Direct Tax Case Laws

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CA Final NOV 2012 Exams

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1.              CIT v. Modi Industries Ltd. (2011) 339 ITR 467 (Del.)

"Current Repairs” u/s 31 and the explanation thereof,refers to expenditure affected to preserve and maintain an already existing asset and the object of expenditure must not be to bring a new asset into existence or to obtain a new advantage.

Expenditure incurred on demolition and re-erection of a cell room: It was a Capital Expenditure because it is clear that after completely demolishing the old cell room, an entire new cell room was erected. The money spent was not merely on repairs of the cell room, but for constructing a new cell room.

Expenditure incurred on purchase of pumping set, mono block pump and two transformers, which were parts of a bigger plant: They were not stand alone equipment, but were part of the bigger plant. Therefore, it would be treated as replacement of those parts and the expenditure would be eligible for deduction under section 37(1).

2.              CIT v. Jagatjit Industries Ltd. (2011) 337 ITR 21 (Delhi)

For determining the nature of receipts, due consideration should be given to THE SOURCE OF FUNDS and NOT to the utilization of funds.

Therefore, the gain arising on foreign currency fluctuation in respect of share capital raised in outside country will be treated as capital receipt. Utilization of such gains whether for acquiring the fixed assets or as working capital is irrelevant.

3.              DIT v. Brahamputra Capital Financial Services Ltd. (2011) 335 ITR 182 (Delhi)      

Fact : NBFC gave interest bearing loans to group concern.  It has not recognised the interest/discount etc. as per the NBFC Prudential Norms (RBI) Directions, 1998 because those group concern became NPA as per the said norms and even the recovery of principal amount was doubtful.

Decision : The interest on the NPA, whose recovery was doubtful, was not accounted for in the books and the assessee is bound  by the RBI Guidelines for such treatment. THERE  WAS NO REAL ACCRUAL OF INTEREST INCOME IN THE HANDS OF THE ASSESSEE and, hence, it would not be chargeable to tax under Section 5.                        

4.              Shree Balaji Alloys v. CIT (2011) 333 ITR 335 (J&K)          

Assessee received Excise Duty refund & interest subsidy in pursuance of the New Industrial Policy in J&K. These were not granted for creation of new assets and the incentives would be available only on commencement of commercial production. HC observed that these were NOT THE SOLE CRITERIA for determining the nature of subsidy.  The fact that such incentives were PROVIDED TO ACHIEVE A PUBLIC PURPOSE should also be considered & hence, such subsidy could not be construed as operational incentive for the assessee. Hence, such incentives are capital receipts not liable to tax.

5.              CIT v. Sahkari Chini Mills Ltd. (2010) 328 ITR 27 (All.)

The incentive received under Scheme of Central Government for recoupment of Capital Employed and repayment of Loan from FI for setting up / expansion of new sugar factory IS NOT IN COURSE OF TRADE because the main eligibility condition for the scheme was utilization of incentive for repayment of specified loans. Therefore, it is a CAPITAL RECEIPT NOT CHARGEABLE to TAX.

Allahabad High Court followed the ruling of the Apex Court in CIT vs. Ponni Sugar & Chemicals Ltd. (2008) 306 ITR 392.

6.              CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)

7.         CIT v. Udupi Builders P. Ltd. (2009) 319 ITR 440 (Kar.)                                        

Company established Hotel industry based on subsidy ANNOUNCED by State Govt to encourage tourism. but Subsidy was RECEIVED AFTER COMPLETION OF HOTEL PROJECT & commencement of business. The purpose of subsidy is important & not the time of receipt (may be received even after 10yrs). Hence it is CAPITAL RECEIPT not chargeable to tax.

8.              Joseph George and Co. v. ITO (2010) 328 ITR 161 (Kerala)                               

Receipts from lodging business will be chargeable to tax under the head Profit & Gain from Business or Professional. However, letting out of its building to the bank on long-term lease will be RENTAL INCOME to be assessed as Income from House Property.

9.              CIT v. Asian Hotels Ltd. (2010) 323 ITR 490 (Del.)                                        .

Notional Interest on interest free deposit given by tenant to landlord is NOT assessable either as business income or income from house property.

10.              Rollatainers Ltd. v. CIT (2011) 339 ITR 54 (Del.)

The  Corporate Debt Restructuring Cell approved the waiver of working capital loans in form of Cash Credit Limit and also the Term Loan taken by the assessee (a sick company) from banks & FIs.

High Court Decision

·        The provision of Sec 41(1) are attracted in respect of Waiver Of The Working Capital Loan utilized for day-to-day business operations, since it AMOUNTED TO REMISSION OF TRADING LIABILITY.

