Review of landmark judgments Presented by Chythanya K

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

Topics chosen 1. Depreciation 2. Interest 3. Bad debts 4. 43 B 5. TDS 6. Concealment Raghuraman & Chythanya

Topics chosen 1. Reassessment 2. Stay of recovery 220(6) 3. Fresh claim after filing of return 4. Firm 5. Deemed dividend 6. Miscellaneous Raghuraman & Chythanya

Depreciation-Intangible ◦ Goodwill: - Srivatsan Surveyors (P) Ltd. vs. ITO [2009] 125 TTJ (Chennai) 286 : right in restrictive covenant (non compete) is not an intangible asset under sec 32(1)(ii) - No : GURUJI ENTERTAINMENT NETWORK LTD vs. ACIT (2007) 108 TTJ (DEL) 180 - No : Bharatibai Vyas v. ITO 97 ITD 248 Ahm - No : RG Keswani v. ACIT 308 ITR-AT 271 Mum Raghuraman & Chythanya

Depreciation-Intangible ◦ Skyline Caterers (P) Ltd. vs. ITO [2008] 118 TTJ (Mumbai) 344 - M/s ONGC Videsh Ltd Vs DCIT 2009 -TIOL-758 -ITAT-DEL : The right granted to the assessee by way of licence to have an access and to carry on of business of exploration and development of mineral oil is an asset entitled to depreciation u/s. 32(1)(ii) of the IT Act. - Bosch Ltd Vs CIT 2009 -TIOL-736 -ITAT-BANG. pdf : ‘Business information' under the category of 'other identifiable intangibles (goodwill) is eligible for depreciation - Hindustan Coca Cola Beverages Pvt Ltd Vs DCIT 2009 -TIOL-650 ITAT-DEL. Intangible assets like marketing and trading reputation, trading style and name, marketing and distribution territorial knowhow and information of territory although called as goodwill qualify for depreciation - Kotak Forex Brokerage Ltd Vs ACIT 2009 -TIOL-711 -ITATMUM. pdf – Consideration paid of KOTAK name is goodwill Raghuraman & Chythanya eligible for depreciation

Depreciation-Stock exchange card ◦ M/s Techno Shares & Stocks Ltd Vs CIT 2010 -TIOL-67 -SC-IT Raghuraman & Chythanya

Depreciation-Software ◦ SC TO DECIDE ON SOFTWARE UPGRADE SPEND TAX LIABILITY : Notice issued on 10. 12. 2007 ◦ Revenue : - Southern Roadways Ltd. [2008] 304 ITR 84 (Mad) G. E. Power Services India Ltd. [2008] 300 ITR 420 (Delhi) G. E. Capital Services Ltd. [2007] 164 Taxman 46 (Delhi) Arch Finance Ltd. [2007] 165 Taxman 188 (ITAT DELHI) Media Video Ltd v JCIT (2002) 122 Taxman Mag 28 IBM India LTD 105 ITD 1 (BANG. ) ◦ - Capital : M/s Millenium Infocom Ltd 2008 -TIOL-481 -ITAT-MAD Arawali Construction (2002) 124 Taxman 146 (Raj) ◦ Case to case examination is required : Amway India Enterprises vs. DCIT (2008) 114 TTJ (Del) (SB) 476 Raghuraman & Chythanya

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) Relying on Alps Theatre’s case 65 ITR 377 SC Raghuraman & Chythanya

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 ◦ CIT v. Shree Rajasthan Syntex Ltd. [2009] 313 ITR 231 (Raj) HC Raghuraman & Chythanya

Depreciation-Lease See also • Circular 760 dt. 13. 01. 1998 for Interest Tax • Sundaram Finance Vs State of Kerala 17 STC 489 SC • CIT v. Motor & General Finance 327 ITR 530 Delhi Raghuraman & Chythanya

Depreciation-Lease ◦ Mere inclusion of Rs. 12, 50, 639 in the total business income is not the determinative factor for deciding whether trucks were used by the assessee during the relevant year in a business of running them on hire : CIT vs. Gupta Global Exim P. Ltd. (SC) 305 ITR 132 ◦ Higher rate of depreciation is also admissible when motor lorry is used by assessee in his own business of transportation of goods on hire : S. C. Thakur & Bros. [2009] 180 Taxman 348 (Bom. ) Raghuraman & Chythanya

