1

Caselaw Analysis

CA. CHYTHANYA K.K., B. Com, FCA, LLB

Advocate

chyti@clclawyers.com, 09844114184

Revision

1. Effect of show cause notice under section 263:

AMITABH BACHCHAN 2016-TIOL-70-SC-IT

2. Can an order be made under section 263 for further

enquiry - CIT Vs Saravana Developers 2016-TIOL-

196-HC-KAR-IT

2

Limitation

• Explanation 1 to section 158BE(2) excludes

period during which assessment proceedings

were stayed, from the period of limitation to

complete block assessment.

• Where stay of some other nature is granted other

than the stay of the assessment proceedings but

the effect of such stay is to prevent the

Assessing Officer from effectively passing

assessment order, even that kind of stay order

may be treated as stay of the assessment

proceedings

Limitation

• Because of the reason that such stay order

becomes an obstacle for the Assessing Officer to

pass an assessment order thereby preventing the

Assessing Officer to proceed with the

assessment proceedings and carry out

appropriate assessment

VLS Finance [2016] 68 taxmann.com 368 (SC), 384

ITR 1

3

Tax adjustment between two persons

1. Ashish Plastic Industries 373 ITR 45 (SC)

2. CIT Vs Relcom 2015-TIOL-2538-HC-DEL-IT

3. CIT v. Bhooratnam, (2013) 357 ITR 196 (AP)

Right person to pay tax

1. Capital gain is liable in the hands of partnership firm

though partners already paid taxes in individual

capacity

2. Capital gain on transfer of construction work in

Progress [WIP] to the partners by the firm on

dissolution to be taxed in the hands of partnership

firm [WIP] though partners already paid taxes in the

individual capacity;

3. Follows Hon‟ble SC decision in Ch. Atchaiah [218

ITR 239]

Sangam Builders Promoters [TS-6268-ITAT-

2015(PUNE)-O]

4

Section 40a(ia) 1. No retro default - Vatika Township 367 ITR 466 SC,

CIT Vs Kotak Securities 2011-TIOL-693-HC-MUM

2. Kotak Securities 383 ITR 1 SC

3. Principle of doubtful penalisation - CIT Vs JDS

APPARELS 2014-TIOL-2046-HC-DEL

Section 40a(ia) – Extent of disallowance

In Honda Cars 382 ITR 88 Delhi : Para 6 : Dept

concedes that in terms of the Circular No.3/2015

dated 12.02.2015 issued by the CBDT disallowance

under Section 40(a)(i) should be made only in the

appropriate proportion of the sum chargeable to tax

as per Section 195(1) of the Act and as the said

Circular of CBDT is binding on the Assessing Officer,

the benefit of the Circular would be given to the

assessee

5

Section 40a(ia) 1. Only when AO makes up his mind that a particular

payment requiring TDS under a particular section,

has been made without such deduction, that he can

proceed to invoke section 40(a)(ia) after putting

assessee on notice : LDS Engineers 2014-TIOL-

790-ITAT-DEL

2. Sundry creditors cannot be disallowed u/s 40(a)(ia) of

the Act without bringing on record that the said

amount represents current year expenditure which is

payable : GURJANT SINGH Vs ITO 2014-TIOL-510-

ITAT-KOL

Section 40a(ia) 1. When no expenditure is claimed, no disallowance

Maruti Freight Movers Ltd. [2015] 152 ITD 740 (Kol),

PENTHEA BUILDERS & DEVELOPERS PVT LTD Vs

ITO 2014-TIOL-753-ITAT-DEL, ACIT Vs M/s Godavari

Developers 2012-TIOL-736-ITAT-HYD, ITO vs Ahaar

Consumer Products Pvt. Ltd 10 taxmann.com 181

(Delhi - ITAT), 61 Taxmann.com 88 Pune

2. Held in favour of assessee in CIT Vs Health India

Tpa Services Pvt Ltd 2015-TIOL-2746-HC-MUM-IT &

CIT Vs M/s Calibre Personnel Services Pvt Ltd 2015-

TIOL-358-HC-MUM-IT

3. Contra - DCIT v. Umang Dairies Ltd. [2010] 3 ITR

(Trib) 497 (Delhi)

