Thursday, August 8, 2013

Sum incurred to defend directors arrested for narcotics offence was not an allowable business exp.

Expenditure incurred on professional fees to defend directors of assessee-company who were arrested for narcotics offence couldn’t be allowed being squarely covered within the meaning of Explanation to section 37(1)

In the instant case the assessee was engaged in the business of import of timber and heavy metal scrap. On a specific information, a container destined to be delivered to the assessee was intercepted in mid sea by the officers of Norcotics Control Bureau (NCB). Thereafter, the directors of the assessee-company were arrested by NCB. The assessee claimed the deduction of legal expenses incurred to defend the directors of the company in that case. During assessment, the AO disallowed the deduction towards such expenditure on the ground that it was incurred for the purpose of an offence prohibited by law. The CIT (A) upheld the order of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1) A bare perusal of the Explanation to section 37(1) (‘the Explanation’) indicates that incurring of any expenditure for a purpose which is an offence or prohibited by law cannot be allowed as deduction. As no final order on conviction or acquittal of directors was passed till relevant time, it showed that the charge was still continuing, which was otherwise an offence under the Narcotics Drugs and Psychotropic Substances Act, 1985;

2) There could be no reason to allow deduction towards such an expenditure which had been incurred for the purpose of an offence prohibited by law and which was squarely covered within the meaning of the Explanation;

3) The next ground of the assessee, about there being no nexus between the legal fees paid and breach of law, was not sustainable. Mandate of the Explanation is crystal clear that any expenditure incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction;

4) It does not make any difference whether expenditure was direct or indirect. So long as nexus of the expenditure with the offence was established, it would continue to be hit by the Explanation to section 37(1). Thus, there was no infirmity in the impugned order passed by CIT(A) - OPM International (P.) Ltd. v. Dy.CIT [2013] 35 480 (Mumbai - Trib.)

A registered society is a ‘person’ defined under section 2(31); capable to exercise all rights of a natural person

Primary co-operative credit society which is registered under Co-operative Societies Act, must be treated as juristic person capable of exercising all rights of a natural person

In the instant case the appellants were Primary Co-operative Credit Societies registered under the Kerala Co-operative Societies Act. Notices were issued to the appellants under section 142 for submitting returns. The appellants challenged said notices contending that they were not persons as contemplated under section 142(1). The Single Judge took the view that a combined reading of section 142(1) and section 2(31) would show that co-operative societies like the appellants were also 'persons' as defined in the Act and it could not be held that the notices issued were without jurisdiction.

The High Court held as under:

A perusal of the definition of the word 'person' showed that it included within its sweep all juridical persons. Appellants were cooperative societies. Indisputably they were registered under the Co-operative Societies Act. On a reading of section 9 of the Kerala Co-operative Societies Act it showed that the appellants were co-operative societies which had been registered and which were to be treated as body Corporates vide section 9 of the Kerala Co-operative Societies Act. Under section 2(31) a person comprehends juristic entity. Having regard to the fact that appellants were registered under the Co-operative Societies Act, the appellants had to be treated as body corporate and, therefore, juristic persons capable of exercising all the rights of natural persons as provided in the Act - Mangalam Service Co-operative Bank Ltd. V. ITO [2013] 35 381 (Kerala)

Assessee can’t claim status of a ‘trust’ if its parental body doesn’t surrender its status of mutual club

Where assessee-trust was an extension of mutual club, status of mutuality having transgressed to assessee, it could not be held to be a Charitable Institution and, accordingly, it could not be granted approval under sub-section (5) of section 80G

In the instant case the assessee was registered under section 12AA as a charitable trust. It was also granted recognition under section 80G for a period. The Director of Income-tax (Exemption) refused to give it approval under section 80G for further period on the ground that the assessee had not carried out any charitable activities for previous three financial years.

The Tribunal held as under:

1) The trust was an extension of the Mutual Club of Masons. The status of mutuality reflected on the assessee trust also. Therefore, it couldn’t claim the status of a charitable institution;

2) As the mother body (i.e., Club of Masons) was not surrendering its status of mutuality, it was not possible to treat the assessee-trust as an independent charitable institution. If it was so treated, one would be encouraging violation of law by permitting the mother body to go beyond the perimeter of mutuality through the medium of a trust;

3) Therefore, even though the assessee was registered under the law relating to trust, yet it couldn’t be construed as a charitable institution for the purpose of the Income-tax Act. Consequently, the application put up by the assessee under section 80G couldn’t be entertained - Lodge of Universal Charity 273 EC Charitable Trust v. DIT (Exemptions) [2013] 35 429 (Chennai - Trib.)

Section 54F exemption to be allowed on investment even if transaction hasn’t been completed within stipulated time

Assessee would be entitled to benefit under section 54F if he had invested amount of capital gain in purchasing or constructing a residential house, even though transaction was not completed within stipulated period

In the instant case the assessee had sold certain property and claimed exemption from capital gains under section 54F by stating that he had invested the amount in purchase of land and construction of house property. During the assessment, the AO noted that the period of 3 years from the date of sale of that property had expired and that the assessee had neither purchased any residential house nor had completed construction of any residential house as stipulated in section 54F, therefore, assessee was not eligible for deduction under section 54F. The CIT (A) confirmed the action of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1) Provisions contained in section 54F being a beneficial provisions, have to be construed liberally. In various judicial precedents it has been held that the condition precedent for claiming benefit under section 54F is only that the capital gain realized from the sale of capital asset should be invested by assessee either in purchasing or constructing a residential house within the stipulated period;

2) If the assessee had invested the money in construction of residential house, merely because the construction was not complete in all respects and the house was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit under section 54F;

3) Once the assessee demonstrated that the consideration received on transfer had been invested, even though the transaction was not complete in all respects, he would be entitled to avail of benefit under section 54F;

4) Even though investment made in purchasing a plot of land for the purpose of construction of a residential house had been held to be an investment satisfying the conditions of section 54F, yet the assessee was required to prove the actual date of investment and the amount invested towards purchase or construction of the residential house with supporting evidence;

5) The order of CIT (A) was to be set aside and matter was to be restored to the file of the AO. Thus, ground raised by the assessee was to be allowed - NARASIMHA RAJU RUDRA RAJU V. ACIT 35 90 (Hyderabad - Trib.)