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Review of landmark Review of landmark judgmentsjudgments

Presented byPresented by::Chythanya K.K., B.com, FCA, LLB Chythanya K.K., B.com, FCA, LLB Partner, Raghuraman & ChythanyaPartner, Raghuraman & ChythanyaAdvocates, BANGALOREAdvocates, [email protected]/26564106/984411418441203610/26564106/9844114184

Raghuraman & Chythanya

Topics chosen Topics chosen

1.1. FirmFirm2.2. AOPAOP3.3. DepreciationDepreciation4.4. InterestInterest5.5. 43B43B6.6. TDSTDS7.7. ConcealmentConcealment8.8. Deemed dividendDeemed dividend


Topics chosen – contd.. Topics chosen – contd..

8. FBT8. FBT

9. Fresh claim after 9. Fresh claim after filingfiling

of returnof return


FirmFirm

Firm paying salary to HUF as a working partner : CIT v. Devanand Automobiles [2008] 304 ITR 50 (Karn), CIT v. Golden CIT v. Golden Tough 138 Taxman 190 (Mad.) & Tough 138 Taxman 190 (Mad.) & ITO v. Vegunta ITO v. Vegunta Surya Prakasa Rao Sons & Co. Surya Prakasa Rao Sons & Co. (Visakhapatnam) (Visakhapatnam) [2004] 88 ITD 322 (Visakhapatnam) [2004] 88 ITD 322 (Visakhapatnam)

Since the it could not be established that Since the it could not be established that interest paid to partners on their Current interest paid to partners on their Current accounts related to the capital contribution and accounts related to the capital contribution and since the deed was silent on payment of interest since the deed was silent on payment of interest to balance in current account, the interest is not to balance in current account, the interest is not allowable as a deduction under section 40b : allowable as a deduction under section 40b : Novel Distributing Enterprises V DCIT & Another Novel Distributing Enterprises V DCIT & Another (2001) 251 ITR 704 (2001) 251 ITR 704


FirmFirm

The normal practice is to prepare the accounts at the end of the year, because it is difficult to arrive at a profit or loss on each day’s transaction. In CIT In CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42, SC held v. Ashokbhai Chimanbhai [1965] 56 ITR 42, SC held that profits do not accrue from day-to-day and that profits do not accrue from day-to-day and unless the right to profit comes into existence, unless the right to profit comes into existence, there is no accrual of profits, i.e., till the accounts there is no accrual of profits, i.e., till the accounts are prepared at the end of the term as agreed. are prepared at the end of the term as agreed. Thus, the withdrawals were not out of the share of Thus, the withdrawals were not out of the share of profit, etc., that accrued to the partners : profit, etc., that accrued to the partners : ARCHITECTURAL ASSOCIATES v. ACIT [2005] ARCHITECTURAL ASSOCIATES v. ACIT [2005] 277 ITR [A.T.] 35 [HYD]277 ITR [A.T.] 35 [HYD]

Contra : Contra : Deval Utensils Factory vs. DCIT [2005] Deval Utensils Factory vs. DCIT [2005] 98 TTJ [Pune] 50198 TTJ [Pune] 501


FirmFirm

Netting off principles as per 183 ITR 1 still valid

Remuneration paid to a partner cannot be disallowed on ground that he was not a working partner once he is found to be supervising and controlling business activities, from a different place : Vivek Ispat Udyog v. : Vivek Ispat Udyog v. ITO (2005) 95 TTJ (ITAT –Del.) 1090 ITO (2005) 95 TTJ (ITAT –Del.) 1090

When assessee is neither paying nor making provision to the When assessee is neither paying nor making provision to the extent permissible under the deed, it is implied that partners extent permissible under the deed, it is implied that partners have agreed to take a sum which is lower and as appearing have agreed to take a sum which is lower and as appearing in the partnership accounts : in the partnership accounts : SRI BALAJI AGENCIES vs. SRI BALAJI AGENCIES vs. ITO (2007) 107 TTJ (CHENNAI) 658ITO (2007) 107 TTJ (CHENNAI) 658


FirmFirm

The assessee was not carrying on any other business and had no other source of income. Thus, whatever income arising to the assessee was business income and, hence, computation was in accordance with Chapter IV – D. Thus, it could be said that such cash credit formed part of book profit for the purpose of computation of remuneration. It is necessary to include such cash credit in the book profit for the purpose of allowing remuneration to the partners which was authorized by and in accordance with the terms of partnership deed : DEEPA AGRO AGENCIES v. ITO (2006) 154 TAXMAN – MAGAZINE 80 (BANG.)