Depreciation-Lease Depreciation -Lease Situation 1 Manufacture One business of Manufacture Situation 2 Leasing Manufacture Business 1 Leasing Business 2 No higher rate Higher rate Raghuraman & Chythanya

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 CIT v. Vardhman Polytex Ltd. 299 ITR 152 (P&H) (FB) Raghuraman & Chythanya

Interest ◦ Proviso to section 36(1)(iii) - Prospective - ALANKAR BUSINESS CORPORATION LTD vs. DCIT (2006) 157 TAXMAN 232 CHENNAI - DCIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC) Raghuraman & Chythanya

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) CIT Vs Chandulal Keshavlal 38 ITR 601 SC Raghuraman & Chythanya ◦

Bad debts ◦ Southern Technologies Ltd vs. JCIT [2010] 320 ITR 577(SC) ◦ TRF Ltd. CIT [2010] 323 ITR 397 (SC) ◦ Vijaya Bank v. CIT and another [2010] 323 ITR 166 (SC) Raghuraman & Chythanya

43 B ◦ 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 approved in CIT Vs Alom Extrusions Ltd 319 ITR 306 SC - Rule 30, 32 and 38 of PF Scheme Raghuraman & Chythanya

TDS ◦ Payment in kind 1. Kanchangang Sea Foods Ltd. v. CIT (SC) 325 ITR 540 2. HH Sri Rama Verma v. CIT (1991) 187 ITR 308 SC : “Any sums paid” contemplates payment of an amount of money. Raghuraman & Chythanya

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

TDS ◦ Credit to account 1. 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) 2. Circ no. 3 of 2010 dated 2. 3. 2010 - TDS under sec 194 A is not required in the absence of constructive credit Raghuraman & Chythanya

Section 40 a(ia) Constitutional validity upheld in a) Tube Investments Of India Ltd Vs ACIT 185 Taxman 438 (Mad. ) b) Dey’s Medical (U. P. ) P. LTD. v. UOI [2009] 316 ITR 445 (ALL) HC c) Rakesh Kumar & Co. v. Union of India [2009] 178 Taxman 481 (Punj. & Har. )

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 & CIT vs. Noble and Hewitt (I) P. Ltd. (Delhi – HC) 305 ITR 324 - 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 4 has no application to section 194 J Raghuraman & Chythanya

TDS ◦ Reimbursement of expenses - Reimbursement of expenses is also liable to TDS as per CBDT Circ No. 715 dated 08. 95. - No as per ITO Vs Dr Willmar Schwabe India (P. ) Ltd. (95 TTJ 53) (Delhi ITAT) - CIT vs. Industrial Engg. Projects P. Ltd. (2003 TIOL-247 -HC-DEL-IT) - CIT v. Information Architects [2010] 322 ITR 1 (Bom) HC Raghuraman & Chythanya

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) - Circular No. 5 of 2001 Raghuraman & Chythanya

TDS ◦ Proof to be collected by employer LTC / Conveyance Allowance - assessee-company gives LTC benefits to its employees. Revenue insists on collecting evidence towards actual utilisation of LTC facility. Sec 192 does not cast any obligation on the employer to collect and examine supporting evidence to establish declaration given by individual employees for having availed the facility CIT Vs ITI, Limited 2009 -TIOL-08 -SC-IT (L & T) Raghuraman & Chythanya

TDS ◦ CIT vs. Eli Lilly and Co. (India) P. Ltd. [2009] 312 ITR 225 [SC] As far as the period of default is concerned, the period starts from the date of deductibility till the date of actual payment of tax. Therefore, the levy of interest has to be restricted for the above stated period only. It may be clarified that the date of payment by the concerned employee can be treated as the date of actual payment. ◦ Hindustan Coca Cola Beverages P Ltd. , v. CIT 293 ITR 226 SC Raghuraman & Chythanya

