Thursday, September 27, 2012
Notwithstanding Loan at High Rate of Interest, Share capital Gain cannot be assumed as Business Profit and will be treated as Capital Gains
A
capital investment and resale do not lose their capital nature merely because
the resale was foreseen and contemplated when the investment was made and the
possibility of enhanced values motivated the investment.
It
was held by the Gujarat High Court that the character of the transaction in
question to be one of capital gain and not an adventure in the nature of
business or trade and cannot be construed as business profits but to be
assessed as capital gains.
Interest paid by a branch of a Foreign Bank to its Head Office is deductible in the hands of the branch?
Interest paid by a branch of a Foreign Bank
to its Head Office is deductible in the hands of the branch?
CASE: ABN AMRO Bank NV vs. CIT
Sections: section 90 of the Income-Tax Act, 1961,
Facts
Calcutta High Court in its verdict opined
that the appellant before us is a foreign company
incorporated in Netherlands and having its principal branch
office in India. In course of its banking activities the appellant’s said
branch in India remits substantial funds to its head office as payment of
interest.
There is a continuous process
of the said branch receiving interest from its head office and other branches
and remitting of interest by
the branch to the head office
and other branches.
There are principally only two issues in this appeal, namely,
1. Whether interest payment made
by the Indian branch of the appellant to its head office abroad was to be
allowed as a deduction in computing the profits of the appellant’s branch in
India?
2. Whether in making such payment
to the head office, the appellant’s said branch was required to deduct tax at
source under Section 195 of the said Act?
Under section 90 of the Income-Tax Act, 1961,the Government of India has
entered into the above agreement with the government of Netherland for relief of tax and avoidance of
double taxation. The appellant is an assessee to whom such agreement applies.
Therefore, for the purpose of relief of tax which is related to avoidance of
double taxation, a more beneficial provision amongst rival provisions in the
agreement and the Act will apply to the assessee.
Therefore, if no tax is deductible under section 195(1) & section
40(a)(i) of the Income Tax Act , 1961 will not come in the way of the appellant
claiming such deduction as from its income. Therefore, in the circumstances the
appellant would be entitled todeduct such interest paid, as permitted by the
convention or agreement, in the computation of its income.
WHETHER TRANSACTION BETWEEN London head office of the assessee and its branch in India tantamount to Sale ?
WHETHER TRANSACTION BETWEEN London head office of the assessee and its branch in India tantamount to Sale ?
Case: Betts Hartley Huett and Co Ltd vs Commissioner of Income Tax,West Bengal-II Calcutta
Facts
A Division Bench was concerned with a transaction between the London head office of the assessee and its branch in India. The question before the court was whether it was sale. The court held in construing the transaction that the head office and the branch office being parts of the same entity there could not be a sale by the head office to itself, that is, the branch office.
Wednesday, September 26, 2012
Tax Residency Certificates (TRC) FOR NON-RESIDENT INVESTORS IN INDIA
Tax Residency Certificates (TRC) FOR NON-RESIDENT INVESTORS IN INDIA
All foreign investors will have to produce tax residency certificates (TRC) of their base nation to claim benefits under the double taxation avoidance treaty from April 1, 2013, says a government notification.
The amendments to the Income Tax Act, 1961, the Central Board of Direct Taxes (CBDT) said, will take effect from April 1, 2013 and will apply in relation to the assessment year 2013-14 and subsequent years.
The notification amends Section 90 and Section 90A of the Act dealing with taxation of foreign investment and tax benefits under the Double Taxation Avoidance Agreements (DTAAs). Currently, India has a total of84 DTAAs with foreign countries.
The TRC for availing tax benefits was proposed in the 2012-13 Budget, presented by the then Finance Minister Pranab Mukherjee.The TRC to be obtained by an assessee, not being a resident in India,from the Government of the country or the specified territory, shall contain the name of the assessee, status as to whether it is anindividual or company, its nationality and country wherein it is
registered or incorporated.
Besides, the TRC should also have the tax identification number of the assessee, its residential status for the purposes of tax, period for which the TRC is applicable and address of the assessee during that
period.
Under a clause in the DTAA entered into between two countries, the assessee can take the advantage of paying capital gains tax in either of the two nations.
Sunday, September 23, 2012
Development expense for website is revenue expenditure and amount advanced for it if become unrecoverable is allowable as “Bad Debt”
Development expense for website is revenue
expenditure and amount advanced for it if become unrecoverable is allowable as
“Bad Debt”
Case ; DCIT vs M/s Edelweiss Capital Ltd.
