, and 2008-09)
CIT v. Deco De Trend [2013] 217 Taxman 179 (Mag.) (Mad.)(HC)

S.10B: Export oriented undertakings – Total turnover
Deduction was claimed by assessee on branch sales. CIT(A) and ITAT had denied deduction to assessee. Assessee claimed that branch sales be considered as head office sales and should be considered as exports. The Tribunal held that, section 10B speaks only of exports out of India, irrespective of the purchases. Term "exports out of India" was not defined in Act and it means transfer of goods physically out of territory of India. Concept of ‘deemed exports’ as claimed by assessee in export policy, cannot be imported into IT Act unless Act specifically says so. Assessee goods was not physically exported out of India. Condition precedent for claiming deduction u/s 10B was not satisfied by assessee. Assessee’s application was dismissed. (A. Y. 2005-06)
Seven Hills Business Solutions v. ACIT (2013) 56 SOT 32 (Hyd.)(Trib.)

S.11: Property held for charitable purpose-Charitable or religious trust-Voluntary contribution.
It was held that it is not necessary that a voluntary contribution should be made with a specific direction to treat it as corpus. Therefore, where intention of donor is to give money to a trust which will keep it in trust account in deposit and income from same is utilized for carrying on charitable and religious activities, it satisfies definition part of corpus and, in such a situation assessee would be entitled to benefit of exemption from payment of tax under section 11(1)(d).
DIT v. Sri Ramakrishna Seva Ashrama (2013) 258 CTR 201 (Karn.)(HC)

S.12A: Registration–Setting up school was application for charitable purpose-Commissioner was to be directed to pass consequential order granting registration under section 12AA to assessee. [S.2(15), 12AA]
Assessee-trust was created with objects to run any school and to purchase land for running educational institution. Assessee’s application for registration under section 12A was rejected by the Commissioner. On appeal, the Tribunal held that activities of purchasing land and constructing building for setting up school was application for charitable purpose and, therefore, assessee was entitled for registration under section 12A,and accordingly, the Tribunal set aside matter to file of Commissioner to consider case of assessee in accordance with decision of High Court in Pinegrove International Charitable Trust. However, the Commissioner once again refused to grant registration observing that assessee was only engaged in leasing out building to third party, and no educational activities were provided by assessee. In view of the aforesaid finding of the Tribunal, Commissioner was not right in relooking at issue i.e., activities of assessee trust, objects of entering into collaboration with a third party and, thereafter, holding that educational activities were not provided by trust. The assessee having fulfilled conditions for grant of registration under section 12A, Commissioner was to be directed to pass consequential order granting registration under section 12AA to assessee.
Sandhya Educational Trust v. CIT (2013) 58 SOT 5 (URO) (Chd.)(Trib.)

S.12AA: Procedure for registration-Trust or institution Charitable purpose–Utilisation of corpus donations–Merely on the basis of show cause notice writ petition is premature. [S.2(15), 12A, 80G, Constitution of India, art. 226]
The objects of the assessee-trust were to construct, establish, maintain and support charitable hospitals, nursing homes and dispensaries. It claimed to be running a charitable homeopathic clinic from two rooms on the ground floor of the premises. These rooms were made available free of cost to the assessee by its owner, a trust. The assessee was registered under section 12A of the Income-tax Act, 1961. It was also granted exemption under section 80G. The Commissioner observed that only a meagre sum had been applied for charitable purposes, while a major part of the corpus donations had been spent in constructing the commercial complex. He refused to extend the exemption under section 80G and rejected the application. On the same date, he issued a notice under section 12AA(3) calling upon the assessee to show cause why registration granted to it under section 12A should not be cancelled.

Held, although a huge amount had been received as donation by the assessee during the previous year the amount spent for charitable purposes were meagre. Therefore, the Commissioner was fully justified in holding that the activities being carried on by the assessee could not be said to be for charitable purpose and had rightly withdrawn the exemption granted under section 80G. Also, held that the notice under section 12AA(3) was merely a show-cause notice and challenge to the notice at this stage was premature.
Vishal Khanna Public Charitable Trust v. UOI (2013) 356 ITR 442 (All)(HC)

S.12AA: Procedure for registration-Charitable purpose-Religion-Members of particular church-Registration–Matter remanded. [S.2(15), 12A]
The assessee trust sought registration under section 12AA. One of the objects of the trust restricted the benefits to members of a particular religion, to the members of a particular church. The CIT held that the activity of the trust was not of charitable nature and, thus he denied registration under section 12AA of the trust. The ITAT observed that Registration under section 12A, it is not necessary that object of trust should be to benefit whole of mankind or all persons in a country or State and it is sufficient if intention is to be benefit a section of public as distinguished from a specified individual. therefore, where benefit of assessee trust was restricted to a particular religion, who were members of a particular church, trust would be a charitable institution under section 2(15), where assessee trust did not appear to do any charitable activity as it collected money from members of church, deposited it in bank and refunded it to lady members along with interest at time of marriage and details of collection and meeting of day-to-day expenses were not available, further examination was required before granting registration under section 12A. The ITAT set aside and the issue of registration under section 12AA is restored for reconsideration and re-examination on the basis of judgment of Apex Court and High Courts.
Fathima Matha Charitable Trust v. CIT (2013) 58 SOT 299 (Cochin)(Trib.)

S.12AA: Registration–Where activities of institution were genuine and were being carried out in accordance with objects of trust, registration granted could not be withdrawn in view of amended provisions of section 2(15). [S.2(15), 12A]
where objects of institution could no longer be regarded as toward a ‘charitable purpose’ in view of amended law, registration granted under section 12A could not be reviewed and withdrawn, since there is no stipulation in section 12AA(3) regarding continuing satisfaction. therefore, where activities of institution were genuine and were being carried out in accordance with objects of trust, registration granted could not be withdrawn in view of amended provisions of section 2(15). (A.Y. 2009-10)
Maharashtra Housing & Area Development Authority v ADIT (2013) 58 SOT 196 (Mum.)(Trib.)

S.12AA: Procedure for registration-Trust or institution–Cancellation.
First trust deed along with its objects was executed by the settler and thereafter a second trust deed was executed with two new clauses covering the events of dissolution of the trust and stating that in case of any changes or amendments to the clauses of the trust deed, prior approval of the authorities would be taken. Assessee trust came into existence by the supplementary trust deed, which was passed after combining the clauses of the earlier two trust deeds. Supplementary trust deed was registered u/s 12AA by the CIT. Subsequently, CIT cancelled the registration under S.12AA(3) as the assessee had executed supplementary trust deed without obtaining prior approval. The Tribunal held that the CIT is empowered to cancel the registration already granted to a trust or institution by invoking s. 12AA(3) where it comes to the knowledge of the CIT that the activities of the said trust are not genuine and are not being carried out in accordance with the objects of the trust or institution. It is not the case of the Revenue that the activities carried on by the assessee were not genuine or that it is not carrying on its activities in accordance with its objects. Assessee has given donations to other charitable institutions in line with one of its objects. Supplementary trust deed is nothing but the combination of all the clauses of the earlier two trust deeds and the aims and objects in all the deeds remain the same. Merely because the settler of the trust has claimed deduction u/s 80G in respect of the donations made to the assessee-trust, registration granted to the trust cannot be cancelled. Further, there is no merit in the objections raised by the A.O. that the assessee-trust was carrying on its activities from the same address at which another trust (second assessee) and a concern were operating. Therefore, order u/s 12AA(3) passed by the CIT is reversed.
Satkrit Service Trust v. CIT (2013) 92 DTR 178 / 157 TTJ 112 (Chd.)(Trib.)

S.12AA: Procedure for registration – Trust or institution – Education- Since assessee was yet to commence its activities and as on date there was neither institution nor any coaching classes, in such circumstances, impugned order denying registration was to be set aside and matter was to be remanded back for disposal afresh. [S.2(15)]
In view of amended provisions of section 2(15), education for commercial purpose itself in principle does not constitute ‘non charitable purpose’ rather it depends upon quantity of aggregate receipts of trust. Therefore, denial of registration under section 12AA is not proper when assessee-trust is yet to start its educational activities. Assessee trust was formed to establish, set up, acquire, run, operate, maintain and manage schools, colleges, academies including tutorial or coaching classes. It filed an application seeking registration under section 12AA. Director (Exemption) noticed that trust deed provided for objects for establishing and management of tutorials/coaching classes which constituted commercial activity and, thus, provisions of section 2(15) did not apply. He, thus, denied registration to assessee-trust. Since assessee was yet to commence its activities and as on date there was neither institution nor any coaching classes, in such circumstances, impugned order denying registration was to be set aside and matter was to be remanded back for disposal afresh.
Samria Charitable Trust v. DIT (Exemption)[2013] 36 Taxmann.com 427 / 144 ITD 313(Mum)(Trib.)

S.14A: Disallowance of Expenditure-Exempt income-Matter remanded. [Rule 8D]
The A.O. disallowed Rs. 5.83 crores being proportionate expenditure on exempted income under section 14A of the Act. Commissioner (Appeals) has directed the A. O. to work out the disallowance under section 14A in terms of rule 8D of the Income-tax Rules. The Honorable ITAT held that the Assessment Year for appeal is 2007-08 and hence the provision of rule 8D will not be applicable to the same Assessment Year-Matter remanded. (A.Y. 2007-08)
State Bank of Hyderabad v Dy.CIT (2013) 58 SOT 278 (Hyd.)(Trib.)

S.14A: Disallowance of expenditure-Exempt income–Recording of satisfaction is mandatory-Matter restored. [Rule 8D]
where A.O. was not satisfied with correctness of claim made by assessee that no expenditure was incurred in relation to such income which did not form part of total income, he could invoke section 14A only after recording satisfaction on that issue with regard to accounts of assessee. Disallowance u/s. 14A r.w. rule 8D(2)(iii) can be computed only by taking into consideration average value of investment appearing in balance sheet as on first and last day of previous year from which income not falling within total income has been earned. A.O. had taken into consideration entire investment made by assessee during relevant year for calculation of disallowance under rule 8D, matter was to be restored for re computation. (A.Y.2008–09)
REI Agro Ltd. v. Dy. CIT (2013) 144 ITD 141/35 Taxmann.com 404 (Kol.)(Trib.)

S.14A: Disallowance of expenditure – Exempt income – Share application money.
Assessee-company was engaged in business of investment in shares and securities earned dividend income, which was exempt. Assessee had itself made a disallowance u/s.14A. Authorities below worked out disallowance in terms of rule 8D and included amount of ‘share application money’ as a part of investments yielding tax-free income. The Tribunal held that, ‘share application money’, only represents amount/s paid by way of application for allotment of shares. 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. Share application money to be excluded in working out disallowance u/r. 8D. Matter remitted to AO to verify assessee’s claim. (A.Y. 2008 – 2009)
Rainy Investments Pvt. Ltd. v. ACIT (2013) 56 SOT 61(URO) (Mum.)(Trib.)

S.15: Salaries-Development officer of LIC receiving incentive bonus prior to 1.4.1989 is to be treated as salary –Only entitled to permissible deductions under s. 16. [S.2(24), 10(4), 16, 17]
The assessee was a development officer of LIC and prior to 1.4.1989, he received incentive bonus from LIC. He claimed a deduction of 40% of the said bonus, on the basis that he had incurred expenditure to the extent of 40% for canvassing business. The High Court held that the claim could not be allowed. On appeal, held, dismissing the appeal:
Incentive bonus received by Development Officer of LIC prior to 1.4.1989 is to be treated as ‘salary’. Compartmentalization of income under various heads and computation thereof has to be done strictly in accordance with the statutory scheme. Accordingly, the assessee is only entitled to the deductions specified under s. 16, and the general claim regarding business expenses was correctly disallowed by the High Court.
T.K. Ginarajan v. CIT (2013) 217 Taxman 323 (SC)
Editorial: The decision of the Gujarat High Court in CIT v. Kiranbhai H.Shelat(1999) 235 ITR 635(Guj)(HC) is no longer good law, in view of the decision of the Supreme Court. For incentive bonus received after 1.4.1989, LIC itself has clarified that Development Officers will be able to claim reimbursement to the extent of 30% of incentive bonus. After 1.4.1989, only that part of the incentive bonus after reimbursing the expenses to the extent of 30% will appear in salary certificate. The dispute before the Supreme Court was confined to incentive bonus received before the said date.

S.17(2): Perquisites-Tax-Where employees’ tax liability was borne by employer, tax refunds in respect of same could not be taxed in hands of employee, as such amount never belonged to employee. [S.10(10CC)]
Assessees were. employees of a foreign company, working in India. Tax arising in India on income of employees was borne by foreign employer. It was held that amounts paid directly by employer to discharge employees’ income-tax liability, falls within included category of monetary benefits exempt under section 10(10CC). It was further held that social security, pension and medical insurance contributions by employer are not taxable as perquisites, as assessee does not get a vested right at time of contribution to fund by employer, which continues to remain invested till assessee becomes entitled to receive it. Where tax is deposited in respect of non-monetary perquisite, it is exempt under section 10(10CC) and multiple stage grossing up is not applicable. Where employees’ tax liability was borne by employer, tax refunds in respect of same could not be taxed in hands of employee, as such amount never belonged to employee.
Yoshio Kubo v. CIT (2013) 92 DTR 70 (Delhi)(HC)

S.17(2): Perquisite – Benefit to Director-Purchase of flats less than market price-Since the market price was not considered the matter was set aside. [S.2(24)(iv), Rule 3(7)(ix)]
Assessee worked as working Director in company who sold flats to assessee. Assessee purchased six flats from M/s. SMRL and purchase price of two flats was lower vis-a-vis purchase price of other four flats. AO was of view that M/s. SMRL granted or passed on some benefit or perquisite to assessee, employee by way of concession. Considering lower purchase price in respect of two flats, AO invoked provisions of section 17(2) relating to ‘perquisites’ and proposed to tax different amounts and accordingly, made addition to income returned by assessee. Held, similar concessions offered to Director attract provision of section 2(24)(iv). Tribunal confirmed fact of benefit in purchasing properties at a lesser value than they would have been sold in open market. Provisions of section 2(24)(iv) r.w.s. 17(2) allow difference in value of asset between purchase price and fair market value of property or flats. Assessee’s attempt to compare value of flats with that of flat no.201, was not proper considering differences. Lower authorities have not explored applicability of provisions of section 2(24)(iv) and market value of flats in question. So far as employer–employee relationship is concerned that it is a settled issue that there exists such relationship between Director and company. Therefore, for want of market rate of impugned flats i.e, all six flats and corresponding construction cost of said flats in hands of developer, ground should be set aside to file of AO for examining issue afresh. AO directed to grant a reasonable opportunity of being heard to assessee. Grounds raised by assessee were allowed for statistical purposes (A.Y. 2009 – 2010)
Sarita S. Mantri v. ACIT (2013) 142 ITD 145 /89 DTR 261(Mum.)(Trib.)

S.22: Income from house property-Business income-Business service centre-Renting of office premises to a single party was assessable as income from house property. [S.28(i)]
The assessee company purchased an office which was used as its registered office. However, due to scaling down of business operations, it commercially exploited the said office premises as business service centre. The assessee company prepared a consolidated profit and loss account, debiting the entire expenditure on the maintenance of office, and claimed the same as deductible business expenditure. It claimed entire receipts as business income The A.O. rejected the same, assessing the entire claimed business receipt as ‘income from house property. where concept of business centre is generally operational and workable for ‘temporary’ offices, for conducting meetings outside regular place / time, income received by assessee from renting of office premises to a single party was assessable as income from house property. where rent receipt included cost of providing electricity, only net amount was to be taxed after reduction of electricity cost. (A.Y. 2007–08)
Anik Financial Services (P.) Ltd. v. ITO (2013) 144 ITD 151/35 Taxmann.com 430 (Mum.)(Trib.)

