Review of landmark judgments
Presented by:
Chythanya K.K., B.com, FCA, LLB
Partner, Raghuraman & Chythanya
Advocates, BANGALORE
chyti@vsnl.net
41203610/26564106/9844114184
Raghuraman & Chythanya
Topics chosen
1.
2.
3.
4.
5.
6.
7.
8.
Firm
AOP
Depreciation
Interest
43B
TDS
Concealment
Deemed dividend
Raghuraman & Chythanya
Topics chosen – contd..
8. FBT
9. Fresh claim after filing
of return
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Firm
 Firm paying salary to HUF as a working partner
: CIT v. Devanand Automobiles [2008] 304 ITR
50 (Karn), CIT v. Golden Tough 138 Taxman 190
(Mad.) & ITO v. Vegunta Surya Prakasa Rao Sons & Co.
(Visakhapatnam) [2004] 88 ITD 322 (Visakhapatnam)

Since the it could not be established that interest paid
to partners on their Current accounts related to the
capital contribution and since the deed was silent on
payment of interest to balance in current account, the
interest is not allowable as a deduction under section
40b : Novel Distributing Enterprises V DCIT & Another
(2001) 251 ITR 704
Raghuraman & Chythanya
Firm

The normal practice is to prepare the accounts at the end
of the year, because it is difficult to arrive at a profit or
loss on each day’s transaction. In CIT v. Ashokbhai
Chimanbhai [1965] 56 ITR 42, SC held that profits do not
accrue from day-to-day and unless the right to profit
comes into existence, there is no accrual of profits, i.e.,
till the accounts are prepared at the end of the term as
agreed. Thus, the withdrawals were not out of the share
of profit, etc., that accrued to the partners :
ARCHITECTURAL ASSOCIATES v. ACIT [2005] 277
ITR [A.T.] 35 [HYD]

Contra : Deval Utensils Factory vs. DCIT [2005] 98
TTJ [Pune] 501
Raghuraman & Chythanya
Firm

Netting off principles as per 183 ITR 1 still valid

Remuneration paid to a partner cannot be disallowed on
ground that he was not a working partner once he is found
to be supervising and controlling business activities, from a
different place : Vivek Ispat Udyog v. ITO (2005) 95 TTJ (ITAT –
Del.) 1090

When assessee is neither paying nor making provision to the extent
permissible under the deed, it is implied that partners have agreed to
take a sum which is lower and as appearing in the partnership
accounts : SRI BALAJI AGENCIES vs. ITO (2007) 107 TTJ
(CHENNAI) 658
Raghuraman & Chythanya
Firm

The assessee was not carrying on any other business and had
no other source of income. Thus, whatever income arising to
the assessee was business income and, hence, computation
was in accordance with Chapter IV – D. Thus, it could be said
that such cash credit formed part of book profit for the
purpose of computation of remuneration. It is necessary to
include such cash credit in the book profit for the purpose of
allowing remuneration to the partners which was authorized by
and in accordance with the terms of partnership deed :
DEEPA AGRO AGENCIES v. ITO (2006) 154 TAXMAN –
MAGAZINE 80 (BANG.)

Same was held in CIT v. S.K. Srigiri and Bros. [2008]
Raghuraman & Chythanya
298 ITR 13 (Karn) HC
Firm

