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Caselaw Analysis

Caselaw Analysis. CHYTHANYA K.K., B. Com, FCA, LLB Advocate #1109, 9 th Main, Between Metro Pillars 303 and 304, Vijayanagar , Bangalore, Karnataka, India. chyti@clclawyers.com , 09844114184. Cash credits under section 68 – paving way for next demonetization.

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Caselaw Analysis

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  1. Caselaw Analysis CHYTHANYA K.K., B. Com, FCA, LLB Advocate #1109, 9th Main, Between Metro Pillars 303 and 304, Vijayanagar, Bangalore, Karnataka, India. chyti@clclawyers.com, 09844114184

  2. Cash credits under section 68 – paving way for next demonetization • Applicability of section 68 read with section 115BBE : Tax at 60% • Surcharge as per Sixth proviso to sec 2(3) of Finance Act : 25% • Cess at 3% • Normal penalty at 10% as per section 271AAC(1) • Penalty at 30% or 60% in case of search under section 271AAB(1A) • Penalty under section 271DA at 100%

  3. Cash credits • NDTV TS-283-ITAT-2017(DEL)] • Rajmandir Estate Pvt. Ltd [TS-287-HC-2016(CAL)] • SubhlakshmiVanijya (P) Ltd. v. CIT 155 ITD 171 (Kolkata) • Mohanakala 291 ITR 278 SC

  4. House property v. Business income RAJ DADARKAR AND ASSOCIATES Vs ACIT TS-183-SC-2017 Chennai Properties & Investments Ltd. 373 ITR 673 SC Rayala Corporation (P) Ltd. 386 ITR 500 SC Sultan Bros 51 ITR 353 SC East India Housing and Land Development Trust Ltd. v. CIT, (1961) 42 ITR 49  Karanpura Development Co. Ltd. v. CIT, (1962) 44 ITR 362 See circular no.16 of 2017 dated 25.4.17 

  5. House property v. Business income • Tejas Securities 393 ITR 132 Guj : When partnership deed prohibits share trading, the gain cannot be treated as business profits. • Chennai property principle applied for a firm [non corporate] : Sri Bharathi Warehousing Corporation 392 ITR 160 AP • Mere husk of title – income is chargeable under business Shree Nirmal Commercial 193 ITR 694 Bby • Agya Ram 386 ITR 545 see para 21 [where sole income being rent is indicator of business], para 23[where Chennai property used for non corporate], para 25 for distinguishing between lease and license]

  6. Family settlement • Kale v. Dy. Director of Consolidation AIR 1976 SC 807 • Family settlement involving companies • Permissible : CIT Vs Ashwani Chopra 352 ITR 620 P&H • Not permissible : B.A.Mohota Textiles Traders Pvt. Ltd. TS-234-HC-2017(BOM)

  7. Right person to pay tax Capital gain is liable in the hands of partnership firm though partners already paid taxes in individual capacity Capital gain on transfer of construction work in Progress [WIP] to the partners by the firm on dissolution to be taxed in the hands of partnership firm [WIP] though partners already paid taxes in the individual capacity; Follows Hon’ble SC decision in Ch. Atchaiah[218 ITR 239] Sangam Builders Promoters [TS-6268-ITAT-2015(PUNE)-O]

  8. Tax adjustment between two persons Ashish Plastic Industries 373 ITR 45 (SC) CIT Vs Relcom2015-TIOL-2538-HC-DEL-IT CIT v. Bhooratnam, (2013) 357 ITR 196 (AP)

  9. Section 40a(ia) Palam Gas Service 394 ITR 300 SC No retro default - Vatika Township 367 ITR 466 SC, CIT Vs Kotak Securities 2011-TIOL-693-HC-MUM Kotak Securities 383 ITR 1 SC Principle of doubtful penalisation - CIT Vs JDS APPARELS 2014-TIOL-2046-HC-DEL

  10. Section 40a(ia) – Extent of disallowance • In Honda Cars 382 ITR 88 Delhi : Para 6 : Dept concedes that in terms of the Circular No.3/2015 dated 12.02.2015 issued by the CBDT disallowance under Section 40(a)(i) should be made only in the appropriate proportion of the sum chargeable to tax as per Section 195(1) of the Act and as the said Circular of CBDT is binding on the Assessing Officer, the benefit of the Circular would be given to the assessee