S.24:Income from house property-Deduction-Interest- Prepayment charges for closure of loan is allowable as deduction. [S.2(28A), 24(b)]
The Assessing Officer disallowed the assessee’s claim for deduction of amount paid as prepayment charges for closure of loan account which was taken for acquisition of property fetching the extant house property income.The ITAT observed that the definition of interest under section 2(28A) makes it manifest that it has basically two components, viz., firstly, the amount with nomenclature of interest for moneys borrowed and secondly, the amount paid by whatever name called in respect of the money borrowed or debt incurred. The second category may also encompass any charge paid for not utilizing the credit facility. Incorporating the definition of ‘interest’ in section 24(b), the position emerges that not only the amount paid designated as interest but also any other amount paid, by whatever name called in relation to such debt incurred, also qualifies for deduction, early repayment of loan, the assessee managed to wipe out its interest liability in respect of the loan, which would have otherwise qualified for deduction under section 24(b) during the continuation of loan. Pre payment charges have live and direct link with the obtaining of loan which was availed for acquisition of property. The payment of such ‘prepayment charges’ cannot be considered as de hors the loan obtained for acquisition or construction or repair, etc., of the property on which interest is deductible under section 24(b). The direct interest and prepayment charges, are species of the term ‘interest’. Therefore, deduction claimed by the assessee is allowable as deduction u/s. 24(b). (A.Y. 2006-07)
Windermere Properties (P.) Ltd. v. Dy.CIT (2013) 58 SOT 167 (Mum.)(Trib.)

S.28(i): Business income-Initial offer in many companies-Selling the same immediately was assessable as business income and not as short term capital gains. [S.45]
Assessee applied in Initial Public Offer (IPO) in many companies and allotted certain shares which had been immediately sold. Gains arising thereof was claimed as short-term capital gains. Since there were 40 purchases by assessee and in no case difference of purchase and sale was more than 30 days, same established that assessee was doing business on applying share of IPO and selling same immediately on allotment. therefore, short-term capital gain shown by assessee was rightly treated as business income.(A.Y. 2006-07)
Shreyas M. Jhaveri v. ITO (2013) 58 SOT 286 (Mum.)(Trib.)

S.28(i): Business income–Advance–Expenditure claimed by payer-Receipt is treated as revenue receipt.
Assessee had received from its clients a sum for advertising services which was treated as advance for services. However, in payer’s book said sum was reflected as expenditure incurred during year. Held, that the receipt could not be treated as advance and to be treated as revenue receipt in hands of assessee.(AY 2008-09)
Cheil India (P.) Ltd. v. DCIT (2013) 58 SOT 11(URO) (Delhi) (Trib.)

S.28(i): Business loss–Banking company–Loss on revaluation of securities is not allowable as deduction.
Loss on revaluation of securities described as permanent assets was not loss on stock in trade and hence, not allowable as deduction. (A. Y. 1993-1994)
CIT v. ING Vysya Bank Ltd. (2013) 356 ITR 532 (Karn.)(HC)

S.28(i): Business loss–Confiscation of goods by Customs and Border Protection Force was held to be allowable as business loss.
The assessee, the proprietor of a pharmaceutical company, exported bulk drugs to Mexico through San Diego Port, California, USA. The goods were cleared by the Indian customs authorities and reached California, USA. During the transit from California to Mexico, the goods were seized by the Customs and Border Protection Force of the USA for some statutory violations. The assessee claimed business loss before the Assessing Officer as a bad debt and alternatively loss of stock-in-trade. Held, the amount was deductible as business loss. (A.Y.2005-06)
CIT v. T. C. Reddy (2013) 356 ITR 516 (AP)(HC)

S.28(i): Business loss-Shares dealing-Loss on off market transaction cannot be treated as sham where off market transactions were found to be at market rates and payment was made or received through banking channel.
The Assessee Company, as part of its business made huge purchase and sale of shares through the Stock Exchange on day to day basis. During assessment, the A.O. noticed that the assessee had also carried out ‘off market transactions’ for sale and purchase of shares with some sister concerns as well as others, resulting in huge losses. Assessing Officer disallowed loss holding off market transactions as a sham. On appeal, the Commissioner (Appeals) allowed the loss as the Assessing Officer had considered the profit earned on the off-market transactions and only disallowed the loss incurred on such transactions.
Where off market transactions were found to be at market rates and payment was made or received through banking channel on a consolidated basis, loss on such transactions could not be disallowed holding them as sham transactions. (A.Ys.2002-03 to 2005-06)

ACIT v. Hina Nitin Parikh (2013) 144 ITD 157/ 35 Taxmann.com 416 (Ahd.)(Trib.)

S.28(i): Business loss-Capital loss-Loss of refundable deposit with sister concern is capital loss and not allowable as business loss or bad debt. [S. 36(1)(vii)].
Where the assessee had given deposit/advance to subsidiary company for taking premises on lease, there was no business transaction with subsidiary company and element of commercial expediency did not exist. Hence, loss of such refundable deposit would be capital loss. (AY 2004-05)
APL India (P.)Ltd. Addtl. CIT (2013) 58 SOT 41(URO)(Mum) (Trib.)

S. 28(i): Business loss – Irrecoverable amount on sale of leased asset allowable as business loss.
The assessee has given plant and machinery to the on lease. On expiry of the lease term the assessee has sold the plant and machinery to the same parties on 31-03-1999. Since the amount has become irrecoverable, so the assessee wrote off the amount in the books of account. Since these debts are on sale of leased assets i.e. in the course of business the same should be allowed as a business loss. Assessee’s claim for deduction in respect of amount written off as business loss was rejected. On appeal the Hon’ble ITAT decided the issue as debts in question were on sale of leased assets, i.e., in course of business. assessee’s claim of business loss was allowable. (A.Y. 2001 – 02)
IGFT Ltd. v.ITO (2013) 144 ITD 57/36 Taxmann.com 241 (Mum.)(Trib.)

S.31: Repairs and insurance of machinery, plant and furniture-Expenses to increase in life of existing assets cannot be treated as capital in nature.
It was held that increase in life of existing assets beyond their original estimated economic life by repairs and maintenance could not be taken as ground for treating such expense as capital in nature.
CIT v. Vishal Paper Industries(2013) 351 ITR 478 (P & H)(HC)
Editorial: Order of Tribunal in Vishal Paper Industries v. JCIT (2013) 21 ITR 220 (Chandigarh)(Trib) is affirmed.

S.31: Repairs and insurance of machinery, plant and furniture –Current repairs- Replacement of integral part of machinery will come within the meaning of current repairs.
Chamber assembly is one of the integral parts of intermix machine and, therefore, expenditure incurred by assessee for replacing chamber assembly would come within meaning of ‘current repairs’. (AY 2006-07 & 2007-08)
Midas Rubber (P.) Ltd. v. ACIT (2013) 58 SOT 7 (URO) (Cochin) (Trib.)

S.32: Depreciation-Explanation 5 added to section 32 with effect from 1-4-2002 could not unsettle assessment orders for earlier years which are final and accepted both by revenue as well as assessee.
During the course of assessment, the AO disallowed the claim of depreciation on the ground that in the earlier assessment years, depreciation though not claimed was thrust upon the assessee. Consequently, the written down value of the plant & machinery was supposed to be lower and the depreciation to be allowable was also lower in the current assessment year. The CIT(A) as well as the Tribunal had set aside the depreciation matter for the earlier assessment years following the decision of the Apex Court in the case of CIT v. Mahendra Mills [2000] 243 ITR 56. For the current assessment year, the CIT(A) once again decided in favor of assessee. Tribunal was in agreement with the CIT(A) and held that the earlier assessment was final and need not be reopened in view of explanation 5 to section 32 of the Act.
On appeal by the department, the High Court dismissing the appeal of the revenue held that without disturbing the written down value of the plant & machinery for the earlier years, it would not be possible to change the opening written down value for the subject Assessment Years. The High Court also held that the Explanation 5 added to Section 32 of the Act would be applicable w.e.f. 1st April, 2002 and could not unsettle the Assessment Orders for earlier years which are final and accepted both by the revenue as well as the assessee(A.Ys. 2003-04 to 2005-06).
CIT v. Silvassa Industries Ltd. (2013) 217 Taxman 116 (Bom.)(HC)

S.32: Depreciation-Exempt from tax till 1-04-2003-Notional depreciation-Assessee had to claim notional depreciation in its books of accounts and depreciation for current year is to be allowed by adopting written down value. [S.10(29)]
The assessee claimed depreciation on straight line basis, on the reasoning that in earlier years, as income was exempt, no depreciation had been claimed. Hence, it was contended by the assessee that depreciation should be allowed on straight line basis on original cost, and not on written down value. The Tribunal allowed the assessee’s claim on the basis that assessees which were covered under s. 10(29), of the Act were not required to compute depreciation on the basis of written down value only. On appeal, held, remanding the matter to the AO:
Depreciation has to be allowed on year-to-year basis, i.e. by taking notional depreciation for the earlier years and computing written down value accordingly. Assessee’s calculation based on straight line method could not be accepted. (A.Y. 2003-04)
CIT v. U. P. State Warehousing Corporation (2013) 357 ITR 487/ 217 Taxman 252 (All.)(HC)

S.32: Depreciation–lease hold properties-On long-term leasehold properties, including lease for perpetuity depreciation is not allowable.
The assessee had claimed depreciation in respect of long-term leasehold properties including lease for perpetuity. It was held that the Tribunal was right in declining assessee’s claim of depreciation in respect of long-term leasehold properties including lease for perpetuity. Similar view had been taken by the High Court in the assessee’s own case for earlier A.Y., and no reasons for taking a different view existed. (A.Y. 1995-96)
Peerless General Finance and Investment Co v. CIT [2013] 217 Taxman 251 (Cal.)(HC)

S.32: Depreciation–Set off of unabsorbed depreciation–Short term capital gains.
Assessee was entitled to set off of unabsorbed depreciation pertaining to assessment years up to 1996-97, against short term capital gains. (A.Y. 1999-2000)
DCIT v. Bisleri Sales Ltd. (2013) 58 SOT 73 (Mum.)(Trib.)

S.32: Depreciation–Additional depreciation–Year in which machinery is first put to use.
In terms of clause (iia) of section 32(1), additional depreciation is available in year in which machinery is new and first put to use and not for any succeeding year. (A.Y.2007-08)
CRI Pumps (P.) Ltd. v ACIT (2013) 58 SOT 154 (Chennai)(Trib.)

S.32: Depreciation-Unabsorbed depreciation for the asst years 1997-98 and 1999-2000 cannot be Set off any other head of income other than ‘income from business in the A.Ys. 2003-04 & 2004-05. [S.32(2)]
Assessee claimed set off of unabsorbed depreciation relating to assessment years 1996-97 and 1998-99 against income of relevant assessment year. Unabsorbed Depreciation relating to assessment years 1997-98 to 1999-2000 was to be dealt with in accordance with provisions of section 32(2) as applicable to those assessment year and, therefore, assessee could not claim set off of unabsorbed depreciation relating to those assessment years under any head of income other than ‘income from business or profession’ in assessment years 2003-04 and 2004-05. The Honorable ITAT had rejected the claimed of the assessee. (A.Y. 2007– 08)
Dharti Dredging & Infrastructure Ltd. v. Addl. CIT (2013) 144 ITD 120/ 35 Taxmann.com 563 (Hyd.)(Trib.)

S.32: Depreciation–Trust-Business income-Depreciation cannot be denied-Matter required re adjudication. [S. 2(15), 12A, 44AB]
The assessee-trust was registered under section 12A, it did not claim exemption under sections 11 and 12 in view of insertion of first proviso to section 2(15). Assessee itself determined income in computation of income under head ‘Profits and Gains of Business or Profession and not in terms of provisions of sections 11 and 12. The Assessing Officer disallowed claim for depreciation while the Commissioner (Appeals) allowed it relying only upon decisions cited by assessee. Held, in none of those decisions, embargo stipulated in first proviso to section 2(15) had been considered nor even Commissioner (Appeals) recorded his specific findings on facts pointed out by Assessing Officer in light of first proviso to section 2(15) and its impact (A.Y.2009-10)
ADIT(E) v. Automotive Component Manufacturers Association of India (2013) 58 SOT 159 (Delhi)(Trib.)

S.32: Depreciation – Revised claim-Assessing Officer was directed to allow the claim.
Assessee in return of income had claimed depreciation at lower amount. However, same was rightly quantified in Tax Audit Report in Form No. 3CD. Upon realization, assessee claimed differential in depreciation. However, Assessing Officer did not allow same on ground that said fresh claim was not made in revised return of income, and, in view of Goetze (India) Ltd. v. CIT [2006]284 ITR 323/ 157 Taxman 1 (SC), Assessing Officer could not consider fresh claim. Commissioner (Appeals) sustained said order. Since Supreme Court’s decision bars only Assessing Officer but not appellate authorities to entertain fresh/new, claim, Assessing Officer was directed to allow differential in depreciation to assessee. (A.Y. 2009–2010)
Riddhi Steel & Tubes (P.) Ltd. v. ACIT (2013) 36 Taxmann.com 369/144 ITD 397(Ahd.)(Trib.)

S.32(1)(iia): Depreciation–Additional depreciation
Assessee engaged in the business of transport of spirit and Molasses acquired a new wind mill during the previous year and claimed deprecation. Assessee also claimed additional depreciation u/s 32(1)(iia) on such wind mill. However, AO was of the opinion that such additional depreciation could not be allowed since wind energy undertaking of the assessee could not be treated as an undertaking engaged in manufacture of article or thing. Further, as per the AO original business of the assessee was not manufacturing or producing any article or thing, but only transporting spirit and molasses. In this view of the matter, he denied additional depreciation claimed by the assessee. The Tribunal held that, Assessee necessarily had to have a line of manufacturing or production, though operational connectivity was not required. In the present case, the assessee was not into any business of manufacture or production but only transportation of molasses and spirit. Thus, the first condition in the enacting provision, that assessee has to be engaged in the business of manufacture or production of an article or thing is not satisfied. The progress stops there. The application stops there. Assessee was not eligible for claiming additional depreciation u/s.32(1)(iia) of the Act. Lower authorities were correct in taking this view. (A.Y. 2005-06)
Shiva Cargo Movers Ltd. v. DCIT (2012) 53 SOT 44 / 82 DTR 246 / 152 TTJ 74 (Chennai)(Trib.)