Payments to the partners not in their capacity as
partners, but made for the specific services rendered by
them
-
CIT v. Rajam Ramaswamy and Sons [2008] 298 ITR 325
(Mad) HC
CIT v. Gemini Productions [1977] 110 ITR 847 Mad.
CIT v. Chitra Kalpana [1988] 169 ITR 678 AP
-
Raghuraman & Chythanya
AOP
 Meeting of minds of members, common
design and common purpose creates AOP. A
Joint venture to provide project consultancy
services where there is allotment of work to
members. AOP is created despite separate
billing, members having separate bank
accounts and each member bearing its own
costs and expenses : Geocuonslt ZT GmbH, In re
[2008] 304 ITR 283 (AAR)
Raghuraman & Chythanya
AOP
 Four persons joining together, purchasing land and raising
commercial complex thereon with no equal contribution either
for purchase of land or for construction of complex. No interest
was paid to member contributing in excess and no interest
charged from member contributing less. Loans were raised
collectively, a common bank account was opened, all the four
members pooled their resources together for construction of
commercial complex, and sold part of the building to repay the
loans as rental income proved insufficient for the purpose. This
is an adventure in the nature of trade, hence profits from sale of
building was assessable in the hands of AOP as business income
: ACITvs. S. Prabhakar Kamath & Ors. [2008] 116 TTJ (Bang)
817
Raghuraman & Chythanya
AOP - Essentials





Two or more persons as held in the case of CIT v. Indira
Balkrishna [1960] 39 ITR 546 (SC)
Voluntary Combinations as held in the case of CIT v. G.
Murugesan and Bros [1973] 88 ITR 432 (SC)
A common purpose/common action with object to produce
profit or gains as held in the case of CIT v. Indira Balkrishna
[1960] 39 ITR 546 (SC). However, the object to produce
profit or gain is no longer a sine qua non with the insertion of
the Explanation to Sec 2(31)
Combination of joint enterprise as held in the case of
Mohamed Noorullah v. CIT [1961] 42 ITR 115 (SC)
Some kind of scheme for common management as held in the
case of CIT v. Cloth Semi-Wholesalers [19560 29 ITR 500
(Nag.)
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Depreciation-Intangible

Stock exchange membership card - Depreciation
-
Yes : Farrokh Irani / D.Z. Patel [2005-2006] 39-A
BCAJ 622
Yes : Vyomit Shares, Stocks & Investments (P.) Ltd.
v. DCIT [2007] 106 ITD 408 [Mum]
-

Goodwill:
-
No : GURUJI ENTERTAINMENT NETWORK LTD vs.
ACIT (2007) 108 TTJ (DEL) 180
No : Bharatibai Vyas v. ITO 97 ITD 248 Ahm
-
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Depreciation-Computer

Computer software is a ‘plant’ owned by person purchasing it though
as a licensee, hence eligible for depreciation @ 25 percent under s.
32(1)(i) r/w Appendix I : Amway India Enterprises vs. DCIT
(2008) 114 TTJ (Del) (SB) 476

UPS attached to computers is a source of alternative supply of
power to computers and applying the functional test, is part of
power supply system and not the computer system : Nestle India
Ltd. vs. DCIT [2007] 111 TTJ (Del) 498

Router is part of computer : Routermania Technologies (P.) Ltd.
v. ITO [2007 16 SOT 384 (ITAT – Mum.)
Colour xerox machine is part of computer : ITO v. SAMIRAN
MAJUMDAR [2005] 280
ITR [A.T.] 74 [KOL]
Raghuraman & Chythanya

Depreciation-Building

Purchase of commercial space – cost attributable
to undivided interest in land is not eligible for
depreciation : DCIT v. Capital Cars P. Ltd.
[2007] 295 ITR (AT) 224 (Delhi)
Raghuraman & Chythanya
Depreciation-Lease

Circular no 9/ 23.3.1943 [HP]

Accounting Standard 19

Circular No.2 of 2001, dated February 9, 2001

ABB LTD v. IFCI (2006) 154 TAXMAN 512 (SC)

J. M. Shares & Stock broker vs. DCIT (2007)
109 TTJ (Mumbai) 311
Raghuraman & Chythanya
Interest
 Proviso to section 36(1)(iii) - retrospective
The import of the proviso to section 36 (1) (iii) is
that the interest paid on the capital borrowed for
the purpose of acquisition of an asset till the date
such an asset is first put to use shall not be allowed
as deduction. This is borne out as a converse
proposition in Explanation 8 to section 43 (1) and a
combined reading of section 36 (1) (iii) and section
43 (1) shows that the same is in consonance with
the law laid down by the Supreme Court in
Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167
Raghuraman & Chythanya
Interest
 Proviso to section 36(1)(iii) - Prospective
- SWARAJ ENGINES LTD. v. JCIT [2005] 98 TTJ
[Chd.] 346
- ALANKAR BUSINESS CORPORATION LTD vs.
DCIT (2006) 157 TAXMAN 232 CHENNAI
- DCIT v. Core Health Care Ltd. [2008] 298 ITR
194 (SC)
Raghuraman & Chythanya
Interest

