ITR : Volume 328 : Part 4 Issue dated 15-11-2010

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INCOME TAX REPORTS (ITR)

Volume 328 : Part 4 (Issue dated 15-11-2010)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

SUPREME COURT

Assessment --Books of account of assessee not rejected--Assessing Officer cannot refer matter to Departmental Valuation Officer-- Sargam Cinema v. CIT . . . 513

Reassessment --Information--Opinion of District Valuation Officer--Cannot be basis for reopening assessment--Income-tax Act, 1961, s. 147-- Asst. CIT v. Dhariya Construction Co . . . . 515

HIGH COURTS

Advance tax --Interest payable by assessee--Compensation and interest on acquisition of land--Failure to pay advance tax--Interest can be levied under section 234B--Income-tax Act, 1961, s. 234B-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

Appellate Tribunal --Tribunal holding that assessee produced all relevant documents before Assessing Officer--Finding of fact--Income-tax Act, 1961-- CIT v. Sikka Overseas P. Ltd. (Delhi) . . . 641

Assessment --Reference to Valuation Officer--Opinion of Valuation Officer--Not sufficient basis without anything further to make addition--Income-tax Act, 1961-- CIT v. Naveen Gera (Delhi) . . . 516

----Valuation of property--Reference to Valuation Officer for valuation of investment--Not permissible where assessment made prior to September 30, 2004--Income-tax Act, 1961, s. 142A-- CIT v. Naveen Gera (Delhi) . . . 516

Business --Adventure in the nature of trade--Purchase of plots of land demarcated for acquisition by Government--Subsequent acquisition and receipt of compensation--Transaction adventure in the nature of trade--Gains assessable as business income--Income-tax Act, 1961, ss. 2(13), 28-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

----Business income--Cessation of liability--Interest on loans deducted in prior years--Credit entries transferred to capital accounts of partners of assessee-firm--Liability to pay interest ceased--Interest credited to accounts of creditors in assessment year assessable under section 41(1)--Income-tax Act, 1961, s. 41(1)-- Sree Hanuman Trading Co . v. ITO (Ker) . . . 662

----Other sources--Interest on compensation--Assessable as business income--Income-tax Act, 1961, s. 28-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

Business expenditure --Capital or revenue expenditure--Expenditure incurred in setting up new unit--Finding that new unit was separate and independent--Expenditure not deductible--Income-tax Act, 1961, s. 37-- CIT v. Vadilal Dairy International Ltd . (Guj) . . . 544

----Capital or revenue expenditure--Expenditure on foreign travel--Foreign travel for purposes of setting up new unit--Expenditure capitalised by assessee--Expenditure not deductible--Income-tax Act, 1961, s. 37-- CIT v. Vadilal Dairy International Ltd. (Guj) . . . 544

----Disallowance--Payments in cash exceeding specified limit--Distributor of lottery tickets--Explanation that Government insisted on payments in cash or demand drafts--Contention that Government agents were coming for collection of cash--Explanation contrary to contention--Commissioner (Appeals) and Tribunal not justified in setting aside disallowance--Matter remanded--Income-tax Act, 1961, s. 40A(3)-- ITO v. K. N. Pramod (Karn) . . . 669

Capital gains --Capital loss--Assessee in October 1992 acquiring convertible debentures for shares hold--Renunciation of right--Loss incurred--Deductible as short-term capital loss--Income-tax Act, 1961, s. 55-- Asst. CIT v. Acropolish Investments Ltd .(Guj) . . . 664

----Liability to tax--Land and building brought to firm as capital contribution by partners--Depreciation on land and buildings allowed to firm for a number of years--Dissolution of firm and assets distributed among partners--Transaction covered by section 45(4)--Gains assessable--Reference to valuer under section 55A justified--Income-tax Act, 1961, ss. 45(4), 55A--CIT v. Kumbazha Tourist Home (Dissolved) (Ker) . . . 600

Charitable purpose --Exemption--Money advanced for purchase of land--Peaceful and vacant possession of property handed over and irrevocable general power of attorney executed in assessee's favour--Assessee entitled to exemption--Income-tax Act, 1961, s. 11-- Director of Income-tax (Exemptions) v. Maharaja Agarsen Technical Education Society (Delhi) . . . 551

----Registration--Truck operators association--Welfare activities as in business organizations--Assessee not formed for advancement of general public utility--Assessee not entitled to benefit of registration--Income-tax Act, 1961, ss. 2(15), 12AA-- CIT v. Truck Operators Association (P&H) . . . 636

Deduction of tax at source --Writ--Works contract--Supply of eggs to Government in terms of specification contained in contract--Transaction whether works contract or sale is a question of fact--Assessee having alternative remedies under Income-tax Act--Writ would not issue to quash order for deduction of tax at source--Income-tax Act, 1961, s. 194C--Constitution of India, art. 226-- Mani Muthusamy v. Personal Assistant to Collector (Mad) . . . 588

Export --Special deduction under section 80HHC--Computation of turnover--Conversion charges not includible in turnover--Income-tax Act, 1961, s. 80HHC-- CIT v. Coimbatore Twisters Pvt. Ltd. (Mad) . . . 609

Income --Accrual of income--Time of accrual--Interest on compensation--Assessable in year of receipt--Income-tax Act, 1961-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

Income from undisclosed sources --Investment in property--Burden of proof to prove understatement is on Revenue--No evidence found at search to suggest payment over and above consideration mentioned in registered purchase deed--Addition solely on basis of report of Valuation Officer--Not justified--Income-tax Act, 1961-- CIT v. Smt. Suraj Devi (Delhi) . . . 604

----Long-term capital gains--Assessees belonging to a group purchasing and selling shares of similar companies--Assessing Officer holding transactions sham as sale through same broker and not at market rate--Tribunal finding transactions genuine--Finding of fact--Income-tax Act, 1961, s. 68-- CIT v. Jamnadevi Agrawal (Bom) . . . 656

Interest on borrowed capital --Capital used for setting up new business--Law applicable--Proviso to section 36(1)(iii) effective from 1-4-2004--Interest deductible in assessment year 1993-94--Income-tax Act, 1961, s. 36(1)(iii)-- CIT v. Vadilal Dairy International Ltd. (Guj) . . . 544