S.32A: Investment allowance–Manufacture or production- Machineries used for Manufacture of milk products is eligible for investment allowance. [S.263]
The investment allowance on new machinery and plant would be available only when such machinery and plant, inter alia, are used for the purpose of business of manufacturing or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. The assessee was employing machinery for making milk products like ghee, flavoured milk, butter milk, rose milk and kova. When once the milk was subjected to the process, in its factory, new products emerged which were altogether different from milk itself. The assessee was entitled to investment allowance. (A.Y. 1983-84)
CIT v. Vizag District Milk Producers Co-op. Union Ltd. (2013) 356 ITR 612 (AP)(HC)

S.32A: Investment allowance-Manufacture of aerated water with synthetic essence is entitled investment allowance- Explanation to item 5 in Eleventh Schedule, w.e.f. 1-4-88 is not retrospective.
Court held, that insertion of Explanation to item 5 in Eleventh Schedule w.e.f. 1-4-1988 is not retrospective and machinery used in the manufacture of aerated water with synthetic essence was entitled to investment allowance prior to 1-4-1988.(A.Y. 1982- 83,1985-86)
CIT v. Vijayawada Bottling Co. Ltd. (2013) 356 ITR 625 (AP)(HC)
CIT v. Sarvaraya Sugars Ltd. (2013) 356 ITR 625 (AP)(HC)

S.35: Scientific research-CBDT-For grant of approval to scientific research, CBDT can only refer matter to Central Government and cannot decide matter itself.
The assessee is a scientific research association. Its application for grant of approval in terms of section 35(i)(ii) was remained pending. In the mean time an amendment was made in the object clause .The CBDT rejected the application by holding that approval could not be given as the condition prescribed was not satisfied. It was held that for grant of approval to scientific research, CBDT can only refer matter to Central Government and cannot decide matter itself.
Shriram Scientific & Industrial Research Foundation v. CBDT (2013) 258 CTR 267 (Delhi)(HC).

S.35(2AB): Scientific research expenditure-Clinical trials-Capital expenditure on laboratory equipment and computer was held to be allowable-Capital expenditure on motor car matter set aside.
Assessee being engaged in business of manufacturing of drugs and pharmaceuticals filed return claiming weighted deduction at 150 percent as per section 35(2AB) on certain sum being capital expenditure on accounts of lab equipment, computer and motor car. AO relying on language used in section 35(2AB) read with section 35(2) held that assessee was not eligible for weighted deduction on capital expenditure. CIT (A) confirmed disallowances made by AO. The Tribunal, held that the capital assets namely laboratory equipment and computer were eligible for weighted deduction if assets in question were used in clinical trials in drug and pharmaceutical industry of assessee. Nomenclature of impugned assets indicated relationship of assets to activities relating to clinical trials. They were used only for clinical trials. Therefore, assessee was entitled to weighted deduction in accordance with provisions of section 35(2AB). (A.Y. 2008 – 2009)
Sequent Scientific Ltd. v. ACIT (2013) 142 ITD 473 (Mum.)(Trib.)
S.35D: Amortisation of preliminary expenses-Foreign Currency Convertible Bonds (FCCB)- Expenses incurred for issue of FCCB was not allowable as revenue expenditure, amortisation of expenses was held to be justified. [S.37(1)]
Assessee company is engaged in business of broadcasting TV programmes. It issued Foreign Currency Convertible Bonds (FCCB) on 28-4-2004. The same bonds were convertible into shares any time on or after 8-6-2004 and before 22-4-2009. There was an option for redemption on or after 12-5-2006 and up to 24-2-2009. During previous year assessee incurred certain expenditure towards issue of FCCB and claimed same to be allowed as revenue expenditure. Assessing Officer concluded that assessee had incurred impugned expenditure in connection with expansion and extension of business in field of television and setting up of new channels. since impugned expenditure would result in addition to existing profit earning apparatus giving advantage in capital field, it was capital in nature. And therefore, it had to be amortized under section 35D. (A.Y.2005-06)
Zee Telefilms Ltd. v. ACIT (2013) 58 SOT 36(URO)(Mum.)(Trib.)

S.35DDA: Amortization of expenditure–Applicability of Rule 2BA is relevant only to employees for the purpose of claiming exemption under section 10(10C), no such compliance mandatory for claiming deduction in the hands of employer. [S.10(10C), Rule 2BA]
The language of rule 2BA made it clear that the amount received is by the employee and for the purpose of claiming the benefit under section 10(10C). This has nothing to do with the employer’s claim, which is a different claim under section 35DDA. The Tribunal rightly took the view that rule 2BA is attracted and applicable only to a circumstance, where the benefit of section 10(10C) is sought for and not in a situation where the provisions of section 35DDA are called in aid. (A.Y. 2007-08)
CIT v. State Bank of Mysore (2013) 356 ITR 468 (Karn.)(HC)

S.36(1)(iii): Interest on borrowed capital–Loan to subsidiary company-Not from borrowed capital-Interest was deductible.
In light of a finding that loan to subsidiary was not from borrowed capital, interest was deductible u/s 36(1)(iii). (A. Y. 1982-1983, 1985-1986)
CIT v. Vijayawada Bottling Co. Ltd. (2013) 356 ITR 625(AP) (HC)
CIT v. Sarvaraya Sugars Ltd. (2013) 356 ITR 625(AP) (HC)

S.36(1)(iii): Interest on borrowed capital–borrowed funds utilised in advancing loans to directors instead of using same for business purpose – interest cannot be allowed.
The assessee declared certain loss in its return of income. On scrutiny, it was found that the assessee had advanced loan to the directors of Rs. 3.91 crores which amount was standing at Rs. 3.23 crores in earlier year. The AO observed that the funds borrowed for business purpose were diverted for advancing loans to Directors, thus disallowed the interest expense. The CIT(A) as well as the Tribunal upheld the order of the AO.
On appeal by the assessee, the High Court dismissing the appeal observed that it was undisputed that the advances given to the directors had increased from Rs. 3.23 crores to Rs. 3.91 crores without corresponding return thereof and with no better performance in the business of the assessee. Further, assessee had not showed any such nexus of the borrowed funds utilised in the business. Accordingly, it confirmed the decision of the Tribunal on basis of facts. (A.Y. 2002-03)
Murali & Co. (P.) Ltd. v. ACIT (2013) 217 Taxman 258 (Mad.)(HC)

S.36(1)(iii): Interest on borrowed capital- Expansion of business-Allowable as revenue in nature.
It was held that where borrowed funds were exclusively utilized for purpose of expansion of existing business having common administration and common fund, which resulted enhancement of production by thrice, interest paid on loan borrowed was to be treated as revenue in nature and accordingly, same was allowable under section 36(1)(iii) (A.Y, 2000-01)
CIT v. U.P. Asbestos Ltd. (2013) 357 ITR 509 / 91 DTR 12 (All) (HC).

S.36(1)(iii): Interest on borrowed capital–Interest-free advances-Disallowance was not justified.
The AO disallowed interest in relation to interest-free advance to 100 per cent subsidiary of assessee. Since the disallowance was mostly on account of opening balance which had already been deleted by Tribunal in AY 1998-99 and in the current year, advance given was easily explained from current profit, the disallowance was not justified. (AY 1999-2000)
KEC International Ltd. v. DCIT (2013) 58 SOT 18 (URO) (Mum.) (Trib.)

S.36(1)(iii): Interest on borrowed capital- Interest free advances to sister concern–Own funds in the shape of share capital-Interest on borrowed capital is to be allowed.
Since assessee had its own funds in shape of share capital and share application money which was sufficient to meet amount advanced by it as interest free to its associate concerns, deduction claimed on interest paid on borrowed capital was to be allowed. (A.Ys. 2005-06 and 2006-07)
Venus Records & Tapes (P.) Ltd. v. Addl.CIT (2013) 58 SOT 47 (URO) (Mum.)(Trib.)

S.36(1)(vii): Bad debts–Bad debts could be written off even after closure of the accounting period.
The assessee had originally filed its return of income u/s 139(1), but subsequently filed a revised return. In the revised return, certain debts were claimed as bad debts. The Assessing Officer held that the decision regarding the irrecoverability of the said debts was taken on 30.3.2005, and accordingly, the debts had to be written off in F.Y. 2004-05, and claimed in Asst. Year 2005-06. The CIT(A) upheld this reasoning, and upheld disallowance of claim u/s 36(1)(vii) in respect of AY 2004-05. The Tribunal however upheld the claim of the assessee. On appeal, held, dismissing the appeal:
The mandate of s. 36(1)(vii) is that the assessee must write off the bad debt in the accounts ‘for’ the previous year. The mandate is not that the write off itself must happen ‘in’ the previous year. The law requires the assessee to write off the bad debt in its accounts for the relevant year. There is no condition that the writing off itself should be done before the end of the financial year. (A.Y. 2004-05)
CIT v. U.P. Rajkiya Nirman Nigam Ltd. (2013) 217 Taxman 367 (All.)(HC)

S.36(1)(vii): Bad debts-Provision for bad and doubtful debt- Suffice if amount had been reduced from debtors balance shown on asset side of balance-sheet at close of year.
For allowability of deduction on account of bad debt, it was not necessary for assessee to close individual account of each debtor in its books and it would suffice if amount had been reduced from debtors balance shown on asset side of balance-sheet at close of year. (A.Y.1999-2000)
KEC International Ltd. v. DCIT (2013) 58 SOT 18(URO) (Mum.) (Trib.)

S.36(1)(viia): Provision for bad and doubtful debts-Schedule bank- Allowance cannot be in excess of provision for bad debts actually made in accounts. [S.36(1)(vii)]
The assessee bank claimed 10 per cent of the aggregate average rural branches advance amounting to Rs. 26.20 crores and sum of Rs. 50.18 crores being provision and doubtful debts at the rate of 7.5 per cent of the total income under section 36(1)(viia). Apart from this, assessee claimed an amount of Rs. 102.15 crores under section 36(1)(vii) being loans from non-rural branches actually written off. A.O. restricted the claim of Rs. 276.39 crores under section 36(1)(viia) to Rs. 46 crores on the ground that the provision actually made by the assessee was to the extent of Rs. 46 crores only. Commissioner (Appeals) upheld the order of the A.O. ITAT held that allowance under section 36(1)(viia) cannot be in excess of provision for bad debts actually made in accounts. (A.Y.2007-08)
State Bank of Hyderabad v. Dy.CIT (2013) 58 SOT 278 (Hyd.)(Trib.)

S.36(1)(viii):Eligible business-Special reserves-Financial corporation-Interest on short-term deposits is not eligible for deduction. [S.28(i)]
The assessee after receiving funds from the Central and State Governments used to park excess funds in the bank in short-term deposits. The interest earned on the said deposits was again utilized for advancing funds under the various schemes as per the instructions of the Government from time to time. The assessee claimed that such interest should be considered at par with the accrued interest from integrated development of small and medium town and mega-city projects and was eligible for deduction under section 36(1)(viii). The ITAT held that the income earned from deposits with the bank, etc., cannot be treated as income from business. The said interest income has to be treated as ‘Income from other sources’. The income earned from interest on short-term deposits can be considered as part of business income, even if the same is utilized for advancing funds under the instructions from the Government. The deduction under section 36 is available only in respect of income computed under the head ‘Profit and Gains of Business or Profession’ under section 28. Interest from short-term deposits is not taken into consideration in computing the income referred to in section 28. Interest income on short-term deposits is not eligible for deduction under section 36(1)(viii). (A.Ys. 2005-06 & 2006-07)
Tamil Nadu Urban Finance & Infrastructure Development Corpn. Ltd. v. ACIT (2013) 58 SOT 53(URO) (Chennai)(Trib.)

S.37(1):Business expenditure–Commission–On the basis of statement that no commission agent was involved disallowance of commission for the asst year 2005-06 was held to be justified-For the Assessment year 2006-07 there was no contrary evidence hence commission was held to be allowable.
For AY 2005-06, there were seven buyers who had stated categorically before the Assessing Officer in their written responses that in the transactions of purchase made by them of the web offset printing machines from the assessee, no commission agent was involved. The assessee was confronted with this fact but no explanation had been tendered in this regard. The onus had shifted to the assessee but no explanation was tendered in this regard. Therefore, any amount paid by way of commission to persons in respect of the seven buyers could not be regarded as business expenditure under section 37.

There was no evidence from the buyers indicating that there was no commission agent between them and the assessee. Thus, there was no material on record nor was there any other evidence which the Revenue could produce to indicate that the commission paid to the commission agents was not genuine. Consequently, the entire amount of commission paid to the commission agents in the year AY 2006-07 was allowable as business expenditure. (A.Ys. 2005-06, 2006-07)
CIT v. Printer House P. Ltd. (2013) 356 ITR 474 (Delhi) (HC)

S.37(1): Business expenditure–Claim made by assessee in respect of freight and octroi expenses could not be disallowed .
The assessee had claimed certain expenditures on freight and octroi. The Assessing Officer disallowed the same. Under an agreement entered into by the assessee with its principal, the principal was to pay freight for raw material and for finished goods, while assessee had to bear expenditure in respect of movement of casting, scrap, alloys etc. The Tribunal allowed the assessee’s claim. Held, dismissing the appeal:

The AO had disallowed the claimed expenditure without pointing out specifically that the claim of the appellant was in respect of raw materials or finished goods, and not castings/alloys etc. In these circumstances, on the facts of the case, the claim made by the assessee could not be disallowed.
CIT v. Reclamation Welding (P.) Ltd. [2013] 217 Taxman 143(Mag.) (Guj.)(HC)

S.37(1): Business expenditure–Foreign tour-Details were not furnished-Disallowance was held to be justified.
Assessee claimed deduction of expenditure incurred on foreign tour claiming it to be undertaken for business purposes. However, it failed to furnish details of foreign visits and explain its justification to assessee’s business. It was held that expenditure of foreign tour be disallowed in entirety. (A.Y. 1993-94)
Peerless General Finance & Investment Co. Ltd. v. CIT (2013) 88 DTR 26 (Cal.)(HC)

S.37(1): Business expenditure–Opposed to public policy-Fee for compounding an offence cannot be incidental to business but if it is not an offence and is compensatory, then the claim has to be allowed-Matter remanded to consider specific scheme of the Act.
The assessee was a builder engaged in the construction and sale of flats. It claimed deduction of compounding fee paid to Ghaziabad Development Authority (GDA) to regularize the extra construction as per the norms of the authority and permissible under the bye laws of the authority as per which subject to certain conditions extra construction could be regularized. The Assessing officer held that such expenditure would be hit by the Explanation to section 37(1), disallowed the assessee’s claim. The Tribunal held that the finding arrived at in the impugned order that nothing was brought on record so as to establish that violation was merely in respect of slight deviations from original plan has not been assailed by the assessee as per the procedure mandated by law. In order to decide the issue, the specific scheme of the Act, which empowered the GDA to collect compounding fee necessarily, has to be seen. This aim has not been seen by the CIT(A). As such, the issue has to be restored back to the file of the CIT(A). The argument of business necessity and resultant consequences of regularizing the construction after payment of fees have no relevance. TO the extent the assessee is able to prove on the basis of the wording of the specific statute which created and empowered the GDA that the amount so paid is compensatory in nature, the assessee may have a case. However, the minute the payment is tainted with illegality, then as being against public policy itself, even if the specific statute permits the payments to regularize the sale, the payment would not be allowable as a deduction by virtue of Explanation attached to section 37(1). (A.Y. 2005 – 2006)
Shree Sidhi Vinayak Construction Co. v. ITO (2013) 143 ITD 509 / 35 taxmann.com 286 (Delhi)(Trib.)

S.37(1): Business expenditure–Ad-hoc disallowance was deleted-Vehicle running expenses and depreciation on car was estimated at 5% for personal expenses.
A.O. made addition on account of various expenses and had disallowed 20 per cent of vehicle expenses and 20 per cent depreciation on car on account of personal use of vehicles by assessee. Commissioner (Appeals) held that disallowance had been made on ad hoc and lump sum basis without assigning any justification or reasoning. Tribunal held Commissioner (Appeals) had rightly deleted ad hoc additions, however the vehicle running expenses and depreciation on car had to be disallowed on account of personal use at a reasonable rate of 5 per cent. (A.Y. 2009-10)
Dy.CIT v. Subhash Chand Agrawal (2013) 58 SOT 122 (URO) (All.)(Trib.)

