ITAT accepts lacuna in law as sec. 41(1) doesn’t tax depreciation claim if capital loan is waived off by lender

The assessee purchased a depreciable asset for which it took loan of same amount from a group company. Subsequently, parent company waived off the loan, which was shown as capital receipt by the assessee in its financial statements, without adjusting the book value of such asset. During assessment, the AO reduced the WDV of the asset to the extent of waived off loan and disallowed the claim for differential depreciation amount pertaining to the period when such loan was waived off and for the subsequent years.

On appeal, the Tribunal held in favour of assessee as under:

1) Since there was no sale or destruction of any assets comprising the block of assets, provisions of Section 43(6)(c)(i)(B) could not be invoked on ground of waiver of loan;

2) Further, concept of 'actual cost' as defined under section 43(1) could be applied only in year of purchase of assets. Therefore, the actual cost of asset recorded in the year of purchase could not be disturbed in the year of waiver;

3) In that regard there was a lacuna, in law, inasmuch as on one hand assessee got waiver of monies payable on purchase of machinery and claimed such receipt to be not taxable in view of it being a capital receipt and on other hand assessee claimed depreciation on value of machinery for which it did not incur any cost.

In view of above, it was held that under law revenue had no remedy and, therefore, disallowance of depreciation could not be sustained - Akzo Nobel Coatings India (P.) Ltd. v. DCIT [2012] 28 taxmann.com 82 (Bangalore - Trib.)

Suo-motu disallowance for TDS default shielded assessee from penal consequences of sec.201

In the instant case, the assessee made provision for expenses at year-end without making specific entries into accounts of the respective parties.  In the next year, the entire provision was written back and the TDS provisions were duly complied with at the time of actual payments to respective parties. While filing the return of income for the year in which provision was created, such provision was disallowed by the assessee itself. AO, however, raised tax demand for default in TDS liability and levied interest under sections 201(1) and 201(1A) respectively. Further, the CIT (A) upheld the decision of the AO.

On appeal, the Tribunal held in favour of assessee as under:

1) Once the amount had been disallowed under the provisions of section 40(a)(i) on the reason that tax had not been deducted, it was surprising that the AO held that the said amount was subject to TDS provisions again so as to demand the tax under section 201 and to levy interest under section 201(1A);

2) Once amount was disallowed under section 40(a)(i)/(ia) on the basis of the audit report of the chartered accountant, the same amount couldn’t be subject to the provisions of TDS under section 201(1) on the reason that assessee should have deducted the tax;

3) If the order of the AO was to be accepted then disallowance under Section 40(a)(i) and 40(a)(ia) couldn’t be made and provisions to that extent might become otiose. In view of actual disallowance under section 40(a)(i)/(ia) by assessee having been accepted by the AO, the said amount couldn’t be considered as amount covered by provisions of section 194C and 194J so as to raise TDS demand again under section 201 and levy interest under section 201(A);

4) Therefore, the assessee's ground on this issue was allowed as the entire amount had been disallowed under the provisions of section 40(a)(i)/(ia) in the computation of income on the reason that TDS was not deducted - Pfizer Ltd. v. ITO(TDS) [2012] 28 taxmann.com 17 (Mumbai - Trib.)

Even dishonour of cheque due to ‘signature mismatch’ would be violation of sec. 138: SC

In the instant case, the following issues came up for consideration before Supreme Court:

1) Whether section 138 of the Negotiable Instrument Act covers dishonour of cheques other than due to insufficiency of funds?

2) Whether section 138 covers dishonour of cheques on the ground that “signatures do not match with specimen signatures on records of bank”?

The Supreme Court held as under:

a) The expression “amount of money …………. is insufficient” appearing in Section138 of the Act is a genus. Dishonour for reasons such “as account closed”, “payment stopped”, “referred to the drawer” are only species of that genus;

b) Just as dishonour on the ground that the account has been closed is a dishonour falling in the first contingency referred to in Section 138, so also dishonour on the ground that the “signatures do not match” or that the “image is not found”, which too implies that the specimen signatures do not match the signatures on the cheque would constitute a dishonour within the meaning of Section 138 of the Act;

c) If after issue of the cheque the drawer closes the account it must be presumed that the amount in the account was nil, hence, insufficient to meet the demand of the cheque;

d) A similar result can be brought about by the drawer changing his specimen signature given to the bank or in the case of a company changing the mandate of those authorized to sign the cheques on its behalf;

e) So long as the change is brought about with a view to prevent the cheque from being honoured the dishonour would become an offence under Section 138 subject to other conditions prescribed being satisfied.