Concealment The word ‘concealment’ has ‘deliberateness’ built into it - K. C. Builders v. ACIT 265 ITR 562 (S. C. ) - G. L. Didwania v. ITO [1997] 224 ITR 687 (SC) - Dilip N Shroff v. JCIT [20 O 7] 291 ITR 519 (SC) - In Kartar Singh vs. State of Punjab JT 1994 (SC) 432, p. 466: 1994 (3) SCC 569 Raghuraman & Chythanya

Concealment ◦ Willful concealment is not an essential ingredient for attracting the civil liability : DILIP N. SHROFF V. JCIT [20 O 7] 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

Dharmendra diluted ◦ CC & CCE Vs M/s Rajasthan Spinning & Weaving Mills (Dated: May 12, 2009) [2009] 180 Taxman 609 (SC) ◦ CIT v. Atul Mohan Bindal [2009] 317 ITR 1 (SC) : It goes without saying that for applicability of Section 271(1 )( c), conditions stated therein must exist ◦ CIT v. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158 (SC) Raghuraman & Chythanya

Mens rea - Dharmendra has not considered following direct decisions by benches of three judges Anwar Ali 76 ITR 696 Hindustan Steel 83 ITR 26 DM Manasvi 86 ITR 557 Ananthram Veersinghaih 123 ITR 457

Mens rea - CIT v. Haryana Warehousing Corporation [2009] 314 ITR 215 (P&H) The issue which arose for determination in Dharmendra was, whether under sec 11 AC of CE Act, 1944, penalty for evasion of payment of tax had to be mandatorily levied irrespective of whether non levy was an intentional or innocent omission. - In other words, the apex court was examining a proposition, whether means rea was an essential ingredient before penalty under section 11 AC could be levied. - The issue of mens-rea does not arise when the ingredients before any penalty can be imposed on an assessee under section 271 (1) (c) of the Act are not made out - Thus viewed, the judgment of Dharmendra, besides being a judgment under a different legislative enactment, is totally inapplicable to the facts and circumstances of this case. Raghuraman & Chythanya

Penalty v. Loss a) Virtual Soft 289 ITR 83 SC b) Gold Coin Health Food P. Ltd [2008] 304 ITR 308 (SC) c) JCIT v. Saheli Leasing and Industries Ltd. [2010] 324 ITR 170 (SC) d) Nalwa Sons Investment Ltd. 327 ITR 543 Delhi Raghuraman & Chythanya

Reassessment a) Rajesh Jhaveri 291 ITR 500 SC b) Kelvinator of India 320 ITR 561 SC c) CIT v. Greenworld Corporation v. ITO and another [2009] 314 ITR 81 (SC) Raghuraman & Chythanya

Reassessment – Procedure ◦ GKN Driveshaft 259 ITR 19 SC ◦ ACIT and another v. Hotel Blue Moon [2010] 321 ITR 362 (SC) Raghuraman & Chythanya

Stay of recovery ◦ Section 220(6) ◦ Valvoline Cummins Limited vs. DCIT (Delhi – HC) 307 ITR 103 ◦ Soul v. DCIT [2010] 323 ITR 305 (Delhi) HC ◦ Subhash Chander Sehgal v. DCIT [2008] 173 Taxman 412 (Delhi) ◦ Lakshmi Machine Works Ltd. v. DCCT [2008] 17 VST 32 (Mad) HC Raghuraman & Chythanya

Stay of recovery • Nos. 96, dated august 21, 1961 • Circular 530 dt. 06. 03. 89 • Circular 589 dt. 16. 01. 91 • 1914, dated December 2, 1993 Raghuraman & Chythanya

Power of CIT(A) for granting stay ◦ Smita Agrawal (Ind. ) v. CIT [2009] 184 Taxman 59 (All) 321 ITR 491 Raghuraman & Chythanya

Fresh claim after filing of return 1. 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) 2. 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

