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Cash payment not sacrosanct for deduction
August, 11th 2008

Taxable income of business or profession is computed by deducting the expenditures from the receipts which are in the nature of income.

The onus for claiming expenditure as a deduction is on the taxpayer, showing that it was actually incurred and was wholly and exclusively in relation to business or profession.

In the present-day context one of the convenient modes of proving the fact of expenditure is to make payment by cheque, preferably account-payee cheque, to show the genuineness of payment and thereafter justifying its eligibility for deduction.

All payments by cheque need not necessarily be sacrosanct. The assessing officer (AO) can still verify the genuineness and the need for such expenditure, as held in the Schneider Electric India Ltd vs CIT (2008 171 Taxman 177 Delhi) case.

In this case, the expenditure towards commission was doubted by the AO and the deduction was denied while computing the total income. The tribunal found factually that there was no agreement between the taxpayer and the commission agent and there was no material on record to show that the commission agent procured any business to the taxpayer.

It was held that the payment by account-payee cheque by itself is not sufficient to discharge the onus of expenditure and the decision of the tribunal was affirmed by the court.

Payments made to an allied concern towards goods or services could be subjected to reasonable test as contained in Section 40A(2)(a) of the Income-Tax Act. The allied or sister concern for the purpose of applying this reasonable test is covered widely by clause (b) of Section 40A(2).

In CIT vs Paarel Imports & Exports (P) Ltd (171 Taxman 209), the taxpayer paid service charges to a consultancy firm in which its managing director and other directors were partners.

The services rendered by the allied concern were no different from what was done by the directors of the company.

On the basis of facts, the court held that the transaction towards claim of expenditure was only a device adopted to avoid tax which could not be allowed.

The expenditure by way of payment to allied concern was disallowed by applying the apex court decision in the McDowell & Co Ltd vs CTO (1985 154 ITR 148 SC) case.

Dominant object of trust

A charitable trust or institution recognised under Section 80 G enables its donors to claim the amount of donation as a deduction from their total income. The recognition under Section 80 G would be granted in the case of trusts or institutions which are eligible for exemption under Sections 11 and 12 or under Section 10(23C) of the Act. In Umaid Charitable Trust vs Union of India (2008 171 Taxman 94 Rajasthan), the benefit of Section 80 G was denied to the trust on the ground that the assessee trust incurred more than 5 per cent for religious purpose colouring and repairing of Lord Vishnus temple.

The court held the benefit of Section 80G could not be denied merely because the expenditure incurred was towards a particular religion.

Factually, the trust was not for any particular religion in this case and its dominant objects were charitable in nature and hence the decision favoured the assessee.

Liability for warranty

Dealers engaged in sale of household gadgets such as television sets, heaters, air-conditioners, refrigerators, air-coolers and computers give a warranty time within which the replacement of defective parts is made free of cost.

It is prudent that the dealers anticipate expenditure towards free replacements and, accordingly, make a provision in the books of account.

The issue whether such provision is eligible for deduction was positively decided in CIT vs Hewlett Packard India (P) Ltd (2008 171 Taxman 13 Delhi) and in CIT vs Jay Bee Industries (171 Taxman 386).

A liability in presenti is deductible in contrast to a liability in futuro.

A liability due to exchange fluctuation on a pending contract for supply became an issue in CIT vs Taiko Chander Nagar Chemicals (P) Ltd (171 Taxman 266).

The assessee obtained orders from foreign buyers with advance payment to be adjusted against supplies to be made.

The assessee had to supply in future more quantities than what was originally agreed due to rupee devaluation.

The assessee treated this excess quantity to be supplied as a trading loss. The court applying the Sutlej Cotton Mills Ltd (116 ITR 1) case declined the claim of the assessee.


Penalty for concealment

Submission of appropriate and sufficient evidence in tax proceedings provides a definite relief to the taxpayers. The consequence of admitting an item as income due to inadequacy of evidence in possession or inability to prove the genuineness of the claim was decided in V.V. Projects & Investments (P) Ltd vs Deputy CIT (2008 171 Taxman 62 AP).

The assessee acquired solar equipment, which was eligible for higher rate of depreciation, could not produce evidence or confirmation from the equipment supplier. Hence, the assessee withdrew the claim of depreciation and filed a revised return. The AO simply accepted the revised return and made a note in the assessment order that proceedings for concealment penalty under Section 271(1)(c) is initiated separately.

The court held that the assessment order did not reflect any satisfaction of AO as required under Section 271(1)(c) and, hence, the levy of penalty was set aside. Readers may note that to the ill-luck of the taxpayers, the Finance Act, 2008 has inserted sub-section (1B) to Section 271 with retrospective effect from April 1, 1989, to empower the AO and the Revenue to slap penalty even where the assessment order does not satisfy any detection of concealment or furnishing of inaccurate particulars by the taxpayer. It is enough to levy penalty based on any addition or disallowance in the assessment order.

Meaning of industrial undertaking

The Income-Tax Act contains so many definitions in Section 2 and still there are various terms which have been defined in respective sections by way of Explanations which could be applied only to that particular section and could not be imported to interpret any other provision of law.

Section 72A is an incentive provision meant for set off of accumulated loss and unabsorbed depreciation of companies engaged in amalgamation or demerger. It is applicable only to industrial undertakings and recently extended to banking companies also.

Whether hospitals when they undergo amalgamation or demerger can enjoy the benefit of Section 72A was discussed in Assistant CIT vs Apollo Hospitals Enterprises Ltd (171 Taxman 397).

The court held that the unabsorbed depreciation of the amalgamating company or the demerged company eligible for carry forward and set off by the successor amalgamating company or resulting company could not be applied to hospitals since they are not industrial undertakings.

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