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 Vishnu's 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.