Loss --Business loss--Lease transaction found to be bogus--Claim for business loss arising from such transaction--Not allowable--Income-tax Act, 1961-- CIT v. English Indian Clays Ltd. (Ker) . . . 647

Offences and prosecution --Wilful attempt to evade tax--Penalty set aside by competent court--Prosecution based on same facts cannot continue--Income-tax Act, 1961, ss. 276C, 278B-- Harkawat and Company v. Union of India (MP) . . . 624

Penalty --Concealment of income--Additions on account of disallowance of certain expenses--Not a case of concealment of income or furnishing inaccurate particulars--Tribunal deleting penalty on finding disallowance on an estimate basis without pointing out any specific defect in explanation of assessee--Findings of fact--Income-tax Act, 1961, s. 271(1)(c)-- CIT v. SSP Ltd. (P&H) . . . 643

----Concealment of income--Claim for deduction of loss--Details regarding claim furnished--Claim rejected--No furnishing of inaccurate particulars or concealment of income--Cancellation of penalty--Valid--Income-tax Act, 1961, s. 271(1)(c)-- CIT v. IFCI Ltd. (Delhi) . . . 611

----Disallowance--Not a ground for levying penalty--Income-tax Act, 1961, s. 271(1)(c)--CIT v. SSP Ltd. (P&H) . . . 643

Precedent --Effect of decision of Supreme Court in Assistant CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500-- CIT v. Chandrasekhar Balagopal (Ker) . . . 619

----Effect of decision of Supreme Court in State of A. P. v. Kone Elevators [2005] 3 SCC 389-- Mani Muthusamy v. Personal Assistant to Collector (Mad) . . . 588

----Effect of Supreme Court decision in Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194-- CIT v. Vadilal Dairy International Ltd. (Guj) . . . 544

Professional income from foreign sources --Special deduction--Dress designer--Is an artist--Design fees received in convertible foreign exchange--Eligible for deduction under section 80RR--Income-tax Act, 1961, s. 80RR-- CIT v. Tarun R. Tahiliani (Bom) . . . 629

Purchase of immovable property by Central Government --Transactions cited by transferor and transferee not considered--No good reason for valuation fixed by Appropriate Authority--Order of pre-emptive purchase--Not valid--Income-tax Act, 1961, s. 268UD(1)-- Dattaram Bhikai Telge v. Appropriate Authority (Bom) . . . 580

Reassessment --Limitation--Exclusion from limitation--Reassessment consequent on finding in appellate order--Effect of sections 150(1) and 153(1)--Order of Commissioner (Appeals) in 1996 that capital gains was assessable in assessment year 1983-84 --Notice under section 148 based on order--Not barred by limitation--Income-tax Act, 1961, ss. 148, 150, 153-- Kalyan Ala Barot v. M. H. Rathod (Guj) . . . . 521

----Notice--Notice after four years on ground assessee not entitled to deduction claimed--Assessee disclosing fully and truly all material facts necessary for assessment and Assessing Officer applying mind thereto--No case for reopening assessment beyond four years--Income-tax Act, 1961, s. 148-- Hindustan Petroleum Corporation Ltd. v. Deputy CIT (Bom) . . . 534

----Notice--Returns filed between 1-10-1991 and 30-9-2005--Notice issued under section 143 after twelve months--Reassessment proceedings valid--Income-tax Act, 1961, ss. 143(2), 147, 148-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

----Notice--Validity of notice--Law applicable--Effect of amendment of sections 143 and 147 with effect from 1-4-1989--Failure to make assessment based on return--Notice of reassessment not barred--Notice valid--Income-tax Act, 1961, ss. 143, 147, 148-- CIT v. Chandrasekhar Balagopal (Ker) . . . 619

Reference --Finality of findings of fact--Income-tax Act, 1961, s. 256-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

Rejection of books of account --Assessing Officer rejecting books of account, making assessment by applying gross profit at a higher rate--Finding by appellate authorities that no justification for rejecting books of account since assessee given explanation for decrease in sale and no defect in valuation of stock and assessee following same method of valuation consistently for many years--Findings of fact--Income-tax Act, 1961-- CIT v. Patiala Distt. Co-op. Milk Producers' Union Ltd . (P&H) . . . 615

Undisclosed investment --Purchase of property disclosed in declaration under Voluntary Disclosure Scheme--No evidence found in course of search to show payment of any sum over that declared--No addition permissible--Voluntary Disclosure of Income Scheme, 1997-- CIT v. Naveen Gera (Delhi) . . . 516

Words and phrases --"Artist"--Meaning of-- CIT v. Tarun R. Tahiliani (Bom) . . . 629

 

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Constitution of India :

Art. 226 --Deduction of tax at source--Writ--Works contract--Supply of eggs to Government in terms of specification contained in contract--Transaction whether works contract or sale is a question of fact--Assessee having alternative remedies under Income-tax Act--Writ would not issue to quash order for deduction of tax at source-- Mani Muthusamy v. Personal Assistant to Collector (Mad) . . . 588

Income-tax Act, 1961 :

S. 2(13) --Business--Adventure in the nature of trade--Purchase of plots of land demarcated for acquisition by Government--Subsequent acquisition and receipt of compensation--Transaction adventure in the nature of trade--Gains assessable as business income-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

S. 2(15) --Charitable purpose--Registration--Truck operators association--Welfare activities as in business organizations--Assessee not formed for advancement of general public utility--Assessee not entitled to benefit of registration-- CIT v. Truck Operators Association (P&H) . . . 636

S. 11 --Charitable purpose--Exemption--Money advanced for purchase of land--Peaceful and vacant possession of property handed over and irrevocable general power of attorney executed in assessee's favour--Assessee entitled to exemption-- Director of Income-tax (Exemptions) v. Maharaja Agarsen Technical Education Society (Delhi) . . . 551

S. 12AA --Charitable purpose--Registration--Truck operators association--Welfare activities as in business organizations--Assessee not formed for advancement of general public utility--Assessee not entitled to benefit of registration-- CIT v. Truck Operators Association (P&H) . . . 636

