Ganjam Trading Co. (P.) Ltd. v DCIT ITA No: 3724 (MUM.) OF 2005, 932 (MUM.) OF 2006 and 1384 & 289 (MUM.) OF 2007] (Mum ITAT) Background: The assessee, in the business of trading and investment in goods, securities, etc., had declared income from interest, dividend and profit/loss from trading of shares. In the years under consideration, the assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short “the Act”) and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business. AO observed that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The assessee had advanced the borrowed funds for allotment of shares of group companies. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies. The AO made disallowance u/s 36(1)(iii) by computing interest @ 15%. CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the CIT(A) observed that the assessee had substantial interest free funds amounting to Rs. 169.09 crores. He held that the disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made.
Yearly Archives: 2012
CIT v Deutsche Post Bank Home Finance Ltd. (ITA No. 312 OF 2012 (dtd 2.7.2012) (Delhi HC) Background: Assessee is a 100% subsidiary of one BHW Holding AG, Germany (‘Holding Company’) and is engaged in the activity of housing finance. By two letters dated 24.09.2004 and 04.02.2005, the Holding Company granted subvention assistance to the assessee to an extent of Euro two million i.e. equivalent to Rs. 11,22,38,874/-. This was done on the evaluation of the Holding Company, that the assessee was likely to incur losses which would be substantially if not entirely eroded. The AO held that the subvention receipt was by way of casual receipt in order to assist the assessee to continue its business operation and therefore rejected the assessee’s contention. The assessee preferred an appeal to the CIT(A) who accepted the assessee’s contention holding that the money received could not be taxed as it was akin to a gift, and Gift Tax had been abolished. The Revenue appealed to the ITAT. The ITAT held as under:
Funding by Holding Co to recoup future losses is not taxable – Delhi HC
Harshad J Choksi v CIT (Income Tax Appeal No. 43 OF 1997 dated August 14, 2012) (Bom HC) Background: The assessee is a stock and share broker. During the assessment year 1991-1992, the assessee sought to write off an amount of Rs.47.58 lacs as bad debts, due to breach committed by 3 members of the BSE. The AO held that the assessee was not entitled to claim the benefit of bad debts in respect of Rs.47.58 lacs, as the assessee has not satisfied the condition precedent as provided under Section 36(2) of the Act, which requires that the amount must be offered to tax in an earlier previous year. On Appeal, the Commissioner of Income Tax (Appeals) upheld the finding of the Assessing Officer to the extent of Rs.44.98 lacs after having allowed an amount of Rs.2.60 lacs as a business loss. On appeal before the Tribunal the assessee contended that even if the deduction is not allowable as bad debts under Section 36(1)(vii) of the Act, the aforesaid amount of Rs.44.98 lacs should be allowed as a business loss in computing the profits and gains earned in carrying on a business. The Tribunal held that once an assessee has made a claim for loss on account of bad debts then unless the assessee fulfills the requirements of Section 36(2) of the Act, the benefits of the same cannot be extended to the assessee.
Bad debts if not allowable u/s 36(2), would be allowable u/s 37 – Bombay HC
CIT v Smifs Securities Limited [2012] 24 taxmann.com 222 (SC) Background: In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective efect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company. The assessee claimed that the extra consideration over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961. CIT(A) came to a conclusion that the assessee in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee stood increased. This finding was also been upheld by Income Tax Appellate Tribunal.
Goodwill is an intangible asset eligible for depreciation – Supreme Court
Apoorva Patni v ACIT IT APPEAL NOS. 192, 193, 239 & 273 TO 276 (PN) OF 2011 (Pune ITAT) Background: The assessee filed her return of income for the assessment year 2006-07 declaring a total income of Rs 13,95,40,653/- under various heads of income, viz. income from house property, business income, capital gains and income from other sources. The income declared under the head capital gains included short term as well as long term capital gain on investments made through the PMS providers. Besides, the assessee has also declared capital gains, both long term and short term, from direct dealing in mutual funds, investments also. Apart from the aforesaid dealings in shares and securities, the assessee also had a portfolio wherein income from share and securities transactions was declared as business income. In this factual background, the Assessing Officer treated the short term as well as long term capital gain earned through the investments made through PMS providers amounting to Rs 3,86,38,849 as income which was liable to be assessed as ‘business income’ and not under the head ‘Capital gains’. The Commissioner of Income-tax (Appeals) has, however, upheld the contentions of the assessee that the gain from investments made through the PMS provider was assessable under the head capital gains.