Section :28 of
the Income-Tax Act ,1961
Facts
The ITAT , Mumbai in this case was of the
view that if the expenditure on the development websites,
the expenditure could not have been regarded as capital expenditure since the website is put up for
the purposes of day-to-day running of the business
and even if one were to view that some enduring benefit is
obtained by the assessee, the benefit cannot be said to accrue to the assessee
in the capital field.
A website is
something where full information about the assessee’s business is given and it
helps the assessee’s customers in dealing with it. A website constantly needs updating, otherwise it
may become obsolete. It helps in the smooth and efficient running of the
day-to-day business. The expenditure would have been allowable as
revenue expenditure; as a corollary, when the website did not materialize, the
amounts advanced to the companies who were engaged to develop the websites, when they became irrecoverable,
can be written off and claimed as loss incidental to the business. The loss is
thus allowable as business loss in terms of section 28 of the Act
Friday, September 21, 2012
Is the expenditure incurred on payment of retrenchment compensation and interest on money borrowed for payment of retrenchment compensation on closure of one of the textile manufacturing units of the assessee-company revenue in nature?
Is the
expenditure incurred on payment of retrenchment compensation and interest on
money borrowed for payment of retrenchment compensation on closure of one of
the textile manufacturing units of the assessee-company revenue in nature?
Case : CIT
v. DCM Ltd. (2010) 320 ITR 307 (Delhi)
Facts
The company claimed deduction of retrenchment
compensation paid to employees of the unit which had been closed down and
interest on money borrowed for payment of retrenchment compensation.
Apex Court in CIT v. Prithvi Insurance Co. (1967) 63 ITR
632 and arrived at the conclusion that there was interconnection, interlacing and unity of control
and management, common decision making mechanism and use of common funds in respect of all the
four units.
The High Court was of the opinion that the
payment of compensation to workers on closure of a textile mill unit is treated as a revenue expenditure
since after closure of the unit, the remaining business continued and there was
inter-connection in the functioning of the different units. Therefore, it
follows that if compensation is paid to workers on closure of the entire
business, the same would be a capital expenditure.
Can the expenditure incurred by the assessee on techno-economic feasibility report for the manufacture of a new product be eligible for deduction under section 35D?
Can
the expenditure incurred by the assessee on techno-economic feasibility report
for the manufacture of a new product be eligible for deduction under section
35D?
Case : CIT
v. Tamil Nadu Road Development Co. Ltd. (2009) 316 ITR 380 (Mad.)
Section
: 35D of the Indian Income-Tax Act ,1961
The assessee-company engaged in
the business of implementation of the industrial policy and creation of
infrastructure facilities in the State of Tamil Nadu on a commercial framework
claimed deduction in respect of the expenditure incurred on account of
techno-economic feasibility report for the manufacture of new products. The
Assessing Officer disallowed the deduction treating it as a capital
expenditure. The Commissioner (Appeals) allowed the assessee's claim on the
finding that the expenses incurred were covered under section 35D of the Income-tax Act, 1961,
as the expenses were incurred to find out new ideas by conducting test studies and pilot studies
for improving the existing business and, therefore, could not be treated as
capital expenditure. This was confirmed by the Tribunal and the High
Court.
Can the valuation done by any authority of the State Government for the purpose of payment of stamp duty in respect of land or building be taken as actual sale consideration received by the purchaser?
Can the valuation done by
any authority of the State Government for the purpose of payment of stamp duty
in respect of land or building be taken as actual sale consideration received
by the purchaser?
Case Law : CIT v. Chandni Buchar
(2010) 323 ITR 0510 (Pun.& Har.)
Section : 50C of Income-Tax Act 1961
The Assessing
Officer added the difference between purchase price disclosed in the sale deed
and purchase price of the property adopted for the purpose of paying the stamp
duty to the total income of the assessee as income from unexplained sources.