6

Section 40a(ia)

1. No expenditure could be disallowed u/s.40(a)(i) of the

Act if such expenditure was capitalized and not

claimed as a revenue : Gera Developments Pvt Ltd

Vs JCIT 2015-TIOL-167-ITAT-PUNE & Reckitt

Benckiser Healthcare India Ltd. v. Asst. CIT (OCD)

[2014] 360 ITR 427 (Guj. – HC)

2. See Nector Beverages 314 ITR 314 SC

Section 40a(ia)

1. Second proviso to sec 40a(ia) is retrospective -

Rajeev Kumar Agarwal vs. ACIT (ITAT Agra) ITAT

Online – 02.06.2014 and Bharti Auto Products Vs.

CIT ((2013) 27 ITR 611 (Trib.)(Rajkot)(SB) [contra :

Prudential Logistics & Transports in ITA No. 01 of

2014 Kerala dated 13th January, 2014]

2. Ansal Landmark Township TS-495-HC 2015, 377 ITR

635 - Delhi HC : FA 2012 amendment is retrospective

7

Section 40a(ia)

1. Where payee has shown income in the return but

claiming the same as exempt, payer cannot be

regarded as defaulter - RBL Bank Ltd. 65

Taxmann.com 219 Panaji Tri :

Section 40a(ia)

1. No disallowance of depreciation under sec 40a(ia) -

Sonic Biochem Extractions P. Ltd. v. ITO [2013] 23

ITR (Trib) 447 (Mumbai), Nector Beverages 314 ITR

314 SC, Cranes Software ITA No. 741 & 742/B/2010

[Bangalore ITAT], SMS Demag Pvt Ltd Vs DCIT

2010-TIOL-135-ITAT-DEL

2. Similar issue pending before Karnataka High Court in

Wifi Networks in ITA 394 of 2013

8

Section 40a(ia) 1. No disallowance in case of short deduction - CIT Vs

M/s S K Tekriwal 2012-TIOL-1057-HC-KOL-IT , CIT

Vs Valibhai Khanbhai Mankad 2012-TIOL-892-HC-

AHM-IT, Sriram Refregeration Industries 361 ITR 119

AP at 129 and CIT Vs Kishore Rao (HUF) 2016-

TIOL-719-HC-KAR-IT , CIT Vs Hewlett-packard India

Sales Pvt Ltd 2016-TIOL-356-HC-KAR-IT

2. Contra : PVS Memorial Hospital ltd. TS-439-HC-2015

Kerala

3. No set off between excess TDS and short TDS - ITO

vs Nisha Saraf 2011-TIOL-06-ITAT-KOL

Section 40a(ia)

1. No section 40a(ia) in case of presumptive taxation -

Shri B V Prabhu Vs ITO 2010-TIOL-420-ITAT-BANG

9

Section 40a(ia) : Paid v. payable 1. Adverse : Ryatar Sahakari Sakkare Karkhane [TS-

132-HC-2016(KAR)], Crescent Export Syndicate

2013-TIOL-404-HC-KOL],

2. Favourable : Vector Shipping [TS-352-HC-

2013(ALL)] SLP dismissed in [TS-401-SC-2014].

3. In Rishti Stock and Shares [TS-359-ITAT-2013

(MUM)] and Pratibhuti Viniyog [TS-536-ITAT-

2014(MUM)] disallowance u/s 40(a)(ia) was upheld

stating that SC's SLP dismissal in Vector Shipping is

not "ratio decidendi" on Sec 40(a)(ia) disallowance

Section 40a(ia) : Paid v. payable

1. Newly inserted section 40a(ib) and existing section

44BB use „paid or payable‟

2. CIRCULAR NO.10/DV/2013 [F.NO. 279/MISC./M-

61/2012-ITJ(VOL.II)], DATED 16-12-2013

10

Section 40b v. Sec 14A

1. When s. 10(2A) speaks of its exclusion from the total

income it means the total income of the person

whose case is under consideration i.e. the partner.