Thus, it held that the dishonour due to signature mismatch would be covered by Sec. 138 of the Negotiable Instrument Act, and, thus, the trial Court could now proceed with the trial of the complaints filed by the appellants expeditiously - Laxmi Dyechem v. State of Gujarat [2012] 28 taxmann.com 1 (SC)

Subject matter to initiate winding-up proceedings isn't subordinate to pending arbitration on such matter

In the instant case, the petitioner-creditor was a NBFC. It granted credit facilities to a company. The agreement was backed up by the personal guarantees executed by two directors of the company.  The loan was partly secured by the company by pledging of a fixed deposit held in the name of the company in a bank. Cheques issued for repayment in three trenches were dishonored. In view of the huge unpaid dues, the petitioner filed winding up petition contending that the company was unable to pay its debts. Simultaneously, the petitioner invoked the arbitration clause contained in the agreement and applied to the Bombay High Court under section 9 of the Arbitration Act, 1996. The company contended that Court should exercise its discretion in not admitting the petition and should direct the petition to be stayed over till the arbitral reference between the parties would be concluded.

Deliberating on the issue, the High Court held as under:

1) The scope of an arbitral reference is altogether different from the scope of a creditor's winding up petition even though the claim in both actions may be founded on the same cause;

2) The initiation of an arbitral reference in respect of a claim, which is made the subject-matter of a creditor's winding up petition as well, will not operate as a bar on the winding-up proceedings;

3) Creditor's arbitration petition on a claim, and his simultaneous winding-up petition on the same claim could never been regarded as parallel proceedings;

4) The institution of a suit or an arbitral reference, in such a situation, makes no difference since the arbitral reference has to be initiated in place of a suit if the matrix contract on which the money is claimed is governed by an arbitration agreement.

In view of the above findings, it held that initiation of an arbitral reference in respect of a claim which is made subject-matter of a creditor's winding up petition would not operate as a bar on winding up proceedings - Maheshwary Ispat Ltd., In re [2012] 28 taxmann.com 4 (Calcutta)

Super profit making comparables and 'notional interest' on credit period to AEs irrelevant factors for TP adjustments

In this case, assessee had received certain commission from its AE. Consequently, it raised debit note for Rs.18,43,796 as commission @ 3%. Assessee claimed that the commission earned by him was more than the industry’s average, thus, the test of arm's length principle was satisfied. On being referenced, the TPO compared the commission of 3% with controlled transactions of Indian clients of assessee where the average commission rate was worked out to be 3.375%. However, the average rate included commission rate of 7% received from ‘E’. In addition to above the TPO noticed that assessee had allowed extended credit period to its AE. Accordingly, the TPO made an addition in respect of notional interest for extended credit period and for the difference of 0.375% in the rate of commission.


Ruling in favour of assessee, the Tribunal held as under:

1) As per industry’s policy, the media agency earns commission @2.5%; the case of ‘E’ was an extreme case of earning 7% commission. Keeping in view the principle that the extreme profit companies are to be excluded, this company couldn’t be considered as a comparable for arriving at the average mean;

2) Therefore, AO/TPO was directed to exclude ‘E’ from list of comparables and work out the commission accordingly;

3) With reference to the calculation of interest on the so-called credit period it was noticed that the assessee was not charging any interest from clients for the services rendered/debit notes provided for delay in payments as a policy;

4) It was also noticed that in some of the transactions the credit period was ranging from 5 to 476 days, which indicated that the clients would not pay amount unless they verified the bills and services rendered;

5) Since it was practice of assessee not to charge interest from any client, this aspect should not be considered as an international transaction exclusively in the case of AE as it was not assessee’s policy to provide credit to any client specifically - Lintas India (P.) Ltd. v. ACIT [2012] 27 taxmann.com 300 (Mumbai - Trib.)