S.37(1): Business expenditure–Securities held as stock in trade-Interest paid on purchase of securities is allowable as deduction.
Assessee bank purchased and sold securities and same were held as stock in trade. The assessee bank paid interest in respect of securities purchased for broken period from preceding due date for payment of interest upto date of purchase. And also received interest in respect of securities sold by them for broken period from preceding due date for payment of interest upto date of sale. A.O. rejected the appellant’s claim holding that the appellant’s contention that the securities constituted stock in trade. It has not been accepted since it was found that the securities held in the category of held to maturity did not form part of the stock. Commissioner (Appeals) allowed the claim on the ground that the same was in stock-in-trade and hence the interest for the broken period is an allowable deduction. The honorable ITAT upheld the order of Commissioner (Appeal) that broken period interest paid by bank was an allowable deduction. (A.Y. 2007-08)
State Bank of Hyderabad v. Dy.CIT (2013) 58 SOT 278 (Hyd.)(Trib.)

S.37(1): Business expenditure–License fee–Additional evidence-Matter remanded.
When the assessee filed additional evidence before the Tribunal against the disallowance made by the AO on account of licence fee by holding that the same was not related to any actual services rendered and that expenditure was not incurred wholly and exclusively for purpose of business, the matter was to be restored back to the AO. (A.Y.1999-2000)
KEC International Ltd. v. DCIT (2013) 58 SOT 18 (URO)(Mum.) (Trib.)

S.37(1): Business expenditure–Pre-operative expenses–Foreign project-No income was offered, expenses was held to be allowable.
Assessee which is in the business of supply and erection of transmission towers,in view of Tribunal’s decision for earlier year, assessee’s claim of pre-operative expenses in relation to foreign project from which no income had been recognized, was allowable. (AY 1999-2000)
KEC International Ltd. v. DCIT (2013) 58 SOT 18 (URO) (Mum.)(Trib.)

S.37(1): Business expenditure–Professional fee–Merely because there is no formal agreement express cannot be disallowed.
Assessee’s claim which was of revenue in nature could not be disallowed only on ground that there were no agreements particularly when assessee had placed on record correspondence and report of consultant regarding various types of consulting assignment being handled by them which was an on-going arrangement. (AY 1999-2000)
KEC International Ltd. v. DCIT (2013) 58 SOT 18(URO) (Mum.) (Trib.)

S.37(1): Business expenditure–Capital or revenue-Computer expenses are revenue-Expenses on printer, scanner and web camera are capital in nature.
Parts like CD ROM drive, hard disk drive and RAM being spares of Central Processing Unit of computer cannot be considered as separate and independent machinery, thus, expenditure incurred on such parts is allowable as revenue expenditure. However, printer, scanner and web camera are independent and separate devices, therefore, expenditure incurred on such devices is capital in nature. (A.Y.2004-05)
APL India (P.)Ltd. v Add.CIT (2013) 58 SOT 41 (URO) (Mum.)(Trib.)

S.37(1): Business expenditure–Capital or revenue-Repairs– Expenses on making premises fit for business use is repairs-Expenditure on split AC is capital nature.
Expenditure incurred by assessee to make office premises fit for business use without bringing any new capital asset into existence is allowable as revenue expenditure. Expenditure on split AC is capital in nature as assessee has brought into existence a new asset.(A.Y.2004-05)
APL India (P.) Ltd. v. Add.CIT (2013) 58 SOT 41 (URO) (Mum.)(Trib.)

S.37(1): Business expenditure–Retirement compensation paid on closure of business is was allowable as deduction.
Retirement compensation paid to workmen, even where such expenditure was incurred upon closure of business, was revenue expenditure and was an allowable deduction.(A.Y.1999-2000)
DCIT v. Bisleri Sales Ltd. (2013) 58 SOT 73 (Mum.)(Trib.)

S.37(1): Business expenditure-Advertising expenses– Commission-Difference between actual amount received and TDS certificate-Matter remanded.
Assessee, an advertising agent, acted as intermediary between clients and third party vendors to facilitate placement of advertisements. The AO found that the TDS certificates reflected higher income than disclosed by assessee. The assessee submitted that only commission was recognised as income and payments to vendors was treated as pass through cost and not reflected in profit and loss account. On investigation, some of vendors were not found at addresses given by assessee and those who were found had confirmed receipt of lower amount. However, the AO disallowed the entire sum as deemed income. The assessee pleaded that adequate opportunity was not given to it to substantiate its claim regarding untraceable vendors. Hence, the matter was to be remitted back to consider said issue afresh.(A.Y.2008-09)
Cheil India (P.) Ltd. v. DCIT (2013) 58 SOT 11 (URO) (Delhi) (Trib.)

S.37(1): Business expenditure–Method of accounting-Video rights-Copy rights- Cost of distribution-Exhibition rights-100% cost of amount was to be allowed due to consistent accounting policy. [S.145,Rule 9B]
The Assessing Officer concluded that the assessee was claiming 100% of the cost of video rights/other copy rights even in a case where small portion of the total bundle of rights was sold and even when small portion of the total period of rights were sold. The Assessing Officer held that only proportionate expenditure could be claimed, but he found that it was difficult to quantify such amount; therefore, he held assessee should be allowed expenditure only to the extent the amount received by the assessee as sale during the year and balance cost of acquisition should be taken as cost of acquisition or inventory of closing stock. Held, consistent method adopted by assessee could not be disturbed without adequate reason. Since expenditure was allowable, full amount of expenditure was to be allowed, and same could not be restricted to extent of revenue earned during year under consideration. (AY 2005-06 and 2006-07)
Venus Records & Tapes (P.) Ltd. v. Add.CIT (2013) 58 SOT 47 (URO) (Mum.)(Trib.)

S. 37(1): Business expenditure–Broken period interest–Once the broken period interest was charged as income on broken period interest to be allowed as deduction. [S.28(i)]
Once broken period interest received by assessee was charged to tax as business income under section 28, a deduction for payment made for broken period interest at time of purchase of those securities could not be denied when assessee’s method of accounting did not result in loss of revenue for revenue authorities. (A.Y.2000-01)
KBC Bank N.V. v JDIT (2013) 58 SOT 235 (Mum.)(Trib.)

S.37(1): Business expenditure–VRS expenses–Revenue expenditure.
Expenditure incurred on account of Voluntary Retirement Scheme are allowable as revenue expenditure. (AY 1999-2000)
KEC International Ltd. v. DCIT (2013) 58 SOT 18 (URO) (Mum.) (Trib.)

S.37(1): Business expenditure-Setting up of-Commencement of business-It is not necessary that all activities which go to make up business should have been started-Matter set aside.
Assessee is engaged in business of engineering and construction work in India. Assessee entered into a contract with NHAI for improving and fourlaning a part of national highway. Assessee filed its return declaring loss. A.O. completed assessment at NIL income by disallowing assessee’s claim of pre-commencement expenditure. On appeal, it was noted that assessee had not brought on record details regarding its EPC contract and thus it was not possible to determine actual date of commencement of business. The Honourable ITAT held that it is not necessary that all activities which go to make up business should have been started, however the matter was to be remanded back for disposal afresh with a direction to assessee to bring necessary details on record. (A.Y. 2002– 03)
UE Development India (P.) Ltd. v. ACIT (2013) 144 ITD 112/ 35 taxmann.com 607 (Bang.)(Trib.)

S.37(1): Business expenditure-Business discontinued-Expenditure is not allowable.
Assessee debited certain amount in its profit and loss account in respect of prepaid payment for SEBI fees, insurance, repairs and maintenance etc. A.O. disallowed said amount because business of assessee had already been transferred. On appeal Tribunal held that as the business was transferred and discontinued disallowance of expenses was justified.(A.Y. 2001–02)
IGFT Ltd. v.ITO (2013) 144 ITD 57/36 Taxmann.com 241 (Mum.)(Trib.)

S.37(1): Business expenditure–Change method mandatory under revised accounting standard- Unascertained liability – Provision as per Accounting Standard – 15 is allowable.[S.145]
The claim of post-retirement benefits, valued on the basis of AS – 15, being based on the valuation of the actuary was both scientific and one of the recognised methods of accounting and quantifying the expenditure. Though actual and exact quantification may not be possible, the liability so recognised by the assessee could not be said to be unascertained and contingent. The assessee having followed the mercantile system of accounting was compulsorily required to account for the post-retirement medical benefits as they were quantified and had accrued during the year. The claim of the assessee was thus allowable. The fact that the assessee had made a provision in the books of account was not relevant. The way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee had earned any profit or suffered any loss.
Glaxo Smithkline Consumer Healthcare Ltd. v. Add. CIT (2013) 25 ITR 100 (Chandigarh)(Trib.)

S.37(2): Business expenditure–Entertainment expenditure–Disallowance of part of expenditure was held to be justified. [S.37(1)]
Expenditure incurred on employees who had accompanied visitors to the assessee concern constituted entertainment expenditure. But in the facts of the case, disallowance of part of expenditure was held to be justified. (A. Y. 1993-94)
CIT v. ING Vysya Bank Ltd (2013) 356 ITR 532(Karn.)(HC)

S.37(3A): Business expenditure–Daily allowance paid to employees is of same charter of hotel expenses of employees for the purpose of disallowances under section 37(3A) to (3D). [S.37(1), 37(3A) to (3D), Rules, 6D].
Held, that the Tribunal was correct in treating the daily allowance paid to employees of the assessee as having the same character as hotel expenses for the purpose of disallowance under section 37(3A) to (3D). (A. Y. 1985-86)
Novopan India Ltd. v. CIT (2013) 356 ITR 580(AP) (HC)

S.40(a)(i): Amounts not deductible-Deduction at source- Transponder fee to non-resident-Royalty-Fees for technical services-Matter set aside to the CIT(A) to decide the issue whether the amount is taxable as business income. [S. 9(1)(vi), 91(vii)]
Assessee company is engaged in business of broadcasting TV programmes under brand name, Zee TV, Zee cinema, etc. These channels were uplinked to satellite in foreign territory and through transponder on satellite uplinked programmes were transmitted over entire footprint of satellite. Assessee had taken space on transponder on asiaset through its non-resident subsidiary company ‘E’ to enable transmission of uplinked programmes. It paid certain amount as transponder fee to ‘E’ and claimed deduction of same. ‘E’ had made payment to asiasat for use of transponder bandwith. Assessing Officer held that nature of transponder fee was royalty as well as fees for technical services on which tax was required to be deduced, which assessee had failed to do so. therefore, applied provisions of section 40(a)(i) and disallowed transponder fee paid to ‘E. Commissioner (Appeals) confirmed order of Assessing Officer. Tribuanl held that lower authorities had erred in applying provisions of section 40(a)(i) only on limited ground that nature of transponder fee was royalty/fees for technical services. since dispute before Tribunal was regarding disallow ability of claim under section 40(a)(i), it was well within subject matter of appeal to consider if provisions of section 40(a) were attracted on some other ground. therefore, matter was to be sent back to Commissioner (Appeals) for examination afresh from point of view of taxability of payment as business income in case of ‘E’. A. Y. 2005-06
Zee Telefilms Ltd. v ACIT (2013) 58 SOT 36(URO) (Mum.)(Trib.)

S.40(a)(ia): Amounts not deductible–Constitutional Validity–petition challenging the constitutional validity of the Section is required to be transferred to the Supreme Court. [Constitution of India. Art. 139(A)(1)]
The assessee had filed a writ petition before the Andhra Pradesh High Court questioning the constitutional validity of the amended provisions of s. 40(a)(ia). The Union of India filed a transfer petition under Article 139(A)(1) of the Constitution of India read with Order XXXVI-A of the Supreme Court Rules, 1966, for transferring the said writ petition to the Supreme Court. Held, allowing the transfer petition:
In view of the fact that the vires of the provisions of a Central Act are being questioned, the transfer petition was to be allowed, and the writ petition was ordered to be transferred from the Andhra Pradesh High Court to the Supreme Court of India.
UOI v. Maruthi Tubes (2013) 217 Taxman 329 (SC)

S.40(a)(ia): Amounts not deductible-Deduction at source-Short fall in deduction-Difference of opinion. [S. 194C(2),194I, 201]
Any short fall in deduction of TDS due to difference of opinion, the TDS be deducted either at 1% u/s. 194C(2) or 10% u/s. 194I, provision of 40(a)(ia) cannot be invoked for the default of the Assessee is in default u/s. 201 of the Act.
CIT v. S.K. Tekriwal (2013) 260 CTR 73 (Cal.)(HC)

S.40(a)(ia): Amounts not deductible-Deduction at source-Deducted last month-Paid before due date if return-Assessee cannot be penalized. [S.139(1)]
Once the TDS is deducted at the last month of the previous year and deposited to the Government Treasury prior to the due date as prescribed under sub-section (1) of Sec. 139, deduction should b e allowed in the current Year. Intention of the provision of Sec. 40(a)(ia) is to deduct TDS and its payment and not to penalize the Assessee. (A.Y. 2007-08)
CIT v. Rajinder Kumar (2013) 260 CTR 113 (Delhi)(HC)

S.40(a)(ia): Amounts not deductible-Deduction at source-Amendment by Finance Act 2010 permitting TDS payment till due date of ROI is retrospective. [S.139(1)]
In 2007-2008 the assessee made professional payments for which TDS had not been paid by 31.3.2007 though it was paid before the due date for filing the return of income. The AO & CIT(A) disallowed the expenditure u/s 40(a)(ia) though the Tribunal deleted it by relying on Virgin Creations (Cal) which held that the proviso to s. 40(a)(ia) amended by the Finance Act 2010 has retrospective effect. On appeal by the department to the High Court HELD dismissing the appeal:
The intention behind s. 40(a)(ia) is to ensure that TDS is deducted and paid. The object of introduction of s. 40(a)(ia) is to ensure that TDS provisions are scrupulously implemented without default in order to augment recoveries. It is not to penalise an assessee when payment has been made within the time stated. Failure to deduct TDS or deposit TDS results in loss of revenue and may deprive the Government of the tax due and payable. The provision should be interpreted in a fair, just and equitable manner. It should not be interpreted in a manner which results in injustice and creates tax liabilities when TDS has been deposited/ paid and the respondent who is following cash system of accountancy has made actual payment to the third party for services rendered. Also, s. 40(a)(ia), prior to the insertion of the proviso by the Finance Act 2010, was not free from interpretative difficulties and problems. The amended provisions are clear and free from any ambiguity and doubt and will help curtail litigation. The amended provision clearly support the view that the expression “said due date” used in clause A of proviso to the un-amended section refers to the time specified in s. 139(1) of the Act. The amended s. 40(a)(ia) expands and further liberalises the statue when it stipulates that deductions made in the first eleven months of the previous year but paid b efore the due date of filing of the return, will constitute sufficient compliance. Consequently, the proviso to s. 40(a)(ia) must be treated as retrospective in operation (Virgin Creations referred/ followed; Bharati Shipyard Ltd. v. Dy. CIT (2011) 132 ITD 53 (Mum.)(SB) disapproved)( ITA 65/2013, dt. 1/07/2013, 24 of 2013 dt 6/9/2013/218 of 2013 dt 6/9/2013) (A.Y.2007-08, 2008-09)

CIT v. Rajinder Kumar. (Delhi)(HC) ;www.itatonline.org
CIT v.Naresh Kumar(2013) 94 DTR 48(Delhi)(HC).
CIT v.Talbros (P) Ltd (2013) 94 DTR 48(Delhi)(HC).
S.40(a)(ia): Amounts not deductible–Deduction of tax at source- Rejection of books of account-Freight charges-When books of account is rejected and income is estimated for failure to deduct at source disallowance can be made by invoking section 40(a)(ia). [S.40A(1), 40A(3),144, 194C]
The assessee is a partnership firm engaged in the business of undertaking and execution of civil contract works. During assessment proceedings the assessee could not produce full set of books of account bills vouchers etc .The AO rejected the books of account and estimated the net profit at 8% of contract receipts. The AO noticed that the assessee has not deducted the tax at source in respect of freight charges paid as per the provisions of section 194C.Accordingly the payment of freight charges was disallowed invoking provisions of section 40(a)(ia).In appeal Commissioner (Appeals) confirmed the disallowance. On appeal to Tribunal the Tribunal held that disallowance can be made under section 40(a)(ia) independently, even if business income is estimated after rejecting book results. Disallowance cannot be equated with other disallowance prescribed under section 40A(1) , 40A(3) etc. they are absolute disallowances ,which are not allowed as expenses at allin computing business income. (AY 2005-06)
K. Venkataraju Vemagiri v. Add.CIT (2013) 58 SOT 33(URO) (Visakhapatnam) (Trib.)

