July12 case law updates..direct tax...v v vimp !!!

S. 2(24)(xi), 17(3)(ii), 17(3)(iii) & 56(2)(iv) Assignment of Key-Man Insurance Policy

On assignment of key-man insurance policy by company to its employee-director against receipt of surrender value from the director, difference between premia paid by company to LIC and surrender value paid by director to company cannot be taxed as “profits in lieu of salary” in the hands of director. [CIT vs. Rajan Nanda (2012) 249 CTR (Del) 141.]

S. 2(29BA) & 80-IA Production of pullovers  amounts to manufacture.

Assessee engaged in production of pullovers by purchasing Flats(pallas) from another concern and subjecting the same to various processes viz. labeling, tailoring, packing, pakki checking, buttons and button holes, linking etc. is carrying out manufacture of an article as a different marketable product comes into existence after the Flats are processed and, therefore, assessee is entitled to deduction u/s 80-I in respect of income derived from manufacture of pullovers. [CIT vs. Oswal Knit India Ltd. (2012) 250 CTR (P&H) 179]

S. 2(29BA), 80-IA &Sch.XI, Entry 10 Preparation of voter’s I-cards amounts to manufacture.

Assessee engaged in preparation of voter’s photo identity cards is engaged in manufacture or production of an article or thing, hence an “industrial undertaking” eligible for deduction u/s 80-IA; manufacture of identity cards cannot be described as photography apparatus and goods within the meaning of Entry 10 of Sch. XI. [CIT vs. Haryana State Electronics Development Corporation Ltd. (2012) 250 CTR (P&H) 316]

S. 2(42A), 48 & 49 Computation of Indexed Cost in case of gift.

While computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift , the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset. [CIT vs. Manjula J. Shah (2012) 249 CTR (Bom) 270]

S. 10A Acquisition on slump basis does not amount to splitting or reconstruction.

Assessee having acquired a software division of a company which was established in 1994, as a going concern on a slump sale basis, there was no splitting up or reconstruction of existing business and therefore assessee was entitled to exemption u/s 10A. [CIT vs. Sonata Software Ltd. (2012) 249 CTR (Bom) 441]

S.10B, 70 &80IA(5) Claim for exemption vs. claim for deduction.

Sec. 10B, as it stands after substitution by Finance Act, 2000 w.e.f 1st April, 2001 is not a provision for exemption, but a provision which enables an assessee to claim a deduction; loss which is sustained by an eligible unit can be set off against the income arising from other units under the same head of profits and gains of business or profession. [CIT vs. Galaxy Surfactants Ltd (2012) 249 CTR (Bom) 38]

S. 10(10D) Amount received on maturity of key-man insurance policy which was assigned is exempt.

Amount received by employee director on maturity of insurance policy, which insurance policy was in the first instance taken by his employer company as key-man insurance policy and thereafter assigned to him, is exempt u/s 10(10D) in the hands of director. [CIT vs. Rajan Nanda (2012) 249 CTR (Del) 141.]

S. 14A : Disallowance applies to partner’s  share of profit. Depreciation is not expenditure.

As the share of profit in partnership firm is exempt u/s 10(2A), section 14A would apply and any expenditure incurred to earn the share income will have to be disallowed.

However S. 14A applies only to “expenditure” incurred by the assessee. Depreciation u/s 32 is an “allowance” and not “expenditure” and so cannot be disallowed u/s 14A. [Vishnu AnantMahajan vs. ACIT (ITAT – Ahmedabad Special Bench) ]

S. 14A : No disallowance if there is no tax free income

 The assessee, a partner in a firm, borrowed funds and advanced it to the firm on terms that firm would pay interest if it made a profit. In one year firm did not pay interest since it incurred loss. The assessee claimed interest paid on the borrowing as deduction u/s 36(1)(iii). Held that no exemption claimed u/s 10(2A) by the assessee and there was no tax free income, S. 14A would not apply. [CIT vs. M/s. Delite Enterprises (Bombay High Court)]

S. 28(va), 45 & 55(2)(a) No compete fees taxable as business income and not as other income.

Only from 1st April,2003 the consideration received under a non-competition agreement is chargeable to tax under  S. 28(va) as profits and gains of business; same could not be charged under S. 55(2)(a). [Commissioner of IT & ANR. vs. K. ChandrakanthKini.(2012) 249 CTR (Kar) 217.]

