ITR ISSUE DATED 26-09-2011 Volume 337 Part 3, SUBJECT INDEX TO CASES REPORTED IN THIS PART

INCOME TAX REPORTS (ITR)

Volume 337 : Part 3 (Issue dated 26-9-2011)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

HIGH COURTS

->> Advance tax --Interest payable by assessee--Default in payment of advance tax--Withdrawal of investment allowance--Fiction under section 32A(5) applicable to levy of interest --Income-tax Act, 1961, ss. 32A(5), 234B-- I. C. I. India Ltd . v. CIT (Cal) . . . 327

->> Assessing Officer --Powers of Assessing Officer--Remand by Commissioner (Appeals) in respect of specific issues--Assessing Officer has no power to consider a new issue--Income-tax Act, 1961, ss. 32A, 43(3), 250-- Deputy CIT (Asstt.) v. Surat Electricity Co. Ltd. (Guj) . . . 271

->> Bad debt --Condition precedent for allowance--Effect of amendment of section 36 w.e.f. 1-4-1989--Writing off amount is sufficient--Assessee need not prove that debt had been bad--Income-tax Act, 1961, s. 36(1)(vii), (2)(iii)-- Asst. CIT v. Pullen Pump Industries (Guj) . . . 294

->> Capital gains --Business income--Purchase of shares and sale within a short time--Finding that shares had been purchased as investment--Gains assessable as capital gains--Income-tax Act, 1961, ss. 28, 45-- CIT v. Consolidated Finvest and Holding Ltd . (Delhi) . . . 264

->> Current repairs --Business expenditure--Meaning of current repairs--Capital or revenue expenditure--Breakdown of machinery after long use--Expenditure on overhauling and reconditioning machinery--Not deductible as current repairs or revenue expenditure--Expenditure on minor repairs of many machines--Deductible--Income-tax Act, 1961, ss. 31, 37-- Bharat Gears Ltd. v. CIT (Delhi) . . . 368

->> Depreciation --Rate of depreciation--Motor vehicle--Difference between lease and hire--Assessee leasing motor vehicles to clients--Not engaged in business of hire--Not entitled to higher rate of depreciation--Income-tax Act, 1961, s. 32--Income-tax Rules, 1962, Appendix I-- Bhagwati Appliance v. ITO (Guj) . . . 286

->> Exemption --Difference between sections 10 and 11--Agricultural marketing committee--Law applicable--Effect of insertion of clause (26AAB) in section 10 w.e.f. 1-4-2009--Provision not retrospective--Committee entitled to exemption under section 10(26AAB) from 1-4-2009--Income-tax Act, 1961, ss. 10, 11-- CIT v. Agriculture Market Committee (AP) . . . 299

->> Interpretation of taxing statutes --Rule against retrospectivity--Declaratory legislation-- CIT v. Agriculture Market Committee (AP) . . . 299

->> Investment allowance --Withdrawal of allowance--Conditions precedent--Transfer of entire division in slump sale within eight years--No price separately indicated for plant and machinery--Section 32A(5) applicable--Withdrawal of investment allowance--Justified--Income-tax Act, 1961, s. 32A(5)-- I. C. I. India Ltd . v. CIT (Cal) . . . 327

->> Penalty --Concealment of income--Failure to furnish return of income when amounts to concealment--Effect of Explanation 3 to section 271(1)--Conditions enumerated in the Explanation are cumulative--Notice under section 148 within period stipulated in section 153(1)--Explanation not applicable--Penalty could not be levied--Income-tax Act, 1961, s. 271-- Chhaganlal S Uteriya v. ITO (Guj) . . . 350

->> Precedent --Effect of decision of Supreme Court in CIT v. Gupta Global Exim P. Ltd. [2008] 305 ITR 132 (SC)-- Bhagwati Appliance v. ITO (Guj) . . . 286

->> Residence --Requirement of stay in India for specified period in previous year--Effect of Explanation (a) to section 6(1)(c)--Employment includes self-employment--Indian citizen doing business in foreign country and staying in India for one hundred and seventy-seven days in the previous year--To be treated as non-resident--Income-tax Act, 1961, s. 6(1)(c)-- CIT v. O. Abdul Razak (Ker) . . . 267