  11. Section 40a(ia) Only when AO makes up his mind that a particular payment requiring TDS under a particular section, has been made without such deduction, that he can proceed to invoke section 40(a)(ia) after putting assessee on notice : LDS Engineers 2014-TIOL-790-ITAT-DEL Sundry creditors cannot be disallowed u/s 40(a)(ia) of the Act without bringing on record that the said amount represents current year expenditure which is payable : GURJANT SINGH Vs ITO 2014-TIOL-510-ITAT-KOL

  12. Section 40a(ia) • When no expenditure is claimed, no disallowance Maruti Freight Movers Ltd. [2015] 152 ITD 740 (Kol), PENTHEA BUILDERS & DEVELOPERS PVT LTD Vs ITO 2014-TIOL-753-ITAT-DEL, ACIT Vs M/s Godavari Developers 2012-TIOL-736-ITAT-HYD, ITO vsAhaar Consumer Products Pvt. Ltd 10 taxmann.com 181 (Delhi - ITAT), 61 Taxmann.com 88 Pune • Held in favour of assessee in CIT Vs Health India Tpa Services Pvt Ltd 2015-TIOL-2746-HC-MUM-IT, CIT Vs M/s Calibre Personnel Services Pvt Ltd 2015-TIOL-358-HC-MUM-IT & G Balraj 390 ITR 50 Kar • Contra - DCIT v. Umang Dairies Ltd. [2010] 3 ITR (Trib) 497 (Delhi)

  13. Section 40a(ia) • No expenditure could be disallowed u/s.40(a)(i) of the Act if such expenditure was capitalized and not claimed as a revenue : Gera Developments Pvt Ltd Vs JCIT 2015-TIOL-167-ITAT-PUNE & Reckitt Benckiser Healthcare India Ltd. v. Asst. CIT (OCD) [2014] 360 ITR 427 (Guj. – HC) • See Nector Beverages 314 ITR 314 SC

  14. Section 40a(ia) • Second proviso to sec 40a(ia) is retrospective - Rajeev Kumar Agarwal vs. ACIT (ITAT Agra)ITAT Online – 02.06.2014 and Bharti Auto Products Vs. CIT ((2013) 27 ITR 611 (Trib.)(Rajkot)(SB) [contra : Prudential Logistics & Transports in ITA No. 01 of 2014 Kerala dated 13th January, 2014] • Ansal Landmark Township TS-495-HC 2015, 377 ITR 635 - Delhi HC : FA 2012 amendment is retrospective

  15. Section 40a(ia) Where payee has shown income in the return but claiming the same as exempt, payer cannot be regarded as defaulter - RBL Bank Ltd. 65 Taxmann.com 219 Panaji Tri :

  16. Section 40a(ia) • No disallowance of depreciation under sec 40a(ia) - Sonic Biochem Extractions P. Ltd. v. ITO [2013] 23 ITR (Trib) 447 (Mumbai), Nector Beverages 314 ITR 314 SC, Cranes Software ITA No. 741 & 742/B/2010 [Bangalore ITAT], SMS DemagPvt Ltd Vs DCIT 2010-TIOL-135-ITAT-DEL • Similar issue pending before Karnataka High Court in Wifi Networks in ITA 394 of 2013

  17. Section 40a(ia) No disallowance in case of short deduction - CIT Vs M/s S K Tekriwal2012-TIOL-1057-HC-KOL-IT , CIT Vs ValibhaiKhanbhaiMankad2012-TIOL-892-HC-AHM-IT, Sriram Refregeration Industries 361 ITR 119 AP at 129 and CIT Vs Kishore Rao (HUF) 2016-TIOL-719-HC-KAR-IT , CIT Vs Hewlett-packard India Sales Pvt Ltd 2016-TIOL-356-HC-KAR-IT Contra : PVS Memorial Hospital ltd. TS-439-HC-2015 Kerala No set off between excess TDS and short TDS - ITO vsNisha Saraf 2011-TIOL-06-ITAT-KOL

  18. Section 40a(ia) No section 40a(ia) in case of presumptive taxation - Shri B V Prabhu Vs ITO 2010-TIOL-420-ITAT-BANG

  19. Section 40a(ia) - Reimbursement Aassessee, during the subject assessment year paid a sum of Rs.4.59 crores to its holding company M/s. IDFC Ltd. on account of reimbursement of expenses Tribunal allowed the appeal of the respondent assessee holding that there is no requirement of deducting TDS in case of reimbursement of expensesfollowing the decision of this Court in Commissioner of Income Tax Vs. Siemens AG, 310 ITR 320 = 2008-TIOL-569-HC-MUM-IT as well as the decision of its coordinate bench in Stratcap Securities (I) Pvt. Ltd. Vs. ACIT, ITR 7048/Mum/2008 = 2011-TIOL-163-ITAT-MUM Tribunal’s decision upheld in IDFC INVESTMENT ADVISORS LTD 2016-TIOL-2699-HC-MUM-IT

  20. Section 40a(ia) – Charitable trust Section 40a(ia) is inapplicable to a trust eligible for exemption under section 11 : Mother Theresa Educational Society [2016] 158 ITD 473 (Visakhapatnam - Trib.) Mahatma Gandhi Seva Mandir [2012] 52 SOT 26 (Mum.)