Claims de hors the return • When the Assessee has already made a claim in respect of a particular deduction, during assessment proceedings, he would have the right to correct the right figure and it cannot be said that it is a fresh case to be hit by Goetze case : TVS Motors Company Ltd 2009 -TIOL-448 -ITAT-MAD. pdf • Goetze case is not applicable for enhancement of claim originally made in the return : Hero Honda Finlease Ltd. (2008) 115 TTJ (Del) (TM) 752 • Goetze case applies only to claim of deduction and not to exemption which is statutorily available ACWT vs. Ku. Ragini Sanghi [2009] 120 TTJ (Ind) 1116, 123 ITD 384

Claims de hors the return • Goetze does not impinge on the power of ITAT : Jai Parabolic Springs Ltd. [2008] 172 Taxman 258 (Delhi) & M/s Modi Xerox Ltd Vs JCIT, Meerut 2008 TIOL-635 -ITAT-DEL • Goetze could have been applied had the AO/CIT (A) refused to entertain the claim made without filing a revised return. However, since the claim has been examined in detail and since even the powers of Tribunal are not restricted as held in the very said case of Goetze (India) Ltd. (supra), the ground raised may be entertained: SNC-Lavalin/Acres INC. 110 TTJ (Del) 13

Firm ◦ Salary to partner is allowable deduction to the extent mentioned in s. 40(b) if it was so authorised by the deed of partnership and there is no need to quantify the amount in the deed itself as per ACIT vs. Suman Construction [2009] 121 TTJ (Pune) 847 ◦ Firm paying salary to HUF as a working partner : CIT v. Devanand Automobiles [2008] 304 ITR 50 (Karn), CIT v. Golden Touch 138 Taxman 190 (Mad. ) & ITO v. Vegunta Surya Prakasa Rao Sons & Co. (Visakhapatnam) [2004] 88 ITD 322 (Visakhapatnam) relying on 229 ITR 458 SC Raghuraman & Chythanya

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

Section 187 ◦ Dissolution or change in constitution - Two partners retiring and two new partners inducted on same day where business continued under same –is a case of change in constitution. Deed calling it a dissolution is not material as per CIT and another v. Bharat Steel Rolling Mills [2009] 313 ITR 406 (All) HC ◦ Contra : CIT v. Ketan Chemicals [2006] 281 ITR 244 Guj Raghuraman & Chythanya

Capital gains - § Part IX conversion – Exigible to capital gains Amin Machinery (P) Ltd. vs. DCIT [2007] 111 TTJ (Ahd) 892 The question of taxability of capital gains in case of Part IX conversion is a question of law as per CIT v. Well Packaging [2009] 309 ITR 338 (SC) Raghuraman & Chythanya

Deemed dividend ◦ Deemed dividend to be taxed in hands of a) Recipient : Circular No. 495 dated September 23, 1987 [1987] 168 ITR (St. ) 87 b) Interested person : CIT Vs. MUKUNDRAY K. SHAH (2007) 290 ITR 433 (SC) Raghuraman & Chythanya

Miscellaneous 1. On repairs - Saravana Spinning Mills 293 ITR 301 SC, CIT v. Sri Mangyakarasi Mills P. Ltd. [2009] 2. 315 ITR 114 (SC) and CIT v Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 [SC]M On subsidy - Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC) & Sahney Steel and Press Works Ltd and others V CIT (1997) 228 ITR 253 3. On waiver of interest at end of year - Sarabhai holdings P. Ltd. 307 ITR 89 (SC) 4. On mutuality – Canara Bank Golden Jubilee Staff Welfare Fund 308 ITR 202 Kar (SLP dismissed by SC in 320 ITR-St Raghuraman & Chythanya

Miscellaneous 7. On manufacture – India Cine Agencies 308 ITR 98 SC, M/s. Oracle Software's case ( 2010 TIOL-04 -SC-IT ) & 2009 -TIOL-127 -SC-ITLB, ITO, Udaipur Vs M/s Arihant Tiles & Marbles (P) Ltd (Dated: December 02, 2009) 8. On appeal by State – CK Gangadharan 304 ITR 61 SC and JK Charitable Trust 308 ITR 161 SC 9. Liquidated damage is not income - CIT, Gujarat Vs M/s Saurashtra Cement Limited 2010 -TIOL-49 -SC-IT Raghuraman & Chythanya

Q&A Thanks Raghuraman & Chythanya