CIT v Great City Manufacturing Co [ITA No: 461 of 2009 dtd 10.12.2012] – Allahabad High Court Background: The assessee is a partnership firm engaged in the business of manufacture and export/sale of brass art ware. The assessee filed its return of Income for AY 2005-06 on 31.10.2005 declaring a total income of Rs. 57,68,627. During the course of assessment proceeding the AO noticed that the assessee had paid remuneration to its partners to the tune of Rs. 39,31,965/- whereas it has paid total salary to its employees only Rs. 486918/-. The AO stated that the partnership deed does not specify the functions and duties in respect to working partners justifying the remuneration of Rs. 13,10,665/- to each of its partners when barely a total salary of Rs. 486918/- was paid to all its employee. The remuneration paid to working partners was highly excessive. On this point the Assessing Officer allowed the remuneration upto Rs. 4,00,000/- per annum to each of the partners.
Business expenditure/income
ITO v Mittal Investment & Co. [IT Appeal No. 1951 (Delhi) of 2012] (Del ITAT) Background: The assessee, a partnership firm, was engaged in the business as agent of post office schemes, PPF, RBI Bonds, LIC, Mutual Funds etc. on commission basis. The assessee had claimed expenses of Rs. 20,85,695/- on account of commission expenses. During the course of assessment proceedings, AO required the assessee to furnish complete details of commission paid with proof of TDS deducted and deposited on the commission so paid. Since, no TDS was deducted u/s 194H, the AO disallowed the commission u/s 40(a)(ia) for non deduction of tax.
TDS u/s 194H not applicable on sub-brokerage on securities – Del ITAT
ITO vs. LKP Securities Ltd (ITAT Mumbai) In AY 2008-09 the assessee collected employees’ contribution to the Provident Fund and ESIC but did not pay it within the due date prescribed by the relevant legislation. The amount was, however, paid before the due date of filing the ROI. The AO assessed the said amounts as income u/s 2(24)(x) but declined to grant a deduction u/s 36(1)(va) as the amount had been paid after the due date. The CIT(A), relying on Alom Extrusions 319 ITR 306 (SC) and AIMIL 321 ITR 508 (Del) held that the amounts had to be allowed as a deduction u/s 43B as they had been paid before filing the ROI. On appeal by the department to the Tribunal, HELD reversing the CIT(A):
Employees’ PF/ ESI Contribution is not covered by s. 43B – Mum ITAT
Mrs Amisha B Koradia v ITO (ITA No.03/Mum/2011 dtd 19.04.2013) Mumbai ITAT Background: The assessee is a beneficial shareholder in M/s Koradia Construction Pvt Ltd, and has 50% of share-holding. During the course of assessment proceedings, the AO noted that the assessee has taken loan of Rs. 78,10,000/- various dates from this company which has accumulated profit of Rs. 8,00,97,861/-. In the absence of explanation, the AO treated the loan as deemed dividend u/s 2(22)(e) of the Act and added Rs. 78,00,000/- to the income of the assessee. The assessee filed an appeal before the CIT(A) and argued that the AO ignored the fact that the said sum includes remuneration of Rs 2 lacs, opening debit balance of Rs 5,32,396, other debit balances of Rs 4,75,000 amounting to Rs 12,10,396. Further, it includes a sum of Rs. 58 lacs represents advance received from the company towards purchase of flat which ultimately could not go through and the amount was later on refunded. The CIT(A) granted relief to the extent of Rs 12,10,396 and confirmed the balance addition.
Deemed dividend not attracted for loan in the course of business transactions – Mum ITAT
CIT v M.D. Jakir Hossain Mondal (ITA No 31 of 2013 dtd 04.04.2013) (Calcutta High Court) Background: The assessee incurred expenditure of Rs. 31 lakhs on freight but did not deduct TDS thereon u/s 194C. The AO held that as there was a failure to deduct TDS, the expenditure could not be allowed as a deduction u/s 40(a)(ia). However, the CIT(A) allowed the claim on the ground that the freight charge was a part of the price of the goods and there was no contract between the assessee and the transporter.
Merilyn Shipping case on 40(a)(ia) distinguished by Calcutta High Court
Natco Pharma Ltd v DCIT [ITA No 377 (Hyd) of 2009 & 487 of 2010] (Hyderabad ITAT) Background: Assessee has written off a sum of Rs. 5,70,09,063 towards creditor advances pertaining to 461 parties. During the assessment proceedings, the assessee could furnish the desired details sought for by him only in respect of two parties. In respect of the remaining 459 parties, the assessee merely furnished the names of those parties. It could not furnish the address of those parties. The assessee has submitted that advances were made to those parties either for supply of material or for rendering services. The assessee has claimed that those parties have failed to supply goods/render services and the advance amount could not be recovered from them. The AO held that the said amounts are not bad debts and hence provisions of section 36(2) are not applicable to the same. Further, the assessee has not filed account copies of those parties and therefore, the claim of the assessee for deduction of the amount of Rs. 5,21,62,330 cannot be allowed.
Bad debts: Mere write-off in the books is not sufficient – Hyderabad ITAT
CIT v Reliance Communication Infrastructure Ltd. [28 taxmann.com 302] –BOMBAY HIGH COURT Background: Assessee filed its return of income for the AY 2004-05 declaring a loss of Rs.277 crores. The AO passed order under Section 143(3) of the Act determining the loss at Rs.276 crores under the normal provisions of the Act and determining the income of Rs.394 crores under the provisions of Section 115 JB of the Act. The Commissioner of Income Tax on review found that the assessment order appeared to be erroneous and prejudicial to the interest of the revenue on following two counts: (i) That 50 crores shares of Reliance Infocomm Ltd. (RIL) were transferred at the rate of Rs.1/- per share (the face value per share) to Mr Mukesh Ambani when the market value of the share was Rs.53.01/- per share. Therefore, a sum of Rs.2635 crores was proposed to be taxed as a short term capital gain being a difference between market value per share of Rs.53.71 and face value per share was Rs.1/-. (ii) Amount of Rs.3037 crores received from Reliance Infocomm Ltd. as fees for grant of Indefeasible Right of Connectivity (IRC) for a period of 20 years was income accrued to the assessee in the assessment year 2004-05 itself.
Advance lease income taxable on pro-rata basis as per AS-19 – Bombay HC
Sonata Information Technology Ltd. v DCIT [ITA NO. 1507 (MUM.) OF 2012 dated 7.9.2012] (Mum ITAT) Background: The assessee is a company engaged in the business of purchase and sale of software. Assessee made a payment of Rs. 199,79,11,595/- for purchase of software from persons who are resident in India. The Assessee did not deduct tax at source while making payment towards such purchases. According to the AO, the payment is in the nature of Royalty because it was for a right to use software and therefore the Assessee ought to have deducted tax at source and since the Assessee had not so deducted tax at source, the sum in question was not allowed as deduction under the provisions of Section 40(a)(ia) of the Act. The CIT(A) also confirmed the addition.
Amendment in definition of royalty does not extend to disallowance u/s 40(a) – Mum ITAT
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.