S. 28(i) Allowability of advances as business loss.

Advances given to the persons who had been employed by the assessee-company if became unrecoverable, it would clearly be treated as business loss; however, loss of security deposit given for taking the premises on rent cannot be allowed as deduction. [CIT vs. Triveni Engineering & Industries Ltd. (2012) 250 CTR (Del) 277]

S. 32(1)(ii) Depreciation on Intangible Assets.

Intangible assets viz. business claims, business information, business records, contracts, employees and know-how acquired by the assessee under slump sale of running business are in the nature of “business or commercial rights of similar nature” specified in s. 32(1)(ii) and therefore, same are eligible for depreciation. [Areva T&D India Ltd. vs. Deputy CIT (2012) 250 CTR (Del) 151]

S.36(1)(vii) & 36(2) Dues from clients allowable as bad debts even though not offered to tax in earlier years.

Assessee share broker was entitled to deduction by way of bad debts u/s 36(1)(vii) r/w s. 36(2) in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him, as value of the shares transacted by the assessee as a stock broker on behalf of its client is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction.  [CIT vs. Shreyas S. Morakhia (2012) 249 CTR (Bom) 30]

S. 37(1) Capital vs. Revenue expenditure.

Expenditure incurred for indigenisation of software is revenue expenditure. [CIT vs. Sonata Software Ltd. (2012) 249 CTR (Bom) 443]

S. 40(a)(ia) : Amendment by Finance Act 2010 is retrospective.

For A.Y 2008-2009, the assessee made a deposit of TDS after the due date for payment but before the due date for filing ROI. Held amendment to 40(a)(ia) by the Finance Act, 2010 w.e.f 01.04.2010, which allows time for deposit of TDS up-to due date of filing of ROI should be treated as retrospective w.e.f 01.04.2005. [ITO vs. Taru Lending Edge (P) Ltd. (ITAT – Delhi)]

S. 40(a)(ia) & 194C Liability for TDS in franchisee agreements.

Agreement between the assessee and franchisees was an agreement for permitting the payee to utilize the name and copyright of the assessee in the study material and in running the coaching centres, and there were mutual rights, duties and obligation and it was not a works contract; provisions of s. 194C and consequently s. 40(a)(ia) were not applicable. [CIT vs. Career Launcher India Ltd. (2012) 250 CTR (Del) 241]

S. 73  Where income assessed as business income Explanation to S 73 not applicable.

Assessee’s income from service charges (Rs. 2.25 crores) and loss in share trading (Rs. 2.23 crores), had to be taken into account in computing the income under the head of business, both being sources under the same head, and the assessee having dividend income of Rs. 4.7 lakhs (income from other sources), the assessee’s case fell within purview of exception carved out in the Explanation to S.73 and the assessee could not be deemed to be carrying on a speculative business. [CIT vs. Darshan Securities (P) LTD. (2012) 249 CTR (BOM) 199.]

S. 80I  Where separate unit established deduction allowable even if new unit dependent on old unit.

Assessee having acquired a separate license, invested huge sum of Rs. 7.5 crores for putting up plant and machinery and production capacity also increased almost double, was entitled to deduction u/s 80I; only because to a certain extent the new undertaking is dependent on the existing unit, will not deprive the new undertaking the status of a separate and distinct identity. [Gujarat Alkalies& Chemicals Ltd vs. CIT (2012) 249 CTR (Guj) 82]

S. 80-IB(10) Ownership of land  not necessary for claiming deduction.

Terms and conditions of development agreements showed that assessee had taken full responsibility for execution of the projects and the resultant profits or loss belonged to the assessee in entirely and all other conditions of s.80-IB(10) being satisfied, deduction u/s 80-IB(10) could not be disallowed to assessee on the ground that land under development projects was not owned by assessee and in some cases development permission was granted in the name of original landowners. [CIT vs. Radhe Developers &Ors (2012) 249 CTR (Guj) 393]