As the share income is excluded from his total

income, s. 14A would apply and any expenditure

incurred to earn the share income will have to be

disallowed

Shri Vishnu Anant Mahajan Vs ACIT 2012-TIOL-

311-ITAT-AHM-SB

Section 40b v. Sec 14A 1. Interest under section 36(1)(iii) is also an expenditure

only and same is also hit by provisions of section 14A

if it is found that the same has been incurred for

earning exempt income.

2. Proviso to Section 28(v) comes into play only if there

is some disallowance in hands of firm under clause

(b) of Section 40 and it is not applicable in case of

disallowance made under Section 14A.

See Shankar Chemical Works v. DCIT [2011] 47 SOT

12

11

Section 40b v. Sec 14A

1. Interest under section 40b is actually allowable under

section 36(1)(iii) and hence would come under

section 14A : ACIT v. Pahilajrai Jaikishin 66

Taxmann.com 30 Mumbai

Section 40A(3) 1. Sec 40A(3) applies to cash purchases found as a

result of search even when the undisclosed income is

offered on peak credit basis : K.R. Ganesh Kumar

383 ITR 165 Mad.

2. No disallowance if paid to agent who is required to

pay in cash as per rule 6DD(k) 382 ITR 337 Raj. It

applied Attar Singh Gurmuk Singh 191 TR 667 SC

even post omission of rule 6DD(j) see para 10 and

para 11.

3. No disallowance if genuineness is proved : Honey

Enterprises 65 Taxmann.com 35 Delhi & Gurdas

Garg [TS-719-HC-2015(P & H)]

12

Section 40A(3)

1. Disallowance is only in respect of excess over the

threshold : M G Pictures (Madras) Ltd Vs ACIT 2015-

TIOL-37-SC and Shankar Koliwad in ITA No. 5040 of

2009 dated 20.01.12 [Kar]

2. Section 40A(3) of the Act is mandatory and is also

applicable in the case of illegal business :S. Venkata

Subba Rao vs. CIT (1988) 173 ITR 340 AP & CIT vs.

Hynoup Food and Oil Ind. P. Ltd. (2007) 290 ITR

702 (Guj)

Section 40A(3) 1. Section 40A(3) is not applicable in case of fictitious

payments [CIT v. DineshKumar Chandmal Jain

[2014] 221 Taxman 367 (Guj. – HC)]

2. There is a difference between “crossed cheque” and

“account payee cheque”. Payment by crossed

cheque attracts s. 40A(3) disallowance : Rajmoti

Industries Vs ACIT 2014-TIOL-586-HC-AHM-IT

3. When vendors insist on cash payment, sec 40A(3)

may not be invoked : Anupam Tele Services 2014-

TIOL-161-HC-AHM

13

Depreciation

Hire purchase:

• Circular No.127 (12)-I.T.2 dated 13.5.1943

• Circular dated 13.1.1998, under the Interest Tax Act 1974

• Recognised in CIT v. Ashok Leyland Finance Ltd. [2012] 210 Taxman 95 (Mad.)

• Circular No. 9 dated 23.3.1943 applied in Sai Industries Ltd. v. Asst. CIT [2013] 353 ITR 213 (Delhi) HC

Depreciation - Lease Distinction between Operating lease v. Financial lease is

recognised

• ABB vs. IFCI (2004) 12 SCC 570,

• Sundaram Finance Ltd vs. State of Kerala AIR 1966 SC 1178 = (2002-TIOL-145-SC-CT)

• CIT v. INSTALMENT SUPPLY LTD. [2012] 20 taxmann.com 779 (Delhi)

• AS 19 [Ind AS 17]

14

Depreciation - Lease

Distinction between Operating lease v. Financial lease is not recognised

• Circular No.2 of 2001, dated February 9, 2001

• ICDS 350 ITR 527 SC

When assessment is made at GP

1. Sec 40a(ia) is sustainable even when the assessment is made on GP : Prabhat Construction Co. v. CIT 155 ITD 813 Patna

2. No 40A(3) if assessed on GP : Amman Steel 377 ITR 568 Mad.

3. Depreciation and interest, which are otherwise deductable in the ordinary course of assessment, remain the same legal character, even where the profit of assessee is determined on percentage basis : CIT Vs Y Ramachandra Reddy 2014-TIOL-1507-HC-AP-IT