  21. Sec 14A • Godrej & Boyce Manufacturing Company [2017] 394 ITR 449 (SC) • Dividend is tax free inspite of company paying DDT under section 115O • Therefore, section 14A is applicable with respect to dividend income. • The requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income

  22. Rule 8D – Not a suomotu obligation • CIT Vs Taikisha Engineering India Ltd 2014-TIOL-2239-HC-DEL-IT : If and only if the Assessing Officer is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of the Rules. Thus, Rule 8D is not attracted and applicable to all assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules • This would imply that no need to pay advance tax by applying Rule 8D, no need to pay interest and no need to pay penalty

  23. Sec 14A and MAAT • Vireet Investment Ltd. TS-272-ITAT-2017(DEL) SB : Section 14A cannot be applied while computing book profits under section 115JB • The matter is pending in appeal in Karnataka High Court in the case of Manyata Promoters in ITA 452/2014 • Conflicting Delhi HC decisions • CIT vs. Goetze (India) Ltd ITAT Online – 06.02.2014 : Adverse • Bhushan Steel : Favourable

  24. No Sec 14A in the year of no exempt income • Redington India Ltd Vs ADDL CIT 2017-TIOL-62-HC-MAD-IT • 15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd vs. CIT (225 ITR 802) = 2002-TIOL-290-SC-IT-LB). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.

  25. Section 40b v. Sec 14A • When s. 10(2A) speaks of its exclusion from the total income it means the total income of the person whose case is under consideration i.e. the partner. As the share income is excluded from his total income, s. 14A would apply and any expenditure incurred to earn the share income will have to be disallowed • Shri Vishnu AnantMahajan Vs ACIT 2012-TIOL-311-ITAT-AHM-SB

  26. Section 40b v. Sec 14A • Munjal Sales 298 ITR 298 SC • After the enactment of Finance Act, 1992, section 40(b)(iv) was brought to the statute book not only to avoid double taxation but also to bring on par different assessees in the matter of assessment. • Therefore, the assessee-firm, in the present case, was required to prove that it was entitled to claim deduction for payment of interest on capital borrowed under section 36(1)(iii) and that it was not disentitled under section 40(b)(iv). • There is one more way of answering the above contention. Section 36(1)(iii) and section 40(b)(iv) both deal with payment of interest by the firm, for which deduction could be claimed.

  27. Section 40b v. Sec 14A • Munjal Sales 298 ITR 298 SC • Therefore, keeping in mind the scheme of Chapter IV-D every assessee who claims deduction under sections 30 to 38 is also requires to establish that it is not disentitled under section 40. • It is in this respect that we have stated that the object of section 40 is to put limitation on the amount of deduction which the assessee is entitled to under sections 30 to 38. In our view, section 40 is a corollary to sections 30 to 38 and, therefore, section 40 is not a stand-alone section

  28. Section 40b v. Sec 14A • Interest under section 40b is actually allowable under section 36(1)(iii) and hence would come under section 14A : ACIT v. PahilajraiJaikishin 66 Taxmann.com 30 Mumbai • Contra : Interest paid on partner’s capital is not an expenditure and hence sec 14A could not be applied : Quality Industries v. ACIT 73 Taxmann.com 363 Pune ITAT.