Same was held in CIT v. S.K. Srigiri and Bros. Same was held in CIT v. S.K. Srigiri and Bros. [2008] 298 ITR 13 (Karn) HC[2008] 298 ITR 13 (Karn) HC


FirmFirm

Payments to the partners not in their capacity as partners, but made for the specific services rendered by them

- CIT v. Rajam Ramaswamy and Sons [2008] 298 CIT v. Rajam Ramaswamy and Sons [2008] 298 ITR 325 (Mad) HC ITR 325 (Mad) HC

- CIT v. Gemini Productions [1977] 110 ITR 847 CIT v. Gemini Productions [1977] 110 ITR 847 Mad.Mad.

- CIT v. Chitra Kalpana [1988] 169 ITR 678 APCIT v. Chitra Kalpana [1988] 169 ITR 678 AP


AOPAOP

Meeting of minds of members, common design and common purpose creates AOP. A Joint venture to provide project consultancy services where there is allotment of work to members. AOP is created despite separate billing, members having separate bank accounts and each member bearing its own costs and expenses : : Geocuonslt ZT GmbH, In re [2008] 304 ITR 283 (AAR)


AOPAOP

Four persons joining together, purchasing land and raising commercial complex thereon with no equal contribution either for purchase of land or for construction of complex. No interest was paid to member contributing in excess and no interest charged from member contributing less. Loans were raised collectively, a common bank account was opened, all the four members pooled their resources together for construction of commercial complex, and sold part of the building to repay the loans as rental income proved insufficient for the purpose. This is an adventure in the nature of trade, hence profits from sale of building was assessable in the hands of AOP as business income : ACITvs. S. Prabhakar Kamath & Ors. [2008] 116 TTJ (Bang) 817


AOP - EssentialsAOP - Essentials

Two or more persons as held in the case of CIT v. Two or more persons as held in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC)Indira Balkrishna [1960] 39 ITR 546 (SC)

Voluntary Combinations as held in the case of CIT v. G. Voluntary Combinations as held in the case of CIT v. G. Murugesan and Bros [1973] 88 ITR 432 (SC)Murugesan and Bros [1973] 88 ITR 432 (SC)

A common purpose/common action with object to A common purpose/common action with object to produce profit or gains as held in the case of CIT v. produce profit or gains as held in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC). However, the Indira Balkrishna [1960] 39 ITR 546 (SC). However, the object to produce profit or gain is no longer a sine qua object to produce profit or gain is no longer a sine qua non with the insertion of the Explanation to Sec 2(31)non with the insertion of the Explanation to Sec 2(31)

Combination of joint enterprise as held in the case of Combination of joint enterprise as held in the case of Mohamed Noorullah v. CIT [1961] 42 ITR 115 (SC)Mohamed Noorullah v. CIT [1961] 42 ITR 115 (SC)

Some kind of scheme for common management as held Some kind of scheme for common management as held in the case of CIT v. Cloth Semi-Wholesalers [19560 29 in the case of CIT v. Cloth Semi-Wholesalers [19560 29 ITR 500 (Nag.)ITR 500 (Nag.)


Depreciation-IntangibleDepreciation-Intangible

Stock exchange membership card - Depreciation

- Yes : Farrokh Irani / D.Z. Patel [2005-2006] 39-A BCAJ 622

- Yes : Vyomit Shares, Stocks & Investments (P.) Yes : Vyomit Shares, Stocks & Investments (P.) Ltd. v. DCIT [2007] 106 ITD 408Ltd. v. DCIT [2007] 106 ITD 408 [Mum] [Mum]

Goodwill:

- No : GURUJI ENTERTAINMENT NETWORK LTD No : GURUJI ENTERTAINMENT NETWORK LTD vs. ACIT (2007) 108 TTJ (DEL) 180vs. ACIT (2007) 108 TTJ (DEL) 180

- No : Bharatibai Vyas v. ITO 97 ITD 248 AhmNo : Bharatibai Vyas v. ITO 97 ITD 248 Ahm


