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.

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.