S. 28 --Business--Adventure in the nature of trade--Purchase of plots of land demarcated for acquisition by Government--Subsequent acquisition and receipt of compensation--Transaction adventure in the nature of trade--Gains assessable as business income-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

----Business--Other sources--Interest on compensation--Assessable as business income-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

S. 36(1)(iii) --Interest on borrowed capital--Capital used for setting up new business--Law applicable--Proviso to section 36(1)(iii) effective from 1-4-2004--Interest deductible in assessment year 1993-94-- CIT v. Vadilal Dairy International Ltd. (Guj) . . . 544

S. 37 --Business expenditure--Capital or revenue expenditure--Expenditure incurred in setting up new unit--Finding that new unit was separate and independent--Expendi-ture not deductible-- CIT v. Vadilal Dairy International Ltd . (Guj) . . . 544

----Business expenditure--Capital or revenue expenditure--Expenditure on foreign travel--Foreign travel for purposes of setting up new unit--Expenditure capitalised by assessee--Expenditure not deductible-- CIT v. Vadilal Dairy International Ltd. (Guj) . . . 544

S. 40A(3) --Business expenditure--Disallowance--Payments in cash exceeding speci-fied limit--Distributor of lottery tickets--Explanation that Government insisted on payments in cash or demand drafts--Contention that Government agents were coming for collection of cash--Explanation contrary to contention--Commissioner (Appeals) and Tribunal not justified in setting aside disallowance--Matter remanded-- ITO v. K. N. Pramod (Karn) . . . 669

S. 41(1) --Business--Business income--Cessation of liability--Interest on loans deducted in prior years--Credit entries transferred to capital accounts of partners of assessee-firm--Liability to pay interest ceased--Interest credited to accounts of creditors in assessment year assessable under section 41(1)-- Sree Hanuman Trading Co . v. ITO (Ker) . . . 662

S. 45(4) --Capital gains--Liability to tax--Land and building brought to firm as capital contribution by partners--Depreciation on land and buildings allowed to firm for a number of years--Dissolution of firm and assets distributed among partners--Transaction covered by section 45(4)--Gains assessable--Reference to valuer under section 55A justified--CIT v. Kumbazha Tourist Home (Dissolved) (Ker) . . . 600

S. 55 --Capital gains--Capital loss--Assessee in October 1992 acquiring convertible debentures for shares hold--Renunciation of right--Loss incurred--Deductible as short-term capital loss-- Asst. CIT v. Acropolish Investments Ltd . (Guj) . . . 664

S. 55A --Capital gains--Liability to tax--Land and building brought to firm as capital contribution by partners--Depreciation on land and buildings allowed to firm for a number of years--Dissolution of firm and assets distributed among partners--Transaction covered by section 45(4)--Gains assessable--Reference to valuer under section 55A justified--CIT v. Kumbazha Tourist Home (Dissolved) (Ker) . . . 600

S. 68 --Income from undisclosed sources--Long-term capital gains--Assessees belonging to a group purchasing and selling shares of similar companies--Assessing Officer holding transactions sham as sale through same broker and not at market rate--Tribunal finding transactions genuine--Finding of fact-- CIT v. Jamnadevi Agrawal (Bom) . . . 656

S. 80HHC --Export--Special deduction under section 80HHC--Computation of turnover--Conversion charges not includible in turnover-- CIT v. Coimbatore Twisters Pvt. Ltd. (Mad) . . . 609

S. 80RR --Professional income from foreign sources--Special deduction--Dress designer--Is an artist--Design fees received in convertible foreign exchange--Eligible for deduction under section 80RR-- CIT v. Tarun R. Tahiliani (Bom) . . . 629

S. 142A --Assessment--Valuation of property--Reference to Valuation Officer for valuation of investment--Not permissible where assessment made prior to September 30, 2004-- CIT v. Naveen Gera (Delhi) . . . 516

S. 143 --Reassessment--Notice--Validity of notice--Law applicable--Effect of amendment of sections 143 and 147 with effect from 1-4-1989--Failure to make assessment based on return--Notice of reassessment not barred--Notice valid-- CIT v. Chandrasekhar Balagopal (Ker) . . . 619

S. 143(2) --Reassessment--Notice--Returns filed between 1-10-1991 and 30-9-2005 --Notice issued under section 143 after twelve months--Reassessment proceedings valid-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

S. 147 --Reassessment--Information--Opinion of District Valuation Officer--Cannot be basis for reopening assessment-- Asst. CIT v. Dhariya Construction Co .(SC) . . . 515

----Reassessment--Notice--Returns filed between 1-10-1991 and 30-9-2005--Notice issued under section 143 after twelve months--Reassessment proceedings valid-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

----Reassessment--Notice--Validity of notice--Law applicable--Effect of amendment of sections 143 and 147 with effect from 1-4-1989--Failure to make assessment based on return--Notice of reassessment not barred--Notice valid-- CIT v. Chandrasekhar Balagopal (Ker) . . . 619

S. 148 --Reassessment--Limitation--Exclusion from limitation--Reassessment consequent on finding in appellate order--Effect of sections 150(1) and 153(1)--Order of Commissioner (Appeals) in 1996 that capital gains was assessable in assessment year 1983-84 --Notice under section 148 based on order--Not barred by limitation-- Kalyan Ala Barot v. M. H. Rathod (Guj) . . . 521

----Reassessment--Notice--Notice after four years on ground assessee not entitled to deduction claimed--Assessee disclosing fully and truly all material facts necessary for assessment and Assessing Officer applying mind thereto--No case for reopening assessment beyond four years-- Hindustan Petroleum Corporation Ltd. v. Deputy CIT (Bom) . . . 534

----Reassessment--Notice--Returns filed between 1-10-1991 and 30-9-2005--Notice issued under section 143 after twelve months--Reassessment proceedings valid-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

----Reassessment--Notice--Validity of notice--Law applicable--Effect of amendment of sections 143 and 147 with effect from 1-4-1989--Failure to make assessment based on return--Notice of reassessment not barred--Notice valid-- CIT v. Chandrasekhar Balagopal (Ker) . . . 619