15

When assessment is made at GP

1. Circular no. 29-D dated 31.8.1965

2. When assessed at GP, there is no scope for separate additions and disallowances : CIT vs. Banwari Lal Banshidhar 229 ITR 229 (All) & Hindustan Equipment (P.) Ltd. [2013] 213 Taxman 61 (MP)

Firm and partners – section 10(2A)

• Share in profits v. share in total income

• Vidya Investment & Trading Co. (P.) Ltd. v. UOI [2014] 43 taxmann.com 1 (Karn), 367 ITR 33 Kar

• Scheme of taxation of firm and partners

16

Conversion of firm into company

• Techspin 263 ITR 345 Bby

• R L Kalathia And Co 2016-TIOL-572-HC-AHM-IT

• Unity Care and Health Services(Bangalore)ITAT) (2006) 286 ITR 121 (Bangalore Bench) confirmed by 383 ITR 258 (Mad) in Cadd Centre

Compulsory Acquisition

1. Right to Fair Compensation and Transparency in

Land Acquisition, Rehabilitation and Resettlement

Act, 2013 – see section 96

2. Mary Kutti [TS-723-HC-2015(KER)]

3. Suman Dhamija [TS-697-HC-2015(DEL)] 382 ITR

343

4. CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC)

17

Section 48 – Deferred consideration

Whether deferred contingent payments form part of full

value consideration?

1. Hemal Raju Shete 2016-TIOL-836-HC-MUM-IT

2. Anurag Jain In Re (2005) 145 Taxman 413 (AAR)

upheld in Anurag Jain v. AAR (2009) 183 Taxman 383

(Mad.)

3. Ajay Guliya 209 Taxman 295 (Delhi)

4. Ms. Indira R. Shete 138 ITD 264 (Mum.-ITAT)

Section 2(42A)

What is the date of acquisition of capital asset?

1. CIT v. Suresh Rao 223 Taxman 228 [Kar] [SLP 17644

of 2014]

2. Circular No. 471 dated 15.10.1986 [reported in 162

ITR (St.) 41]

3. CIT vs. Anilaben Upendra Shah [2003] 262 ITR 657

(Guj.)

18

Section 2(47)(v)

1. Potla Nageswara Rao vs. DCIT 365 ITR 249 AP

2. Dr K Ramachandra Vs DCIT 2014-TIOL-782-ITAT-

HYD distinguishing the above

3. Sanjeev Lal‟s case 365 ITR 389 SC

4. Unitech Ltd. [TS-639-SC-2015]

Distinguishing Chaturbhuj Dwarakadas Kapadia 260 ITR 491 Bby

CIT v. Geetadevi Pasari [2009] 17 DTR 280 Bby

Dr.Arvind S.Phadke vs. ACIT 46 taxmann.com 335 (Pune)

The Metal Rolling Works Ltd. V. CIT 339 ITR 373 Bby

Ramnord Research Laboratory P. Ltd. v. WTO [2008] 305 ITR 299 (Bom) HC

CIT v. . K. Jeelani Basha (2002) 256 ITR 282 (Mad.)

19

Section 54/54F

• Construction could commence prior to the date of

transfer – All expenses within one year before the

date of transfer would qualify

• If assessee completes the construction within

section139 [including section 139(4)], the question of

deposit in capital gains scheme does not arise

K. Ramachandra Rao Kar HC in ITA No. 494/2013,

495/2013, 46/2014 and 47/2014 [see also CIT v. J.R.