->> Revision --Application for revision--Rejection of application without considering merits--Levy of penalty not valid--Rejection of application not justified--Income-tax Act, 1961, s. 264-- Chhaganlal S Uteriya v. ITO (Guj) . . . 350

->> Search and seizure --Assessment of third person--Condition precedent--Satisfaction of Assessing Officer that undisclosed income found during search belonged to third person--Cash belonging to third person seized from his employee in premises of searched person--No evidence to indicate satisfaction of Assessing Officer that cash seized belonged to third person--Notice under section 158BD to third person--Not valid--Income-tax Act, 1961, s. 158BD-- Chandrakantbhai Amratlal Thakkar v. Deputy CIT (Guj) . . . 258

->> ----Block assessment--Penalty--Scope of section 158BFA--Substantial addition to income returned under section 158BC--Tax not paid--Penalty to be levied--Commissioner allowing payment of tax in instalments--Not relevant--Income-tax Act, 1961, s. 158BFA-- CIT v. Heera Construction Co. P. Ltd. (Ker) . . . 359

AUTHORITY FOR ADVANCE RULINGS

->> Non-resident --Transfer to non-resident subsidiary of shares in Indian company without consideration--Not taxable in India--Transfer pricing provisions not applicable--No requirement of deduction of tax at source--But liable to file return--Income-tax Act, 1961, ss. 45, 47(iii), 92 to 92F, 139, 195-- Deere and Company, In re. . . 277

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Income-tax Act, 1961 :

->> S. 6(1)(c) --Residence--Requirement of stay in India for specified period in previous year--Effect of Explanation (a) to section 6(1)(c)--Employment includes self-employment--Indian citizen doing business in foreign country and staying in India for one hundred and seventy-seven days in the previous year--To be treated as non-resident-- CIT v. O. Abdul Razak (Ker) . . . 267

->> S. 10 --Exemption--Difference between sections 10 and 11--Agricultural marketing committee--Law applicable--Effect of insertion of clause (26AAB) in section 10 w.e.f. 1-4-2009--Provision not retrospective--Committee entitled to exemption under section 10(26AAB) from 1-4-2009-- CIT v. Agriculture Market Committee (AP) . . . 299

->> S. 11 --Exemption--Difference between sections 10 and 11--Agricultural marketing committee--Law applicable--Effect of insertion of clause (26AAB) in section 10 w.e.f. 1-4-2009--Provision not retrospective--Committee entitled to exemption under section 10(26AAB) from 1-4-2009-- CIT v. Agriculture Market Committee (AP) . . . 299

->> S. 28 --Capital gains--Business income--Purchase of shares and sale within a short time--Finding that shares had been purchased as investment--Gains assessable as capital gains-- CIT v. Consolidated Finvest and Holding Ltd .(Delhi) . . . 264

->> S. 31 --Current repairs--Business expenditure--Meaning of current repairs--Capital or revenue expenditure--Breakdown of machinery after long use--Expenditure on overhauling and reconditioning machinery--Not deductible as current repairs or revenue expenditure--Expenditure on minor repairs of many machines--Deductible-- Bharat Gears Ltd. v. CIT (Delhi) . . . 368

->> S. 32 --Depreciation--Rate of depreciation--Motor vehicle--Difference between lease and hire--Assessee leasing motor vehicles to clients--Not engaged in business of hire--Not entitled to higher rate of depreciation-- Bhagwati Appliance v. ITO (Guj) . . . 286

->> S. 32A --Assessing Officer--Powers of Assessing Officer--Remand by Commissioner (Appeals) in respect of specific issues--Assessing Officer has no power to consider a new issue-- Deputy CIT (Asstt.) v. Surat Electricity Co. Ltd. (Guj) . . . 271

->> S. 32A(5) --Advance tax--Interest payable by assessee--Default in payment of advance tax--Withdrawal of investment allowance--Fiction under section 32A(5) applicable to levy of interest-- I. C. I. India Ltd . v. CIT (Cal) . . . 327