S. 150 --Reassessment--Limitation--Exclusion from limitation--Reassessment consequent on finding in appellate order--Effect of sections 150(1) and 153(1)--Order of Commissioner (Appeals) in 1996 that capital gains was assessable in assessment year 1983-84 --Notice under section 148 based on order--Not barred by limitation-- Kalyan Ala Barot v. M. H. Rathod (Guj) . . . 521

S. 153 --Reassessment--Limitation--Exclusion from limitation--Reassessment consequent on finding in appellate order--Effect of sections 150(1) and 153(1)--Order of Commissioner (Appeals) in 1996 that capital gains was assessable in assessment year 1983-84 --Notice under section 148 based on order--Not barred by limitation-- Kalyan Ala Barot v. M. H. Rathod (Guj) . . . 521

S. 194C --Deduction of tax at source--Writ--Works contract--Supply of eggs to Government in terms of specification contained in contract--Transaction whether works contract or sale is a question of fact--Assessee having alternative remedies under Income-tax Act--Writ would not issue to quash order for deduction of tax at source-- Mani Muthusamy v. Personal Assistant to Collector (Mad) . . . 588

S. 234B --Advance tax--Interest payable by assessee--Compensation and interest on acquisition of land--Failure to pay advance tax--Interest can be levied under section 234B-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

S. 256 --Reference--Finality of findings of fact-- Deputy CIT v. Gopal Ramnarayan Kasat (Bom) . . . 556

S. 268UD(1) --Purchase of immovable property by Central Government--Transactions cited by transferor and transferee not considered--No good reason for valuation fixed by Appropriate Authority--Order of pre-emptive purchase--Not valid-- Dattaram Bhikai Telge v. Appropriate Authority (Bom) . . . 580

S. 271(1)(c) --Penalty--Concealment of income--Additions on account of disallowance of certain expenses--Not a case of concealment of income or furnishing inaccurate particulars--Tribunal deleting penalty on finding disallowance on an estimate basis without pointing out any specific defect in explanation of assessee--Findings of fact-- CIT v. SSP Ltd. (P&H) . . . 643

----Penalty--Concealment of income--Claim for deduction of loss--Details regarding claim furnished--Claim rejected--No furnishing of inaccurate particulars or concealment of income--Cancellation of penalty--Valid-- CIT v. IFCI Ltd. (Delhi) . . . 611

----Penalty--Disallowance--Not a ground for levying penalty--CIT v. SSP Ltd. (P&H) . . . 643

S. 276C --Offences and prosecution--Wilful attempt to evade tax--Penalty set aside by competent court--Prosecution based on same facts cannot continue-- Harkawat and Company v. Union of India (MP) . . . 624

S. 278B --Offences and prosecution--Wilful attempt to evade tax--Penalty set aside by competent court--Prosecution based on same facts cannot continue-- Harkawat and Company v. Union of India (MP) . . . 624

 

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ITR Volume 328 : Part 3 (Issue dated 8-11-2010) INCOME TAX REPORTS (ITR) Volume 328 : Part 3 (Issue dated 8-11-2010) SUBJECT INDEX TO CASES REPORTED IN THIS PART SUPREME COURT Advance tax --Nature of--Does not affect charge of tax or modify liability

INCOME TAX REPORTS (ITR)

Volume 328 : Part 3 (Issue dated 8-11-2010)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

SUPREME COURT

Advance tax --Nature of--Does not affect charge of tax or modify liability to pay tax on assessment order--Income-tax Act, 1961, ss. 4(1), 190(1), 207-- Brij Lal v. CIT . . . 477

Settlement of cases --Settlement Commission--Interest under section 234B--Only up to the date of order under section 245D(1) and not up to date of order of settlement under section 245D(4)--Income-tax Act, 1961, ss. 234B, 245D(1), (4)-- Brij Lal v. CIT . . 477

Settlement Commission--Proceedings concluded--Thereafter interest under section 234B cannot be levied by way of rectification--Relevant date for determining quantum of interest under section 234B--Income-tax Act, 1961, ss. 2(40), (45), 140A, 143, 154, 207, 209, 210, 215, 234A, 234B, 234C, 245A, 245C, 245D, 245E, 245F, 245-I-- Brij Lal v. CIT . . . 477

Words and phrases --"Assessment", meaning of-- Brij Lal v. CIT . . . 477

HIGH COURTS

Accounting --Change of method of accounting from turnover base to capital investment base--Bona fides of assessee to adopt new method cannot be doubted merely because resulting in more benefits to assessee--Income-tax Act, 1961-- CIT v. Jindal Saw Pipes Ltd . (Delhi) . . . 338

Advance tax --Interest payable by assessee--Waiver of interest--Jurisdiction to grant waiver--Effect of circular-cum-notification dated 23-5-1996--Chief Commissioner and Director General of Income-tax (Exemptions) have jurisdiction only in cases covered by category 2(a) to (e) mentioned in circular--Income-tax Act, 1961, ss. 234B, 234C--Circular-cum-Notification dated 23-5-1996-- Director General of Income-tax (Exemptions) v. Jockeys Association of India (Karn) . . . 405

Appeal to Appellate Tribunal --Additional ground can be entertained--Income-tax Act, 1961, s. 250(5)-- CIT v. Jindal Saw Pipes Ltd. (Delhi) . . . 338

Appeal to High Court --Circular fixing monetary limit in case of appeal by Revenue --Whether monetary limit applicable to pending cases--To be decided by a larger Bench--Income-tax Act, 1961, ss. 260A, 268A-- CIT v. Varindra Construction Co. (P&H) . . . 446

Business expenditure --Deduction only on actual payment--Exclusion from disallowance--Law applicable--Amendment of section 43B with effect from 1-4-2004--Amendment retrospective--Payment of contribution to provident fund after due date but before filing of return--Payment deductible--Income-tax Act, 1961, s. 43B-- H. P. Tourism Development Corporation Ltd. v. CIT (HP) . . . 508

Cash credits --Share application money--Assessee proving identity of parties, genuineness of transaction and creditworthiness of share applicants--Tribunal deleting additions after appreciating evidence on record--Finding of fact--No substantial question of law--Income-tax Act, 1961, s. 68-- CIT v. Ujala Dyeing and Printing Mills P. Ltd. (Guj) . . . 437

