The Hindu Business Line : Key High Court rulings in the I-T realm

According to Section 260A of the Income-tax Act, 1961, cases involving substantial questions of law can go up to the High Courts, from the appellate tribunal stage.

In respect of facts, however, the appellate tribunal is the final authority and the courts normally do not interfere.

Business expenditure

While computing income from business or profession, expenditures incurred for earning such income is deductible. Expenditure includes payment towards purchase of raw material and finished goods. Section 40A(3) says that expenditure in excess of Rs 20,000 paid otherwise than by account-payee crossed cheque or bank draft is liable for disallowance at 20 per cent of such expenditure.

In CIT vs Kothari Sanitation and Tiles (P) Ltd (2006 282 ITR 117 Madras), it was held that cash payment in excess of the limits prescribed in Section 40A(3) is to be interpreted as payment `in a sum' and not the aggregate of payments made during the day by the assessee.

Therefore, irrespective of any number of transactions/payment, if each payment is less than the limit prescribed in Section 40A(3), the question of disallowance would not arise.

Business loss

While doing business, losses arise. Whether such loss is to be reduced while computing the income and how a business loss is different from business expenditure is debatable. In CIT vs Mahendra N.Shah (2006 280 ITR 462 Gujarat), the assessee claimed loss due to fraud by a seller who presented bogus shipping documents.

The court held that the assessee had factually suffered a loss and the loss related to import of commodity dealt with by the assessee and the transaction was genuine. Accordingly the claim of the assessee was allowed as business loss.

A contrasting decision could be found in Patel Brass Works vs CIT (2006 286 ITR 598 Gujarat). In this case, the assessee entered into an agreement for purchase of machinery. The assessee cancelled the contract and eventually the amount given as advance was forfeited by the vendor.

The claim of the assessee as capital loss (short term) was rejected by the court. Also, the alternative claim as business loss was also rejected.

The reason for rejection apparently is that the transaction related to capital goods and not goods or merchandise regularly dealt with by the assessee.

Depreciation

Depreciation is an important deduction. The claim of depreciation enables the assessable unit to retain funds for replenishment of asset after its useful life. In CIT vs Ace Builders (P) Ltd (2006 281 ITR 210 Bombay), it was held that no distinction need to be drawn between depreciable and non-depreciable assets for the purpose of obtaining deduction under Section 54 E (at present, Section 54EC).

The court held that investment of net consideration on transfer of asset (even depreciable asset) held for more than 36 months as eligible for deduction, while computing capital gains.

Capital gains

Capital gains arise upon transfer of capital asset, which may be short term or long term based on the period of holding. Even deemed transfer of capital assets is envisaged in the I-T Act. In CIT vs Moped & Machines (2006 281 ITR 52 MP) it was contended that if a firm consisting of two partners is dissolved due to demise of one partner, Section 45(4) cannot be applied on the entity, namely, the firm, which has become non-existent subsequently.

The court held that transfer contemplated under Section 2(47) cannot be applied for invoking Section 45(4). This decision would provide an easy escape route for firms.

Section 47 deals with transactions not regarded as transfer. Though there may be transfer of capital asset the transactions enumerated in the section are not liable to capital gains tax. However, in CIT vs Brahmi Investments (P) Ltd (2006 286 ITR 66 Gujarat), upon liquidation of wholly-owned subsidiary company, the assessee received some assets from the liquidator.

The assessee's claim that it is exempt under Section 47(v) was rejected by the court. It was held that Section 46(2) is to be applied and the cost of the assets obtained from the liquidated company has to be compared with the cost of acquisition of shares for computation of capital gains.

In CIT vs V. Natarajan (2006 287 ITR 271 Madras), the assessee sold a residential building at Bangalore and purchased another residential building at Chennai. The new residential house acquired in Chennai was registered in the name of his wife.

The court held that even though the assessee had invested the capital gain in acquisition of residential house in the name of his wife, the eligibility for deduction under Section 54 is satisfied.

The reasoning for the conclusion was, however, not elaborated in the decision.

Concealment penalty

Section 271(1)(c) provides for levy of concealment penalty if the assessee furnishes inaccurate particulars of his income or resorts to concealment of income. In New Sorathia Engineering Co vs CIT (2006 282 ITR 642 Gujarat) it was held that the penalty order must state whether it is levied for concealment of income or for furnishing inaccurate particulars by the assessee. In the absence of such clear-cut finding, the penalty order could not be sustained and, accordingly, it was held as not valid.

In CIT vs Sri Saradha Textile Processors (P) Ltd (2006 286 ITR 499 Madras), the assessee claimed depreciation and investment allowance by mistake.

Later, when pointed out by the assessing officer, the assessee withdrew the claim. It was held that the action of the assessee was bona fide and there was no deliberate furnishing of inaccurate particulars to evade taxes.

Hence, the levy of penalty was cancelled.