The Commissioner of Income-tax (Appeals) deleted this addition by holding that
section 50C is a deeming provision for the purpose of bringing to tax the
difference as capital gain. Further, he also held that in the absence of any
legally acceptable evidence, valuation done for the purpose of section 50C
would not represent actual consideration passed on to the seller. The Tribunal also held that
valuation done by any State agency for the purpose of stamp duty would not ipso
facto substitute the actual sale consideration as being passed on to the
seller by the purchaser in the absence of any admissible evidence. The
Assessing Officer is obliged to bring on record positive evidence indicating the fact that the
assessee has paid anything more than the sum disclosed in the purchase
deed. In this case, the assessee has discharged the burden of proving the sale
consideration as projected in the sale deed by producing the original bank
statement.
The
High Court, therefore, held that the view taken by the Tribunal while accepting
the order of the Commissioner of Income-tax (Appeals) does not suffer from any
legal infirmity.
Can the valuation done by any authority of the State Government for the purpose of payment of stamp duty in respect of land or building be taken as actual sale consideration received by the purchaser?
Can the valuation done by
any authority of the State Government for the purpose of payment of stamp duty
in respect of land or building be taken as actual sale consideration received
by the purchaser?
Case Law : CIT v. Chandni Buchar
(2010) 323 ITR 0510 (Pun.& Har.)
Section : 50C of Income-Tax Act 1961
The Assessing
Officer added the difference between purchase price disclosed in the sale deed
and purchase price of the property adopted for the purpose of paying the stamp
duty to the total income of the assessee as income from unexplained sources.
The Commissioner of Income-tax (Appeals) deleted this addition by holding that
section 50C is a deeming provision for the purpose of bringing to tax the
difference as capital gain. Further, he also held that in the absence of any
legally acceptable evidence, valuation done for the purpose of section 50C
would not represent actual consideration passed on to the seller. The Tribunal also held that
valuation done by any State agency for the purpose of stamp duty would not ipso
facto substitute the actual sale consideration as being passed on to the
seller by the purchaser in the absence of any admissible evidence. The
Assessing Officer is obliged to bring on record positive evidence indicating the fact that the
assessee has paid anything more than the sum disclosed in the purchase
deed. In this case, the assessee has discharged the burden of proving the sale
consideration as projected in the sale deed by producing the original bank
statement.
The
High Court, therefore, held that the view taken by the Tribunal while accepting
the order of the Commissioner of Income-tax (Appeals) does not suffer from any
legal infirmity.
Can exemption under section 54B be denied solely on the ground that the new agricultural land purchased is not wholly owned by the assessee, as the assessee’s son is a co-owner as per the sale deed?
Can
exemption under section 54B be denied solely on the ground that the new
agricultural land purchased is not wholly owned by the assessee, as the
assessee’s son is a co-owner as per the sale deed?
Case: CIT v. Gurnam Singh (2010) 327 ITR 278 (P&H)
Section:
54B of Indian Income-Tax Act, 1961
Facts
A deduction under section 54B claimed
by the assessee in respect of the land purchased by him along with his son out
of the sale proceeds of the agricultural land. However, the AO denied the same on
the ground that the land was registered in the name of the assessee’s son.
The Tribunal observed that the
agricultural land sold belonged to the assessee and the sale proceeds were also
used for purchasing agricultural land. The possession of the said land was also
taken by the assessee. It is not the case that the sale proceeds were used for
other purposes or beyond the stipulated period. The only objection raised by
the Revenue was that the land was registered in the name of his son. Therefore, it cannot be said that
the capital gains were in any way misused for any other purpose contrary to the
provisions of law.
In
this case, the High Court concurred with the Tribunal’s view that merely
because the assessee’s son
was shown in the sale deed as co-owner, it did not make any difference.
It was not the case of the Revenue that the land in question was exclusively
used by the son. Therefore, the assessee was entitled to deduction under
section 54B.
Can freight subsidy arising out of the scheme of Central Government be treated as a “profit derived from the business” for the purposes of section 80-IA?
Can
freight subsidy arising out of the scheme of Central Government be treated as a
“profit derived from the business” for the purposes of section 80-IA?
Case: CIT v. Kiran
Enterprises (2010) 327 ITR 520 (HP)
Section 80-IA of the Income-Tax Act 1961
Section 80-IA provides for deduction in respect of profits and gains
derived from eligible business.
In this case, the Central Government had framed a scheme whereby
freight/transport subsidy was provided to industries set up in remote areas
where rail facilities were not available and some percentage of the transport
expenses incurred to transport raw material/finished goods to or from the
factory was subsidized.
The issue under consideration is
whether such freight subsidy arising out of the scheme of Central Government
can be treated as a “profit derived from the business” for the purposes of
section 80-IA.