Charitable purposes --Exemption--Educational institution--Assessee running schools--Entitled to exemption under section 11--Income-tax Act, 1961, s. 11-- CIT v. Manav Mangal Society (P&H) . . . 421

Deduction of tax at source --Interest--Chit fund--Chit agreement would not fall under "money lending"--No "debt incurred"--Bid amount disbursed is not interest payable on money borrowed--Payments disbursed not subject to deduction of tax at source--Income-tax Act, 1961, ss. 2(28A), 194A, 201-- CIT v. Sahib Chits (Delhi) (Pvt.) Ltd. (Delhi) . . . 342

Export --Special deduction--Computation--Meaning of "profits of business"--Law applicable--Effect of insertion of clause (iiid) in section 28 by Finance Act, 2005--Entire sale consideration on transfer of DEPB credit assessable on business profits--Income-tax Act, 1961, ss. 28(iiid), 80HHC-- CIT v. Kalpataru Colours and Chemicals (Bom) . . . 451

Special deduction--Computation--Tribunal allowing deduction under section 80HHC on basis of book profits under section 115JA and not on basis of eligible profits under section 80HHC as per normal computation--Justified--Income-tax Act, 1961, ss. 80HHC, 115JA-- CIT v. Bhari Information Technology Systems P. Ltd. (Mad) . . . 380

Income --Association--Principle of mutuality--Interest on surplus funds invested in fixed deposits with banks--Not income received from members of assessee but from third parties--Investing funds of association in bank fixed deposits a prudent commercial decision--Principle of mutuality does not apply--Matter remanded--Income-tax Act, 1961-- CIT v. Common Effluent Treatment Plant, (Thane-Belapur) Association (Bom) . . . 362

Association--Principle of mutuality--Surplus income over expenditure--Principle of mutuality applies--Not chargeable to tax--Income-tax Act, 1961-- CIT v. Common Effluent Treatment Plant, (Thane-Belapur) Association (Bom) . . . 362

Principle of mutuality--Club--Surplus funds deposited with institutional members--Interest on such deposits--Does not satisfy principle of mutuality--Chargeable to tax--Income-tax Act, 1961, s. 4-- Madras Gymkhana Club v. Deputy CIT (Mad) . . . 348

Time-barred unclaimed matured debentures transferred to general reserve account and utilised for business purposes--Amount assessable as trading receipt--Income-tax Act, 1961-- Hindustan Foods Ltd. v. Deputy CIT (Bom) . . . 392

Income from undisclosed sources --Additions to income on basis of statement given by assessee during survey--Assessee later contending that income was from agriculture--Assessee failing to produce books of account or any other authentic contemporaneous evidence of agricultural income--Some entries in a diary not sufficient and conclusive to hold that statement made earlier false--Addition proper--Income-tax Act, 1961, ss 132(4), 133A-- Bachittar Singh v. CIT (P&H) . . . 400

Amount realised on sale of gold jewellery and diamonds--Claim that gold jewellery and diamonds declared under Voluntary Disclosure of Income Scheme--No specific finding regarding claim--Addition to income not justified--Matter remanded--Finance Act, 1997, s. 68-- Smt. Kailashi Devi G. Agarwal v. ITO (Karn) . . . 425

Unaccounted sales--Unaccounted sales covered by income declared by assessee--No separate addition required--Income-tax Act, 1961-- CIT v. Sambhav Textiles Ltd. (P&H) . . . 444

Industrial undertaking --Deduction under section 80-IB--Sale of export incentive--Not income derived from industrial undertaking--Not entitled to deduction--Income-tax Act, 1961 s. 80-IB-- CIT v. Jaswand Sons (P&H) . . . 442

Special deduction under section 80-IA--Computation of gross total income for purposes of section 80-IA--Deduction granted after setting off losses from all other sources--Proper--Income-tax Act, 1961, s. 80-IA-- CIT v. Tridoss Laboratories Ltd .(Bom) . . . 448

Loss --Set off of loss--Year in which loss occurred--Destruction of stock stored in State warehousing corporation by fire in 1978--Suit filed for reimbursement of loss dismissed in May 1982--Loss allowable in assessment year 1983-84--Income-tax Act, 1961, s. 71-- New Diwan Oil Mills v. CIT (P&H) . . . 432

Precedent --Effect of decision of Supreme Court in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306-- H. P. Tourism Development Corporation Ltd . v. CIT (HP) . . . 508

Effect of decision of Supreme Court in CIT v. Anjum M. H. Ghaswala [2001] 252 ITR 1-- Director General of Income-tax (Exemptions) v. Jockeys Association of India (Karn) . . . 405

Principle of mutuality --Application of-- CIT v. Common Effluent Treatment Plant, (Thane-Belapur) Association (Bom) . . . 362

Reassessment --Limitation--No assessment made under section 143(3)--Time limit of four years not applicable--Income-tax Act, 1961, ss. 143(3), 147-- Madras Gymkhana Club v. Deputy CIT (Mad) . . . 348

Search and seizure --Undisclosed investment--Addition on basis of statement under section 132(4) by assessee recorded at midnight--Assessee later retracting and giving proper explanation for investment--Statement made at odd hours cannot be considered as voluntary statement--Addition not justified--Income-tax Act, 1961-- Kailashben Manharlal Chokshi v. CIT (Guj) . . . 411

Survey --Discrepancy in stock and cash--Addition on basis of statement made during survey--Assessee later contending that statement incorrect and that discrepancy reconciled as it was a mistake--Statement made under section 133A not conclusive proof--Assessee able to explain discrepancy in stock by production of relevant record--Addition to be deleted--Income-tax Act, 1961, s. 133A-- CIT v. Dhingra Metal Works (Delhi) . . . 384

Unexplained investments --Addition on basis of variation between stocks hypothecated with bank and stock shown in books of account--Tribunal finding addition based on bank statement and verification by Regional Officer that stock actually lying with assessee and assessee failed to give satisfactory explanation--Findings of fact--Income-tax Act, 1961 s. 69-- B. T. Steels Ltd. v. CIT (P&H) . . . 471