S.40(a)(ia) : Amounts not deductible-Deduction at source–Contractor–No disallowance can be made on presumptions.
The assessee had made provisions on account of TDS payable to contractor, but it could produce challan of lower amount. The Assessing Officer worked out expenditure on reverse working mechanism, i.e., (Rs. 3,863/2 per cent) and disallowed the same under section 40(a)(ia) for non-deposition of tax deducted at source. The Commissioner (Appeals) also sustained the disallowance made by the Assessing Officer. The Tribunal held that the Assessing Officer had not brought on record any such instance of expenditure, on which tax was not deducted or deducted but not paid so, in the absence of which disallowance cannot be made under section 40(a)(ia). Further, assessee submitted that on each and every expenditure for contractor’s payment, tax had been deducted at source and paid wherever it was applicable. If expenditure has been subject matter of tax deduction at source and if compliance to Chapter XVII-B has been made, then no disallowance can be made under section 40(a)(ia) on presumption basis. Therefore, in the interest of justice, the issue was set aside to the file of Assessing Officer. (A.Y. 2009–2010)
Riddhi Steel & Tubes (P.) Ltd. v. ACIT (2013) 36 taxmann.com 369 / 144 ITD 397(Ahd.)(Trib.)

S.40(a)(ia): Amounts not deductible-Deduction at source–Contractor-Amendment to section 40(a)(ia) by Finance, Act, 2010 giving relaxation applies retrospectively.
Assessee engaged in business of civil contractor made payment to subcontractor. AO allowed assessee’s claim. CIT(A) invoked jurisdiction u/s 263 set aside order of AO, directing him to complete assessment examining assessee’s claim of deduction u/s 40(a)(ia). AO held that assessee was not entitled to benefit of amended section 40(a)(ia), holding that assessee was required to deducted and deposited TDS by 31.03.2006, but deposited payment on 05-10-2006. CIT(A) dismissed assessee’s appeal. The Tribunal held that, the provisions of section 40(a)(ia) as they existed at that time stipulated not only deduction of tax at source but also its deposit with the Government within the same year. The rigours of section 40(a)(ia) were relaxed by the Finance Act, 2010 w.e.f. 1.4.2010 to enable an assessee to pay the tax deducted by him at source under Chapter XVII-B of the Income-tax Act on or before the due date specified in sub-section (1) of section 139. Relaxation introduced by the Finance Act 2010 w.e.f. 1.4.2010 would be available in earlier years also. Disallowance u/s 40(a)(ia) would not be called for where the assessee has deducted the tax at source in conformity with Chapter XVII-B of the Income-tax Act and paid over the same to the Government on or before the due date specified in sub-section (1) of section 139. Scheme of Chapter XVII-B shows that it mandates the person responsible for paying any sum out of which tax is required to be deducted at source to deduct the requisite amount of tax at source out of the amounts paid/credited by him. Though it is stated by the AO that tax has been deducted at source in the present case, it does not come out from his order whether such tax was deducted at source out of the amounts paid/credited by the assessee. Issue restored to the file of the AO with the direction to verify as to whether the assessee has deducted the tax at source out of payments made to the deductee. (A.Y. 2006 – 07)
Rana Builders v. ITO (2013) 142 ITD 205 (Rajkot)(Trib.)

S.40A(2): Expenses or payments not deductible-Excess or unreasonable –Interest paid to relative at a rate higher than market rate –Addition justified.
The assessee paid interest @ 18.25% on the credit balance of Smt. Shakuntala Devi, who is the mother of Karta of the HUF and as such is a specified person within the meaning of section 40A(2)(b). Since the rate of interest was higher than the prevalent market rate of interest of 15%, the AO disallowed the excess interest paid. The assessee submitted that the loan was taken on long term basis without giving any security. The plea of the assessee was rejected. The CIT(A) and Tribunal confirmed the addition.
On appeal by the assessee, the High Court held that in absence of any plausible explanation by the assessee, addition made by applying provisions of section 40A(2)(b) was justified [A.Y. 2007-2008].
Ramesh Chand (HUF) v. CIT (2013) 217 Taxman 75 (P&H.)(HC)

S.40A(3): Expenses or payments not deductible – Cash payments exceeding prescribed limits – Payment by cheque for part not proved – addition on account of cash payment exceeding limit justified.
The assessee purchased wheat for Rs. 39,25,680/-. Out of the said amount, Rs.8,44,934/- was found to have been paid though cheques. The AO found that the payment of Rs.30,80,746/- was made by assessee otherwise by account payee cheque and disallowed 20% of the amount for violation of section 40A(3) of the Act. The CIT(A) as well as Tribunal confirmed the disallowance.
On appeal by the assessee, the High Court observed that the failure of the appellant to give evidence during the course of assessment proceedings or in appeal before the Commissioner of Income Tax or the Tribunal is sufficient to confirm the findings of fact recorded by the authorities under the Act for the reason of failure of the appellant to produce the proof of payment through the account payee cheques before the authorities [A.Y. 2007-2008].
Ramesh Chand (HUF) v. CIT (2013) 217 Taxman 75 (P&H.)(HC)

S.40A(3): Expenses or payments not deductible – Cash payments exceeding prescribed limits –Payment to land owners-Identity of payee and genuineness was established-Disallowance was deleted. [Rule 6DD(h), (K)]
Assessee made payment in excess of Rs. 20000 to landowners for purchase of land. AO made disallowance of 20 percent of total cash payment u/s 40A(3). CIT(A) affirmed findings of AO. The Tribunal held that the payment in cash was made by assessee to villagers for purchase of agricultural land at a place where banking facility was not available. Even if it is assumed that payments were made at a town where banking facilities were available, case of the appellant company would still fall under exception of Rule 6DD(h). Rule 6DD(h) of the Rules has to be interpreted liberally so as not to frustrate the object of the legislature. The object of s. 40A(3) is not to disallow genuine payments and r. 6DD has to be interpreted keeping in view the object of the main provision. The second proviso to s. 40A(3) refers to "the nature and extent of banking facilities available, considerations of business expediency and other relevant factors", which means that the object of the legislature is not to make disallowance of such cash payments which have to be compulsorily made by the assessee in view of absence of banking facilities at the place of payment. The AO and learned CIT(A) have observed that the appellant company could have opened bank accounts at such town in the name of the sellers. It would be too much to expect that the appellant company would be able to compel the villagers to open bank accounts at the town which ultimately they will not be able to operate as they do not reside at such town. If such a myopic view is taken regarding the interpretation of r. 6DD(h), the very object of the legislature would be frustrated. There is no dispute regarding the identity of the payees and the genuineness of the land transactions in respect of which payments have been made. The assessee made cash payment to the agricultural land seller villagers which are covered under second proviso to section 40A(3) of Rule 6DD(h) of the Rules. Disallowance made is set aside and the assessee’s appeal allowed. (A.Y. 2006 – 2007)
Saraswati Housing & Developers v. Addl.CIT (2013) 142 ITD 198 /27 ITR 175(Delhi)(Trib.)

S.40A(7): Expenses or payments not deductible–Gratuity- Impossible to have made provision for gratuity in books – liability having accrued in very year itself, was to be allowed in corresponding year.
The assessee, a company engaged in textile manufacturing claimed Rs.1,67,34,000/- on account of liability for gratuity of employees in respect of their services up to 31-3-1973.Out of the total claim of Rs. 1,67,34,000 only a sum of Rs. 32,92,000 was debited to the profit and loss account as a provision for gratuity. The AO, therefore considered only Rs. 32,92,000 to be admissible deduction under section 40A(7). In the first round, the CIT(A) had decided the issue in favour of the assessee, however, the Tribunal had restored the matter to the AO for fresh determination. In the remand, the AO once again allowed only a sum of Rs. 32,92,000, which findings of the AO were confirmed by the CIT(A). The Tribunal held that under the special circumstances of the case, it was not practicable, rather it was impossible, to have made a provision for gratuity in the previous year relevant to assessment year 1973-74, accounts of the assessee having been closed but was the liability accrued in the year itself, it was to be allowed in this very year.
On appeal by the department, the High Court following its own Order in the assessees own case and in light of the law laid down by the Supreme Court in Shree Sajjan Mills Ltd. v/s. CIT (1985) 135 ITR 585 held that the assessment year in question i.e. 1973-74 is squarely covered by the expression provided under sub-clause (ii) of clause (b) of section 40A(7) and concluded that the Tribunal has rightly held that the amount of gratuity was allowable.
CIT v. Swadeshi Cotton Mills Co. Ltd. (2013) 217 Taxman 51 (Mag.) (All.)(HC)

S.41(1): Profits chargeable tax – Remission or cessation of trading liability –Liability not proved at the end of the year can be added.
The assessee had purchased goods from one “T”. Due to a dispute with the said “T” the assessee failed to make payment to “T”, which amount was reflected in the Balance Sheet as a sundry creditor. Since the assessee failed to submit a confirmation from the said “T” the AO issued a notice u/s. 133 (6) to “T”. The AO observing that no such entity existed on the address given made addition u/s. 41 (1). The Tribunal held that if the liability is not proved can be added to the income of the assessee and remitted the matter to the AO to verify the discharge of the liability till the date of fresh assessment and if the assessee failed to produce the creditor or unable to give exact address, the AO would be free to add back the same as per law.
On appeal by the assessee, the High Court in light of the findings of the Tribunal observed that no question of law arises and hence dismissed the appeal of the assessee [A.Y. 2007-2008].
Rama Steel Rolling Mills & General Engg. Works v. ITO (2013) 217 Taxman 58 (Mag.) (Raj.)(HC)

S.41(1): Profits chargeable tax-Remission or cessation of trading liability.
The assessee, a electric co-operative society established in the State of Maharashtra by the Government of India, was entrusted with distribution of the electrical energy exclusively in 183 villages of Shrirampur, Rahuri Taluka fully and Newasa and Sangamner, Rahata Taluka partly. The rates for the electricity purchases from MSEB and selling to ultimate consumers are controlled by the Government of Maharashtra through MSEB and hence it consistently incurred losses due to disparity in the purchase price and sales price of the electricity. The Govt. of Maharashtra accepted the representation made by the assessee society to the MSEB for determining viable tariff and a notification to that effect was issued in the Gazette on 21-5-1999 determining the viable tariff. In compliance to the Govt. notification MSEB vide letter dated 13-5-2001 informed the assessee that the tariff payable by the assessee to the MSEB was reviewed from April 1977 to April 2000. As a result of the said review, the arrears of MSEB were substantially reduced. The MSEB after recalculating the viable tariff vide letter dated 13-5-2001 has allowed rebate to the extent of Rs. 541.80 crores in the price payable by the assessee to the MSEB. The rebate allowed to the extent of Rs. 541.80 crores had been treated as cession of liability within the meaning of sec. 41(1) of the Act by the Assessing Officer as well as the Ld. CIT(A) and the same amount is added in the income of the assessee in the A.Y. 2002-03. The Tribunal held that, the first part of sec. 41(1) contemplates loss, expenditure or trading liability in some former years in which allowance or deduction has been made and the second part of the said section contemplates recoupment of such loss or expenditure or benefit in respect of “such” trading liability by way of remission or cessation in some subsequent years. The word “such” appearing in the second part of sub-section (1) of sec. 41 is significant in the context that the word “such” signifies that the recoupment or benefit must be in respect of loss or expenditure or trading liability mentioned in the first part of the said sub-section. The argument of the Ld. counsel was that to extent of the losses from the A.Y. 1978-79 to 1992-93 aggregating to Rs. 140,46,06,586/-, section 41(1) cannot be applied being it is a deeming provision as the assessee has not got any benefit in tax liability under the charging provisions. The Tribunal observed that in sec. 41(1), the Legislature has used the words “loss” also. If the assessee claims expenditure but ultimately if there is a “loss” and such “loss” cannot be set off u/s 72 of the Act, in such a situation, in our opinion, section 41(1) of the Act cannot be invoked. In the present case the entire rebate is treated as cessation of liability to the extent of Rs. 541.80 crores and the addition is made in the A.Y. 2002-03. The assessee could get the benefit of the brought forward business losses from the A.Y. 1993-94 as well as depreciation allowance and the tax liability of the assessee is reduced. So far as these fifteen assessment years are concerned, even if the rebate relates to the tariff which is debited to the P & L a/c in the respective assessment years but the fact remains that the losses which were worked out after debiting the said tariff had lapsed. Both the parties have not brought to our notice any direct decision on this crucial issue but to our conscious, considering the intention of the Parliament to enact sec. 41(1) creating fiction is not to put any extra burden of tax on the assessee but to take away the benefit which is enjoyed by the assessee by reducing the tax liability under the charging provisions of the Act. Hence the said amount cannot be taxed u/s 41(1) (A.Y. 2002 – 2003)
The Mula Pravara Electric Co-operative Society Ltd. v. Dy. CIT (2013) 91 DTR 434 / 156 TTJ 517 (Pune)(Trib.)

S.43(1): Actual cost–Explanation 3 to section 43(1)– Depreciation-Cost paid by the assessee to be considered for allowing depreciation as the parties are not related. [S. 32]
Assessee-company claimed to have purchased three wind mills for Rs. 6.70 crores from ‘Vestas’ and claimed depreciation thereof. These wind mills were originally purchased by a different party but due to non-payment of consideration, were returned back. The Assessing Officer found that Original Purchaser sold five wind mills at average rate of Rs. 41.9 lakhs per piece but assessee had shown cost of such mills at an average of Rs. 2.23 crores per piece and hence, invoked Explanation 3 to section 43(1).

The Tribunal found that the wind mills compared by the AO with those purchased by the assessee were different, and hence, such comparison was not proper. Actual cost paid by assessee was to be considered as cost price for allowing depreciation to assessee. Further, neither the Original purchaser nor the seller were related to each other or the assessee, no question of reduction of tax liability of assessee arose. (AY 2004-05)
NavlakhaTranslines v. ITO (2013) 58 SOT 55(URO)(Pune)(Trib.)