On appeal, the High Court held
that the transport subsidy received by the assessee was not a profit derived
from business since it was not an operational profit. The source was not the
business of the assessee but the scheme of Central Government. The words “derived from” are narrower in
connotation as compared to the words “attributable to”. Therefore, the freight
subsidy cannot be treated as profits derived from the business for the purposes
of section 80-IA.
Does the Central Board of Direct Taxes (CBDT) have the power under section 119(2)(b) to condone the delay in filing return of income?
Does the Central Board
of Direct Taxes (CBDT) have the power under section 119(2)(b) to condone the
delay in filing return of income?
Case: Lodhi Property Company
Ltd. v. Under Secretary, (ITA-II), Department of Revenue (2010) 323 ITR 0441
(Del.)
Section : 19(2)(b)
of Income-Tax Act ,1961
Facts
The assessee filed
the annual return with one day delay. The delay was due to administration
process in the IT office as the representative of assessee was not received
correct guidance for locating the exact section where his IT return was to be
filed.
The issue under consideration is
whether the CBDT has the power under section 119(2)(b) to condone the delay in
filing return of income.
The High Court held that the Board has the
power to condone the delay in case of a return which was filed late and where a
claim for carry forward of losses was made. The delay was only one day and the
assessee had shown sufficient reason for the delay of one day in filing the
return of income. If the delay is not condoned, it would cause genuine hardship to the petitioner.
Therefore, the Court held that the delay of one day in filing of the return has
to be condoned.
Section
119(2)(b) empowers the CBDT to authorise any income tax authority to admit an
application or claim for any exemption, deduction, refund or any other relief
under the Act after the expiry of the period specified under the Act, to avoid
genuine hardship in any case or class of cases.
Whether Charter Fees paid to non-resident will attract the provisions of tax deduction at source under section 195 of Income-Tax Act ,1961
Does payment of
charter fee to a non-resident (for chartering fishing vessels), by way of
percentage of fish catch done outside the territorial waters of India but
brought to an Indian port for verification and valuation before dispatch of the
same to the non-resident, attract the provisions of tax deduction at source
under section 195?
Case: Kanchenjunga Sea Foods
Ltd. v. CIT & ITO (2010) 325 ITR 540 (SC)
Section
: 5(2) ,195& 201 of Income-Tax Act, 1961
Facts
An Indian company engaged in the sale and
export of sea foods entered into an agreement with a non-resident for
chartering two fishing vessels (trawlers) for an all-inclusive charter fee of
US $ 6,00,000 per vessel per annum. The charter fee was payable out of earnings
from the sale of fish and for this purpose, 85% of the gross earnings from the
sale of fish was to be paid to the non-resident company.
In this case , Supreme Court was of the view
that since the first receipt of 85% of the fish catch was in India, the
non-resident effectively received the charter fee in the shape of 85% of the
fish catch in India.
In light of the above, the income earned by
the non-resident was
chargeable to tax under section 5(2) of the Income-tax Act, 1961. The
Indian company was, therefore, liable to deduct tax under section 195 on the payment made
to the non-resident company. Since it had failed to deduct tax at source, it
was an assessee-in-default
under section 201.
It may be noted that TDS provisions under
section 195 are attracted
even if the charter fees is payable in kind, for example, as a percentage of
fish catch, as in this case.
Is admission fee paid by a company towards corporate membership of a club allowable as a revenue expenditure?
Is admission fee paid
by a company towards corporate membership of a club allowable as a revenue
expenditure?
Case Law: CIT v. Samtel Color Ltd. (2010) 326 ITR 425 (Delhi)
Section : 37(1)
of the Indian Income-Tax Act
Facts
Assessee claimed
the corporate membership fee paid to a club as revenue expenditure. The AO disallowed
the same and assessed the same as capital expenditure.
The Commissioner (Appeals) opined that though
the membership of the club provided the assessee a benefit which fulfils the
business purpose test, it also resulted in benefits to directors and executives
in their personal capacity. Accordingly, it directed the Assessing Officer to
disallow 20% of the expenditure and allow the balance amount as revenue
expenditure on the ground that the entire expenditure was not incurred for
business purposes.
The Tribunal, however, observed that
corporate membership itself was meant for the benefit of the company and hence the
expenses were for business purposes and, therefore, there was no reason to
disallow the expenditure either wholly or in part.