  29. Section 40b v. Sec 14A • Interest under section 36(1)(iii) is also an expenditure only and same is also hit by provisions of section 14A if it is found that the same has been incurred for earning exempt income. • Proviso to Section 28(v) comes into play only if there is some disallowance in hands of firm under clause (b) of Section 40 and it is not applicable in case of disallowance made under Section 14A. • See Shankar Chemical Works v. DCIT [2011] 47 SOT 121 [Ahm]

  30. Related implications • Section 44AD/44ADA v. Section 28(v) • No separate provision for allowance under sec 40b • Once section is applied, deductions under sections 30 to 38 shall be deemed to have been allowed • As sec 40b co-exists with section 36(1)(iii), there is no disallowance when sec 36(1)(iii) is deemed to be dealt with • Section 28(v) operates to tax interest and remuneration in the hands of partners

  31. Related implications • Section 44AD/44ADA v. Section 28(v) • When sections 44AD/AE are applied, it is preferable to amend the deed to provide for no interest and remuneration • Disallowance of interest and remuneration to partners under section 14A does not give relief to partners as per Shankar Vittal case • Section 44AE stands on a different footing

  32. Section 40A(3) • Sec 40A(3) applies to cash purchases found as a result of search even when the undisclosed income is offered on peak credit basis : K.R. Ganesh Kumar 383 ITR 165 Mad. • No disallowance if paid to agent who is required to pay in cash as per rule 6DD(k) in The Solution 382 ITR 337 Raj. It applied Attar Singh Gurmuk Singh 191 TR 667 SC even post omission of rule 6DD(j) see para 10 and para 11. • No disallowance if genuineness is proved : Honey Enterprises 65 Taxmann.com 35 Delhi, Gurdas Garg [TS-719-HC-2015(P & H)], Hotel Nagas2016-TIOL-1012-HC-MAD (Contra : TS-607-ITAT-2016(Mum)

  33. Section 40A(3) • Disallowance is only in respect of excess over the threshold : M G Pictures (Madras) Ltd Vs ACIT 2015-TIOL-37-SC and Shankar Koliwad in ITA No. 5040 of 2009 dated 20.01.12[Kar] • Section 40A(3) of the Act is mandatory and is also applicable in the case of illegal business :S. VenkataSubba Rao vs. CIT (1988) 173 ITR 340 AP & CIT vs. Hynoup Food and Oil Ind. P. Ltd. (2007) 290 ITR 702 (Guj)

  34. Section 40A(3) • Section 40A(3) is not applicable in case of fictitious payments [CIT v. DineshKumarChandmal Jain [2014] 221 Taxman 367 (Guj. – HC)] • There is a difference between “crossed cheque” and “account payee cheque”. Payment by crossed cheque attracts s. 40A(3) disallowance : Rajmoti Industries Vs ACIT 2014-TIOL-586-HC-AHM-IT • When vendors insist on cash payment, sec 40A(3) may not be invoked : Anupam Tele Services 2014-TIOL-161-HC-AHM

  35. Depreciation - Building • Building which was constructed by the firm belonged to the firm though reimbursed by the assessee. • The title in the said immovable property cannot pass when its value is more than Rs.100/- unless it is executed on a proper stamp paper and is also duly registered with the sub-Registrar. • In the absence thereof, it could not be said that the assessee had become the owner of the property • Explanation 1 is not available as assessee did not itself carry construction : Mother Hospital Pvt Ltd Vs CIT 2017-TIOL-120-SC-IT

  36. Implications • If no depreciation, cost should have been allowed as per Madras Auto 233 ITR 468 SC

  37. Depreciation Hire purchase: • Circular No.127 (12)-I.T.2 dated 13.5.1943 • Circular F.No. 160/1/96 dated 13.1.1998, under the Interest Tax Act 1974 • Recognised in CIT v. Ashok Leyland Finance Ltd. [2012] 210 Taxman 95 (Mad.) • Circular No. 9 dated 23.3.1943 applied in Sai Industries Ltd. v. Asst. CIT [2013] 353 ITR 213 (Delhi) HC

  38. Depreciation - Lease Distinction between Operating lease v. Financial lease is recognised • ABB vs. IFCI (2004) 12 SCC 570, • Sundaram Finance Ltd vs. State of Kerala AIR 1966 SC 1178 = (2002-TIOL-145-SC-CT) • CIT v. INSTALMENT SUPPLY LTD. [2012] 20 taxmann.com 779 (Delhi) • AS 19 [Ind AS 17]

  39. Depreciation - Lease Distinction between Operating lease v. Financial lease is not recognised • Circular No.2 of 2001, dated February 9, 2001 • ICDS 350 ITR 527 SC

  40. When assessment is made at GP • No 40A(3) if assessed on GP : Amman Steel 377 ITR 568 Mad. Approved in Pradeep Singh Wazir 2017-TIOL-135-SC-IT • Sec 40a(ia) is sustainable even when the assessment is made on GP : Prabhat Construction Co. v. CIT 155 ITD 813 Patna – No more good law now. • Depreciation and interest, which are otherwise deductable in the ordinary course of assessment, remain the same legal character, even where the profit of assessee is determined on percentage basis : CIT Vs Y Ramachandra Reddy 2014-TIOL-1507-HC-AP-IT