Income from PMS is capital gains and not business income – Pune ITAT
Armstrong World Industries Mauritius Multiconsult Ltd., In re A.A.R. NO. 1044 OF 2011 (dtd 22.08.2012) Background: Armstrong World Industries Mauritius Multiconsult Ltd (Armstrong Mauritius) is a wholly owned subsidiary of Armstrong World Industries Limited United Kingdom (Armstrong UK). Armstrong UK in turn is a fully owned subsidiary of Armstrong USA. The Armstrong Mauritius was incorporated in Mauritius in the year 1999. It is a tax resident of Mauritius. Armstrong World Industries India (Pvt.) Limited (Armstrong India) was incorporated in India in the year 1999 as a wholly owned subsidiary of Inarco Ltd., an Indian company. Inarco Limited was engaged in the business of production of textile machine parts and floorings. Armstrong UK, through the applicant, was holding 50% of the share capital in Inarco Limited. Pursuant to a scheme of amalgamation, approved by the High Court of Bombay, the flooring business of Inarco Limited was transferred to Armstrong-India. In consideration of that transfer of business, Inarco Limited was allotted 3,60,000 shares of the value of Rs. 10/- each in Armstrong India. Subsequently, Inarco Limited transferred to Armstrong Mauritius 36,00,000 shares of Rs. 10 each of Armstrong India. This resulted in Armstrong Mauritius holding 99.97% of the share capital of Armstrong India. The other 0.03% of the shares therein are held by Armstrong UK.
AAR disregards Revenue’s arguments for treating Mauritian company as conduit company
Sri Venkatesh Paper Agencies (Hyd.) (P.) Ltd. [ITA No.: 636 (Hyd) of 2011] (Hyderabad ITAT) Background: The assessee is engaged in the business of paper and boards. During the course of assessment proceedings, the AO found that the assessee has claimed interest payment of Rs. 3,12,600 to M/s. Sinermas Pulp & Papers Ltd. without deducting tax at source. The assessee contended that the amount of Rs. 3,12,600 was paid as interest on the overdue bills and that the payment of interest was not on a deposit or loan but on purchases. Therefore, it is not required to deduct tax at source. The AO however, did not accept the explanation of the assessee and disallowed the sum of Rs. 3,12,600 u/s. 40(a)(ia) on the reasoning that whether the assessee paid the interest in respect of delayed payment of purchases or deposits or loans it has to deduct tax at source as per the provisions of the Act. CIT(A), came to held that the definition of the term interest as given in section 2(28A) of the Act would mean interest payable in any manner in respect of any monies borrowed or debt incurred and held that the definition of interest is wide enough to take within its ambit the debt owed by the assessee on account of overdue bills.
Interest on trading liability not subject to TDS u/s 194A – Hyderabad ITAT
DCIT v Prithvi Prakashan (P.) Ltd. IT Appeal NO. 5189 (MUM.) OF 2006 (Mumbai ITAT) Background: The assessee had purchased 17 Iron Rolls used in Steel Industries from M/s. Indore Steel & Iron Mills Ltd. (ISIM) for a sum of Rs. 34,97,500/- on 25.3.1993. These rolls had been purchased by ISIM for a sum of Rs. 36,88,540/- in 1991. The assessee vide lease agreement dated 27.3.1993 had leased these rolls to ISIM for a period of three years commencing from 27.3.1993. At the time of original assessment dated, the AO noted that there was no physical movement of iron rolls which remained with ISIM. No physical possession was handed over by ISIM to the assessee. Further, prior to the purchase by the assessee these were heavily depreciated due to use by ISIM. The assessee had claimed depreciation of Rs. 17,48,750/- @ 50% of the normal rate for 100% of depreciation The AO held that it was a case of simple loan transaction which had been given the colour of lease transaction to reduce tax liability of the assessee. In appeal, the CIT(A) allowed claim of depreciation in order dated 28.6.1996. In further appeal, the Tribunal in the order dated 30.1.2004 in ITA No. 5840/Mum/2006 noted that the authorities below did not examine as to what happened to the leased assets on expiry of lease period and therefore, set aside the order of CIT(A) and restored the matter to the file of AO for passing a fresh order.
Mumbai ITAT lays down tests for determining whether sale & leaseback is a sham transaction!
DCIT v KRA Holding & Trading Pvt. Ltd. (ITA NO. 240/PN/2011) [ITAT Pune] Background: The assessee during the year under consideration had claimed an amount of Rs. 2,11,95,334 as portfolio management fees paid to the portfolio managers. The same was made in terms of investment management agreement made on 01-01-2005. During the course of assessment proceedings, the AO was not convinced with the explanation given by the assessee and noted that similar issue was decided against the assessee for assessment year 2004-05 to 2006-07 wherein the payments has been disallowed and added back to the business income of the assessee. Therefore, he disallowed the payment treating the same as termination fees computed on profit sharing basis and not specifically provided in the agreement and not as per SEBI rules and regulations. The CIT(A) observed that the assessee has not shown the fees paid to the portfolio managers as an expenditure in the P&L account. The same has been loaded on the purchase price of shares, which are either sold or carried forward to next year and concluded that these expenses are not allowable under either of the heads for the reason that they are against the guidelines of the SEBI and are also not allowable under the head ‘capital gains’.