->> ----Investment allowance--Withdrawal of allowance--Conditions precedent--Transfer of entire division in slump sale within eight years--No price separately indicated for plant and machinery--Section 32A(5) applicable--Withdrawal of investment allowance--Justified-- I. C. I. India Ltd . v. CIT (Cal) . . . 327

->> S. 36(1)(vii) --Bad debt--Condition precedent for allowance--Effect of amendment of section 36 w.e.f. 1-4-1989--Writing off amount is sufficient--Assessee need not prove that debt had been bad-- Asst. CIT v. Pullen Pump Industries (Guj) . . . 294

->> S. 36(2)(iii) --Bad debt--Condition precedent for allowance--Effect of amendment of section 36 w.e.f. 1-4-1989--Writing off amount is sufficient--Assessee need not prove that debt had been bad-- Asst. CIT v. Pullen Pump Industries (Guj) . . . 294

->> S. 37 --Current repairs--Business expenditure--Meaning of current repairs--Capital or revenue expenditure--Breakdown of machinery after long use--Expenditure on overhauling and reconditioning machinery--Not deductible as current repairs or revenue expenditure--Expenditure on minor repairs of many machines--Deductible-- Bharat Gears Ltd. v. CIT (Delhi) . . . 368

->> S. 43(3) --Assessing Officer--Powers of Assessing Officer--Remand by Commissioner (Appeals) in respect of specific issues--Assessing Officer has no power to consider a new issue-- Deputy CIT (Asstt.) v. Surat Electricity Co. Ltd. (Guj) . . . 271

->> S. 45 --Capital gains--Business income--Purchase of shares and sale within a short time--Finding that shares had been purchased as investment--Gains assessable as capital gains-- CIT v. Consolidated Finvest and Holding Ltd .(Delhi) . . . 264

->> ----Non-resident--Transfer to non-resident subsidiary of shares in Indian company without consideration--Not taxable in India--Transfer pricing provisions not applicable--No requirement of deduction of tax at source--But liable to file return-- Deere and Company, In re (AAR) . . . 277

->> S. 47(iii) --Non-resident--Transfer to non-resident subsidiary of shares in Indian company without consideration--Not taxable in India--Transfer pricing provisions not applicable--No requirement of deduction of tax at source--But liable to file return-- Deere and Company, In re (AAR) . . . 277

->> Ss. 92 to 92F --Non-resident--Transfer to non-resident subsidiary of shares in Indian company without consideration--Not taxable in India--Transfer pricing provisions not applicable--No requirement of deduction of tax at source--But liable to file return-- Deere and Company, In re (AAR) . . . 277

->> S. 139 --Non-resident--Transfer to non-resident subsidiary of shares in Indian company without consideration--Not taxable in India--Transfer pricing provisions not applicable--No requirement of deduction of tax at source--But liable to file return-- Deere and Company, In re (AAR) . . . 277

->> S. 158BD --Search and seizure--Assessment of third person--Condition precedent--Satisfaction of Assessing Officer that undisclosed income found during search belonged to third person--Cash belonging to third person seized from his employee in premises of searched person--No evidence to indicate satisfaction of Assessing Officer that cash seized belonged to third person--Notice under section 158BD to third person--Not valid-- Chandrakantbhai Amratlal Thakkar v. Deputy CIT (Guj) . . . 258

->> S. 158BFA --Search and seizure--Block assessment--Penalty--Scope of section 158BFA--Substantial addition to income returned under section 158BC--Tax not paid--Penalty to be levied--Commissioner allowing payment of tax in instalments--Not relevant-- CIT v. Heera Construction Co. P. Ltd. (Ker) . . . 359

->> S. 195 --Non-resident--Transfer to non-resident subsidiary of shares in Indian company without consideration--Not taxable in India--Transfer pricing provisions not applicable--No requirement of deduction of tax at source--But liable to file return-- Deere and Company, In re (AAR) . . . 277

->> S. 234B --Advance tax--Interest payable by assessee--Default in payment of advance tax--Withdrawal of investment allowance--Fiction under section 32A(5) applicable to levy of interest-- I. C. I. India Ltd . v. CIT (Cal) . . . 327