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Finance Act, 1997 :

S. 68 --Income from undisclosed sources--Amount realised on sale of gold jewellery and diamonds--Claim that gold jewellery and diamonds declared under Voluntary Disclosure of Income Scheme--No specific finding regarding claim--Addition to income not justified--Matter remanded-- Smt. Kailashi Devi G. Agarwal v. ITO (Karn) . . . 425

Income-tax Act, 1961 :

S. 2(28A) --Deduction of tax at source--Interest--Chit fund--Chit agreement would not fall under "money lending"--No "debt incurred"--Bid amount disbursed is not interest payable on money borrowed--Payments disbursed not subject to deduction of tax at source-- CIT v. Sahib Chits (Delhi) (Pvt.) Ltd. (Delhi) . . . 342

S. 2(40) --Settlement of cases--Settlement Commission--Proceedings concluded--Thereafter interest under section 234B cannot be levied by way of rectification--Relevant date for determining quantum of interest under section 234B-- Brij Lal v. CIT (SC) . . . 477

S. 2(45) --Settlement of cases--Settlement Commission--Proceedings concluded--Thereafter interest under section 234B cannot be levied by way of rectification--Relevant date for determining quantum of interest under section 234B-- Brij Lal v. CIT

(SC) . . . 477

S. 4 --Income--Principle of mutuality--Club--Surplus funds deposited with institutional members--Interest on such deposits--Does not satisfy principle of mutuality--Chargeable to tax-- Madras Gymkhana Club v. Deputy CIT (Mad) . . . 348

S. 4(1) --Advance tax--Nature of--Does not affect charge of tax or modify liability to pay tax on assessment order-- Brij Lal v. CIT (SC) . . . 477

S. 11 --Charitable purposes--Exemption--Educational institution--Assessee running schools--Entitled to exemption under section 11-- CIT v. Manav Mangal Society (P&H) . . . 421

S. 28(iiid) --Export--Special deduction--Computation--Meaning of "profits of business"--Law applicable--Effect of insertion of clause (iiid) in section 28 by Finance Act, 2005--Entire sale consideration on transfer of DEPB credit assessable on business profits-- CIT v. Kalpataru Colours and Chemicals (Bom) . . . 451

S. 43B --Business expenditure--Deduction only on actual payment--Exclusion from disallowance--Law applicable--Amendment of section 43B with effect from 1-4-2004--Amendment retrospective--Payment of contribution to provident fund after due date but before filing of return--Payment deductible-- H. P. Tourism Development Corporation Ltd. v. CIT (HP) . . . 508

S. 68 --Cash credits--Share application money--Assessee proving identity of parties, genuineness of transaction and creditworthiness of share applicants--Tribunal deleting additions after appreciating evidence on record--Finding of fact--No substantial question of law-- CIT v. Ujala Dyeing and Printing Mills P. Ltd. (Guj) . . . 437

S. 69 --Unexplained investments--Addition on basis of variation between stocks hypothecated with bank and stock shown in books of account--Tribunal finding addition based on bank statement and verification by Regional Officer that stock actually lying with assessee and assessee failed to give satisfactory explanation--Findings of fact-- B. T. Steels Ltd. v. CIT (P&H) . . . 471

S. 71 --Loss--Set off of loss--Year in which loss occurred--Destruction of stock stored in State warehousing corporation by fire in 1978--Suit filed for reimbursement of loss dismissed in May 1982--Loss allowable in assessment year 1983-84-- New Diwan Oil Mills v. CIT (P&H) . . . 432

S. 80HHC --Export--Special deduction--Computation--Meaning of "profits of business"--Law applicable--Effect of insertion of clause (iiid) in section 28 by Finance Act, 2005--Entire sale consideration on transfer of DEPB credit assessable on business profits-- CIT v. Kalpataru Colours and Chemicals (Bom) . . . 451

Export--Special deduction--Computation--Tribunal allowing deduction under section 80HHC on basis of book profits under section 115JA and not on basis of eligible profits under section 80HHC as per normal computation--Justified-- CIT v. Bhari Information Technology Systems P. Ltd. (Mad) . . . 380

S. 80-IA --Industrial undertaking--Special deduction under section 80-IA--Computation of gross total income for purposes of section 80-IA--Deduction granted after setting off losses from all other sources--Proper-- CIT v. Tridoss Laboratories Ltd . (Bom) . . . 448

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ITAT DEL: Software licensing payments are royalty and taxable,

Software licensing payments are royalty and taxable, rules Tribunal

Microsoft case verdict goes in favour of Revenue Department.

Software firm hit hard

End-user payments for licensing of software to be treated as 'royalty'

Microsoft says payments made towards licensing of software cannot be treated as royalty

Payments made to Microsoft prior to Jan 1, 1999, also taxable as royalty

K.R.Srivats

New Delhi, Oct. 30

The Delhi Income-Tax Appellate Tribunal (ITAT) has held that payments received by Microsoft Corporation from end users (in India) through distributors for sale of Microsoft software, are taxable as royalty. This would be applicable for all the payments made before January 1, 1999, the ITAT has said.

Until this date, Microsoft Corporation, a US company, had direct arrangements with various Indian distributors for sale of Microsoft software (off- the-shelf/shrink-wrapped), on a principal-to-principal basis.

From January 1, 1999, the business model was changed and Microsoft granted exclusive licence to Gracemac Corporation of the US to manufacture the Microsoft software and distribute it in terms of the licence agreement. Even under the changed business model, the ITAT has now held that payments for software licensing should be treated as royalty for tax purposes.

Disposing a batch of appeals relating to three different entities — Microsoft Corporation, Gracemac Corporation and Microsoft Regional Sales Corporation (MRSC) — relating to different assessment years, the ITAT bench upheld the ruling of CIT (appeals) that consideration received from licensing of computer software would be in the nature of royalty under the Indian Income Tax law and India-US DTAA.

Revenue Dept

This ITAT ruling comes in the Revenue Department's favour. Microsoft has been contending that payments made towards licensing of computer software cannot be treated as royalty, but should be considered as business profits. If considered as business profits, the software major would have had no tax liability here as it does not have a permanent establishment in India.

