Controversies

1. Controversies

2. Controversies • Interest u/s.234A — Taxes paid but return delayed • Interest income and mutuality • Cash credits — Burden of proof • Reopening of a completed assessment – 147 • Allow ability of interest on borrowed funds where interest free advances are made to sister concerns. • Assets acquired by previous owner- Cost indexation.

3. Controversies • Loan or deposit received/repaid by way of journal entries – application of 269SS and 269T. • Waiver of interest • Allow ability of HRA and interest on housing Loan for self-occupied property. • URD Purchases - 69C or Trading addition • Voluntary surrender and 271(1)(c) …

4. Interest u/s 234A • S. 234A(1) –levy simple interest @ 1% p.m. • for the default of non-furnishing the return of income u/s.139 or S. 142, • on the amount of the tax on total income as determined u/s.143(1) or on regular assessment • as reduced by the advance tax and the tax deducted or collected at source and such other taxes as are specified in clauses (i) to (vi) of the said Section.

5. Case laws- 234A • Dr. Pronnoy Roy & Anr. v. CIT, 254 ITR 755(Del) • Roshanlal S. Jain (AOP) v. DCIT, 220 CTR 38 (Guj.), • Dr. Pronnoy Roy & Anr. v. CIT, 309 ITR 231(SC)

6. Issues on 234A • Interest charged u/s.234A- compensatory / penal or both, • Can interest be charged – when state does not lose revenue • Can interest be charged -without there being any basis. (The base, normally, is the amount unpaid or delayed) • the true meaning of the term ‘advance tax’, • the true meaning of the term ‘interest’, • whether the introduction of S. 271F for levy of penalty has made any difference, • whether interest can be levied simultaneously under two different provisions for the same period and other issues...

7. Latest position-234A • the Supreme Court in 309 ITR 231, has upheld the decision of the Delhi High Court • on the ground that interest levied u/s.234A is compensatory in nature. • Therefore since the tax due had already been paid, which was not less than the tax payable on the returned income which was accepted, the question of levy of interest did not arise.

8. Interest income and mutuality • Income of certain associations of persons is exempt on the doctrine of mutuality • 3 essential conditions for concept of mutuality (CIT v. ITI Employees Death and Superannuation Relief Fund, 234 ITR 308) • that no person can earn from himself, • that there is no profit motivation, • and that there is no sharing of profits.

9. Madras Gymkhana Club v. Dy. CIT, 183 Taxman 333 • Referred : Wankaner Jain Social Welfare Society v. CIT, 260 ITR 241, (Mad.) • that to satisfy the concept of mutuality, • Establish identity, in relation to the relevant income, those contributing to the income and those participating in the distribution of that income. • surplus funds deposited with a member bank enured to the benefit of that member alone, thereby depriving other members of enjoyment of such benefit, which did not satisfy the test of identity of the contributors and the participants. • Though the distribution of interest was to all members, there was no identity between the contributors and the participants, inasmuch as the distribution of interest was made both to members with whom funds were deposited and to those with whom funds were not deposited, while the interest was earned only from members with whom funds were deposited.

10. CIT v. Bankipur Club Ltd., 226 ITR 97(SC) • The Supreme Court held that a host of factors, not one single factor, have to be considered to arrive at a conclusion as to whether the principle of mutuality applies in a given case or not, • further observed that whether or not the persons dealing with each other are a mutual club or not and whether such persons are carrying on a trading activity or an adventure in the nature of trade is largely a question of fact.

11. Relevant Judgements-mutuality • Chelmsford Club v. CIT, 243 ITR 89(SC) • Sports Club of Gujarat Ltd. v. CIT, 171 ITR 504(Guj) • DIT(E) v. All India Oriental Bank of Commerce Welfare Society, 130 Taxman 575(Del) • CIT v. Natraj Finance Corporation,169 ITR 733(AP) • CIT v. Bangalore Club, 287 ITR 263(kar.) • Rajpath Club Ltd., 211 ITR 379 (Guj.) • Gulmarg Association & Anr., 90 TTJ 184 (Ahd.)

12. Cash credits — Burden of proof • whether the assessee’s burden is discharged merely by • filing a confirmation and • proving the identify of the creditors and • whether on furnishing such confirmation, the burden then shifts to the Department, • where the cash credits are not from related persons.

13. Case Laws - cash credit • R. B. Mittal v. CIT, 165 CTR 366(AP) • Orient Trading Co. Ltd. v. CIT, 49 ITR 723(Bom) • Udhavdas v. CIT, 66 ITR 462(SC) • Sreelekha Banerjee v. CIT, 49 ITR 112(SC) • Sarogi Credit Corporation v. CIT, 103 ITR 344(patna)

14. 3 tenets- on cash credit • identity, • creditworthiness and • genuineness

15. Reopening of assessmentCIT v. Kelvinator of India Ltd., 256 ITR 1(Del) • where the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year • however no reassessment will ensue where there was no failure on the part of the assessee to disclose fully and truly the material facts necessary for assessment. • No reopening is possible once it is shown that a mind is applied by the AO to the facts of the case unless the reopening is sought to be made in consequence of the possession of information obtained subsequent to an assessment(Full Bench decision)

16. CIT v. Kelvinator of India Ltd., 256 ITR 1(Del) • IT Department argued that the change of opinion was relevant only for the purposes of clause (b) of S. 147, and • that initiation of reassessment proceedings was permissible when it was found that the Assessing Officer had passed an order of assessment without any application of mind. • According to the department, such application of mind could be found out from the order of assessment itself inasmuch as, if the order of assessment did not contain any discussionon the particular issue, the same may be held to have been rendered without any application of mind.