Depreciation-ComputerDepreciation-Computer

Computer software is a ‘plant’ owned by person purchasing it though as a licensee, hence eligible for depreciation @ 25 percent under s. 32(1)(i) r/w Appendix I : : Amway India Amway India Enterprises vs. DCIT (2008) 114 TTJ (Del) (SB) 476Enterprises vs. DCIT (2008) 114 TTJ (Del) (SB) 476

UPS attached to computers is a source of alternative supply UPS attached to computers is a source of alternative supply of power to computers and applying the functional test, is of power to computers and applying the functional test, is part of power supply system and not the computer system : part of power supply system and not the computer system : Nestle India Ltd. vs. DCIT [2007] 111 TTJ (Del) 498Nestle India Ltd. vs. DCIT [2007] 111 TTJ (Del) 498

Router is part of computer : Router is part of computer : Routermania Technologies Routermania Technologies (P.) Ltd. v. ITO [2007 16 SOT 384 (ITAT – Mum.)(P.) Ltd. v. ITO [2007 16 SOT 384 (ITAT – Mum.)

Colour xerox machine is part of computer : Colour xerox machine is part of computer : ITO v. ITO v. SAMIRAN MAJUMDAR [2005] 280 ITR [A.T.] 74 [KOL]SAMIRAN MAJUMDAR [2005] 280 ITR [A.T.] 74 [KOL]


Depreciation-BuildingDepreciation-Building

Purchase of commercial space – cost attributable to undivided interest in land is not eligible for depreciation : DCIT v. Capital Cars P. Ltd. [2007] 295 ITR (AT) 224 (Delhi)


Depreciation-LeaseDepreciation-Lease

Circular no 9/ 23.3.1943 [HP] [HP]

Accounting Standard 19

Circular No.2 of 2001, dated February 9, 2001

ABB LTD v. IFCI (2006) 154 TAXMAN 512 (SC)ABB LTD v. IFCI (2006) 154 TAXMAN 512 (SC)

J. M. Shares & Stock broker vs. DCIT J. M. Shares & Stock broker vs. DCIT (2007) 109 TTJ (Mumbai) 311(2007) 109 TTJ (Mumbai) 311


InterestInterest

Proviso to section 36(1)(iii) - retrospective

The import of the proviso to section 36 (1) (iii) The import of the proviso to section 36 (1) (iii) is that the interest paid on the capital is that the interest paid on the capital borrowed for the purpose of acquisition of an borrowed for the purpose of acquisition of an asset till the date such an asset is first put to asset till the date such an asset is first put to use shall not be allowed as deduction. This is use shall not be allowed as deduction. This is borne out as a converse proposition in borne out as a converse proposition in Explanation 8 to section 43 (1) and a combined Explanation 8 to section 43 (1) and a combined reading of section 36 (1) (iii) and section 43 (1) reading of section 36 (1) (iii) and section 43 (1) shows that the same is in consonance with the shows that the same is in consonance with the law laid down by the Supreme Court in law laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167


InterestInterest

Proviso to section 36(1)(iii) - Prospective

- SWARAJ ENGINES LTD. v. JCITSWARAJ ENGINES LTD. v. JCIT [2005] 98 [2005] 98 TTJ [Chd.] 346 TTJ [Chd.] 346

- ALANKAR BUSINESS CORPORATION LTD ALANKAR BUSINESS CORPORATION LTD vs. DCIT (2006) 157 TAXMAN 232 vs. DCIT (2006) 157 TAXMAN 232 CHENNAICHENNAI

- DCIT v. Core Health Care Ltd. [2008] DCIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC)298 ITR 194 (SC)


InterestInterest

Interest free advance to sister concerns

- In the present case, the assessee borrowed the fund from the In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in such a case is really whether this interest free loan. The test, in such a case is really whether this was done as a measure of commercial expediency. was done as a measure of commercial expediency.

- The decisions relating to section 37 of the Act will also be The decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the applicable to section 36(1)(iii) because in section 37 also the expression used is “for the purpose of business”. It has been expression used is “for the purpose of business”. It has been consistently held in the decisions relating to section 37 that the consistently held in the decisions relating to section 37 that the expression “for the purpose of business” includes expenditure expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.immaterial if a third party also benefits thereby.

