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Review of landmark judgments

Review of landmark judgments. Presented by : Chythanya K.K., B.com, FCA, LLB Partner, Raghuraman & Chythanya Advocates, BANGALORE chyti@vsnl.net 41203610/26564106/9844114184. Topics chosen. Firm AOP Depreciation Interest 43B TDS Concealment Deemed dividend.

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Review of landmark judgments

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  1. Review of landmark judgments Presented by: Chythanya K.K., B.com, FCA, LLB Partner, Raghuraman & Chythanya Advocates, BANGALORE chyti@vsnl.net 41203610/26564106/9844114184 Raghuraman & Chythanya

  2. Topics chosen • Firm • AOP • Depreciation • Interest • 43B • TDS • Concealment • Deemed dividend Raghuraman & Chythanya

  3. Topics chosen – contd.. 8. FBT 9. Fresh claim after filing of return Raghuraman & Chythanya

  4. Firm • Firm paying salary to HUF as a working partner : CIT v. Devanand Automobiles [2008] 304 ITR 50 (Karn), CIT v. Golden Tough 138 Taxman 190 (Mad.) & ITO v. Vegunta Surya Prakasa Rao Sons & Co. (Visakhapatnam) [2004] 88 ITD 322 (Visakhapatnam) • Since the it could not be established that interest paid to partners on their Current accounts related to the capital contribution and since the deed was silent on payment of interest to balance in current account, the interest is not allowable as a deduction under section 40b : Novel Distributing Enterprises V DCIT & Another (2001) 251 ITR 704 Raghuraman & Chythanya

  5. Firm • The normal practice is to prepare the accounts at the end of the year, because it is difficult to arrive at a profit or loss on each day’s transaction. In CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42, SC held that profits do not accrue from day-to-day and unless the right to profit comes into existence, there is no accrual of profits, i.e., till the accounts are prepared at the end of the term as agreed. Thus, the withdrawals were not out of the share of profit, etc., that accrued to the partners : ARCHITECTURAL ASSOCIATES v. ACIT [2005] 277 ITR [A.T.] 35 [HYD] • Contra : Deval Utensils Factory vs. DCIT [2005] 98 TTJ [Pune] 501 Raghuraman & Chythanya

  6. Firm • Netting off principles as per 183 ITR 1 still valid • Remuneration paid to a partner cannot be disallowed on ground that he was not a working partner once he is found to be supervising and controlling business activities, from a different place : Vivek Ispat Udyog v. ITO (2005) 95 TTJ (ITAT –Del.) 1090 • When assessee is neither paying nor making provision to the extent permissible under the deed, it is implied that partners have agreed to take a sum which is lower and as appearing in the partnership accounts : SRI BALAJI AGENCIES vs. ITO (2007) 107 TTJ (CHENNAI) 658 Raghuraman & Chythanya

  7. Firm • The assessee was not carrying on any other business and had no other source of income. Thus, whatever income arising to the assessee was business income and, hence, computation was in accordance with Chapter IV – D. Thus, it could be said that such cash credit formed part of book profit for the purpose of computation of remuneration. It is necessary to include such cash credit in the book profit for the purpose of allowing remuneration to the partners which was authorized by and in accordance with the terms of partnership deed : DEEPA AGRO AGENCIES v. ITO (2006) 154 TAXMAN – MAGAZINE 80 (BANG.) • Same was held in CIT v. S.K. Srigiri and Bros. [2008] 298 ITR 13 (Karn) HC Raghuraman & Chythanya

  8. Firm • Payments to the partners not in their capacity as partners, but made for the specific services rendered by them • CIT v. Rajam Ramaswamy and Sons [2008] 298 ITR 325 (Mad) HC • CIT v. Gemini Productions [1977] 110 ITR 847 Mad. • CIT v. Chitra Kalpana [1988] 169 ITR 678 AP Raghuraman & Chythanya

  9. AOP • Meeting of minds of members, common design and common purpose creates AOP. A Joint venture to provide project consultancy services where there is allotment of work to members. AOP is created despite separate billing, members having separate bank accounts and each member bearing its own costs and expenses : Geocuonslt ZT GmbH, In re [2008] 304 ITR 283 (AAR) Raghuraman & Chythanya

  10. AOP • Four persons joining together, purchasing land and raising commercial complex thereon with no equal contribution either for purchase of land or for construction of complex. No interest was paid to member contributing in excess and no interest charged from member contributing less. Loans were raised collectively, a common bank account was opened, all the four members pooled their resources together for construction of commercial complex, and sold part of the building to repay the loans as rental income proved insufficient for the purpose. This is an adventure in the nature of trade, hence profits from sale of building was assessable in the hands of AOP as business income : ACITvs. S. Prabhakar Kamath & Ors. [2008] 116 TTJ (Bang) 817 Raghuraman & Chythanya