The High Court upheld the decision of the
Tribunal observing that the expenditure incurred towards admission fee for
corporate membership was for the benefit of the company.
In the instant
case, the admission fee paid towards corporate membership is an expenditure
incurred wholly and exclusively for the purposes of business and not towards
capital account as it only facilitates smooth and efficient running of a
business enterprise and does not add to the profit-earning apparatus of the
business enterprise.
Thursday, September 20, 2012
WHETHER A BENEFICIAL OWNER OF AN ASSET CAN CLAIM DEPRECIATION UNDER THE INCOME-TAX ACT?
WHETHER A BENEFICIAL OWNER OF AN ASSET CAN CLAIM
DEPRECIATION UNDER THE INCOME-TAX ACT?
Case: CIT
v. Smt. A. Sivakami and Another (2010) 322 ITR 64
Section 32 (1) of the Income-Tax Act
Facts
Even though she was not the registered owner
of the same, the assessee, running a proprietary concern, claimed depreciation
on three buses. The Assessing Officer rejected the claim of the assessee on the
ground that the assessee was not the owner of the three buses and the basic
condition under section 32(1) to claim depreciation is that the assessee should
be the owner of the asset.
The Supreme Court, in CIT v. Podar Cement P Ltd. (1997) 226 ITR
625, observed that the owner need not necessarily be the lawful owner entitled
to pass on the title of the property to another. Since, in this case, the
assessee has made available all the documents relating to the business and also
established before the authorities that she is the beneficial owner, she is
entitled to claim
depreciation even though she is not the legal owner of the buses.
Can notional interest assessed by AO on interest free deposit received by an assessee in respect of a shop let out on rent be brought to tax as “Business income” or “Income from house property”?
Can notional
interest assessed by AO on interest free deposit received by an assessee in
respect of a shop let out on rent be brought to tax as “Business income” or
“Income from house property”?
Case Law: CIT v. Asian
Hotels Ltd. (2010) 323 ITR 0490 (Del.)
Facts
The assessee had received
interest free deposit in respect of shops given on rent. The Assessing Officer
added to the assessee's income notional interest on the interest free deposit at
the rate of 18 per cent simple interest per annum on the ground that by
accepting the interest free deposit, a benefit had accrued to the assessee
which was chargeable to tax under section 28(iv).
The High Court held that section 28(iv) of Income-Tax Act
is concerned with business income and brings to tax the value of any
benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession. Section 28(iv) can be invoked only where the benefit or
amenity or perquisite is other than cash. In the instant case, the
Assessing Officer has determined the monetary value of the benefit stated to
have accrued to the assessee by adding a sum that constituted 18 per cent
simple interest on the deposit. Hence, section 28(iv) is not applicable.
Section 23(1)(a) deals with the determination of the
annual letting value of such property for computing the income from house
property. It provides that the annual letting value is deemed to be the
sum for which the property might reasonably be expected to be let from year to
year. This contemplates
the possible rent that the property might fetch and certainly not the interest
on fixed deposit that may be placed by the tenant with the landlord in
connection with the letting out of such property.
Thus, the notional interest is
not assessable either as
business income or as income from house property.
Is the amount paid by a construction company as regularization fee for violating building bye-laws allowable as deduction?
Is the amount paid by a
construction company as regularization fee for violating building bye-laws
allowable as deduction?
Case :Millennia Developers (P)
Ltd. v. DCIT (2010) 322 ITR 401 (Karn.)
section: 37(1) of the Income-Tax
Act
The
assessee, a private limited company carrying on business activity as a
developer and builder, claimed the amount paid by way of regularization fee for
the deviations made while constructing a structure and for violating the plan
sanctioned in terms of the building bye-laws, approved by the municipal
authorities as per the provisions of the Karnataka Municipal Corporations Act,
1976. The assessee’s claim was disallowed by the Assessing Officer and the
disallowance was confirmed by the Tribunal.
The High Court
observed that as per the provisions of the Karnataka Municipal Corporations
Act, 1976, the amount paid
to compound an offence is obviously a penalty and hence, does not qualify for
deduction under section 37. Merely describing the payment as a compounding fee would not alter the
character of the payment.
In this case, it is the actual character of the payment and not
its nomenclature that has determined the disallowance of such expenditure as
deduction. The principle of substance over form has been applied in disallowing an expenditure in
the nature of penalty, though the same has been described as regularization
fee/compounding fee.