Subramanya Bhat, (1987) 165 ITR 571 (Kar)]

What creates an AOP? • Faqir Chand Gulati vs Uppal Agencies Pvt. Ltd. & Anr (2014)

TaxCorp(LJ) 2618 (SC) : Development agreements are NOT joint ventures

• Linde A. G. vs. DDIT (Delhi) (2014) TaxCorp (INTL) 7223 (HC)

• Mere collaborative effort and the overall responsibility assumed by the applicant for the successful performance of the project is not sufficient to constitute an AOP : Hyosung Corporation, In re [2009] 314 ITR 343 (AAR)

• Where the association is not with the object of earning income but for co-ordination in executing the contract, no AOP is created :VAN OORD ACZ. BV, IN RE (2001) 248 ITR 399 (AAR)

• Indira Balkrishna [1960] 39 ITR 546 (SC) & Murugesan and Bros as held in the case of [1973] 88 ITR 432 (SC)

20

What creates an AOP? • Meeting of minds of members, common design and

common purpose creates an AOP.

• Where a joint venture was created to provide project consultancy services and work was allotted to members, mere separate billing and members having separate bank accounts and each member to bear its own costs and expenses, do not derogate from existence of an AOP

Geocuonslt ZT GmbH, In re [2008] 304 ITR 283 (AAR)

• Way out if both are taxed – section 177(3)

• Circular 7 of 7.3.2016

Additional Evidence

• Tek Ram (Dead Through LRS.) v. CIT [2013] 357 ITR 133 (SC)

• Karimjee P. Ltd. 271 ITR 564 SC

21

Survey statement

• CIT v. S. Khader Khan Son 352 ITR 480 SC

• Distinguished in Dr Dinesh Jain Vs ITO 2014-TIOL-398-HC-MUM-IT

TDS - Salary

1. Assessee is not liable to deduct TDS u/s. 192 on

reasonable per diem allowances paid to employees

for overseas trips; Merely because the actual

expenses were not verified, the character or nature of

the payment would not be changed so as to be

taxable u/s. 17(2) of the Act; Payments made were in

the nature of reimbursement of expenses incurred by

employees travelling for business trips / official trips,

not taxable u/s. 10(14), not in nature of perquisites

u/s. 17(2) : [TS-5207-HC-2016(KARNATAKA)-O]

22

TDS - Salary

1. As income from tips would be chargeable in the

hands of the employees as income from other

sources, such tips being received from customers

and not from the employer, Section 192 would not get

attracted at all : ITC LTD 2016-TIOL-48-SC-IT, 384

ITR 14 SC

TDS

• Section 194IA v. sec 40a(ia)

• Is TDS required for payment in kind?

1. Kanchanjunga 325 ITR 540 SC

2. Biocon 36 taxmann.com 291 (Bang. – Trib.)

3. CIT Vs M/s Hindustan Lever Ltd 361 ITR 1 Kar

4. Chief Accounts Officer BBMP [TS-596-HC-2015(KAR)]

23

No TDS on provision entries if payee is not identified

• KPTCL 383 ITR 59 Kar

• Botsch [TS-116-ITAT-2016(Bang)]

• Rayon Corporation 65 Taxmann.com 157 Mumbai Tri

• Ericsson Communications Ltd. 378 ITR 395 Delhi

• UCO Bank vs. UOI (Delhi HC) 51 Taxman.com 253 [cir 8/2011 quashed]

• Sahara India Mutual Benefit 2014-TIOL-625-HC-ALL-IT

No TDS on provision entries if payee is not identified

• IDBI vs. ITO 107 ITD 45(Mum)

• Pfizer Ltd, Pfizer Centre, Parel Vs ITO 2012-TIOL-631-ITAT-MUM

• Kirloskar Oil Engines Ltd Vs Dy.CIT 2015-TIOL-622-ITAT-PUNE

• Mahindra &Mahindra[2014] 29 ITR(Trib.)95 (Mum.)

• Bank of Maharashtra [2010] 6 ITR (Trib) 824 (Ahm)

24

No TDS on provision entries if payee is not identified

• ACIT Vs TECUMSEH PRODUCTS INDIA PVT LTD 2014-TIOL-747-ITAT-HYD

• DCIT vs. Telco Construction Equipment Co. Ltd. [2014] 46-A BCAJ 153 (Bang. – Trib.)

