SELECTED ORDERS OF ITAT
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Vol. 19, Part 2, for the week January 8- January 14, 2007 |
CONTENTS
CONTENTS
List of Cases
Asstt. CIT v. Dhamdhere (K.H.) (Cochin)
Asstt. CIT v. Lafarge India Holding (P.) Ltd. (Mum.)
Asstt. CIT v. Malli Chand Baid (Nag.) (URO)
Dy. CIT v. Lazard India Ltd. (Mum.)
Dy. CIT v. Seagram Manufacturing (P.) Ltd. (Delhi)
Jt. CIT v. Global Calcium (P.) Ltd. (Chennai) (URO)
Jt. CIT v. Indian Management Advisor & Leasing (P.) Ltd. (Delhi)
Mathew Joseph v. Asstt. CIT (Cochin)
Medicare Investments Ltd. v. Jt. CIT (Delhi) (SB)
Mina Deogun (Smt.) v. ITO (Kol.)
Paperbase Co. Ltd. v. Asstt. CIT (Delhi)
Pocket Testament League (India) v. Dy. DIT (Exemption) (Delhi)
Sri Satchidanand S. Pandit v. ITO (Mum.)
Steel and Industrial Forgings Ltd. v. Asstt. CIT (Cochin)
Subject index
Assessment
Issue of notice
- Assessment year 1998-99 -
Whether if Assessing Officer fails to verify return by making an enquiry by
issuing notice under section 143(2) within time allowed, he cannot take
recourse to provisions of section 147 for that purpose - Held, yes - Asstt.
CIT v. Malli Chand Baid (Nag.) (URO)
Business expenditure
Allowability of
- Assessment year 2001-02 -
Assessee-company was engaged in manufacturing and sale of stationery item and
trading activities - It sold its manufacturing unit to its holding company ‘B’
- Before effecting sale of undertaking, assessee entered into an agreement with
‘B’ to carry out necessary study for identifying new markets in India and
abroad for establishment of new distribution network for marketing of paper
stationery - For conducting study, ‘B’ incurred an expenditure of Rs. 3.22
crores on behalf of assessee - Assessee claimed that said expenditure was
incurred for commercial expediency and was allowable as deduction under section
37(1) - However, Commissioner (Appeals), without giving an opportunity to
assessee for explaining as to how expenditure related to business expediency,
rejected its claim - Whether order of Commissioner (Appeals) was to be set
aside so as to allow a reasonable opportunity to assessee for explaining as to
how expenditure incurred/claimed related to commercial expediency - Held,
yes - Paperbase Co. Ltd. v. Asstt. CIT (Delhi)
Business loss/deductions
Allowable as
- Assessment year 1996-97 - In
its letter of offer company ‘M’ had offerred to its existing shareholders
secured redeemable Non-convertible Debentures (NCDs) of Rs. 250 each of ‘M’ for
cash at par along with detachable warrants on right basis in ratio of one NCD
for every 5 equity shares - Said warrants were detachable and, NCDs could be
sold separately after detaching said warrants - As per terms and conditions of
said issue, ‘M’ had made an arrangement with another company ‘I’, whereby an
option was given to successful allottees to sell NCDs allotted to them without
warrants at a price of Rs. 169 per NCD - Said option was to be exercised by
applicant at time of filing application itself and applicant opting for such
option would be required to pay only an amount of Rs. 81 per NCD as application
money as against Rs. 250 otherwise payable by applicant not exercising said
option (Scheme A), and that on successful allotment, allottees exercising said
option were not required to pay anything further, since balance amount of Rs.
169 per NCD was to be received by ‘M’ directly from ‘I’ on behalf of allottees
against the sale of NCDs - Assessee-company, an investment company, being
shareholder of ‘M’ was allotted certain secured redeemable NCDs with detachable
warrants of Rs. 250 per NCD - Assessee exercised option as per letter of offer
and sold NCDs without warrants at rate of Rs. 169 each - Assessee filed return
wherein difference between face value of NCDs (with warrant) and sale value
(without warrant) (i.e., 250-169) was treated as loss on sale of NCDs
and assessee contended that detachable warrant issued along with said NCD was
not assigned any value and same was allotted without any extra cost to existing
shareholders and thus cost of acquisition of NCD to assessee was Rs. 250 each
whereas cost of acquisition of detachable warrants was nil for all
purposes including purpose of computation of profit/loss on sale of said
instruments - For purpose of allowance of its claim, assessee also relied upon
decision of Delhi High Court in CIT v. Abhinandan Investments Ltd.