->> S. 250 --Assessing Officer--Powers of Assessing Officer--Remand by Commissioner (Appeals) in respect of specific issues--Assessing Officer has no power to consider a new issue-- Deputy CIT (Asstt.) v. Surat Electricity Co. Ltd. (Guj) . . . 271

->> S. 264 --Revision--Application for revision--Rejection of application without considering merits--Levy of penalty not valid--Rejection of application not justified-- Chhaganlal S Uteriya v. ITO (Guj) . . . 350

->> S. 271 --Penalty--Concealment of income--Failure to furnish return of income when amounts to concealment--Effect of Explanation 3 to section 271(1)--Conditions enumerated in the Explanation are cumulative--Notice under section 148 within period stipulated in section 153(1)--Explanation not applicable--Penalty could not be levied-- Chhaganlal S Uteriya v. ITO (Guj) . . . 350

Income-tax Rules, 1962 :

->> Appendix I --Depreciation--Rate of depreciation--Motor vehicle--Difference between lease and hire--Assessee leasing motor vehicles to clients--Not engaged in business of hire--Not entitled to higher rate of depreciation-- Bhagwati Appliance v. ITO (Guj) . . . 286

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Whether when assessee, a charitable body, has already claimed ded

Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets by application of money, a further claim of depreciation on same assets would amount to double benefits - YES, rules ITAT

THE issue before the Tribunal is - Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets as application of money, the further claim of depreciation on the same assets would amount to double benefits. And the verdict goes against the assessee.

Facts of the case

Assessee is a charitable trust registered u/s 12A of the Act. In the return of income filed, it claimed depreciation on the assets, the cost of which were already claimed as application of money u/s 11(1). AO disallowed the depreciation claimed u/s 32 stating that the cost of asset/s having been allowed, its WDV was nil, so that there was no amount available on which depreciation could be claimed. The same would even otherwise amount to a double deduction, prohibited by law.

In appeal before ITAT, the assessee contended that the decision in the case of Escorts Ltd. & Othrs was not applicable as was held in the case of CIT vs. Marketing Committee, Pipli, 330 ITR 16 (P&H) and CIT v. Tiny Tots Education Society (2010-TIOL-550-HC-P&H-IT) which provided that there was no double deduction. Further, the law stood amended w.e.f. 1.4.1989 by co-option of clause (d) to s. 11(1) of the Act, so that there was no requirement in law for applying the said income, i.e., as covered by s. 11(1)(d), for claiming exemption in this respect. In view of the decision of the Lissie Medical Institutions, where the amount was voluntarily received with a direction that the same shall form part of the corpus, the assessee would stand to be allowed depreciation on the capital asset/s acquired out of the said funds. However, in case of no specific directions, it would not be though in both the cases, the amount was applied or utilised in the similar manner. A mere direction by the donor would alter the donee's assessable income, even as the same stood utilized by the donor in the same manner, and which was not comprehensible and, in any case, could not be the intent of law. In reply to the query raised by the Bench, that why could not the assessee take a specific direction from the donor(s) where it proposed to acquire capital asset(s) there-from, the assessee contended that it might not be practical always and secondly, the corpus was not for acquiring capital assets alone, and may well be maintained in the form of liquid assets. The two claims were different - the depreciation was a charge against the profits `an above-the-line item' and the acquisition of capital asset(s) was an application of income, determined thus, `a below-the-line item'.

Revenue relied on the decision of Lissie Medical Institutions and contended that the assessee could not point out any infirmity in the said order, so that there was no ground or occasion for the Tribunal to review or re-visit the said order.