• CBDT’s letter dated 05.07.1996 addressed to the Tata Iron & Steel Co. Ltd. [Letter No. 275/126/96 IT (B)]

No TDS on provision entries if payee is not identified - Adverse

• Provision for site restoration as per AS but not a payment to a particular person – No TDS is required. In respect of year end provision, where particulars of payees are available, TDS is required : Dishnet Wireless 45 ITR Tri 430 Chennai

• IBM India Pvt Ltd Vs ITO 2015-TIOL-692-ITAT-BANG

25

Interest

• SC dismisses Revenue’s SLP appeal against Allahabad HC order; Sunil Chandra Gupta [TS-244-SC-2016]

• HC had deleted interest levied u/s 234A/B/C for AY 2010-11, as Revenue had failed to adjust seized cash (available before return filing due-date, in its public deposit a/c consequent to search/seizure) against assessee's tax liability;

• HC had observed that "assessee made a number of request from time to time for the adjustment of the cash seized against the liability of the advance tax, but the department neither replied nor adjusted the said amount";

Interest

• HC had thus ruled that assessee was entitled to adjustment of seized cash against advance tax liability and therefore, no interest could be charged u/s 234A/B/C; Upholding HC order, SC rules that “We find no reason to entertain this Special Leave Petition, which is, accordingly, dismissed” 2015-TIOL-673-HC-ALL-IT

26

Charitable Trust

• Deemed registration : SOCIETY FOR THE PROMN.OF EDN., ALLAHABAD [TS-85-SC-2016]

• Instruction 16 of 2015 dt 6.11.2015 instructs CIT to dispose the application within 6 months.

• It is mandatory that if application for approval u/s 80G is not disposed off within six months from date on which application is made, Commissioner has no jurisdiction to pass an order either granting approval or rejecting it : Maheshwari Foundation 56 Taxmann.com 393 Kar

Education as charity

• Lala Lajpatrai Memorial Trust 383 ITR 339 Bby

• Visvesvaraya Technological University[2016] 68 taxmann.com 287 (SC)

27

Provisos to section 2(15) • As long as service is subservient to charitable cause and is

not in the nature of business itself, sec 2(15) proviso is not attracted : Jeevan Vidya Mission 155 ITD 1150 Mum

• Sale of articles made by women beneficiaries is not trade and hence not hit by sec 2(15) proviso : DIT v. Women' India Trust 579 ITR 506 Bby

• Hoshiarpur Improvement Trust 155 ITD 570 Amritsar

• Charitable institution earning profit from its activities carried on sound principles of management would not lose its character of charitable entity under proviso to Section 2(15) Karnataka Industrial Areas Devt Board 2016-TIOL-831-ITAT-BANG

Provisos to section 2(15)

• Assessee’s income generating activities were inherent part of its main object which was not profit making : Karnataka Water Supply and Drainage Board [TS-544-ITAT-2015(Bang)]

• India Trade Promotion Organization 371 ITR 333 Delhi

• Development of the area/ maintence within the object of general public utility, cannot be concluded that it involves the carrying on of any activity in the nature of trade, commerce or business exemption u/s 12A cannot be denied : Haridwar Development Authority vs CIT 155 ITD 318 Delhi

28

Provisos to section 2(15) - Adverse

• Ownership of State cannot be considered or taken into account to determine the character or nature of the activities carried on by the MIDC. Sec 11 charity exemption not available to MIDC as hit by Sec 2(15) proviso : Maharashtra Industrial Development Corporation vs. DDIT

Refund and interest on refund

• Tata Teleservices [2016] 69 taxmann.com 226 (Delhi) – Instruction 1 of 2015 struck down

• UOI vs. Tata Chemicals Ltd 2014-TIOL-27-SC-IT

• Gujarat Fluorochemicals Ltd 2013-TIOL-47-SC-IT-LB

• GUJARAT FLOUROCHEMICALS LTD 377 ITR 307 Guj

• Pfizer Products India Pvt. Ltd. 83 KLJ 206 Kar HC - Interest on interest awarded as cost

29

Interest

• CIT v. Bhagat Construction Co. Ltd. 235 Taxman 135 SC

• Jyotsna Holding [TS-277-SC-2016]

Thank You