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Direct Tax updates 

Recent Judgements - From the Courtroom                                                         

A. Tribunal

1. Subsequent commercial-use cannot disentitle Sec 54F exemption if building constructed for residential-purpose: Relevant factor to judge is whether construction is made for residential house or commercial purpose, merely because building used as a school cannot change nature and character of building from residential to commercial; Also holds that law is settled that ‘a residential house’ does not mean a single residential house; Sec 54F exemption entitled even where assessee constructs or receives a number of flats adjacent to each other or in different floor of same building; Relies on jurisdictional HC ruling in Syed Ali Adil. [N. Revati v. ITO (ITA 67/Hyd/2013) (Hyd ITAT) dated 2 April 2014]

2. 30 days share-holding period, a yardstick distinguishing between business income & STCG: ITAT rules that profit on sale of shares held for less than 30 days should be treated as ‘business income’ and if held for more than 30 days should be treated as STCG; Observes that differentiation of share transactions as business income or capital gains is a vexed issue, stresses that devising yardstick to distinguish between trading and investment activity based on periodicity of holding is important especially in case of assessee maintaining dual portfolio. [Gurumukh J Sukhwani (ITA 79/PN/2011) (Pune ITAT) dated 30 April 2014]

3. Assessee’s accounts cannot determine income accrual, no tax liability on hypothetical income: Income cannot accrue merely on ground that assessee follows mercantile system of accounting; mere tax deduction at source cannot be a test for determining income; Accrual happens when assessee has legal right to claim the income, where no income has accrued, there cannot be tax liability on hypothetical income; While Schedule VI to Companies Act requires income accrued but not due to be part of profits for accounts, concept of “accrued but not due” contradictory for IT Act purpose as what was not due could not have accrued; Relies on Madras HC ruling in Lucas Indian Services Ltd. [Addl CIT v. Shri Vinay V. Kulkarni (ITA 2363/PN/2012) (Pune ITAT) dated 29 April 2014]

B. High Court

4. Holds share income as capital gains, weighs 'investment' approach over short duration: HC holds income from share sale-purchase transaction as capital gains considering entire facts, applying frequency, object, volume etc tests; Reiterates that no straight jacket formula available to decide transactions' nature, all facts, circumstances ought to be considered; Relies on SC ruling in P. Mohammed Mirakhan. [CIT v. Devasan Investment Pvt Ltd (ITA 1102/2011) (Del HC) dated 16 April 2014]

5. Lays down principles on PMS (Portfolio Management Scheme) income-classification; Rules taxation under capital gains: HC lays down tests / principles to determine characterization of share transactions under discretionary PMS; Agreement terms do not indicate investor's intention to make profits, at best embodies intention to appoint an agent with limited liability, who will invest on behalf of the investor and nothing more; Assessee’s intention must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing money. [Radials International v. ACIT (ITA No.485/2012) (Del HC) dated 25 April 2014]

6. Section 68 - Addition could not be on account of share application money, only on basis of any third party statement: Addition under section 68 on basis of statement made by third parties stating that the alleged companies were engaged in providing accommodation entries in lieu of commission; However, said third party statement was made behind back of assessee and no opportunity of being heard or cross-examining third parties was provided to assessee; Assessing Officer could not bring any material to disapprove genuineness of confirmation, affidavits and various details furnished by assessee; [CIT v. Supertech Diamond Tools (P) Ltd [2014] 44 460 (Rajasthan HC) dated 12 December 2013]

7. Upholds disallowance on cross cheque payment; Account payee cheque mandated u/s 40A(3): RBI circular dated January 23, 2006, directs banks that 'account payee cheques' to be credited to payee's account only, unlike crossed cheques which is negotiable and can be endorsed; In view of intention of legislature to trace the constituent of money, Sec. 40A(3) made more stringent by way of amendment substituting 'crossed cheque' with 'account payee cheque' w.e.f. July 13, 2006. [Rajmoti Industries v. ACIT (Tax Appeal 105/2014) (Guj HC) dated 1 April 2014]

C. Supreme Court

8. Dismisses Revenue's SLP; HC held computer peripherals entitled to 60% depreciation: SC dismisses Revenue’s SLP against Delhi HC judgment; HC had allowed assessee’s depreciation claim @ 60 % on computer peripherals like CD writer, Printer, Network Cables, Switches, isolators etc; HC had relied on its own ruling in BSES Rajdhani Power Limited [CIT v. Birlasoft Ltd (SLP (Civil) 20645/ 2012) dated 14 February 2014]

9. Lays down law on criminal proceedings for non-filing of tax return: SC dismisses appeals filed by Sasi Enterprises and its partners Jayalalitha (Tamil Nadu Chief Minister) and N. Sasikala against initiation of criminal proceedings; IT Dept initiated criminal proceedings u/s 276CC of Income Tax Act for non filing of firm's income tax return; SC interprets scope of Sec 276CC and its proviso, says benefit of proviso available only on 'voluntary filing' and not after detection of failure to file return. [Sasi Enterprises v. ACIT [2014] 41 500 (SC) dated 30 January 2014]

10. Confirms 271(1(c) penalty; Holds “voluntary disclosure”, “amicable settlement” as irrelevant plea: Statute does not recognize defences like ‘avoiding litigation’ and ‘buying peace of mind’ under Explanation 1 to Sec 271(1)(c); AO shall not be carried away by assessee's plea like "voluntary disclosure", "buy peace", "avoid litigation", "amicable settlement", etc. to explain away its conduct; Burden to rebut the presumption of concealment raised by Expl. 1 to Sec. 271(1)(c) was on assessee; Principles laid in SC rulings of Dharmendra Textile Processors and Atul Mohan Bindal correctly applied by Revenue; SC confirms HC ruling [Mak Data P. Ltd. v. CIT (358 ITR 593) dated 30 October 2013]

By: CA Abhay Agrawal


Published by

CA Abhay Agrawal
(Income Tax Consultant)
Category Income Tax   Report

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