6) The nature of the service and the fees being charged to ‘E’ were entirely different when compared to the other clients, which were considered as comparable. Therefore, the fixed fee received from ‘E’ couldn’t be used for comparison as it was not comparable to the transactions of commission undertaken by assessee with the other clients;

Concealment penalty is inevitable if bogus claim is withdrawn in revised return filed after initiation of survey

The assessee, a public limited company, claimed a deduction of Rs. 10,00,000 under section 35CCA purportedly paid to a trust for assessment year 1983-84. Subsequently, the claim was withdrawn by filing a revised return. During assessment, the AO observed that assessee had revised its return of income only as a result of survey action taken by revenue in the assessee’s premises. It was further noticed by AO that the assessee was in knowledge of the fact that the trust was not genuine and had deliberately made a false claim under Sec. 35CCA to reduce its taxable income. Accordingly, the AO imposed the maximum penalty, being 200% of the tax sought to be evaded. On appeal, the CIT(A) as well as ITAT held in favour of assessee.

On revenue’s appeal, the High Court held in favour of revenue as under:

1) The assessee made the donation through cheque, which was encashed through a bogus bank account opened specifically for this purpose;

2) It was evident from the records that bank account of the drawee had been opened in a fictitious name merely for the purpose of misappropriating the amount;

3) The assessee’s contention that it was a victim of a fraud played by several persons acting in concert couldn’t be accepted because the special crossing (‘account
payee’) in the cheque was converted or altered into an ordinary crossing by the assessee’s account manager and senior advisor who had also affixed their signatures;

4) The revised return was filed by assessee only when it was cornered and the income tax authorities had collected material on the basis of which it could be said that the claim for deduction was false or bogus.

From the above facts, it was held that filing of revised return was an act of despair and it couldn’t benefit the assessee in any way. Accordingly, penalty order passed by AO was restored – CIT v. Usha International Ltd. [2012] 27 taxmann.com 227 (Delhi)

Performing regulatory function by BIS isn’t a business activity even if it earned profit from such functions

The BIS (“the assessee”), a statutory body, was established under the Bureau of Indian Standards Act, 1986 ("the BIS Act"). The exemption granted to assessee under section 10(23C)(iv) was withdrawn by DIT(E) on the contention that the nature of activities carried on by the assessee was hit by proviso to section 2(15), as the activities carried on by assessee were in the nature of business. The DIT(E) further noted that the assessee had earned substantial amount of income. The assessee, thus, filed instant writ against the order of DIT(E).

The High Court held in favour of assessee as under:

1) Assessee is a statutory body established under the BIS Act and brought into existence "for the harmonious development of the activities of standardization, marking and quality certification of goods". This has been its primary and pre-dominant object, and the profit/revenue earned on discharging its functions is purely incidental;

2) The assessee performs sovereign and regulatory function, in its capacity of an instrumentality of the state. Therefore, it could not be said that it was carrying on an activity of trade, commerce or business;

3) "Rendering any service in relation to trade, commerce or business" couldn’t cover within its fold the regulatory and sovereign authorities, set up to act as agencies of the State in public duties;

4) The primary object for setting up such regulatory bodies is to ensure general public utility. Further, it couldn’t be said that the public utility activity of evolving, prescribing and enforcing standards, "involves" the carrying on of trade or commercial activity.

Therefore, the impugned order of DIT was quashed by High Court - Bureau of Indian Standards v. DGIT(E) [2012] 27 taxmann.com 127 (Delhi)

Extension of period to submit ITR-V can’t validate a time-barred Sec. 143(2) notice

In this case, the return was e-filed by the assessee on 25-09-2009. The ITR-V for the same was received by CPC on 29-11-2010 i.e., within the period as extended by Circular No. 3/2009. Consequently, the AO issued a section 143(2) notice on 26-08-2011 and also passed the order under section 143(3). Assessee contended that the time limit for issue of notice should be reckoned from the date of e-filing of return. Consequently, the order passed by AO was without jurisdiction as it was passed on the basis of a time-barred notice.
 
Deliberating on the issue, the Tribunal held in favour of assessee as under:

1) According to the CBDT Scheme framed in this respect, the date of transmitting the return electronically shall be the date of furnishing of return if the form ITR-V is furnished in the prescribed manner and within the period specified;

2) Since ITR-V, received by CPC was within the prescribed time in the prescribed manner and in the prescribed form, hence, for all practical purpose, the date of filing of the return shall be the date on which the return was electronically uploaded i.e. 25-09-2009.