S.43B: Deductions on actual payment–Luxury tax-no deduction claimed by the assessee-No addition can be made.
The assessee company was engaged in the hotel business. The AO held that luxury tax was payable by the assessee which was not paid and hence made an addition u/s. 43B of the Act. The CIT(A) deleted the addition observing that the total payment of luxury tax during the year exceeded total collection of the luxury tax and hence the amount which was not collected could not be treated as the income of the assessee. Appeal filed by the department to the Tribunal was dismissed.
On appeal by the department, the High Court inter-alia observed that in order to form income of a person, the person must receive or deemed to receive any sum. The amount of luxury tax which was not received cannot form part of the income of any person. The High Court further observed that the scope of inquiry by the AO under section 43B is as to whether the assessee can be allowed deduction which can only be allowed to the assessee when it has liability to pay under the law and has actually paid that amount. The question of addition will arise only when the assessee has claimed deduction and the A) finds that conditions mentioned in this section has not been satisfied. Accordingly, on facts of the case it held that the assessee has not claimed any deduction in respect of its liability for payment of luxury tax as such no question of addition will arise.
CIT v. U.P. Hotels (P.) Ltd. (2013) 35 Taxmann.com 565 (All.) (HC)

S.43B: Deductions on actual payment- Any sum received from employees – Employees contributions to PF and ESIC -Paid within the due date of filing the return of income cannot be added. [S.2 (24)(X), 36(1)(va)]
The assessee deposited the amounts received from its employees as contributions in the PF and ESIC after the due date, i.e., after 15th of the next month but before the due date of filing the return of income. The AO added the amount on the ground that after deletion of the second proviso to section 43B by the Finance Act, 2003, the contribution of the employer is governed by provisions of Section 43B, whereas, employees’ contribution continues to be governed by provision of Section 36 (1)(va) read with Section 2(24)(x) of the Act. The CIT(A) deleted the disallowance and Tribunal upheld the decision of the CIT(A) holding that the employees’ contribution is allowable, if the same is paid before the due date of return.
On appeal by the revenue, the High Court relying on the decision of the Supreme Court in the case of CIT v. Alom Extrusions Ltd. (2009) 319 ITR 306 and CIT v. Vinay Cement Ltd. (2009) 313 ITR (St) 1 as well as that of Delhi High Court in the case of CIT v. AIMIL Ltd. (2010) 321 ITR 508 dismissing the appeal, held that assessee would be entitled to the deduction.
CIT v. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. (2013) 35 taxmann.com 616 (Raj.)(HC)

S.43B: Deductions on actual payment – Sales Tax – payment made during the year – allowable only if added back in the earlier years.
During the relevant year the assessee availed benefits under Sales Tax Amnesty Scheme on payment basis u/s. 43B, in order to discharge unpaid sales tax dues of earlier financial years. The AO did not grant the benefit of the deduction. The CIT(A) upheld the claim for sales tax but disallowed the claim for interest. The Tribunal granted the claim of interest also granted, however, the matter was remitted to the AO to verify as to whether sales tax which remained unpaid in the earlier year was added to the income for those years.
On appeal by the assessee, the High Court dismissing the appeal observed that the Tribunal is merely permitting the AO to verify necessary details and thereafter grant deduction. It observed that the AO is not permitted any latitude to re-examine the question on any principle of law but only to verify a specific fact. It further observed that, the AO shall confine his inquiry to such aspect only and grant the benefit as may be available to the assessee (A.Y. 2005-2006).
Deepak Nitrite Ltd. v. DCIT (2013) 217 Taxman 63 (Guj.)(HC)

S.43B: Deductions to be allowed only on actual payment–EPF-ESI-Paid before due date of return is allowable.
EPF and ESI contribution collected and remaining payable at year end, but paid before due date of filing return, is allowable. (A. Y. 2008-09)
Gobindpada Bhanja Chowdhury v ITO (2013) 58 SOT 135 (URO) (Cuttack)(Trib.)

S.44AA: Accounts-Civil construction-Rejection of accounts–In the absence of cogent evidence, audited books of account should not be disturbed. [S.44AD].
Held, there was no evidence to show that the excess amount, if any, was collected or even if it was collected it was passed on to the assessee. There was no search, survey or seizure at the premises of the assessee. Apart from this, the Department had not examined any purchaser or flat owner to verify the correctness of the noting that the actual price was much higher than the price recorded in the account books. Though there may be some doubt about the price of the flats until and unless it was proved by some evidence, doubt could not take the place of proof. Until and unless such noting was corroborated by material evidence, the Assessing Officer erred in making addition to the income. When the assessee had maintained account books, vouchers and other documents as required under sub-section (2) of section 44AA and got them audited and furnished them along with the audit report such benefit should have been extended to the assessee. The audited account books were maintained and there was no question of disbelieving them in the absence of any cogent evidence. (A.Y. 1993-94)
CIT v. Dolphin Builders (P.) Ltd. (2013) 356 ITR 420(MP) (HC)

S.44AD: Civil Construction-As the receipts were disclosed and income was offered ,credit in the bank cannot be assessed as income from other sources.
Assessee has filed the return of income applying the provisions of section 44AD. On appeal the CIT(A) held that receipts appearing in the bank account were not from the contract business ,therefore such income was assessed as income from other sources. On appeal Tribunal held that the assessee being found to be a name lender and could have charged only commission for lending its name since the assessee had already offered its income to tax, no further amount was taxable . On appeal from the Tribunal order in assessee’s favour, it was held that no substantial question arose for consideration in view of the fact that the relevant amounts were disclosed by the assessee and were assessed to tax in terms of s. 44AD. (A.Y. 2006-07)
CIT v. Kamlesh (Smt) (2013) 217 Taxman 272 (P& H)(HC)

S.44AD: Civil construction–Computation–Total receipts including those not accounted for in the books of account does not exceed Rs.40 lakhs, section 44AD is not applicable. [S.44AA]
Court held that total receipts including those not accounted for in the books of account does not exceed Rs.40 lakhs ,section 44AD is not applicable.(A.Y. 1993-94)
CIT v. Dolphin Builders (P.) Ltd. (2013) 356 ITR 420 (MP)(HC)

S.45: Capital gains-Business income-Sale of shares-Controlling interest-Not freely transferable-Profit on sale of shares is assessable as capital gains and not as business income.[S. 28(i)]
The assessee is a company engaged in the business of investment .The assessee had subscribed to 20 percent of the issued shares of Millennium Alcobey (P) Ltd (MABL) with the right to nominate the manager of MABL, shares were not freely transferable. The above shares were sold to other two share holders of MABL ie. Scottish & Newcastle (S&N) and United Breviaries Ltd (UB). The assessee offered the income under the head capital gains and invested the capital gains under the specified Bonds under section 54EC.AO assessed the income as business income-CIT (A) allowed the appeal o assessee. Tribunal reversed the finding of CIT(A) and confirmed the order of AO. On appeal by the assessee the Court held that finding of the Tribunal that the assessee had purchased the shares with the object of trading in them and not to hold as capital asset is perverse, therefore profit on sale of shares was assessable as capital gains and not as business income. (A.Y. 2006-07)
Accra Investments (P) Ltd v.ITO( 2013) 93 DTR 89 (Bom.)(HC)

S.45: Capital gains-Business income-Investment in shares-Profit on sale of shares assessing the income as capital gains was held to be justified. [S.28(i), 263]
Assessee, a non-banking finance company, filed its return declaring income from sale of shares under head ‘capital gains’. Assessing Officer after making a detailed enquiry, passed an order accepting assessee’s claim. Commissioner passed a revisional order under section 263 taking a view that income from sale of shares was to be treated as ‘business income’. Tribunal confirmed said revisional order. It was noted from records that assessee had made all investments with its own funds, valued closing stock at cost, earned substantial dividend income, did not deal in futures and derivatives and it never claimed set off of losses arising from sale of investments against other incomes. It was held that in view of aforesaid, impugned order passed by Tribunal was to be set aside and that of Assessing Officer was to be restored. (A.Y. 2006-07)
Spectra Shares & Scrips (P.) Ltd. v. CIT (2013) 91 DTR 289 (AP)(HC)

S.45: Capital gains –Business income – Transactions in shares – Portfolio management scheme-Assessable as capital gains.
The assessee was a private family trust. It had invested its corpus fund in purchase of shares/securities through four Portfolio Management Services (PMS) and had shown long-term capital gains (LTCG) and short-term capital gain (STCG) on sale of such securities. During the course of scrutiny assessment proceeding, the Assessing Officer found enormous volume, frequency and multiplicity of transactions of purchase and sale in share and security. He also observed that the intention of the assessee was not to make investment in shares for long-term benefit, but to earn quick profit by frequently buying and selling the shares with an eagerness to account for as much gains as quickly as possible under guise of STCG/LTCG. He, therefore, concluded that the profit on the sale of said shares was assessable under the head ‘profit and gain of business or profession’. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. The Tribunal held, that, on perusal of the agreements between assessee and portfolio managers clearly shows that the intention of the assessee to appoint these portfolio managers is to invest its corpus fund in shares and securities for wealth creation. The submissions of the assessee have been rejected by the lower authorities only because the assessee has engaged portfolio manager to look after its investment. Further, more thrust is given on the volume, periodicity and frequency of transactions. In this background, the finding of the Commissioner (Appeals) that the PMS are nothing but agents working for and on behalf of the assessee is not correct. All decisions regarding investments, its timings, etc., are made by the PMS provider and not by the assessee per se, though the resultant gain/loss is on account of the assessee’s investment. The contention of the revenue authorities that in respect of certain scrips, the holding period was very less cannot be held against the assessee inasmuch as it had no control on such decision making in a discretionary PMS arrangement because such decisions were taken by the PMS provider. Insofar as other objections of the revenue authorities that volume and frequency of transactions were large so as to constitute business activity are concerned, it is found that the assessee has engaged four PMS provider, has transacted in 7 shares and the total number of transactions is 110. In a stock exchange, where more than 5000 shares are traded every day, the observations of the lower authorities do not carry much weight Considering the facts and the submissions, the decision of the Commissioner (Appeals) is erroneous. Considering the nature of transaction through Portfolio Management Services providers the transactions have resulted into capital gains, STCG and LTCG as returned by the assessee. Therefore, the Assessing Officer is directed to accept the capital gains as returned by the assessee. (A.Y. 2008 – 2009)
Salil Shah Family (P.) Trust v. ACIT [2013] 36 taxmann.com 543/144 ITD 390 (Mum.)(Trib.)

S.48: Capital gains –Sale of shares by a non-resident to resident- Breach of RBI guidelines – Addition cannot be made in assessment proceedings on the basis of price fixed by RBI guidelines. [S.144C, Foreign Exchange Management Act, RBI guidelines]
The Assessee is atax resident of Germany .It had an Indian subsidiary. During the year the Assessee sold the part of shares held by its Indian Subsidiary taking the selling price at Rs 390 per share. The AO enhanced the amount of capital gains taking a view of Guidelines issued by RBI ,selling price per share was to be taken at Rs 400 per share. Guidelines issued by RBI are addressed to authorised dealer banks for FEMA purposes and, thus, It is FEMA authorities and not income-tax authorities who are competent to take appropriate action against assessee on breach of said Guidelines. Therefore, where in view of Income-tax Authorities, assessee while computing capital gains arising on sale of shares committed violation of these Guidelines, appropriate course open to them was to bring it to notice of authorised dealer banks.
Zeppelin Mobile System GmbH v. Add.CIT (2013) 58 SOT 18 (Delhi)(Trib.)

S.49: Capital Gains-Previous owner-Cost of acquisition-Gifts-Base year-Acquisition by previous owner or 1-04-1981. [S.2(22B), 2(42A), 55]
The assessee acquired land as a gift from his mother and sold that land. He opted for fair market value of land as on 1-4-1981 under section 55(2)(b)(ii), calculated on basis of Patwari’s certificate and a comparable sale transaction. A.O. held that period of holding was to be reckoned from date of gift, ignoring period for which it was held by donor. The Assessee therefore calculated cost of acquisition on date of gift and indexed it taking it as base year. Tribunal held that where capital asset became property of assessee by gift or other modes mentioned in section 49(1), period of holding of previous owner was to be included while calculating capital gains. therefore, cost of acquisition of such capital asset was cost to previous owner or fair market value on 1-4-1981, at option of assessee, and indexation was to be done taking year of acquisition by previous owner or 1-4-1981, as the case may be, as base year. (A.Y. 2006-07)
Vishwanath Sharma v. ACIT (2013) 58 SOT 267 (Chd.)(Trib.)

S.50C: Capital gains–Full value of consideration-Stamp valuation- Lease hold rights-Provision is applicable- Sale of rights in plots and buildings-Matter remanded since complete details were not available.
The assessee had taken a plot of land on lease from Maharashtra Industrial Development Corporation (MIDC) in the year 1967 for a lease of 95 Years .It had also paid the premium. During the relevant year the assessee had sold part of plot with the consent of MIDC. The AO applied the provisions of section 50C .The contention of the assessee was since this plot of land was a leasehold rights only, it was neither land nor a building and therefore, section 50C would not be applicable to such transactions. In appeal Commissioner (Appeals) up held the order of AO. On appeal the Tribunal held that since the assessee transferred rights in plots as well as rights in building, provisions of section 50C were attracted. However, since complete details of relevant facts were not available on record matter was to be remanded to file of Assessing Officer. (A.Y. 2008-09)
Shavo Norgren (P.) Ltd. v. DCIT (2013) 58 SOT 23 (Mum.)(Trib.)

S.54: Capital gains–Exchange of flats–Construction-NABARD Bonds- New flat received in exchange of old flat, which constructed by builder amount to construction and entitled to exemptions. [S.54EC]
The assessee exchanged an old flat for anew flat and cash compensation, under development agreement with builder. She claimed capital gaims arising of transfer of old flat as exempt under section 54 and amount invested in NBARD bonds exempt under section 54EC.The AO held that the assessee had neither purchased a house property within 1 year before or two years after the date of transfer nor had constructed a new residential house with in a period of three years from the date of transfer therefore disallowed the exemption under section 54 and 54EC.On appeal Commissioner (Appeals) also confirmed the order of AO. On second appeal the Tribunal held that ,where new flat received in exchange of old flat was constructed by builder and its possession was given to assessee within 3 years from the date of transfer, it amounted to construction, and therefore exemptions under section 54 is allowable and part of consideration was invested in NBARD bonds the exemption under section 54EC is also allowable. (A.Y.2006-07)
Veena Gope Shroff (Smt.) v. ITO (2013) 58 SOT 36 (Mum.)(Trib.)

S.54: Capital gains–Purchase of plot for construction-Eligible for exemption-Assuming the construction is not completed within three years ,the exemption can be withdrawn the period when three years expires. [S.54F]
Investment in purchase of a plot for construction of house would entitle an assessee to claim exemption under section 54 or section 54F. Exemption claimed by assessee under section 54 cannot be denied on the ground that assessee has not utilized sale consideration received from sale of flats itself, in purchasing a new residential house. Assuming the construction is not completed within three years, the exemption can be withdrawn the period when three years expires. (AY 2007-08)
Pushpa Devi Tirbrewala (Smt.) v. ITO (2013) 58 SOT 41 (Hyd.)(Trib.)