[2002] 254 ITR 538/121 Taxman 161 - Assessing Officer, however, disallowed assessee’s
claim holding that warrant cost was to be taken at Rs. 81 only and not nil,
as canvassed by assessee - Whether since issue involved in instant case as well
as all material facts relevant thereto were similar to that of Abhinandan
Investments Ltd.’s case (supra), assessee in instant case was
entitled to deduction for loss incurred on sale of NCDs - Held, yes -
Whether decision of Delhi High Court dismissing appeal filed by revenue against
order of Tribunal passed in case of Abhinandan Investments Ltd. (supra)
holding that no substantial question of law arose, was a decision on merits and
would constitute a binding precedent, which Special Bench was bound to follow -
Held, yes - Medicare Investments Ltd. v. Jt. CIT (Delhi) (SB)
- Assessment year 1999-2000 -
Whether in view of decision of Special Bench of Delhi Tribunal, in case of Oil
& Natural Gas Corporation Ltd. v. Dy. CIT [2002] 83 ITD 151,
exchange loss on account of fluctuation in foreign currency rate is allowable
as deduction - Held, yes - Dy. CIT v. Lazard India Ltd.
(Mum.)
Capital gains
Cost of acquisition
- Assessment year 2004-05 -
Assessee’s father purchased a property on 16-4-1958 - He died on 29-6-1968 and
thereafter, his wife ‘B’ became owner of said property - ‘B’ expired on
16-9-1999 and thereafter, assessee inherited said property and sold same
subsequently - Assessing Officer while determining cost of acquisition of
assessee’s share in property under section 55(2)(B)(ii) adopted case of
inflation index applicable to financial year 1998-99 as base on ground that in
said year assessee first held asset on demise of her mother - Whether when an
assessee sells an inherited capital asset, capital gain is to be computed with
reference to period of holding and cost of acquisition incurred by first owner
- Held, yes - Whether if an asset is acquired before 1-4-1981, market
value of capital asset as on 1-4-1981 would be taken for purpose of indexation
- Held, yes - Whether since assessee’s father who was first owner of
said property had acquired same in year 1958, i.e., before 1-4-1981,
Assessing Officer was required to compute capital gain by applying cost
inflation index applicable for financial year 1981-82 and not to financial year
1998-99 - Held, yes - Smt. Mina Deogun v. ITO (Kol.)
- Assessment year 2004-05
-Whether in valuing market value of any property, consi-deration should not
only be given to locality but also to other facts relatable to specific
property - Held, yes - Whether where registered valuer had valued market
value of property acquired by assessee by comparing sale instance of other
property situated in that area and had also considered other facts relatable to
that specific property and its location, in such circumstances, value of
property as estimated by registered valuer deserved to be accepted - Held,
yes - Smt. Mina Deogun v. ITO (Kol.)
Slump sale, cost of acquisition in case of
- Assessment year 2001-02 -
Whether in case of slump sale, where liabilities are more than value of assets,
net worth, viz., cost of acquisition, has to be taken at nil and
entire sale consideration is liable to capital gains tax - Held, yes - Paperbase
Co. Ltd. v. Asstt. CIT (Delhi)
Charitable or religious trust
Exemption of income from property held under
- Assessment year 1993-94 -
Whether benefit of exemption under section 11 can be denied to a trust which is
registered as a charitable institution and part of its income is applied for
religious purposes, i.e., for benefit of a particular religious
community - Held, no - Pocket Testament League (India) v. Dy.