  11. AOP - Essentials • Two or more persons as held in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC) • Voluntary Combinations as held in the case of CIT v. G. Murugesan and Bros [1973] 88 ITR 432 (SC) • A common purpose/common action with object to produce profit or gains as held in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC). However, the object to produce profit or gain is no longer a sine qua non with the insertion of the Explanation to Sec 2(31) • Combination of joint enterprise as held in the case of Mohamed Noorullah v. CIT [1961] 42 ITR 115 (SC) • Some kind of scheme for common management as held in the case of CIT v. Cloth Semi-Wholesalers [19560 29 ITR 500 (Nag.) Raghuraman & Chythanya

  12. Depreciation-Intangible • Stock exchange membership card - Depreciation • Yes : Farrokh Irani / D.Z. Patel [2005-2006] 39-A BCAJ 622 • Yes : Vyomit Shares, Stocks & Investments (P.) Ltd. v. DCIT [2007] 106 ITD 408 [Mum] • Goodwill: • No : GURUJI ENTERTAINMENT NETWORK LTD vs. ACIT (2007) 108 TTJ (DEL) 180 • No : Bharatibai Vyas v. ITO 97 ITD 248 Ahm Raghuraman & Chythanya

  13. Depreciation-Computer • Computer software is a ‘plant’ owned by person purchasing it though as a licensee, hence eligible for depreciation @ 25 percent under s. 32(1)(i) r/w Appendix I : Amway India Enterprises vs. DCIT (2008) 114 TTJ (Del) (SB) 476 • UPS attached to computers is a source of alternative supply of power to computers and applying the functional test, is part of power supply system and not the computer system : Nestle India Ltd. vs. DCIT [2007] 111 TTJ (Del) 498 • Router is part of computer : Routermania Technologies (P.) Ltd. v. ITO [2007 16 SOT 384 (ITAT – Mum.) • Colour xerox machine is part of computer : ITO v. SAMIRAN MAJUMDAR [2005] 280 ITR [A.T.] 74 [KOL] Raghuraman & Chythanya

  14. Depreciation-Building • Purchase of commercial space – cost attributable to undivided interest in land is not eligible for depreciation : DCIT v. Capital Cars P. Ltd. [2007] 295 ITR (AT) 224 (Delhi) Raghuraman & Chythanya

  15. Depreciation-Lease • Circular no 9/ 23.3.1943 [HP] • Accounting Standard 19 • Circular No.2 of 2001, dated February 9, 2001 • ABB LTD v. IFCI (2006) 154 TAXMAN 512 (SC) • J. M. Shares & Stock broker vs. DCIT (2007) 109 TTJ (Mumbai) 311 Raghuraman & Chythanya

  16. Interest • Proviso to section 36(1)(iii) - retrospective The import of the proviso to section 36 (1) (iii) is that the interest paid on the capital borrowed for the purpose of acquisition of an asset till the date such an asset is first put to use shall not be allowed as deduction. This is borne out as a converse proposition in Explanation 8 to section 43 (1) and a combined reading of section 36 (1) (iii) and section 43 (1) shows that the same is in consonance with the law laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 Raghuraman & Chythanya

  17. Interest • Proviso to section 36(1)(iii) - Prospective • SWARAJ ENGINES LTD. v. JCIT[2005] 98 TTJ [Chd.] 346 • ALANKAR BUSINESS CORPORATION LTD vs. DCIT (2006) 157 TAXMAN 232 CHENNAI • DCIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC) Raghuraman & Chythanya

  18. Interest • Interest free advance to sister concerns • In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in such a case is really whether this was done as a measure of commercial expediency. • The decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is “for the purpose of business”. It has been consistently held in the decisions relating to section 37 that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. S.A.BUILDERS LTD vs. CIT (2007) 288 ITR 1 (SC) Raghuraman & Chythanya

  19. 43B • No distinction between employer’s contribution and employees’ contribution • Hitech India P. Ltd. V. UOI (1997) 227 ITR 446 (AP) • C.I.T. v. Madras Radiators and Pressings Ltd. (Mad.) [2003] 264 ITR 620 (Mad.) • CIT v. Sabari Enterprises [2008] 298 ITR 141 (Karn) HC Raghuraman & Chythanya

  20. 43B • There is distinction between employer’s contribution and employees’ contribution • JCIT vs. I.T.C. Ltd [2008] 115 TTJ (Kol) (SB) 45 • Gallium Equipment P Ltd v DCIT (2002) 81 ITD 358 Delhi • NATIONAL PLASTIC INDUSTRIES LTD v. ITO (2007) 11 SOT 415 (ITAT-Mum.) • IMP POWER LTD vs. ITO (2007) 107 TTJ (MUMBAI) 522 Raghuraman & Chythanya