Are expenses incurred on purchase of software components in the nature of capital expenditure or revenue expenditure?
Are expenses incurred on
purchase of software components in the nature of capital expenditure or revenue
expenditure?
Case : CIT v. Sundaram Clayton Ltd. (2010) 321 ITR 69 (Mad.)
Facts :
Section 37(1) of the Income-Tax
Act
The High Court observed that this
issue is covered by its decision in the case of CIT v. Southern Roadways Ltd. (2007) 288
ITR 15. In that case, it was held that the upgradation of computers by
changing certain parts thereby enhancing the configuration of the computers for improving their efficiency,
but without making any structural alterations is not a change of an enduring
nature.
Therefore,
applying the ratio of the above decision in this case, the Madras High Court
held that the expenditure
incurred on purchase of software components has to be treated as a revenue
expenditure.
Can additional depreciation under section 32(1)(iia) of the Income-Tax Act on setting up of a windmill by an assessee manufacturing textile goods ?
Can additional depreciation
under section 32(1)(iia) of the Income-Tax Act on setting up of a windmill by an assessee manufacturing textile goods ?
Case: CIT v. VTM Limited
(2009) 319 ITR 336 (Mad.)
The assessee is a company engaged
in the business of manufacture of textile goods. It claimed additional
depreciation on the setting up of wind mills for generation of power. The
Revenue contended that the setting up of a windmill for generation of power had
absolutely no connection with the business of the company i.e. for the
manufacture of textile goods, and, therefore, the company was not entitled to
claim the additional depreciation under section 32(1)(iia).
The High Court held that in order to claim the benefit of section
32(1)(iia), what is required to be satisfied is that the new machinery or plant
should have been acquired and installed after March 31, 2002 (March, 31,
2005, as per the amended provisions), by an assessee, who was already
engaged in the business of manufacture or production of any article or thing.
The provision does not state that the setting up
of a new machinery or plant should have any operational connectivity to the
article or thing that is already being manufactured by the assessee. Hence, it
was held that the assessee is entitled to additional depreciation on setting up
of a wind mill.
Whether subsidy received from government for establishing a hotel is a capital receipt or not ?
Whether subsidy received from government for establishing a hotel
is a capital receipt or not ?
Case : CIT v. Udupi Builders P. Ltd. (2009) 319 ITR 440 (Kar.)
Facts
AO held it as
revenue receipt. The Commissioner (Appeals) held that the subsidy had been granted
to the assessee by the State Government as per the package of incentives and
concessions and that it was towards investment and not a revenue receipt. The
Tribunal confirmed the order passed by the Commissioner (Appeals).
An appeal to
High Court by the revenue , it was argued by the Revenue that since the subsidy is received by
the assessee after completion of the hotel project and commencing of the
business, such receipt has to be taken as a revenue receipt and not a capital
investment.
The High Court held that the
hotel industry was established based on the subsidy announced by the State
Government to encourage tourism and the State Government was in the habit of
releasing the subsidy amount depending upon the budgetary allocation in each
year. In several cases, the State Government had released the subsidy amount
even after ten years of the commencement of the project. Therefore, the subsidy received has to be
treated as a capital receipt and would not be liable to tax.
2
Whether liquidated damages received by a
company from the supplier of plant for failure to supply machinery to the
company within the stipulated time – a capital receipt or a revenue receipt?
Case: CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
Facts
The assessee, a cement
manufacturing company, entered into an agreement with a supplier for purchase
of additional cement plant. One of the conditions in the agreement was that if
the supplier failed to supply the machinery within the stipulated time, the
assessee would be compensated at 5% of the price of the respective portion of
the machinery without proof of actual loss. The assessee received Rs.8.50 lakhs
from the supplier by way of liquidated damages on account of his failure to
supply the machinery within the stipulated time. The Department assessed the
amount of liquidated damages to income-tax. However, the Appellate Tribunal
held that the amount was a capital receipt and the High Court concurred with
this view.
The Apex Court affirmed the
decision of the High Court holding that the damages were directly and intimately linked with the procurement of
a capital asset i.e., the cement plant, which lead to delay in coming into
existence of the profit-making apparatus. It was not a receipt in the course of profit
earning process. Therefore,
the amount received by the assessee towards compensation for sterilization of
the profit earning source, not in the ordinary course of business, is a capital receipt in the
hands of the assessee.