DIT (Exemption) (Delhi)
Circulars & Notifications
- CBDT’s Circular No. 495, dated
22-9-1987
- CBDT Circular No. 636, dated
13-8-1992
- Circular No. 19, dated
12-5-1943
- Circular No. 681, dated
8-3-1994
Deduction of tax at source
Contractors/sub-contractors, payments to
- Assessment year 2003-04 -
Assessee-company was engaged in business of processing, bottling and selling of
scotch and Indian made foreign liquor - It used to purchase packaging material,
like glass bottles, caps, etc., from manufacturers for packing and selling its
own goods - Assessing Officer treated said transaction as a work contract and
not a contract for sale on ground that those manufacturers supplied said
material as per assessee’s specifications - Consequently, he treated assessee
as a defaulter for not deducting tax at source, as per provisions of section
194C, on payments made by it for purchase of said customized packing material -
Whether customization of packing material supplied in accordance with
specifications laid down by assessee would not make transaction of sale into a
transaction of contract - Held, yes - Whether, further since those
manufacturers were undertaking independent purchase of raw material, without
any assistance of assessee and assessee was also not having any right to
inspect manufacturing activity, it could be said that transaction between
assessee and manufacturer of packing material was a transaction of sale and purchase
on principal to principal basis, and therefore, assessee was not liable to
deduct tax under section 194C on payments so made - Held, yes - Dy.
CIT v. Seagram Manufacturing (P.) Ltd. (Delhi)
Deductions
Exporters
- Whether 90 per cent of gross
receipts like interest, rent, brokerage, commission, etc., should be excluded
while computing export profit for purpose of computation of deduction under
section 80HHC - Held, yes - Whether, however, since some expenditure may
be incurred in earning such incomes, an ad hoc 10 per cent deduction
from such incomes would be allowed to account for these expenses - Held,
yes - Jt. CIT v. Global Calcium (P.) Ltd. (Chennai) (URO)
Deemed dividend
- Assessment year 2001-02 -
Assessee was engaged in business of printing - He was also director of a
company ‘H’ holding beneficial shares of ‘H’ entailing voting power exceeding
10 per cent - Certain amount was payable by assessee to ‘H’ on account of
printing job work done by ‘H’ for assessee - Assessing Officer treated said
amount as deemed dividend under section 2(22)(e) and, accordingly
included same in total income of assessee - Whether since transaction in
question was entered into during regular course of business between ‘H’ and
assessee and was not entered into for benefit of assessee, Assessing Officer
was wrong in treating said amount as deemed dividend under section 2(22)(e)
- Held, yes - Sri Satchidanand S. Pandit v. ITO
(Mum.)
Depreciation
Allowance/Rate of
- Assessment year 1996-97 -
Whether an assessee who has acquired an asset on hire-purchase agreement, is
entitled to depreciation on asset in year of entering into hire-purchase
agreement, notwithstanding that he would become owner of asset, once he makes
payment of all instalments and exercises option to acquire assets - Held,
yes - Jt. CIT v. Indian Management Advisor & Leasing (P.) Ltd.
(Delhi)
Expenditure incurred in relation to income not includible in total
income
- Assessment year 2000-01 -
Assessee-company was engaged in making investment in shares of cement companies
- It incurred certain administrative expenses and claimed deduction of same -
Assessing Officer, after considering provision of section 14A, came to
conclusion that since assessee’s business activities were confined to share
investment, income from which being dividend qualified for exemption under
section 10(33), expenses so incurred were not eligible for deduction -
Whether since assessee had not earned dividend income in relevant previous
year, section 14A was not applicable - Held, yes - Asstt. CIT v.
Lafarge India Holding (P.) Ltd. (Mum.)