Meanwhile, in the case of Gracemac Corp, the ITAT has held that payments made in respect of copyright in Microsoft software are taxable as royalty in its hands.

Under Microsoft's changed business model from January 1, 1999, Gracemac had entered into a licence agreement with Microsoft Operations Pte Ltd, a Singapore-based wholly-owned subsidiary of Microsoft Corporation, for non-exclusive licence to reproduce Microsoft software in Singapore. Microsoft Operations sold all its Microsoft software copies to MRSC branch in Singapore. MRSC had delivered Microsoft software copies to Indian distributors, ex-warehouse in Singapore, who in turn sold them to re-sellers/end users in India.

Microsoft Operations paid royalty to Gracemac. The royalty was based on a percentage of net selling price received by MRSC from distributors in various countries, including India.

The Delhi ITAT has also ruled that MRSC cannot be taxed again on the same income, by way of royalty, for exploitation of same rights which had been taxed in the hands of Gracemac Corporation. Any such move would constitute double taxation and therefore the ITAT has deleted the additions in the hands of MRSC for all the three years.

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Delhi HC: Tax evasion suspicion needs to be recorded.

The Delhi high court has ruled that the tax authorities cannot initiate assessment proceedings simply on belief of escapement of tax, or belief that some income has escaped tax, effectively curbing powers of the revenue department to open past cases. Such belief must be based on prudence which a reasonable person is required to apply, said the high court quashing the income escaping assessment proceedings initiated by the Revenue department under section 147 of the Income Tax Act against an assessee. "The formation of belief must be on the base or foundation or platform of prudence which a reasonable person is required to apply," said a bench comprising Chief Justice Deepak Misra and Justice Manmohan in its order. The court added that the reasons why the assessing officer believed some income had escaped tax needed to be recorded as well. According to section 147 of the I-T Act, amended through the Direct Tax Laws (Amendment) Act of 1989 which came into effect from April 1, 1989, cases could be re-opened if the assessing officer has reason to believe that the income has escaped assessment. Prior to Direct Tax Laws (Amendment) Act, 1987, the assessing officer was empowered to make back assessment on fulfilment of two conditions. One, if the assessing officer has reason to believe that by reason of the omission or failure on the part of an assessee income chargeable to tax has escaped assessment for that year. Second, notwithstanding that there has been no omission or failure on the part of the assessee, the income-tax officer has in consequence of information in his possession has reason to believe that income chargeable to tax has escaped assessment for any assessment year. The amended Act dropped these two conditions, widening the power of the assessing officer to open a case if he has reason to believe that income has escaped assessment. The high court on the plea of the assessee Sarthak Securities held the income escapement proceedings under section 147 of the I-T act, 1961 as illegal. The assessee had filed its return for the assessment year 2003-04 declaring an income of Rs 15,360. It was processed and intimation under Section 143(1) was issued on April 6, 2004 accepting the return. The company had allotted shares to four companies on March 31, 2003 for the amount of Rs 2,50,000, Rs 2,50,000, Rs 3,00,000 and Rs 2,50,000, respectively. These companies were active as per the records of the Registrar of Companies (ROC) and were assessed to income-tax. The department on March 25, 2010 issued notice under section 148 of the Act to the assessee saying that it had reason to believe that the income chargeable to tax for the assessment year 2003-04 had escaped assessment and asked the assessee to file its return for the assessment year in question. – www.economictimes.indiatimes.com

ITR (Trib)) HIGHLIGHTS : Dt 18-10-2010 Volume 5 Part 8

ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS

ISSUE DATED 18-10-2010

Volume 5 Part 8

 

APPELLATE TRIBUNAL ORDERS

 

Trust setting up and running educational institution, genuineness of activity established, entitled to registration u/s.12A : Shri Krishna Education and Welfare Trust v. CIT (Delhi) p. 750

 

Where no material produced by AO to prove purchase and lease of cylinders not genuine, assessee entitled to depreciation : Asst. CIT v. Banaras Beads Ltd. (Delhi) p. 761

 

Export proceeds received in convertible foreign exchange before completion of assessment to be included in total turnover : Asst. CIT v. Banaras Beads Ltd. (Delhi) p. 761

 

Liability on account of foreign exchange fluctuation allowed on accrual basis with reference to rate of foreign exchange at end of year : HLS Asia Ltd. v. Dy. CIT (Delhi) p. 774

 

Capital assets not constituting trading items of assessee ; deduction not allowable u/s. 80HHC : HLS Asia Ltd. v. Dy. CIT (Delhi) p. 774

 

Loans obtained for working capital against security of lands cannot be deducted while computing net wealth of assessee : Phoenix International Ltd. v. Dy. CWT (Delhi) p. 787

 

Where fixation of annual value of property by Municipal Corporation at higher rate, CIT directing AO to examine issue considering ss.23 and 24, proper : SICAL Logistics Ltd. v. Addl. CIT (Chennai) p. 801

 

Where repayment of loans in cash prior to amendment, penalty not imposable u/s. 271E : ITO v. Sudesh Kumar Sareen (Delhi) p. 829

 

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Penalty: Judgement from Hon'ble Supreme Court

Penalty: Welcome judgment from Hon'ble Supreme Court

Apr 9, 2010 Income Tax

 

 

If the Assessing officer or Commissioner (Appeals) in the course of any proceedings under the Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, then he can direct that such person shall pay by way of penalty u/s. 271(1) (c), a sum not less than 100% but not exceeding 300% of the amount tax sought to be evaded by reason of concealment of his income or furnishing inaccurate particulars of his income. This section is used as a weapon by the assessing officers. In fact in the orders passed u/s. 143(3) of the Income Tax Act, they have been mentioning "Initiate Penalty proceedings u/s. 271(1) (C) of the I T Act" by default on additions/disallowances done without providing any reasons irrespective of whether the assessee really tried to conceal his income or furnished inaccurate particulars of his income or even if additions/disallowances are on account of legally debatable issues.