S. 80-IB(10) & 80-IB(14)(a) Common area to be excluded in calculating prescribed area.

If the area does not exclusively belong to the owner of the residential unit and if he has to share that common area with the owner of another residential unit, then that common area has to be excluded from the built-up area; it is not necessary for such exclusion whether that area is shared by all the owners of the building. [CIT & ANR. Vs. Raghavendra Constructions (2012) 250 CTR (Kar) 285]

S. 115E & 115H Concessional tax available to NOR.

Status of the assessee was “not ordinarily resident” and various deposits in banks were specified investments as per s. 115E and therefore assessee was entitled to the benefit of s. 115E and the question of filing of declaration u/s 115H did not arise. [CIT vs. N. Sundarraman (2012) 250 CTR (Mad) 212]

S. 127 Recording of reasons for transfer of cases whether mandatory- Matter referred to larger Bench.

Question whether the decision of three Judge Bench of the Supreme Court in the case of Ajantha Industries vs. CBDT 1976 CTR (SC) 79 : (1976) 102 ITR 281 (SC) so far as it lays down the law that the requirement of recording reasons u/s 127(1) is a mandatory direction under the law and non-communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee is no longer a good law in view of the subsequent decisions of the Supreme Court in the cases of Managing Director, ECIL vs. B.Karunakar AIR 1994 (SC) 1074 and State Bank of Patiala vs. S.K Sharma AIR 1996(SC) 1669 as held in the case of Arti Ship Breaking vs. Director of IT(Inv.) &Ors. (2000) 161 CTR (Guj) 323 : (2000) 244 ITR 333 (Guj) is recommended to be referred to a larger Bench. [Millennium Houseware&Ors.Vs. CIT & ANR. (2012) 250 CTR (Guj) 123]

S. 143, 151 & 251 No power to CIT-A to change the status of the assessee.

If the status of the assessee is required to be modified, the only option available to the ITO is to assess the income in the appropriate status, if permitted by law, by issuing a notice to the assessee in that particular status; CIT(A) was not justified in modifying the status from AOP to BOI. [GuttaAnjaneyulu& Co vs. CIT (2012) 249 CTR (AP) 106]

S. 194H Liability for TDS.Purchase and resale vs. commission.

Sale of milk and milk products by assessee dairy to concessioners/agents who sold the same from the booths owned by the assessee was on principal to principal basis and therefore, assessee dairy was not liable to deduct tax at source u/s 194H from the payments made to concessioners. [CIT vs. Mother Dairy India Ltd. (2012) 249 CTR (Del) 559]

S. 206AA PAN law read down to not apply to assessee’s without taxable income

 The assessee, whose income was below taxable limit, filed Form 15-G and requested that no TDS be deducted on interest on fixed deposit. The assessee was informed that in view of S. 206AA, TDS would have to be deducted in the absence of PAN. Held in writ petition that S. 206AA as being arbitrary and unconstitutional to the extent that it compelled persons with no taxable income to obtain a PAN. [KowsalyaBai vs. UOI ( Karnataka High Court)]

S.271(1)(c) Bona-fide mistake not liable for penalty.

Amount surrendered by assessee was recorded in books but could not be sufficiently explained and partners of the assessee were uneducated not having knowledge of accounts and therefore their bona fide act could not be treated as concealment of income within the meaning of s. 271(1)(c). [Punjab Rice Mills vs. CIT & ANR. (2012) 250 CTR (All) 201]

S. 271(1)(c) : Penalty not levied for breach of S. 50C

The fact that assessee agreed to additions because of deeming provisions of S. 50C does not mean that he filed inaccurate particulars of his income. The assessee’s acceptance of addition on the basis of valuation made by the Stamp Valuation Authority is not conclusive proof that sale consideration as per the sale agreement was incorrect and wrong and so penalty u/s 271(1)(c) cannot be levied. [ChimanlalManilal Patel vs. ACIT (ITAT – Ahmedabad)]