S.A.BUILDERS LTD vs. CIT (2007) 288 ITR 1 (SC)S.A.BUILDERS LTD vs. CIT (2007) 288 ITR 1 (SC)


43B43B

No distinction between employer’s contribution and employees’ contribution

- Hitech India P. Ltd. V. UOI (1997) 227 ITR 446 (AP)Hitech India P. Ltd. V. UOI (1997) 227 ITR 446 (AP)

- C.I.T. v. Madras Radiators and Pressings Ltd. C.I.T. v. Madras Radiators and Pressings Ltd. (Mad.) [2003] 264 ITR 620 (Mad.) (Mad.) [2003] 264 ITR 620 (Mad.)

- CIT v. Sabari Enterprises [2008] 298 ITR 141 CIT v. Sabari Enterprises [2008] 298 ITR 141 (Karn) HC(Karn) HC


43B43B

There is distinction between employer’s contribution and employees’ contribution

- JCIT vs. I.T.C. Ltd [2008] 115 TTJ (Kol) (SB) JCIT vs. I.T.C. Ltd [2008] 115 TTJ (Kol) (SB) 4545

- Gallium Equipment P Ltd v DCIT (2002) 81 ITD Gallium Equipment P Ltd v DCIT (2002) 81 ITD 358 Delhi358 Delhi

- NATIONAL PLASTIC INDUSTRIES LTD v. ITO NATIONAL PLASTIC INDUSTRIES LTD v. ITO (2007) 11 SOT 415 (ITAT-Mum.)(2007) 11 SOT 415 (ITAT-Mum.)

- IMP POWER LTD vs. ITO (2007) 107 TTJ IMP POWER LTD vs. ITO (2007) 107 TTJ (MUMBAI) 522(MUMBAI) 522


TDSTDS

Pass through cases

Loans are taken in individual capacities by directors but cheques taken by them in name of company and transferred to their accounts on same day. Repayment of loan and interest was routed through company. Company is bound to deduct tax at source : CIT vs. Century Building Industries P. Ltd. (2007) 293 ITR 194 (SC)


TDSTDS

Credit to account

Fact that the credit to any account is to be act that the credit to any account is to be deemed to be credit to the payee’s account deemed to be credit to the payee’s account also presupposes that payee can be also presupposes that payee can be ascertained. Therefore, this deeming fiction ascertained. Therefore, this deeming fiction can only be activated when the identity of can only be activated when the identity of the payee can be ascertained : the payee can be ascertained : IDBI vs. IDBI vs. ITO (2006) 104 TTJ 230 (MUMBAI)ITO (2006) 104 TTJ 230 (MUMBAI)


TDSTDS

Car rentals : 194C v. 194I?

- BSNL’ case 145 STC 91 SC

- AAR’s ruling in Dell International Services India (P.) Ltd, In re [2008] 172 Taxman 418


TDSTDS

Service tax

- A service provider is merely acting as an agent of the service provider is merely acting as an agent of the Government, and is not entitled to claim deduction on Government, and is not entitled to claim deduction on account of service-tax and therefore the analogy of sales-account of service-tax and therefore the analogy of sales-tax, excise duty, is not applicable : tax, excise duty, is not applicable : ACIT vs. Real Image ACIT vs. Real Image Media Technologies (P) Ltd. [2008] 116 TTJ Media Technologies (P) Ltd. [2008] 116 TTJ (Chennai) 964(Chennai) 964

- Circ 4/2008, dated April 28, 2008Circ 4/2008, dated April 28, 2008 : : Service tax paid Service tax paid by the tenant does not partake of the nature of “income” by the tenant does not partake of the nature of “income” of the landlord. The landlord only acts as a collecting of the landlord. The landlord only acts as a collecting agency for the Government for collection of service tax.agency for the Government for collection of service tax.

- Circular F.No. 275/73/2007-IT(B), dated 30.06.2008 Circular F.No. 275/73/2007-IT(B), dated 30.06.2008

[2008] 172 Taxman (BN)[2008] 172 Taxman (BN) : Circular 761 has no : Circular 761 has no application to section 194Japplication to section 194J


TDSTDS

Reimbursement of expenses

- Reimbursement of expenses is also liable to Reimbursement of expenses is also liable to TDS as per CBDT Circ No. 715 dated TDS as per CBDT Circ No. 715 dated 08.08.95. 08.08.95.

