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.

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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.