Interest on borrowed capital

Interest on monies borrowed for business is deductible under Section 36(1)(iii). If the assessee advances money to an allied concern without interest, then the Revenue would naturally probe the nexus between borrowing and advancing of funds. In CIT vs Prem Heavy Engineering Works (P) Ltd (2006 285 ITR 554 Allahabad), the assessing officer disallowed a portion of interest paid by the assessee on overdraft facilities to the bank on the ground that the assessee had advanced interest-free funds to its allied concern. The court held that the assessee company's share capital and free reserves and interest free advances of Rs 1 crore were sufficient to advance interest free funds to its allied concern. Accordingly, the disallowance of interest was rejected. The court held that the Revenue had not argued the case that the amount borrowed from the bank had not been utilised for the purposes of business by the assessee and, hence, such issue was not decided.

A contrary decision could be found in CIT vs Abhishek Industries Ltd (2006 286 ITR 1 P&H). In this case, the assessee advanced money to its sister concern without charging interest. It was held that the onus is on the assessee to show that its borrowings were used for its own business. The court held that the Revenue need not establish the nexus between borrowings and interest-free advances for the purpose of disallowing the interest on borrowings. This decision dissented from the decision in Prem Heavy Engineering Works (P) Ltd (supra).

Penalty for cash loan

The I-T Act contains numerous penal provisions and one among them is penalty for accepting loan or deposit otherwise than by account-payee crossed cheque or bank draft. In CIT vs Standard Brands Ltd (2006 285 ITR 295 Delhi), the assessee received cash loan which was treated as undisclosed income in the assessment. Again penalty proceedings were initiated for acceptance of such cash loan for levy of penalty under Section 271D. The court held once the loan amount is treated as undisclosed income of the assessee, it cannot be subjected to penal proceedings applicable for loan transactions.

Also, in CIT vs Idhayam Publications Ltd (2006 285 ITR 221 Madras) the assessee company received cash loans from a director. It was held that the term `deposit' does not include any amount received from a director or a shareholder of a private limited company as per the Companies (Acceptance of Deposits) Rules, 1975. Hence, it was held that no penalty can be imposed on such transactions.

In CIT vs Tam Tam Pedda Guruva Reddy (2006 287 ITR 72 Karnataka) it was held that the time limit for imposition of penalty must be reckoned from the date of initiation of penal proceedings and not the date of (re)assessment proceedings initiated by the assessing officer.

Assessment and reassessment

Assessment is the final point which gives conclusion to the tax proceeding. If any income was not assessed earlier, the proceedings for reassessment might follow. However, for reassessment, time limitation is prescribed based on the quantum of income escaping assessment. A definite time limitation, however, is six years from the end of the relevant assessment year. In Metro Auto Corporation vs ITO (2006 286 ITR 618 Bombay), the original assessment of the assessee was pending in appeal before the appellate authorities. The assessing officer gave notice for reassessment of income. The court held that when the appeal is pending before the appellate authorities, the assessment is not final and the notice issued for reassessment is not valid in law.

In CIT vs Omprakash Bagria (HUF) (2006 287 ITR 523 MP), the assessee filed a return and obtained an intimation. After the receipt of intimation, a revised return was filed. Later the assessee contested the assessment on the reasoning that the revised return filed after assessment (intimation) is not valid, as also the assessment thereto. The court held that the intimation under Section 143(1) is not an assessment and, therefore, the assessee who filed a valid revised return cannot contest that return as not valid and seek cancellation of assessment thereof made by the assessing officer.

Tax deduction at source

Tax deduction or collection at source is one of the easy methods of tax collection resorted to by the exchequer. The payer of income has to deduct tax at source and remit the same to the exchequer. The recipient of income has to make a claim for refund or adjustment of such tax subsequently. In BDA Ltd vs ITO (TDS) (2006 281 ITR 99 Bombay) the tax deduction towards payment for getting printed labels was discussed. The court held that the assessee gave an order for printing labels and it is a contract of sale and not a `works contract' and, hence, not liable for tax deduction under Section 194 C. Similar decision can be found in CIT vs Dabur India Ltd (2006 283 ITR 197 Delhi).

In CIT vs Sri Ram Memorial Education Promotion Society (2006 287 ITR 155 Allahabad), the assessee was subjected to penalty under Section 271C for failure to deduct tax at source. Again proceedings were initiated for not filing the TDS return in time and for delay in issuing Form 16 by the assessee. It was held that when the assessee has been subjected to penalty for not deducting tax at source, the penalty for further defaults such as non-filing or delayed filing of TDS return or issue of TDS certificate would not arise.

Interest

For non-payment of taxes within the due date, the assessee is liable to pay interest. Similarly, where any tax is refundable the Department pays interest as prescribed in the statute. In CIT vs Jyotsna Holding (P) Ltd (2006 284 ITR 121 Delhi), the assessee paid excess amount as self-assessment tax. It was held that the assessee is eligible for interest even on the refund of self-assessment tax paid by him.

In Devarsons (P) Ltd vs U. P. Singh (2006 284 ITR 36 Gujarat), the assessee offered a sum chargeable to tax consequent to retrospective amendment in law. The tax was also paid voluntarily by the assessee. The Chief Commissioner recorded the bona fide belief of the assessee but did not assign any reason for reducing only a portion of interest chargeable under Section 234 B. The court accordingly held that the Chief Commissioner, satisfied with the bona fide of the assessee's conduct, must waive interest in entirety.

(The author is an Erode-based chartered accountant.)

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