Income escaping assessment
Non-disclosure of primary facts
- Assessment year 1998-99 -
Assessee filed his return of income for assessment year 1998-99, which was
completed under section 143(1)(a) - Thereafter, Assessing Officer on
basis of some information held that there was abrupt increase in turnover by
more than twenty times, which was not explained by assessee and assessee had
not fully explained investment in opening of a new office and had also not
disclosed fully and truly all material information relating to creditors for
Rs. 15 lakhs and, therefore, he had reason to believe that income of assessee
had escaped assessment; and, accordingly, he made reassessment - Assessee
contended that increase in turnover did not ipso facto result in forming
belief that income had escaped assessment and further investment in opening of
office had been duly recorded in books of account and details of creditor names
and purchases were mentioned in balance sheet - Commissioner (Appeals) accepted
said contention and set aside order of Assessing Officer by holding that
Assessing Officer simply wanted to investigate case and had no information on
basis of which there could be a reason to believe that income had escaped
assessment - Whether order of Commissioner (Appeals) was justified - Held,
yes - Asstt. CIT v. Malli Chand Baid (Nag.) (URO)
Chargeable as
- Assessment year 2004-05 - Assessee
along with her husband had constructed a residential building on a plot of
land, which was registered in name of her husband - This building was let out
since 1973-74 and in all past assessments of assessee and her husband till
assessment year 2003-04, one-third of rental income was assessed in assessee’s
hands under head ‘Income from house property’ - However, in assessment year
2004-05, Assessing Officer assessed rental income received by assessee under
head ‘Income from other sources’ - Whether since for past several years rental
income was assessed as ‘income from house property’, there was no reason to
take a different view assessment year 2004-05 - Held, yes - Smt. Mina
Deogun v. ITO (Kol.)
Income from other sources
Chargeable as
- Assessment year 2000-01 -
Whether where funds not immediately required by assessee for its business
purpose were invested in FDRs, interest thereon could not be put to tax under
head ‘Business income’ but such interest was chargeable/taxable under head ‘Income
from other sources’ - Held, yes - Asstt. CIT v. Lafarge India
Holding (P.) Ltd. (Mum.)
Deductions
- Assessment year 1997-98 -
Whether when assessee who was engaged in export business had taken loan from
certain bank and diverted part of loan to another concern, interest earned on
such diverted loan would not be eligible for deduction under section 57 - Held,
yes - Mathew Joseph v. Asstt. CIT (Cochin)
Income-tax Act, 1961
- Section 2(22)
- Section 11
- Section 14A
- Section 22
- Section 28(i)
- Section 32
- Section 37(1)
- Section 50B
- Section 55
- Section 56
- Section 57
- Section 69C
- Section 71
- Section 80HHC
- Section 115JA
- Section 143
- Section 147
- Section 194C
Interpretation of statute
- Rule of Schematic
interpretation and Rule of Harmonious interpretation
Losses
Set off of from one head against income from another
- Assessment year 1997-98 - Whether
in view of facts stated under heading, ‘Income from other sources - Deductions’
interest earned by assessee by advancing certain sum to its sister concern out
of loan taken from bank could not be set off against interest paid to bank - Held,
yes - Mathew Joseph v. Asstt. CIT (Cochin)
Minimum alternate tax
- Assessment years 1998-99 and
1999-2000 - Assessee-company while computing book profit for purpose of section
115JA deducted carried forward depreciation - Assessing Officer refused to
deduct said depreciation - Whether assessee was required to workout figures of
brought forward depreciation and loss as per method prescribed in Circular No.
495, dated 22-9-1987 and after following said method whichever would be less,
either loss or depreciation, same would be reduced for working out book profit
for relevant assessment years - Held, yes - Steel and Industrial
Forgings Ltd. v. Asstt. CIT (Cochin)
Unexplained expenditure
- Assessment years 1997-98 to 2000-01 and 2002-03 - Assessee-firm was engaged in business of trading essential oils, synthetic perfumes, herbal extracts, etc. - Pursuant to a survey, Assessing Officer found that assessee had shown purchase of herbal oils, entirely on credit basis which were supported only by assessee’s own bought notes - He, therefore, held that purchases were bogus and, accordingly, made addition under section 69C - Whether since purchase of materials on basis of bought notes on which payments were made subsequently was a consistent commercial practice followed by assessee in its line of business for more than two/three decades and, moreover, no incriminating or additional documents were found during course of survey to show that assessee had made bogus purchase, addition made under section 69C was to be deleted - Held, yes - Asstt. CIT v. K.H. Dhamdhere (Cochin)