Friday, March 31, 2017

Utilization of refund of TDS by company in liquidation would amount to contempt of court: Apex court

Contempt of Courts Act: Company in liquidation received money from National HighwayAuthority of India (NHAI) on account of acquisition of company's land.High Court had directed NHAI to deposit said amount with Registrar of High Court andNHAI deposited said amount after deducting TDS.

Thereafter, company has filed its return and claimed refund of the entire amount coveredby the TDS. Such amount was utilized for various purpose by the company. The ApexCourt held that utilization of TDS refund would amount to Contempt of order of High Court,as refund was actually compensation in respect of land acquired from company and itwas that amount which High Court wanted to protect by its order. - [2017] 79 463 (SC)

Share premium isn’t part of capital employed for computing Sec. 35D deduction of preliminary exp: SC

The issue before the Supreme Court was as under:

Whether "Premium" collected by Company on its subscribed share capital was to be treated as "capital employed in the business of the Company" within the meaning of Explanation(b) of sub-section(3) to Section 35D so as to enable the Company to claim deduction of preliminary expenses as prescribed under Section 35D?Supreme Court held in favour of revenue as under:

The "premium amount" collected by the Company on its subscribed issued share capital could not be said to be the part of "capital employed in the business of the Company" inview of the following reasons:-

1) If the intention of the Legislature was to treat the amount of "premium" collected by theCompany from its shareholders while issuing the shares to be the part of "capitalemployed in the business of the company", then it would have been specifically said so inthe Explanation(b) to sub-section(3) of Section 35D of the Act. It was, however, not said so.

2) Section 78 of the Companies Act which deals with the "issue of shares at premium anddiscount" requires a Company to transfer the amount so collected as premium from theshareholders and to keep the same in a separate account called "securities premiumaccount". It does not anywhere say that such amount should be treated as part of capitalof the company employed in the business for one or other purpose, even under the
Companies Act.

3) Column III of the Form of Annual Return prescribed under the Companies Act whichdeals with capital structure of the company, provides "issued shares capital break up".This column does not include in it the "premium amount collected by the company from itsshareholders on its issued share capital". This is indicative of the fact that such amount isnot considered as a part of the capital, unless it is specifically provided for in the relevantsection. - [2017] 79 450 (SC)

Lessee can’t claim depreciation on reimbursement of construction cost to lessor: Apex Court


a) Mother Hospital Private Ltd. (Assessee)entered into an agreement with a partnership firm for construction of hospital building on land belonged to the firm.

b) It wasagreed that the firm will complete the construction of the building on the condition that the entire cost of construction should be borne bythe assessee. Since the ownership of the land had to remain with the firm, it was also agreed that the land would be given on lease.

c) Assessee filed its return in which it claimed depreciation on the building portion on the ground that it was deemed owner of building as per Explanation 1 to section 32. 

d) Assessing Officer (AO) rejected claim of depreciation which was upheld by the CIT(A) and High Court on further appeals.

e) Aggrieved by the order of High Court, assessee filed the instant appeal before the Supreme Court.

Supreme Court held in favour of revenue as under:

1) As per explanation 1 to section 32:

“Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes ofthe business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of or improvement to the building, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee."

2) As is clear from the plain language of the aforesaid Explanation, it is only when the assessee holds a lease right and any capital expenditure on the construction to the building is incurred by the assessee, that assessee would be entitled to depreciation to the extent of any such expenditure incurred.

3) If construction is carried out by lessor and expenditure is reimbursed by lessee, Explanation 1 would not come to the aid of the lessee.

4) In the instant case, construction was made by the firm and not by the assessee. It was a different thing that the assessee had reimbursed the amount to the lessor.

5) Since construction was not carried out by the assessee himself, therefore Explanation 1 to section 32 could not be applied and, accordingly, assessee couldn’t claim deprecation on building. [2017] 79 375 (SC) 

Mere signing of 'Sauda Chitthi' wouldn't prove that assessee had received consideration from sale of land: HC


a) Assessee received re-assessment notice on the ground that a document was seized from the residence of Mr. RV, one of the partners of the firm in which assessee was also a partner.

b) This was a copy of 'Sauda Chitthi' entered into between the assessee and Mr. V on one hand as seller and Mr. PK and Mr. RV on other side of the deal as buyers for purchase of land.

c) According to the Assessing Officer (AO), the total sale consideration for above land, according to 'Sauda Chitthi', came to Rs. 18.80 crores and subsequently a sale deed was executed for a consideration of Rs. 56.39 lakhs and balance amount of Rs. 18.23 crores was received by assessee in cash as on-money. He held that the differential amount must be added to income of assessee.

d) Assessee filed writ petition before High Court against such re-assessment notice. High Court held in favour of assessee as under:-

1) It was an admitted position that the assessee had never executed any sale deeds. Merely on the basis of the 'Sauda Chitthi' signed by the assessee (signed and executed though, admittedly they were not owners of land for which the 'Sauda Chitthi' was executed/signed), it couldn’t be said that any amount was received by him.

2) Considering the statement of Mr. RV, he had categorically stated that the ‘Sauda Chitthi’ dated 12-03-2008 was subsequently had cancelled. It also didn’t appear that Mr. RV had stated that he had paid any amount to the assessee.

3) There was no other tangible material available with the AO other than ‘Sauda Chitthi’ to form a reasonable belief that the amount of Rs. 18.23 crores had been received by the assessee in cash.

4) Thus, formation of opinion by the AO seemed to be on surmises and conjectures, which couldn’t be the basis for reopening the assessment, in exercise of powers under section 147. [2017] 79 237 (Gujarat)