After hearing both the parties, the ITAT held that,

++ the argument that the allowance of depreciation and deduction qua the application of income (on the assets on which the same is claimed), does not amount to or result in a double deduction is not acceptable. If the capital asset/s is a part of the asset base of the charitable trust, used for its purposes, it only forms a part of the capital structure or the apparatus of the entity, and only on the strength of which the claim qua depreciation is maintainable, i.e., as a charge against profits/income thereof. Could the same expenditure be considered as being toward `income' and, at the same time, an application of it, or, to put it in the same graphical manner, could an expenditure be considered as both above and below the line, and simultaneously at that. The two are mutually exclusive. While an expenditure is necessarily incurred for the purposes of income, i.e., as a part of the income generating process, directly or indirectly, the other is an application of the income so generated, and has nothing to do with either income generation or the maintenance of the capital structure or the income generating apparatus;

++ even where the income arises only out of voluntary contributions, recognising the need to maintain corpus, as in the case of any business activity, the law provides therefor, so that the trust/institution is not required to apply the same to claim its exemption from tax u/ss. 11 & 12. That is, the very fact that the said contribution is toward capital or corpus, is by itself sufficient to accord it exclusion, and is, thus, not liable for, or is free from the requirement of, it's application toward the object/s of the trust. Income of a charitable trust, it may be noted, is not per se exempt from tax, but only on its application toward its objects. The same, thus, is only in the nature of a deduction, i.e., required to a allowed for computing income subject to tax under the Act, which also finds support from the insertion of s. 11(1)(d). It is, as such, not a question of a mere direction, but of classifying the receipt of the trust into two distinct categories, i.e., `regular' and `toward capital'. The difference, i.e., depreciation being allowable in one case and not in the other, amount as it does to a double deduction, arises out of the very nature of the source of funding. The same rather than being prejudicial to a charitable trust, is beneficial thereto, inasmuch as the law `recognises' capital receipt as the principal source of funding of a charitable trust/institution not engaged in any business, i.e., voluntary contributions, or its need to maintain capital. In any normal case, While a capital asset acquired for and put to use for business purposes would entitle it to a claim for depreciation, i.e., whatever be the source of funding, and whether the same is acquired from `income' or from 'capital', it is only the `income' which is, where otherwise not exempt, liable to tax. Would that in any manner be considered as prejudicial or leading to a dichotomy with reference to the source of funding, as sought to be made out in respect of a charitable trust?

++ the income that is exempt is only that computed applying the normal principles of commercial accounting, i.e., net of expenses, which would thus stand to be deducted, even where the income of the trust is not from business, determined by applying the provisions of Chapter IV-D (refer s. 11 (4A)), and which expenses would include a charge toward depreciation on capital assets deployed or maintained by the trust as well. The differential treatment qua depreciation is only due to the difference in law attending the two scenarios, which rather seeks to bring the same (law) at par with that qua any other entity acquiring and using a capital asset for its purposes. No infirmity, thus, inflicts the tribunal's order qua the differential treatment of the claim for depreciation, i.e., w.r.t. the application or otherwise of the provision of s. 11(1)(d). The assessee's argument or contention for a uniform treatment (qua depreciation) seeks to eliminate the difference that the law itself specifically provides for, i.e., is contrary to the express provisions of law. The user of an asset for the intended purpose/s, a pre-requisite for a claim of depreciation in its respect, is also necessary to validate the claim (in respect of the capital expenditure) qua the application of income, as no charitable purpose would stand to be served where the capital asset acquired thus, and retained, is not used for the objects of the trust;

++ while the claim for depreciation arises following the accrual basis of accounting for determining `income', the cash method is applied for reckoning its application. Accordingly, the two claims amount to a double deduction is purely factual. The assessee/s has not been able to show, any infirmity in the said findings by the tribunal, which is affirmed;

++ without prejudice to the foregoing, both the assessee-trusts are not undertaking any business activity. As such, the claim of depreciation would be, if at all, exigible only with reference to the normative rate(s) of depreciation, i.e., as determined with reference to the useful lives of the relevant asset(s) under its given state of user. In fact, even if business activity was being undertaken, the claim for depreciation u/s. 32(1) would obtain only in respect of business asset(s). The assessee has, however, claimed depreciation in terms of the rate(s) prescribed under the Act and, as such, is not maintainable at the claimed amount/s;

++ no Legislation would have intended a double deduction in respect of the same business outgoing, and it was impossible to conceive otherwise, i.e., unless clearly so expressed. In other words, the intention of non double deduction is the given status, and is to be presumed, unless there is an express provision to the contrary in a particular case, and which was not so in the case(s) before it. The assessee's contention is, thus, not valid. Thus, the findings given in the case of Lissie Medical Institutions are endorsed.