- No as per ITO Vs Dr Willmar Schwabe India No as per ITO Vs Dr Willmar Schwabe India (P.) Ltd. (95 TTJ 53) (Delhi ITAT)(P.) Ltd. (95 TTJ 53) (Delhi ITAT)


TDSTDS

Limitation for action under sec 201(1A)

- In terms of the decision of the Supreme In terms of the decision of the Supreme court in State of Punjab v. Bhatinda District court in State of Punjab v. Bhatinda District Co-op. Mil (P) Union Ltd. (2007) 11 SCC 363, Co-op. Mil (P) Union Ltd. (2007) 11 SCC 363, action must be initiated by the competent action must be initiated by the competent authority under the Act where no limitation authority under the Act where no limitation is prescribed, as in section 201, within that is prescribed, as in section 201, within that period of four years : period of four years : CIT v. NHK Japan CIT v. NHK Japan Broadcasting Corpn. [2008] 172 Broadcasting Corpn. [2008] 172 Taxman 230 (Delhi)Taxman 230 (Delhi)


TDSTDS

Advance rental

- Amount described in lease agreement as Amount described in lease agreement as security deposit-agreement providing for security deposit-agreement providing for reduction of security deposit every six reduction of security deposit every six months by amount of rent payable-security months by amount of rent payable-security deposit was in effect advance rent-tax to be deposit was in effect advance rent-tax to be deducted at source on entire security deducted at source on entire security deposit : CIT deposit : CIT vs. Reebok India Company vs. Reebok India Company (2007) 291 ITR 455 (Delhi)(2007) 291 ITR 455 (Delhi)


ConcealmentConcealment

Willful concealment is not an essential ingredient for attracting the civil liability : : DILIP N. SHROFF V. JCIT [20O7] 291 ITR 519 (SC)

Overruled in Union of India Vs M/s Dharmendra Textile Processors (Dated: September 29, 2008) : 2008-TIOL-192-SC


Deemed dividendDeemed dividend

Deemed dividend to be taxed in hands of

a)a) Recipient : Recipient : Circular No. 495 dated Circular No. 495 dated September 23, 1987 [1987] 168 ITR (St.) 87 September 23, 1987 [1987] 168 ITR (St.) 87

b)b) Interested person : CIT Interested person : CIT Vs. MUKUNDRAY Vs. MUKUNDRAY K. SHAH (2007) 290 ITR 433 (SC)K. SHAH (2007) 290 ITR 433 (SC)

c)c) Department circular when beneficial could Department circular when beneficial could run counter to law/SC decision : Dhiren run counter to law/SC decision : Dhiren Chemicals 254 ITR 554 SCChemicals 254 ITR 554 SC


Fringe Benefit TaxFringe Benefit Tax

Where employees are experts in their field and resident of other countries and they are brought to the rig by providing air tickets or their coming from their place of residence to the rig, the employer incurs the said expenditure as of necessity. It, therefore, clearly falls within the purview of the words “consideration for employment”. If fringe benefits are provided for consideration for employment, which is given or provided to the employee by way of an amenity, reimbursement or otherwise, clearly clause (a) of sub-section (1) shall be attracted : R & B Falcon (A) Pty. Ltd. v. Commissioner of Income-Tax [2008] 301 ITR 309 (SC)


Fresh claim after filingFresh claim after filing of return of return

1. In respect of deduction claimed after return filed, assessing authority has no power to entertain claim made otherwise than by way of revised return : GOETZE (INDIA) LTD. v. CIT [2006] 284 ITR 323 (SC)

2. The Apex Court has not laid down as a matter of law that there is bar for the Assessing Authority to entertain the claim for deduction otherwise than by filing a revised return : : UNIVERSAL SUBSCRIPTION AGENCY (P) LTD vs. JCIT (2007) 159 TAXMAN 64 (ALL.)


Fresh claim after filingFresh claim after filing of return of return

3 Apex court decision is applicable only to 3 Apex court decision is applicable only to brand new claims and not to enhanced brand new claims and not to enhanced claims : JCIT claims : JCIT vs. Hero Honda Finlease vs. Hero Honda Finlease Ltd. (2008) 115 TTJ (Del) (TM) 752Ltd. (2008) 115 TTJ (Del) (TM) 752

4. Apex court verdict does not dilute the power of appellate authorities : CIT v. Jai Parabolic Springs Ltd. [2008] 172 Taxman 258 (Delhi)

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