S.54EC: Capital gains – Investment in bonds –For computing long term capital gains date of purchase to be considered when shares were purchased and transferred in the broker’s demat account and not from the date broker transferred from his demat account to assessee’s demat account.
The assessee earned capital gains on sale of certain shares. His claim was that those shares were purchased on 9-1-2003 and sold on 23-4-2004 and, accordingly, the holding period being more than twelve months, those gains were required to be treated as long-term capital gains and he was entitled to exemption under section 54EC. As per information available to the Assessing Officer, those shares were transferred from demat account of broker to the demat account of the assessee on 5-3-2004 and back to demat account of broker on 23-4-2004. Accordingly, the Assessing Officer held that the holding period of shares by the assessee was less than twelve months, and gain on sale of such shares was required to be treated as short-term capital gains. In effect, according to the Assessing Officer, the assessee was not eligible for exemption under section 54EC. On appeal, the Commissioner (Appeals) noted that the assessee did not have any demat account at the point of time when shares were purchased and it was only on 5-3-2004 that the assessee opened a demat account. He noted that the purchase transaction was supported by the contract note from the broker and also reflected in the balance sheet as on 31-3-2003. Therefore, he directed the Assessing Officer to treat the gain on sale of shares as long-term capital gain and allowed the claim of section 54EC. On revenue’s appeal, the Tribunal held that, once the Assessing Officer does not dispute the date of purchases, merely because the date of transfer of shares to assessee’s demat account is a later date, the date of transfer to demat account cannot be taken as date of purchases. The assessee has given an explanation for delay in transfer to his demat account, and this explanation has not even been challenged or controverted. In these circumstances, Assessing Officer’s challenge to the capital gains being treated as long-term capital gains is indeed devoid of legally sustainable basis. Once the Assessing Officer does not challenge genuineness of a transaction, it cannot be open to him to alter the date of purchases, as claimed by the assessee, and once this date remains unchallenged, there is no basis for holding the capital gains as a short-term capital gain. There is not even a whisper of an allegation about genuineness of the transaction even though it is a case of, what is commonly known as, penny stock and the value of the shares has gone up almost 40 times within one year. For the said reasons, the conclusion arrived at by the Commissioner (Appeals) is to be approved. (A.Y. 2005 – 2006)
ITO v. Ram Krishna Ghosh (2013) 33 taxmann.com 145 / 142 ITD 544 (Kol.)(Trib.)

S.54F: Capital gains–Investment made before sale of existing residential property is not entitled to exemption.
Investment in construction of new residential property made by assessee is not entitled to deduction under section 54F to the extent the same is made before the sale of existing residential property.(AY 2008-09)
Nimmagadda Sridevi (Smt.) v. DCIT (2013) 58 SOT 54 (Hyd.)(Trib.)

S.54F: Capital gains–Sale of shares–Investment in residential property is eligible to exemption. [S.45]
Assessee could not be denied exemption under section 54F for investment of sale proceeds of shares in acquiring residential unit, on the ground that the assessee has not provided the details of broker. Sale consideration cannot be treated as bogus. (A.Y.2004-05)
Ramesh Kumar Goel v. ITO (2013) 58 SOT 49 (Guwahati)(Trib.)

S.55: Capital gains–Transferable Development Rights–No Cost of acquisition hence not liable to capital gains tax. [S.45, 48]
Even though transfer of TDR amounted to transfer of capital asset, the same could not be subjected to tax under head ‘capital gain’ for reason that there was no cost of acquisition in acquiring flat which had been transferred and computation mode given under section 48 failed. (A.Y. 2005-06)
ACIT v. IGE India Ltd. (2013) 58 SOT 62(Mum.)(Trib.)

S.55: Capital gains–Cost of acquisition-Non-compete fees-Capital receipts not chargeable to tax. [S. 4, 5, 28(va)]
Assessee received a sum towards restraint covenants for desisting from carrying on of business activities connected with manufacture, sale and distribution of marketing of carbonated soft drinks for a period of ten years. Assessing Officer had treated sum so received to be taxable under head ‘Capital Gains’ on grounds that assessee had itself invested part of receipt in securities specified under section 54EA and that non-compete right was also a valuable right and was covered by section 55(2)(a). Since the amount in question had been given for not to carry out any business activities, provisions of section 55(2)(a) was not applicable. Also, section 28(va) was brought to in statute with effect from 1-4-2003 and prior to this period, such receipt was to be treated as capital receipt not chargeable to tax.(A.Y.1999-2000)
DCIT v. Bisleri Sales Ltd. (2013) 58 SOT 73 (Mum.)(Trib.)

S.56: Income from other sources–Business income-Interest on short term zero coupon bonds to maintenance of debt-equity ratio is assessable as income from other sources. [S. 28(i)]
Interest earned by short-term investment of money raised by issue of zero coupon bonds in order to maintain debt equity ratio is taxable as income from other sources and not income from business. (A.Y.2008-09)
Bharat Oman Refineries Ltd v. CIT (2013) 356 ITR 399/218 Taxman 282(MP)(HC)

S.56: Income from other sources–Business income- Interest on FDRs –Prior to commencement of business is assessable as income from other sources. [S. 28(i)]
Interest earned on FDRs prior to commencement of business from fund of debenture loans to be treated as income from other sources and not business income. (A. Y. 2008 -09)
Bharat Oman Refineries Ltd. v. Dy.CIT (2013) 58 SOT 149(URO) (Indore)(Trib.)

S.56(2)(vi): Income from other sources-Gift received on the occasion of daughter’s marriage is not exempt from tax.
Assessee received the gift from NRI friends and relatives on the occasion of marriage of daughter as shoguns. The Assessing Officer has held that the gifts were received on occasion of assessee’s daughter marriage of assessee and not the marriage of assessee and the cheques were in the name of the assessee and the same were credited by the assessee to his bank account hence, the said amount is taxable as income from other sources, which was upheld by the Commissioner (Appeals). On appeal to the Tribunal the Tribunal held that “A perusal of the provisions of section 56(2)(vi) read with the proviso there under clearly reveals that they shall not apply to any sum of money received (b) ‘on the occasion of the marriage of the individual’. Therefore, the word ‘individual’ in the context of marriage of individual. Therefore, the word ‘individual’ in the context of marriage can only be the bride or bridegroom and cannot include group of individuals”. As the cheques were in the name of assessee which were credited to his account the addition was justified as income from other sources. On appeal High Court affirmed the view of Tribunal (A.Y. 2007-08)
Rajinder Mohan Lal v. Dy. CIT (2013) 36 taxmann.com 250(P&H)(HC)
Editorial :View of Tribunal in Rajinder Mohan Lal v. Dy. CIT (2012) 49 SOT 713 / 148 TTJ 369 / 75 DTR 85 (Chd.)(Trib.)is affirmed.

S.68: Cash credits-S.11 Property held for charitable purposes – Donation received cannot be assessed as income u/s. 68where receipt issued by assessee already in custody of the Department.
The AO had denied deduction u/s 11(1) for the expenditure incurred on purchase of capital assets on the basis of his finding that unaccounted money by way of anonymous donation was used for the expenditure. The CIT(A) and the Tribunal allowed the claim of the assessee.
On appeal by the department, the High Court dismissing the appeal observed that since the donation receipts are already in the possession of the AO, as the receipt books were impounded in the course of the survey and no confirmations were required to be filed by the assessee, the donations received by the assessee are not anonymous (A.Y. 2006-07).
DIT v. Hans Raj Samarak Society (2013) 217 Taxman 114 (Delhi)(HC)

S.68: Cash credits-Gifts-Mere confirmation is not sufficient-Donor was not produced for examination-Addition was justified-Reopening of assessment on the basis of information by investigation wing was held to be justified. [S.147]
The Assessing Officer reopened the assessment of the assessee’s case under section 147 after information was received from ACIT regarding bogus entries of long term /short term capital gain and bogus gift, found as a result of enquiries by Investigation Wing. Information from enquiry by Investigation Wing formed reason to believe that income had escaped assessment and reopening of assessment under section 147 was justified. In CIT(A) proceedings it is also found that the assessee did not disclose the facts, receipt of amount of gift in his initial return of income. therefore, the A.O. stand in assessment proceedings was right and CIT(A) also confirmed the same. The ITAT observed the facts of the case and held that mere identification of donor and showing movement of gift through banking channel was not sufficient to prove genuineness of gift, and onus to establish identity of donor, his capacity to make such gift and genuineness of transaction was on assessee. where there was no relationship between donor and donee, and donor was neither produced by assessee for examination nor was he traceable at given address to verify correctness of gift deed, addition of amount as income from undisclosed sources under section 68 and also for commission for taking such gift entries was justified. (A.Y.2001-02)
Anil Kumar Singhal v. ITO (2013) 58 SOT 92(URO) (Agra)(Trib.)

S.68: Cash credits-Gift-Relationship and creditworthiness was not proved-Addition was held to be justified.
Assessee claimed to have received certain sum as gift. Assessee failed to prove genuineness of gift. A.O. made addition under section 68. Donor had no capacity to give any gift to assessee, as there was only meagre balance appearing in his bank account and it was not clarified as to how just prior to giving of gift to assessee. there was clearing entry of equivalent amount of gift. Assessee failed to prove her relation with donor and his creditworthiness, addition under section 68 was justified. (A.Y.2004–05)
Archana Pandey (Smt.) v.ITO (2013) 144 ITD 218 / 34 Taxmann.com 88 (Agra)(Trib.)

S.68: Cash credits–Gift–Creditworthiness not proved- Addition was held to be justified.
In case of a gift, it is necessary not only to establish identity of donor, but also creditworthiness of donor to show that money belongs to donor. Assessee had received gift of two sums from his brother’s wife ‘A’ settled in UK. Statement of ‘A’ revealed that she was not a person of means or knowledge about her financial affairs and her finances were managed by her husband. Facts revealed that she had no independent source of income and money was not given from her own bank account or her sources, but stated to have been given out of a loan. On facts, creditworthiness of donor was not proved and, therefore, amounts of gift would be added to assessee’s income under section 68.( A. Y. 2006-07)
Sat Pal John v. ITO (2013) 34 taxmann.com 95 / 2013) 143 ITD 668 (Asr.)(Trib.)

S.68: Cash credits-Cash deposit in the savings account-Genuineness was proved-Addition was deleted.
The assessee had made certain cash deposit in his saving account with a bank. The assessee explained that this account was opened to help one ‘S’, who was managing the Indian Oil Corporation’s retail outlet. The retail outlet was company-owned and company-operated and ‘S’ was working on job contract basis. The assessee helped him to purchase demand drafts favouring Indian Oil Corporation to effect payments towards the cost of diesel and petroleum products and all the cash deposits made by the assessee were in fact moneys handed over by ‘S’ for the purchase of demand drafts. The Assessing Officer did not accept explanation of the assessee and treated the deposited amount as unexplained cash credit. The Commissioner (Appeals) found that the facts as stated by the assessee were true and supported by ‘S’. He, accordingly, deleted the addition. The Tribunal held that the details of the savings bank account the assessee had with Tamilnad Mercantile Bank Ltd., which was the subject-matter of dispute, were very much reflected in the books of account of the assessee. In the statement of accounts filed by the assessee along with his return of income, the savings bank account balances were also reflected. Therefore, there cannot be a case that the assessee has not disclosed these materials before the Assessing Officer. He has not suppressed any fact. He explained the reason why the amounts were deposited in his savings bank account. But, the Assessing Officer without making any useful enquiry, just made the addition by rejecting the explanations offered by the assessee. Further the most important point to be seen in the present case is that every cash deposit made in the disputed savings bank account of the assessee was immediately withdrawn for the purpose of purchasing the demand drafts in the name of Indian Oil Corporation Ltd. These details, available in the bank passbook itself supported the contention of the assessee beyond any doubt. All the demand drafts were purchased in favour of Indian Oil Corporation Ltd. and they were all purchased for the purpose of running the fuel station managed by ‘S’. Further ‘S’ also had explained these things in a detailed manner. Therefore, when all these matters are crystal clear as per the books of account as well as in the bank statement and the other particulars, it is very reasonable on the part of the Commissioner (Appeals) to come to the conclusion that the assessee has explained the nature of these cash deposits found in the savings bank account maintained by the assessee with Tamilnad Mercantile Bank Ltd. Therefore, the Commissioner (Appeals) is justified in deleting the said addition. (A.Y. 2007 – 2008)
R.V. Jansi (Smt.) v. Addl. CIT (2013) 36 taxmann.com 506 / (2013) 144 ITD 395(Chennai)(Trib.)

S.69: Unexplained investments-Assessment-Where the books of accounts are not rejected additions on the basis of valuation report of DVO cannot be made. [S.143(3)]
The investment made by assessee in building a petrol pump was duly recorded in his books. The AO made a reference to the DVO who enhanced the cost of construction. On the basis of valuation report the AO made addition under section 69 of the Act. However the books of accounts were not rejected. On appeal following the ratio in Sargam Cinema v. CIT (2010) 328 ITR 513 (SC) the Court held that addition cannot be sustained where assessee’s books are not rejected.(ITA no 522/2009 (O&M) dt 16-09-2013). (A.Y.2005-06)
Nirpal Singh v.CIT (2013) The Chamber’s Journal –October-P.82 (P&H)(HC)

S.69: Unexplained investments–Addition based on AIR information:
Assessee, a foreign company is in business of FIIs/Sub Account (Investment in Indian Capital Market). Being a non-resident corporate entity, assessee is registered with SEBI as a sub account holder under FII "Threadneedle Investment Fund ICVC Asia Fund’ for carrying out investment activity in Indian market. During course of assessment proceedings AO asked assessee to reconcile AIR data provided by BSE of various transactions reflected in assessee’s name. It was assessee’s contention that transaction reported by AIR does not pertain to assessee and moreover details furnished by AIR do not indicate any specific information with reference to contact number, scrip name, quantity etc. Assessee pleaded its inability to reconcile transactions on one-to-one basis in absence of complete details. AO without referring to explanations of assessee or examining nature of details came to a conclusion that assessee made investment in scrip ‘Steel Authority of India’ of 4,85,909 shares valued at Rs.11,32,38,770/- on 17.12.2007 and as this transaction was not reconciled or explained, amount was treated as unexplained investment u/s 69 and taxed at rate of 40 percent. Held, just because an AIR report was generated indicating PAN No. of assessee, onus does not shift completely to assessee. It is responsibility of AO to examine complete details before asking for reconciliation and whether transactions were indeed undertaken or not. AIR report also does not contain any authentication but since it is generated by Department, credit was given by AO and DRP about its authenticity. Matter require re-examination by AO by giving due opportunity to assessee. Therefore, for proper examination and coming to a conclusion on facts, orders of DRP and order of AO in this regard were set aside and assessment was restored to file of AO for fresh consideration (A.Y. 2008 – 2009)
Threadneedle Investment Fund v. ADIT(IT) (2013) 56 SOT 214 (Mum.)(Trib.)

S.69A: Unexplained Money-Search and seizure-Hand written note found during search of third person-Statement of third person was not supplied-Matter set aside for re adjudication. [S.132]
Hand written note found during search of third person stated that he had taken cash from assessee for transfer of a tenanted property taken on rent. As per the evidence available with the Revenue, the transaction of a change in possession of the property had taken place and the same being undisclosed or not explained as to its source,the corresponding amount was added under section 69. Commissioner (Appeals) deleted the addition primarily on the ground that there was no corroborative evidence to show that the assessee was in possession of such a huge amount. Before the Tribunal the assessee contended that he has not been supplied with the copy of the statement by third person or of having not been given an opportunity for cross examining them. The Tribunal in the interest of justice restored the matter back to the A. O. for re adjudication. (A.Y.2005-06)
ITO v. Legal Heirs of Nazmin Jamal (2013) 58 SOT 321 (Mum.)(Trib.)