In view of the above, it was held that the notice served on the assessee was beyond the period of six months from the end of the financial year in which the return was furnished and therefore, was invalid and could not be acted upon. Consequently, the assessment order passed was quashed - E.K.K. & Co. v. ACIT [2012] 27 taxmann.com 111 (Cochin - Trib.)

Unabsorbed depreciation of earlier years brings down tax burden on long-term Capital-gains

In the instant case, the assessee’s claim to set off brought forward unabsorbed depreciation against current year's long-term capital gain was rejected by the AO on the basis of following reasoning:

a) Set-off of current year's business loss against the income under the other heads of income does not include unabsorbed depreciation as it was not a part of business loss;

b) Section 32(2) restricts the allowable depreciation of the current year only to the extent of profits and gains of business; and

c) The other reason for rejecting assessee's claim was that the Act treats business loss separately from the depreciation because business loss can be carried forward only for 8 assessment years whereas depreciation can be carried forward for unlimited period.

The AO completed the assessment after disallowing the claim of the assessee for set off of brought forward depreciation. On appeal, the CIT(A) upheld the order of the AO.

On appeal, the Tribunal held in favour as under:

1) As per provisions of sec.32(2), if the current year's depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, then the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year. This means that brought forward depreciation merges with the current year's depreciation because of the legal fiction created by provisions of Sec. 32(2) of the Act;

2) However, this fiction has been subjected to the provisions of sections 72(2) and 73(3). Bare reading of sec. 72 suggest that in case of set off of business loss vis-à-vis depreciation, the first preference shall be given to the business loss as per the provisions of section 72(1) for the simple reason that the business loss can be carried forward only up to 8 assessment years whereas the depreciation can be carried over up to unlimited period; and

3) As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current years' depreciation because of the legal fiction, therefore, the treatment given to the current year's depreciation is equally applicable to brought forward depreciation and  the same is also allowed to be set off from the long-term capital gains - Suresh Industries (P.) Ltd. v. ACIT [2012] 27 taxmann.com 203 (Mumbai - Trib.)

Subsequent reversal of a transaction among group entities isn’t colourable device, if effect carried in ledgers

The assessee-trust was managed by Ansal group. It had entered into agreement with its group concern (‘APIL’) for purchase of plots to open a school in furtherance of its objects. The assessee had paid 95 per cent of the sale consideration and obtained possession of the plots. Subsequently, the sale agreement was cancelled and entire sale consideration was returned to assessee by APIL. During assessment, AO held that the transactions were not genuine and were devised with an intention to advance surplus money to APIL. The AO withdrew the benefit of exemption under section 11 and 12 on the ground that the directors and trustees of both concerns were connected persons falling within the purview of specified persons under section 13(1)(c), and the money had been advanced without interest for the benefit of specified persons. The CIT(A) reversed the order of AO.

On appeal, the Tribunal held in favour of assessee as under:

1) The assessee was a charitable institution and there was no change in its objects;

2) From assessee's books of account, it clearly emerged that more often than not APIL had credit balance; thus, it had been providing monetary support to trust now and then. Therefore, a presumption could not be drawn that APIL had diverted the funds without proper justification for its use;

3) Assessee's debiting of 95 per cent advance to asset acquisition account itself indicated that because of substantial advance and possession it treated the plots as its assets. Treatment of these amounts as advances in APIL books did not militate against assessee's method of accounting. Therefore, the alleged variation in categorization of accounting in two different sets of books would not convert valid transactions into colourable transactions;

4) It could not be found that there was any motivation on the part of APIL to clandestinely divert Trust’s Funds for its personal use;

5) Assessee contended that cancellation of plots was in the interest of trust as by that time it had moved on to better projects including a university. Since no cancellation charges were to be levied, it terminated the agreements;

6) From objective view every entity has a right to carry on its objectives in the manner it best considers. Revenue couldn’t step in the shoes of the trustee in these matters.

Therefore, the exemption under Sec. 11 was allowed to assessee - Chiranjiv Charitable Trust v. ADIT [2012] 27 taxmann.com 99 (Delhi - Trib.)