17. FB-View of Delhi High Court • when a regular order of assessment is passed in terms of S. 143(3) • a presumption can be raised that such an order has been passed on application of mind • S. 114(e) of the Indian Evidence Act- judicial and official acts are presumed to have been regularly performed. • If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, this would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.

18. Case laws for reference • Asian Paints Ltd. v. DCIT & Ors., 308 ITR 195, Idea Cellular Ltd. v. DCIT, 301 ITR 407 and CIT v. Eicher Ltd., 294 ITR 310. (Bom.) • Foramer v. CIT & Ors., 247 ITR 436 (All)

19. CBDT Circular No. 549 dated 31-10-1989 • no reopening would sustain in cases of change of opinion not involving any failure on the part of the assessee to disclose material facts. (para7.2) • It is this circular which has helped in formation of a definitive judicial consensus in the era after amendment of 1989.

20. Allow ability of interest on borrowed loan-issue • Amounts have been advanced to sister concern, it cannot be said to be for business as held in Phaltan Sugar Works Ltd. v. CIT, (1994) 208 ITR 989 (Bom.). • But if advance has been made for the purpose of business, merely because such advance is to sister concern would not disentitle deduction. • Just because a third party benefits by expenditure made would not mean that expense is not incurred for the purpose of assessee’s business. • As long as purpose of incurring any expenditure is for the benefit of business of the assessee, benefit to a third party on account of such expense would not make such expenditure as not incurred for the benefit of assessee’s business.

21. Allow ability of interest on borrowed funds – 3 essentials • D&H secheron electrodes Pvt. Ltd. v. CIT(1983) 142 ITR 528, The MP High Court held that to sustain a claim for the deduction of amount of interest, all that is necessary- • The capital must have been borrowed by the assessee. • It must be borrowed for the purpose of the business or profession of the assessee • The assessee should have paid that amount by way of interest.

22. Allow ability of interest on borrowed funds where interest free advances are made to sister concerns [CIT v. Walchand and Co. Pvt. Ltd., (1967) 65 ITR 381 (SC)]. • Advance is for the purpose of business has to be tested on the cornerstone of commercial expediency. • The test of commercial expediency has to be adjudged from the point of view of the businessman and not of the Revenue. • Interest is deductible as the amount is advances to the subsidiary company as a measure of commercial expediency. • Commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of the business.

23. Case laws for refrence • Eastern Investment Ltd. v. CIT, (1951) 20 ITR 51 (SC) • Sasoon J. David & Co. P. Ltd v. CIT, (1979) 118 ITR 261 (SC)] • CIT v. Premier Auto Finance P. Ltd., (1981) 128 ITR 540 (Del.)  • ACIT v. Vadilal Finance Co. (P). Ltd., 74 TTJ 933 (Ahd.)

24. Cost indexation introduction • In computing gains arising on the transfer of a long-term capital asset, S. 48 of the Income-tax Act requires deduction of the indexed cost of acquisition of the capital asset from the sale consideration. • The indexed cost of acquisition is computed by multiplying the cost of acquisition by the ratio of the cost inflation index for the year of transfer to the cost inflation index for the first year in which the asset was held by the assessee or for 1981-82, whichever was later.

25. Issue for consideration • When a capital asset is acquired by an assessee by gift, inheritance, partition of a Hindu Undivided Family or under any of the other modes specified in S. 49(1), or some other modes specified in certain clauses of S. 47, under Explanation 1 to S. 2(42A), • the period for which the asset was held by the earlier owner or in the earlier form is also to be included as part of the holding period of the assessee for determining whether the capital asset is a long-term capital asset or a short-term capital asset. • The question has arisen before the Tribunal in various cases as to how the indexed cost is to be computed in cases where the capital asset became the property of the assessee by any of the modes specified in S. 49(1) — • whether the indexation is to be considered from the year in which the asset was first acquired by the previous owner, • from the year in which the asset was first acquired by the assessee.

26. Smt. Mina Deogun v. ITO, 19 SOT 183 (Kol.). • in case of succession, the date of acquisition, the cost of acquisition, and the period of holding were to be computed with reference to the acquisition of the capital asset by the first previous owner, for the purpose of applying the base cost inflation index. • the scheme of taxation with respect to inherited assets was that where an assessee sold an inherited capital asset, the capital gain was computed with reference to the period of holding and the cost of acquisition incurred by the previous owner, since inheritance or succession was not regarded as a transfer

27. CBDT Circular No. 636, dated 31-8-1992 • It showed that indexation was to be allowed in respect of the period of holding of the asset, and not in relation to the individuality of the assessee. Intermediate transfers on account of succession were to be ignored.