  21. TDS • Pass through cases Loans are taken in individual capacities by directors but cheques taken by them in name of company and transferred to their accounts on same day. Repayment of loan and interest was routed through company. Company is bound to deduct tax at source : CIT vs. Century Building Industries P. Ltd. (2007) 293 ITR 194 (SC) Raghuraman & Chythanya

  22. TDS • Credit to account Fact that the credit to any account is to be deemed to be credit to the payee’s account also presupposes that payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained : IDBI vs. ITO (2006) 104 TTJ 230 (MUMBAI) Raghuraman & Chythanya

  23. TDS • Car rentals : 194C v. 194I? • BSNL’ case 145 STC 91 SC • AAR’s ruling in Dell International Services India (P.) Ltd, In re [2008] 172 Taxman 418 Raghuraman & Chythanya

  24. TDS • Service tax • A service provider is merely acting as an agent of the Government, and is not entitled to claim deduction on account of service-tax and therefore the analogy of sales-tax, excise duty, is not applicable : ACIT vs. Real Image Media Technologies (P) Ltd. [2008] 116 TTJ (Chennai) 964 • Circ 4/2008, dated April 28, 2008: Service tax paid by the tenant does not partake of the nature of “income” of the landlord. The landlord only acts as a collecting agency for the Government for collection of service tax. • Circular F.No. 275/73/2007-IT(B), dated 30.06.2008 [2008] 172 Taxman (BN) : Circular 761 has no application to section 194J Raghuraman & Chythanya

  25. TDS • Reimbursement of expenses • Reimbursement of expenses is also liable to TDS as per CBDT Circ No. 715 dated 08.08.95. • No as per ITO Vs Dr Willmar Schwabe India (P.) Ltd. (95 TTJ 53) (Delhi ITAT) Raghuraman & Chythanya

  26. TDS • Limitation for action under sec 201(1A) • In terms of the decision of the Supreme court in State of Punjab v. Bhatinda District Co-op. Mil (P) Union Ltd. (2007) 11 SCC 363, action must be initiated by the competent authority under the Act where no limitation is prescribed, as in section 201, within that period of four years : CIT v. NHK Japan Broadcasting Corpn. [2008] 172 Taxman 230 (Delhi) Raghuraman & Chythanya

  27. TDS • Advance rental • Amount described in lease agreement as security deposit-agreement providing for reduction of security deposit every six months by amount of rent payable-security deposit was in effect advance rent-tax to be deducted at source on entire security deposit : CIT vs. Reebok India Company (2007) 291 ITR 455 (Delhi) Raghuraman & Chythanya

  28. Concealment • Willful concealment is not an essential ingredient for attracting the civil liability : DILIP N. SHROFF V. JCIT [20O7] 291 ITR 519 (SC) • Overruled in Union of India Vs M/s Dharmendra Textile Processors (Dated: September 29, 2008) : 2008-TIOL-192-SC Raghuraman & Chythanya

  29. Deemed dividend • Deemed dividend to be taxed in hands of • Recipient : Circular No. 495 dated September 23, 1987 [1987] 168 ITR (St.) 87 • Interested person : CIT Vs. MUKUNDRAY K. SHAH (2007) 290 ITR 433 (SC) • Department circular when beneficial could run counter to law/SC decision : Dhiren Chemicals 254 ITR 554 SC Raghuraman & Chythanya

  30. Fringe Benefit Tax Where employees are experts in their field and resident of other countries and they are brought to the rig by providing air tickets or their coming from their place of residence to the rig, the employer incurs the said expenditure as of necessity. It, therefore, clearly falls within the purview of the words “consideration for employment”. If fringe benefits are provided for consideration for employment, which is given or provided to the employee by way of an amenity, reimbursement or otherwise, clearly clause (a) of sub-section (1) shall be attracted : R & B Falcon (A) Pty. Ltd. v. Commissioner of Income-Tax [2008] 301 ITR 309 (SC) Raghuraman & Chythanya

  31. Fresh claim after filing of return • In respect of deduction claimed after return filed, assessing authority has no power to entertain claim made otherwise than by way of revised return : GOETZE (INDIA) LTD. v. CIT [2006] 284 ITR 323 (SC) • The Apex Court has not laid down as a matter of law that there is bar for the Assessing Authority to entertain the claim for deduction otherwise than by filing a revised return : UNIVERSAL SUBSCRIPTION AGENCY (P) LTD vs. JCIT (2007) 159 TAXMAN 64 (ALL.) Raghuraman & Chythanya

  32. Fresh claim after filing of return 3 Apex court decision is applicable only to brand new claims and not to enhanced claims : JCIT vs. Hero Honda Finlease Ltd. (2008) 115 TTJ (Del) (TM) 752 4. Apex court verdict does not dilute the power of appellate authorities : CIT v. Jai Parabolic Springs Ltd. [2008] 172 Taxman 258 (Delhi) Raghuraman & Chythanya

  33. Q&A Thanks Raghuraman & Chythanya

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