Revenue's appeal allowed.

An assessee should not be deprived of benefit of depreciation u/s 32 for not running factory

An assessee should not be deprived of benefit of depreciation u/s 32 for not running its factory due to adverse law and order situation

Income-tax : The word `used' appearing in section 32(1) should be interpreted to mean a situation where the machineries which are required for implementing the nature of business the assessee runs, have been kept ready for use for the purpose of business [Section 32 of the income-tax Act, 1961 - Depreciation - Allowance/rate of]

l An assessee doing various manufacturing items may have purchased different machineries having regard to the diversity of the orders he gets or expects to get; in the process, a particular type of machinery may be required for finishing a particular type of a product, if in a given assessment year, the assessee did not get any order of manufacture of that particular item necessitating the use of that particular machinery, for that reason, he should not be deprived of the benefit of depreciation of that machinery although the same was ready for use whenever an order of manufacture of such item would come - [2011] 10 taxmann.com 163 (Cal.)

Interesting Case : - Heart Surgery as IT expenditure claim as repaire

Heart Surgery as IT expenditure claim Santi Bhushan u/s 31 as Plant repair

EMINENT lawyer Shanti Bhushan, who is making headlines as member of the Lok Pal Bill drafting committee, is also busy in something really close to his heart. He has decided to move the Supreme Court seeking income tax deduction for expenses incurred on heart surgery. Though the Delhi High Court  dismissed his plea, Bhushan hasn’t lost heart. 

He says he suffered a heart attack due to professional work and the expenditure incurred by him on a heart operation must be deductible under Section 31 of the Income Tax (I-T) Act. Bhushan’s claim is based on the grounds that the heart is a “plant” and the expenditure has been incurred on “current repairs”. He also claimed that his professional receipts rose substantially after the operation and the expenditure was “wholly & exclusively” for his profession and deductible under Section 37(1) of the I-T Act. 

Monetarily, the impact of the high court order will be negligible. I file a return for some `10-15 crore annually and minor surgery costs will not affect me. But I would take the matter to the apex court for my principles.

Dismissing his plea, the high court noted that “if the heart were to be considered a‘plant’, it would necessarily mean that it is an asset which should have found a mention in the assessee’s balancesheet. This was not done and cannot be done as the ‘cost of acquisition’ of such an asset cannot be determined, and, even if the widest meaning to the word ‘plant’ is given, the heart does not satisfy the ‘functionality’ test, because while the heart is necessary for survival, it does not mean it is used as a ‘tool’ for trade or professional activity.” 

THE high court further said that the claim under Section 37(1) was not acceptable as the expenditure was not incurred wholly and exclusively for the assessee’s profession. There was no direct or immediate nexus between the expenses incurred by the assessee and his efficiency in the professional field per se, it said. Although Bhushan is of the view that the high court’s review and judgment are comprehensive, he says the court has committed an error. “It is a comprehensive but controversial judgment. If the court says that the heart should have been mentioned in previous years’ accounts as an asset, I say that it is not a‘purchased asset’ but a ‘God-given gift.’ If the asset is given free, the cost of repairs should be allowed to be deducted,” said Bhushan. If the apex court rules in Bhushan’s favour, it will become law and hence all expenses on such heart surgeries by professionals will be tax-deductible. It’s a different matter that the finance minister may lose heart over the impact it will have on direct tax revenues.
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Dear Friends : The emails are schedule to be posted in the blog and will sent to the group on carious dates and time fixed. Instead of sending it on one day it is spread on various dates. 

regards. R R Makwana

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s. 32(1)(ii) Techno Shares Reversed By Supreme Court

In CIT vs. Techno Shares & Stocks 323 ITR 69 the Bombay High Court considered the definition of an "intangible asset" in s. 32(1)(ii) and held that a stock exchange card was not an intangible asset eligible for depreciation.
 
This judgement has been reversed by the Supreme Court today (9.9.2010). It has been held that a stock exchange card is a "license" and eligible for depreciation u/s 32(1)(ii).