 

Larger Bench of Supreme Court in the case of Union of India and Ors., vs. M/s. Dharmendra textile processors and Ors. [2008 306 ITR 227] had while reversing the supreme court judgment of Dilip N Shroff Vs. Joint CIT, Special Range, Mumbai [2007 291 ITR 519] held that "It is a well-settled principle in law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent". Also it further held that "The Explanations appended to Section 271(1)(c) of the IT Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N. Shroff's case (supra) has not considered the effect and relevance of Section 276C of the I.T. Act. Object behind enactment of Section 271(1)(c) read with explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the I.T. Act". Hence the supreme court in this judgment had concluded that `'Mens Rea'' or `'Willful concealment'' is not a criteria for determining leviability of penalty. Based on this judgment, department had been taking a view that once additions/disallowances are confirmed, penalty is to be automatically levied.

 

Under Income Tax Act, there are many issues which are debatable and hence assessee takes a legal position based on judicial pronouncements existing at the time of filing returns. An assessee also prefers making a claim in a transparent manner by providing on record all relevant facts, reasoning and judicial pronouncements considered while deciding on the making a claim.

 

The moot question that arises is whether making of an incorrect claim/claim which is not sustainable in law tantamounts to furnishing of inaccurate particulars of income and penalty u/s. 271(1)(c) can be levied for the same.

 

Hon'ble Mumbai ITAT in the case of ACIT vs. VIP Industries Ltd. [2009-(122)-TTJ -0289 –TBOM] had after considering the judgment of Dharmendra Textiles (supra) held as under:

 

» Mere fact that an addition is confirmed cannot per se lead to the confirmation of the penalty because quantum and penalty proceedings are independent of each other;

 

» For the deeming provision of Explanation 1 to s. 271(1)(c) to apply, it must be shown either that (a) the assessee fails to offer an explanation, or (b) he offers an explanation which is found to be false, or (c) he offers an explanation which cannot be substantiated or shown to be bona fide.

 

» The judgment of the Supreme Court in Dharmendra Textiles Processors which holds that penalty u/s.271(1)(c) is a civil liability and that "willful concealment" and "mens rea" are not essential ingredients for imposing penalty cannot be read to mean that in all cases where addition is confirmed, penalty shall mechanically follow. If penalty is imposed under such circumstances also there will remain no course open to an assessee to raise disputed claims and such proposition is beyond recognized canons of law.

 

Similarly, Hon'ble Pune ITAT in the case of Kanbay Software India Pvt. Ltd. vs. DCIT [2009-(122)-TTJ -0721 –TPUN] after considering Dharmendra Textiles Judgment had explained that there can be three distinct and mutually exclusive situations in the case of disallowances/addition to income:

 

Sr. No. Situation Penalty Leviable

 

1. Where the addition is on account of contumacious conduct of the taxpayer and his wrongful intention is established. Penalty was always imposable.

 

2. Where it can neither be established that the addition is on account of contumacious conduct of the taxpayer nor is it established that the taxpayer's conduct and explanation is bona fide. Penalty is leviable on account of judgment of Dharmendra Textiles.

 

3 Where it is established that the taxpayer's conduct and explanation is bona fide. Penalty will not be leviable.

 

However Income Tax department had still been contending that once the addition is confirmed/wrong claim is made by the assessee, penalty has to be levied u/s. 271(1)(C) of the Income Tax Act, 1961.

 

This issue once again come up for consideration before the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Reliance Petro Products Pvt. Ltd., (SLP(C) No. 27161 of 2008), wherein after going through the meaning of the words "furnishing of inaccurate particulars" it held as under;

 

» Mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claims made in the return of income cannot amount to furnishing of inaccurate particulars.

 

» Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself, would not attract penalty u/s. 271(1) (c) of the Income Tax Act.

 

» Unless there is a finding that any details supplied by the assessee in its return of income were found to be incorrect or erroneous or false, there is no question of levying penalty u/s. 271(1)(c).

 

» If the contentions of the revenue are accepted, then in case of every return where claim is not accepted by the Assessing Officer for any reason, the assessee will invite penalty u/s. 271(1)(c). That is clearly not the intendment of the Legislature.

 

This judgment clearly indicates that penalty can be levied by the assessing officer only once he proves that assessee has concealed the particulars of income or he has furnished inaccurate particulars of income at the time of filing of return of income or in any submissions thereafter (whether willfully or otherwise).

 

This judgment is surely a welcome judgment and will help the genuine and honest tax payers in a long way to make appropriate claims in the return of income. Also this will put an end to a lot of disputes, where in department has initiated penalty proceedings in case of assessees, purely based on the disallowances/additions made in the return of income.

 

HC Kerala ; S. 14A applies where shares are held as investment and the only benefit derived is dividend

CIT vs. Leena Ramachandran

S. 14A applies where shares are held as investment and the only benefit derived is dividend. S. 36(1)(iii) deduction allowable if shares held as stock-in-trade

The assessee borrowed funds to acquire controlling interest shares in a company with which she claimed to have business dealings. The interest on the borrowings was claimed as a deduction u/s 36(1)(iii). The AO rejected the claim on the ground that the only benefit derived from the investment in shares was dividend and that the interest had to be disallowed u/s 14A. This was confirmed by the CIT (A). The Tribunal held that the deduction of interest was allowable u/s 36(1)(iii) in principle though a portion of the interest paid had to be regarded as attributable to the dividend and was disallowable u/s 14A. On appeal by the Revenue, HELD reversing the order of the Tribunal:

(i) The only benefit derived by the assessee from the investment in shares was the dividend income and no other benefit was derived from the company for the business carried on by it. As dividend is exempt u/s 10(33), the disallowance u/s 14A would apply. The Tribunal was not correct in estimating the s. 14A disallowance to a lesser figure than the interest paid on the borrowing when the whole of the borrowed funds were utilized by the assessee for purchase of shares;

(ii) Deduction of interest u/s 36(1)(iii) on borrowed funds utilized for the acquisition of shares is admissible only if shares are held as stock in trade and the assessee is engaged in trading in shares. So far as acquisition of shares in the form of investment is concerned and where the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s 14A is squarely attracted.

Note: In CIT vs. Hero Cycles 323 ITR 518 (P&H) it was held that held that in the absence of an actual nexus between tax-free income and expenditure, s. 14A disallowance could not be made.

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