Without questioning the business purpose of
the trip, ad hoc disallowance of foreign
tour expenditure not maintainable
Case: Amit Jain Vs
ITO (ITAT Kolkata)
FACTS
Assessee made a foreign trip to Kathmandu Dubai and Rome and claimed certain
expenses as his foreign travel expenses. However, the Assessing Officer required the assessee to present the evidence and also
business connection for such trip. Assessee argued that foreign tour was for inspection
interiors of foreign hotels and resorts.
Assessing Officer, since the appellant did not offer any evidence, he treated
twenty percent of foreign trip expenses as personal in nature and disallowed a
sum of Rs.29, 003/-.
However, ITAT find that none of the authorities below have refused that
this is not for the purpose of business. Once it is not refused, the foreign
trip expenses cannot be disallowed on ad-hoc basis.
Any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed
Any payment for infringement of patent, being purely
compensatory in nature, cannot be disallowed.
Case: Desiccant Rotors International Pvt. Ltd. vs. CIT,
Delhi (Delhi HC)
Facts:
Section 37(1) of the Income-Tax
Act-Payment made by the assessee on settlement of dispute
with a company of USA being neither a fine or a penalty for a proved offence
nor an amount of Compensation of an offence but is merely a sum in settlement
of an action charging the assessee was denied and not proved the same cannot be
rendered to be inadmissible deduction while determining the assessee’s income
from business.
Section 37 of the Income-Tax Act, which is a residuary provision, allows the expenditure as deductable
while computing the income on the satisfaction of the following conditions:
“(a) Expenditure must not
be governed by the provisions of sections 30 to 36 of the Act;
(b) The expenditure must have been laid out wholly and
exclusively for the purposes of the business of the assessee:
(c) The expenditure must not be personal in nature;
and
(d) The expenditure must not be capital in nature.”
The appellant relied on the
in the case of Prakash
Cotton Mills (P.) Ltd where the
Supreme Court held that any payment for infringement of patent, being purely
compensatory in nature, cannot be disallowed as per the law settled.
In this case , Delhi High Court was of the view that it was an expenditure
which was motivated purely by commercial purpose and would be allowable under
Section 37(1) of the Income-Tax Act.
Monday, September 17, 2012
Whether the non-competition fee received by the assessee is permissible as revenue expenditure?
Whether the non-competition fee received by the
assessee is permissible as revenue expenditure?
CASE
: Procter & Gamble Distribution Co Ltd Vs JCIT (ITAT
Mumbai)
Issue : Whether the non-competition fee received by the
assessee is permissible as revenue expenditure?
Facts:
In the case of Tecumseh, USA, a leading
Global compressor manufacturer, the assessee had purchased the compressor
related operations of Whirlpool India, a leading refrigerator manufacturer in India, for Indian compressor
market. The assessee had paid the price of Rs.52.5 crores which included a sum
of Rs.2.65 crores to be paid as non-compete fees. The issue was whether non
compete fees which was in force for 5 years, could be allowed as revenue
expenditure.
The Special Bench in the above case after detailed examination held that the expenditure was capital in
nature.
In arriving at its decision , the
special bench cited the Supreme Court in CIT Vs Coal Shipment Pvt. Ltd. (82 ITR 902) in
which it was held that payment to ward off completion in business to a rival
dealer would constitute capital expenditure if the object of making that
payment was to derive an advantage by eliminating competition over some length
of time.
In Assam Bengal Cement Co. Ltd. (27 ITR 34), it was
held that the assessee who was a manufacturer of Cement had paid protection
fees to the lessor of quarries for lime stone, on annual payment of Rs.5000/-
for the whole period of lease and another sum of Rs.35000/- p.a. as a further
protection fees for five years for similar undertaking in respect of the whole district. The issue was whether the
payment could be allowed as revenue expenditure. Supreme Court observed that
the fact that the payment
was recurring was immaterial. It was the nature of asset acquired which was material. The asset
required was the right to carry on the business unfettered by any competition
which was not a part of working of the business but went on to appreciate the
whole of the capital asset and make it more profit yielding. The expenditure
was thus hold as capital
in nature by the Supreme Court.
Having
considered the facts of the case , Commissioner of Income Tax (A) has
allowed the claim of the assessee that it is a revenue expenditure on the
ground that the said amount has been subjected to disallowance in the relevant
assessment years and taxing the same in the year under consideration will be
subjected to double addition.
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