S.69B: Amounts of investments not fully disclosed in books of account-Hypothecation-Statement furnished to banking authorities. [S.145]
Merely relying upon statement furnished to banking authorities, additions cannot be made on account of difference arising in quantity and value of stock shown in books of account and statement furnished to banking authorities, admittedly to avail higher credit facilities. Stock was only hypothecated and not pledged. Stock was not kept in lock and key of the bank. (A.Y. 2009 – 2010)
Riddhi Steel & Tubes (P.) Ltd. v. ACIT [2013] 36 taxmann.com 369 / 144 ITD 397 (Ahd.)(Trib.)

S.72: Carry forward and set off–Windmill business-Losses of eligible business can be set off against other business. [S.80IA]
Loss from windmill business, which fell under category of eligible business as per section 80-IA, could be set off against other heads of income of assessee. (A.Y.2008-09)
DCIT v. V.B. Koujalgi (2013) 58 SOT 15(URO) (Bang.)(Trib.)

S.72: Carry forward and set off-Business losses-Profit from speculation business-Normal business loss is allowed to be set off against speculation business profit.[S.73].
The Assessing Officer treated the gains arising on sale of shares as profit in speculation business in absence of any evidence of delivery of shares. While adjusting the business loss incurred during the year, A.O. brought the balance income to tax as income from speculation business in the hands of the assessee and did not allow set off of business losses carried forward against this assessed income. CIT(A) confirmed the same that speculative business profit could not be set off against business losses of the current year as well. The honourable ITAT direct when an assessee has two distinct businesses and there is a loss in one business while profit in the other business, the loss can be set off against profit of the other business unless there is a statutory restriction of such a set off. Restriction set out in section 73 relates only to losses of speculation business being set off against profits of non-speculation business. Therefore in the absence of specific restriction on set off of normal business losses against profits of speculation business the same cannot be inferred or assumed. S 72(1) provides that non-speculation business loss can be set off against "profits and gains from any income”. the approach of A.O. was unsustainable in law and he was to be directed to allow set off of normal business losses against speculation business profits. (A.Y. 2005-06)
Ramshree Steels (P.) Ltd. v.ITO (2013) 144 ITD 227/35 Taxmann.com 273 (Luck.)(Trib.)

S.73: Losses-Speculation business-Business of purchase and sale of shares by assessee being speculation business, loss therefrom was entitled to be set off of against profits of business of company from loans and advances.
The assessee’s principle business was earning interest on loans and advances. From the interest so earned, it also carried on business of purchase and sale of shares. The assessee in its return set-off the loss in share trading activities against the profits earned from the interest on the advances and loans. The AO reopened the assessment on the ground that the business of the petitioner was to earn income from interest on advances and loans, the share trading activity of the petitioner was ‘speculative business’ as such and loss there from is not liable to be adjusted towards business profit of the company and income had thus escaped assessment.
On a Writ Petition by the assessee, the High Court observed that section 73 provides for set off the loss of speculation business against the profits and gains of another speculation business of the assessee. By virtue of the Explanation to Section 73, a company, whose principal business is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. It is admitted between the parties that principal business of the petitioner is earning interest on the advances and loans. It also carries on business of purchase and sale of shares from the income derived from the interest. Under the Explanation to Section 73, the business of purchase and sale of shares by the petitioner is speculation business. Accordingly, following its own decision in the case of CIT v. Narain Properties Ltd. [2012] 209 Taxman 274, the High Court held that the assessee is covered under Explanation to section 73 of the Act and is entitled to set off the losses from sale and purchase of the share against the profits of the business of the company from loans and advances. Thus the reassessment proceedings were quashed. (A.Ys. 1998-99 to 2000-01)
Usha Politex Ltd. v. ITO (2013) 217 Taxman 113 (All.)(HC)

S.73: Losses – Speculation business–Gross total income:
The Assessee had shown income from house property at Rs.35,73,950/-, income from other sources at Rs.24,92,129/-, capital gain on sale of flat at Rs.,62,285/- and loss from sale of shares at Rs.3,25,23,981/-. The Assessee contented that main source of income was income from house property and therefore, explanation to section 73 was not applicable. The Tribunal held, that since the figure of loss in absolute terms in share trading was higher than income from other sources taken together, the explanation to section 73 would be applicable. The assessment order was upheld. (A.Y. 2001-2002)
DCIT v. Savlani Trading & Investments Co. (P) Ltd. (2013) 56 SOT 208 (Mum.)(Trib.)

S.74: Losses – Capital gains-S.50-Depreciable assets-Block of assets – Long-term capital loss can be set off against short-term capital gain calculated u/s. 50.[S.50]
The assessee sold its office premises and secured long-term capital gains. However, being a depreciable asset, gains were computed in terms of section 50 of the Act as short-term capital gain. The AO disallowed the claim of the assessee to set off its carry forward long term capital loss against the aforesaid long term capital gains u/s. 74 of the Act. The CIT(A) upheld the order of the AO. On further appeal, the Tribunal allowed the claim of the assessee to set off its long term capital loss in terms of Section 74 of the Act by following its decision in the case of Manali Investments v. ACIT [2011] 45 SOT 128 (Mum)(Trib).
The High Court, following its Order in the case of Manali Investments, dismissed the departmental appeal thereby permitting the set off of bought forward long term capital loss (A.Y. 2006-07)
CIT v. Pursarth Trading Co. (P.) Ltd. (2013) 217 Taxman 113 (Bom.)(HC)

S.79: Carry forward and set off losses – Change in share holdings – Companies in which public are not substantial interested -Carry forward losses cannot be denied on ground of change in shareholding due to merger, if management of company remains the same.
98% shares of the assessee company were held by one IIPL. Same set of people were managing both the assessee and IIPL. On merger of IIPL with the assessee, the AO disallowed the carry forward of losses, u/s. 79, holding that there had been a change in shareholding. The CIT(A) and Tribunal held that there was no change in the management of the company and it remained with the same set of people who were earlier exercising control.
On appeal by the department the High Court, held that the holding company-IIPL was amalgamated with the assessee-company, however, the shareholders of that holding-company continued to be shareholders of the assessee-company and in these circumstances, the prohibition from carrying forward the losses placed by section 79 does not operate (A.Y. 2004-05).
CIT v. Select Holidays Resorts Pvt. Ltd. (2013) 217 Taxman 110 (Delhi.)(HC)

S.80HHC: Export business–Deduction allowable on counter sale to foreigners against foreign exchange.
The High Court following its own judgment in the case of Ram Babu and Sons v. Union of India [1996] 222 ITR 606 (All.)(HC) which has been approved by the Apex Court in the case of CIT v. Silver & Arts Palace [2003] 129 Taxman 56 (SC)held that counter sale to foreigners against foreign exchange are export sales and benefit of section 80HHC has to be given to the assessee (A.Y. 1989-90)
Kraft Palace v. CIT (2013) 217 Taxman 106 (All.)(HC)

S.80HHC: Export business–admissible to exporter of cut and polished marble blocks.
Following its own Order in the case of the assesse for the A.Y. 2003-2004, the High Court held that the assessee is entitled to claim deduction u/s. 80HHC in respect of cut and polished marble blocks (A.Y. 2004-05).
Galaxy Exports v. CIT (2013) 217 Taxman 108 (Raj.)(HC)

S.80HHC: Export business–assessee following cash system of accounting–benefit of cash incentives–allowable even in the year subsequent to the year of export.
The assessee firm engaged in the business of manufacture and export of hand tools follows mercantile system of accounting. In A.Y. 1992-93, assessee received cash incentive and IPRS. In view of the amendment to the Finance Act, 1990 wherein sub section (iiib) was retrospectively inserted in section 28 of the Act w.e.f. 01.04.1967, cash assistance received or receivable was to be treated as income chargeable to tax. The AO included the said amounts in the income of the assessee for AY 1992-93.
On appeal by the assessee, the CIT(A) excluded the export incentives and IPRS from the A.Y. 1992-93, with a direction that the amount should be assessed in A.Y 1989-90 i.e. in the year in which the incentives became receivable. The department filed an appeal to the Tribunal which held that though the said export incentives had become receivable in the A.Y. 1989-1990, but the same were liable to be included in the total income for the A.Y. 1992-93.
In its appeal to the High Court, the assessee submitted that it was following cash system of accounting insofar as export incentives were concerned and should be allowed deduction u/s. 80HHC in A.Y. 1992-93. It was submitted that the deduction under Section 80HHC of the Act had to be calculated with reference to export turnover and total turnover of the A.Y. 1989-90 but the same was admissible in the year of actual receipt of export incentive i.e. A.Y. 1992-93. The High Court relying on the decision of the Supreme Court in the case of B. Desraj v. CIT [2008] 301 ITR 439 allowed the appeal filed by the assesse [A.Y. 1992-1993]
Barcleys International v. CIT (2013) 217 Taxman 110 (P&H.)(HC)

S.80HHC: Export business – 90% of sales tax subsidy and discount received on early payment – cannot be reduced from business profit.
During the year, the assessee had received sales tax subsidy and discounts from customers for early payments during the year. The AO reduced 90% of these receipts in view of clause (baa) of Explanation to section 80HHC of the Act, which was upheld by the CIT(A). On cross appeal to the Tribunal, it was held that sales tax subsidy and discounts is not in the nature of clause (baa) and thus directed the AO not to exclude 90% of the said receipts from “profits of the business” for the purpose of computing deduction u/s 80HHC of the Act.
The High Court dismissed the departmental appeal and held that sales tax subsidy and discount cannot be reduced from business profits. The High Court observed that the decision of the Supreme Court in the case of CIT v. K. Ravindranathan Nair (2007) 295 ITR 228 was not applicable to the present case.
CIT v. Abhishek Industries Ltd. (2013) 217 Taxman 104 (P&H.)(HC)

S.80HHC: Export business-DEPB license to be included for working out deduction.
The High Court, in appeal by the revenue, held that in view of the decision of the Supreme Court in the case of Topman Exports v. CIT (2012) 342 ITR 49 wherein it was held that DEPB is a ‘cash assistance’ receivable by assessee and is covered under clause (iiib) of section 28 of the Act, the Tribunal was right in directing the AO to include DEPB license for working out deduction u/s. 80HHC of the Act [A.Y. 1997-1998].
CIT v. Cadila Health Care Ltd. (2013) 217 Taxman 107 (Guj.)(HC)

S.80HHC: Export business – Interest income cannot form part of export income and thus no deduction can be claimed u/s. 80HHC.
Assessee received certain amount by way of interest. It claimed that interest income in question was also from export income and, therefore, same was part of business profit for deduction u/s. 80HHC. The AO did not agree with assessee and consequently deducted amount of interest from business profit by treating same as not directly related to business activity of assessee. The CIT(A) allowed the ground raised by the assessee. The Tribunal, however, held that amount received towards interest could not be business income and, denied deduction u/s. 80HHC on interest income.
On appeal by the assessee, the High Court confirmed the findings of the Tribunal and held that the Tribunal was absolutely justified in coming to a conclusion that the said amount cannot be business income.
Ravindra Heraeus (P.) Ltd. v. ACIT (2013) 217 Taxman 109 (Raj.)(HC)

S.80HHC: Export business-Premium received on transferring export licence does not involve any earning of foreign exchange and does not result in to profits attributable to export profits hence no deduction is allowable. [S.28(iv)]
Premium received on transferring export licence does not involve any earnings of foreign exchange and does not result in profits attributable to an export activity. Hence, no deduction under section 80HHC is allowable on the same. (A.Y. 2001-02)
CIT v. Garniwal Exports (P.) Ltd. (2013) 356 ITR 432 (Karn.)(HC)

S.80HHC: Export business–Trading–Manufacturing- Deduction had to be allowed only from net profit-Since there was net loss, the claim of deduction was to be disallowed.
Assessee had earned profit from trading export and there was loss from manufacturing export claimed deduction under section 80HHC ignoring loss from manufacturing export. Held, the deduction had to be allowed only from net profit from both activities and since there was net loss, the claim of deduction was to be disallowed. (A.Y.1999-2000)
KEC International Ltd. v. DCIT (2013) 58 SOT 18 (URO) (Mum.)(Trib.)

S.80IA: Industrial undertakings-Infrastructure development- Contract to effect repairs to infrastructure-mere works contract not eligible for deduction.
The assessee was a contractor for marine, mechanical, civil, underwater works and supplier of machinery and equipment on hire. It had entered into an agreement with Inland Waterways Authority of India under which it had undertaken work of construction of permanent banks/protection wall of two canals in Kerala. It claimed deduction u/s. 80-IA for maintenance of infrastructure facility. The AO held that the contract in question was a works contract and, therefore, the assessee was not entitled to the benefit u/s. 80-IA. The CIT(A) and Tribunal upheld the order of the AO.
On appeal by the assessee, the High Court observed that taking note of the nature of the work executed by the assessee, it is a works contract. It is not a case where assessee has invested money in development of infrastructure or operating and maintaining an infrastructure. It is merely an agreement entered into for a period of three years to effect repairs to infrastructure by construction of permanent bank. Accordingly, the High Court held that the contract is a works contract and deduction u/s. 80-IA cannot be allowed. (A.Y. 2005-06)
Yojaka Marine (P.) Ltd. v. ACIT (2013) 217 Taxman 101/92 DTR 54 (Karn.)(HC)

S.80-IA: Industrial undertakings-Infrastructure development–Developer –Contractor:
Assessee-company was in business of construction and had carried out construction of bridges of certain Government Organizations. As per assessee, income from eligible business was 100 percent exempt in view of provisions of section 80-IA. AO held that assessee was not a "Developer" but income was derived as a "Work Contractor", hence not eligible for deduction u/s 80IA. The Tribunal held that, an enterprise had to enter into an agreement with Central or State Government or a Local Authority or any Statutory Authority. Infrastructure facility belonged to Government. But enterprise which was developing or constructing infrastructure facility was to be owned by a Company registered in India. Act also says that an enterprise which was constructing or developing infrastructure facility could be a consortium of such companies. Such an arrangement was eligible for claim of deduction u/s 80IA. Few Circulars had been issued by CBDT through which it has also been clarified, that benefit of impugned deduction was available to an enterprise which either develops or maintains or operated or executed combination of these three, inter alia as a Build, Operate and Transfer (BOT), or, Build, Own, Operate and Transfer (BOOT), or, Build, Own, Lease and Transfer (BOLD) basis or similar other basis where ultimately infrastructure facility so constructed is ultimately transferred to Government or Public Authority, then such an enterprise is within ambits of qualification of deduction. Explanatory memorandum to Finance Act, 2007, states that purpose of tax benefit has all along been to encourage investment in development of infrastructure sector and not for persons who merely execute civil construction work. Thus, there was a distinction between "developer" and a "contractor". It was wrong on part of AO to hold that assessee had merely acted as a contractor. By analyzing the nature of work executed by assessee, it could be said that assessee had acted as a developer. An enterprise which was either developing or operating or maintaining infrastructure facility was required to be owned by a company or a consortium of companies duly registered in India. Act does not prescribe that infrastructure facility was to be owned by such an enterprise. Infrastructure facility was always property of Government and an enterprise was bound by agreement to transfer same after settled period. Assessee’s execution of work was development of infrastructure facility. Assessee had executed construction of infrastructure facility in respect of Government Projects. Hence it was a factual error on part of AO to say that assessee had entered in some contract with few private parties. Therefore, assessee was eligible for the deduction u/s 80IA. (A . Y. 2001-02)
Sugam Construction (P.) Ltd. v. ITO (2013) 56 SOT 45(URO) (Ahd.)(Trib)

 
 
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