28. Case law for refrence • Deputy CIT v. Kishore Kanungo, 102 ITD 437 (Mum.) • Smt. Mina Deogun v. ITO, 19 SOT 183 (Kol.) • Mrs. Pushpa Sofat v. ITO, 81 ITD 1 (Chd.) (SMC) • Deputy CIT v. Smt. Meera Khera, 2 SOT 902 (Mum.)

29. Loan or deposit received/repaid by way of journal entries- applicability of 269 SS and 269 T • Some times loan or deposit is received by way of credit in the books of account by passing journal entries and sometimes deposit is also repaid in similar fashion. • The question is arise whether any account debited and credited in the books of account by way of journal entries would attract the provisions of sections 269SS and 269T ?

30. Purpose of 269 SS and 269T • The purpose of introduction of sections 269SS and 269T is to stop the menace of the unaccounted money in the books of account by way of loan or deposit.

31. Latest Position for 269SS or 269T • Kumari A.B. Shanti v. ADI 197 ITR 330, Madras High Court held that the basic purpose is to stop transactions or unaccounted monies are brought into the books by way of journal entries the provisions of section 269SS and 269T cannot apply.

32. Sunflower Builders (P) Ltd. V. Dy.CIT 61 ITD 227, • ITAT Pune bench, held that Provision of section 269SS Could not be applied where the assessee merely acknowledged the debt incurred earlier and there was no transfer of money from one person to another. The Journal entries in its books of accounts would not come with in the ambit of the words “Loan & Advances” as mentioned in section 269 SS.

33. Asstt. DIT v. Kumari A.B. Shanthi 255 ITR 258 • Supreme Court upheld the constitutional validity of sec 269SS and laid down the Following principal:- • Sec 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he makes some false entries he shall not escape by giving false explanation for the same. During the search and seizure taxpayer try to give false explanation and also manipulate his records to suit the plea of the taxpayer. The main object of sec 269SS was to curb this menace of making false entries in account books and later giving an explanation for the same.

34. Case laws for refrence • Shreenathji Corporation v. Asstt. CIT 58 TTJ 611(Ahd.) • Ganesh Wooden Industries ITA no. 1626/Ahd/1997, Bench “SMC” order dated 08-07-2002.

35. Interest under section 220(2) • Any amount of tax, specified as payable in a notice of demand u/s.156, is required to be paid within 30 days of the service of notice as mandated by S. 220(1) of the Income-tax Act. • The assessee is liable to pay simple interest @ 1% for every month or part thereof, for default in payment of the amount of tax referred to in para 1.1 above, as per S. 220(2) of the Act.

36. Waiver of Interest u/s 220(2) • A provision has been made for reduction or waiver of the interest levied or leviable u/s.220(2) by insertion of S. 220(2A) w.e.f. 1-10-1994 by the Taxation Laws (Amendment ) Act, 1984:- • Sec. 220(2A) as under : • "Notwithstanding anything contained in Ss.(2), the Chief Commissioner or Commissioner may reduce or waive the amount of interest paid or payable by the assessee under the said sub-section if he is satisfied that : • (i) payment of such amount has caused or would cause genuine hardship to the assessee; • (ii) default in the payment of the amount on which interest has been paid or was payable under the said sub-section was due to the circumstances beyond the control of the assessee; and • (iii) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him."

37. Issue for Consideration • The issue is that whether an assessee is obliged to satisfy all the three conditions laid down in S. 220(2A) for reduction or waiver of interest or that compliance of any one or two of them will enable the assessee to seek reduction or waiver of interest.

38. Latest position on the issue • All the three conditions laid down in S. 220(2A) should have been satisfied before interest could be waived under the said provision • The Madras High Court in the case of Auro Foods Ltd., 239 ITR 548, held that an assessee for the purposes of waiver of interest u/s.220(2A) has to satisfy all the three conditions and that non-compliance of any one of them may expose his petition to rejection by the authorities.

39. Case laws for refrence • G.T.N. Textiles Ltd. v. DCIT & Anr., 217 ITR 653 (Ker.) • RamapatiSinghania v. CIT & Ors., 234 ITR 655 (All.) • M. V. Amar Shetty v. CCIT & Anr., 219 CTR 141 (Karn.), • Eminent Enterprises v. CIT, 236 ITR 883 (Ker.) • Metallurgical & Engineering Consultants (India) Ltd. v. CIT, 243 ITR 547, (Pat.)

40. Conditions for HRA u/s 10(13A) • The residential accommodation occupied bt the assessee should not be owned by himself. • The assessee has actually incurred expenditure on payment of rent in respect of residential accommodation occupied by him.

41. Interest on self occupied Property u/s 24(b) • Following deduction are provided: • Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of interest payable on such capital. • When property acquired, constructed with borrowed capital on after 1-4-1999 and such construction completed with in three year the amount of deduction under this clause shall not exceed Rs. 1,50,000.

42. Issue for consideration • Whether a person can claim exemption under section 10(13A) in respect of HRA while also claim tax benefits in respect of repayment of housing loan.