·        In the case of  Waiver Of Term Loan for purchasing capital assets, the provision of Sec 41(1) are not attracted since it CANNOT be treated as remission or cessation of a trading liability.

11.              CIT v. Tulip Star Hotels Ltd. (2011) 338 ITR 482 (Del.)

The assessee company had borrowed certain funds which it had utilized to subscribe to the equity capital of subsidiary company.

Under Sec. 36(1)(iii), the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession is allowable as deduction. In this case, it has been held that interest paid on capital borrowed for investment in a subsidiary company is allowable as deduction since the subsidiary company was formed to carry on the business of the parent company in a more effective manner.

12.              CIT v. Cable Corporation of India Ltd. (2011) 336 ITR 56 (Bom.)

As per explanation to Sec 41(4), "moneys payable" in respect to sale of a building, machinery, plant or furniture would be the price for which it is sold. Therefore, as per Sec 43(6), the opening WDV of block of assets has to be adjusted by the amount for which the asset is actually sold and not by its market value.

13.              Shanti Bhushan v. CIT (2011) 336 ITR 26 (Delhi)

Fact : The assessee was a lawyer by profession. He contended that the heart should be treated as plant as it is used for the purpose of his professional work and expenditure on heart surgery should be allowed as business expenditure either u/s 31 as current repairs to plant or u/s 37 as an expense incurred wholly and exclusively for the purpose of profession.

Decision :  The High Court held that:-

       I.            The expenditure on heart surgery is not allowable as repairs to plant u/s 31 because;

·        To allow the heart surgery expenditure as repair expenses to plant, the heart should have been shown as an asset in PY and in earlier years.

·        The assessee would face difficulty in arriving at the cost of acquisition of such an asset for showing in his books of account.

·        Under sec 43(3), Plant has inclusive definition but the plant must have been used as a business tool which is not true in case of heart. Therefore, the heart cannot be said to be plant for the business or profession of the assessee.

     II.            The claim for allowing the said expenditure u/s 37 is also not tenable because;

14.              CIT v. ITC Hotels Ltd. (2011) 334 ITR 109 (Kar.)

Karnataka HC held that the expenditure incurred on the issue and collection of debenture shall be treated as revenue expenditure even in case of convertible debenture.

15.              DIT v. DSD NoeII GmbH (2011) 333 ITR 304 (Delhi)                                             

The assessee is a German Company providing engineering and technical services for various turnkey projects eligible for PRESUMPTIVE TAXATION SCHEME u/s 44BBB. Assessee fulfils all the conditions of Sec.44BBB(1) & thus, the provision of Sec 28 to 44AA would not be applicable for computation of business income and a sum equal to 10% of the amount paid or payable to the assessee would be deemed as its business income.

16.              CIT v. Priya Village Roadshows Ltd. (2011) 332 ITR 594 (Delhi)                     

Assessee, engaged in running cinemas, incurred expenditure towards architect's fee for examining the technical viability of proposal for takeover of cinema theatre & converts it into multiplex theatre (for existing business with a common administration and common fund). This project was dropped due to lack of financial & technical viability. The expenditure was of REVENUE NATURE as there in no creation of new asset.

17.              B. Raveendran Pillai v. CIT (2011) 332 ITR 531 (Kerala)                                             

Assessee purchased a Hospital which was running in the same building, in the same town, in the same name for several years. Previous owners transferred the right TO USE THE NAME & the goodwill to the assessee. Assessee derived benefit of retention of continued trust of the patients of previous owners. Thus, it was paid for ACQUIRING BUSINESS AND COMMERCIAL RIGHT and comparable with trade mark, franchise, copyright etc. referred to in Sec 32(1)(ii). Hence, depreciation is allowable on such goodwill being a commercial right.

18.              Global Geophysical Services Ltd., In re (2011) 332 ITR 418 (AAR)                  

The Seismic Data (in processed form) is used to create highly accurate images of the earth’s sub-surface which in turn are used by the exploration and production companies (like ONGC, Cairn Energy) for locating potential oil and gas reserves based upon the geology observed. The said activities and services of the applicant clearly fall within the description of Sec44BB.

19.              Federal Bank Ltd. v. ACIT (2011) 332 ITR 319 (Kerala)                                       

There is no ground to treat the communication devices (e.g. EPBAX & Mobile Phones) as Computers. Hence, Communication devices are not entitled to higher depre at 60%.

20.              Iskraemeco Regent Ltd. v. CIT (2011) 331 ITR 317 (Mad.)                                  

The Company took loan for purchase of Capital Asset. The waiver of a portion of principal of the loan would not amount to remission of trading liability to attract the provisions of Section 41(1). Such waiver will also not be treated as benefit ARISING OUT OF BUSINESS for the purpose Sec 28 (iv).