  41. When assessment is made at GP • Circular no. 29-D dated 31.8.1965 • When assessed at GP, there is no scope for separate additions and disallowances : CIT vs. BanwariLalBanshidhar 229 ITR 229 (All) & Hindustan Equipment (P.) Ltd. [2013] 213 Taxman 61 (MP)

  42. Firm and partners – section 10(2A) • Share in profits v. share in total income • Vidya Investment & Trading Co. (P.) Ltd. v. UOI [2014] 43 taxmann.com 1 (Karn), 367 ITR 33 Kar • Scheme of taxation of firm and partners

  43. Conversion of firm into company • Techspin 263 ITR 345 Bby • R L Kalathia And Co 2016-TIOL-572-HC-AHM-IT • Unity Care (2006) 286 ITR 121 (Bang ITAT) confirmed by 383 ITR 258 (Mad) in Cadd Centre • Conversion of company into LLP – sec 47(xiiib) • Umicore Finance 189 Taxman 250 AAR : Even if section 47(xiii) fails, in the absence of charge, it has no effect

  44. Conversion of firm into LLP • [2009] 182 Taxman (St.) 1 : Taxation of Limited Liability PartnershipsPress Note No. 1/16/2007-CLV, dt.10-7-2009 • The Bill further provides that as an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Income-tax Act, the conversion from a general partnership firm to an LLP will have no tax implications • If rights and obligations of partners remain same after conversion and • if there is no transfer of any asset or liability after conversion. • The Finance Bill, 2009 also provides that if there is a violation of these conditions, the provisions of section 45 of Income-tax Act shall apply

  45. Conversion of proprietorship into company • Assessee-proprietor was allotted shares only to the tune of Rs. 1.52 cr out of the net assets worth Rs. 5.17 cr taken over by the company and the balance amount was lying in assessee’s current account, • HC observes that there was clear deficit, which was never paid or satisfied in the form of shares as envisaged under Section 47(xiv)(c) of the Act • Therefore exemption is not available : KV Mohammed Zakir TS-235-HC-2017(KER)]

  46. Compulsory Acquisition Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 – see section 96 : Circular 36/2016 dated 25.10.2016 Mary Kutti [TS-723-HC-2015(KER)] SumanDhamija [TS-697-HC-2015(DEL)] 382 ITR 343 CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC)

  47. Section 48 – Deferred consideration Whether deferred contingent payments form part of full value consideration? HemalRajuShete2016-TIOL-836-HC-MUM-IT Anurag Jain In Re (2005) 145 Taxman 413 (AAR) upheld in Anurag Jain v. AAR (2009) 183 Taxman 383 (Mad.) Ajay Guliya 209 Taxman 295 (Delhi) Ms. Indira R. Shete 138 ITD 264 (Mum.-ITAT)

  48. Some related principles • Income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount CIT v. Excel Industries and others [2013] 358 ITR 295 (SC) • No reassessment in respect of increase in rent with a retro effect as the right to receive did not exist in the relevant previous year : M/S P.G.& W.SAWOO Pvt. Ltd. [TS-251-SC-2016] • The share application money as also interest earned thereon will remain within a trust in favour of the general body of applicants until the process outlined above is completed in all respects : CIT Vs M/s Henkel Spic India Ltd 379 ITR 322 • The mere terming of the money received as 'advance' will not per se render the payment as such when in fact it admittedly was paid upfront as a lump sum amount on which TDS was been deducted as such for the period 1st January to 31st March 2006CIT Vs AMAN KHERA2016-TIOL-1673-HC-DEL-IT SLP dismissed 77 Taxmann.com 287 SC

  49. Section 2(42A) What is the date of acquisition of capital asset? CIT v. Suresh Rao 223 Taxman 228 [Kar] [SLP 17644 of 2014] Circular No. 471 dated 15.10.1986 [reported in 162 ITR (St.) 41] CIT vs. AnilabenUpendra Shah [2003] 262 ITR 657 (Guj.)

  50. Section 2(47)(v) PotlaNageswara Rao vs. DCIT 365 ITR 249 AP Dr K Ramachandra Vs DCIT2014-TIOL-782-ITAT-HYD distinguishing the above Sanjeev Lal’s case 365 ITR 389 SC Unitech Ltd. [TS-639-SC-2015]

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