Interest free advance to sister concerns
-
In the present case, the assessee borrowed the fund from the bank
and lent some of it to its sister concern (a subsidiary) as interest
free loan. The test, in such a case is really whether this was done
as a measure of commercial expediency.
-
The decisions relating to section 37 of the Act will also be applicable
to section 36(1)(iii) because in section 37 also the expression used is
“for the purpose of business”. It has been consistently held in the
decisions relating to section 37 that the expression “for the purpose
of business” includes expenditure voluntarily incurred for commercial
expediency, and it is immaterial if a third party also benefits thereby.
S.A.BUILDERS LTD vs. Raghuraman
CIT (2007)
288 ITR 1 (SC)
& Chythanya
43B
 No distinction between employer’s contribution
and employees’ contribution
-
Hitech India P. Ltd. V. UOI (1997) 227 ITR 446 (AP)
-
C.I.T. v. Madras Radiators and Pressings Ltd. (Mad.)
[2003] 264 ITR 620 (Mad.)
-
CIT v. Sabari Enterprises [2008] 298 ITR 141
(Karn) HC
Raghuraman & Chythanya
43B
 There is distinction between employer’s
contribution and employees’ contribution
-
-
JCIT vs. I.T.C. Ltd [2008] 115 TTJ (Kol) (SB) 45
Gallium Equipment P Ltd v DCIT (2002) 81 ITD 358
Delhi
NATIONAL PLASTIC INDUSTRIES LTD v. ITO
(2007) 11 SOT 415 (ITAT-Mum.)
IMP POWER LTD vs. ITO (2007) 107 TTJ
(MUMBAI) 522
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TDS
 Pass through cases
Loans are taken in individual capacities by
directors but cheques taken by them in name of
company and transferred to their accounts on
same day. Repayment of loan and interest was
routed through company. Company is bound to
deduct tax at source : CIT vs. Century Building
Industries P. Ltd. (2007) 293 ITR 194 (SC)
Raghuraman & Chythanya
TDS
 Credit to account
Fact that the credit to any account is to be
deemed to be credit to the payee’s account also
presupposes that payee can be ascertained.
Therefore, this deeming fiction can only be
activated when the identity of the payee can be
ascertained : IDBI vs. ITO (2006) 104 TTJ
230 (MUMBAI)
Raghuraman & Chythanya
TDS
 Car rentals : 194C v. 194I?
-
BSNL’ case 145 STC 91 SC
-
AAR’s ruling in Dell International Services
India (P.) Ltd, In re [2008] 172 Taxman 418
Raghuraman & Chythanya
TDS

Service tax
-
A service provider is merely acting as an agent of the
Government, and is not entitled to claim deduction on account
of service-tax and therefore the analogy of sales-tax, excise
duty, is not applicable : ACIT vs. Real Image Media
Technologies (P) Ltd. [2008] 116 TTJ (Chennai) 964
-
Circ 4/2008, dated April 28, 2008 : Service tax paid by the
tenant does not partake of the nature of “income” of the
landlord. The landlord only acts as a collecting agency for the
Government for collection of service tax.
-
Circular F.No. 275/73/2007-IT(B), dated 30.06.2008
[2008] 172 Taxman (BN)
: Circular 761 has no application to
Raghuraman & Chythanya
section 194J
TDS
 Reimbursement of expenses
-
Reimbursement of expenses is also liable to TDS
as per CBDT Circ No. 715 dated 08.08.95.
-
No as per ITO Vs Dr Willmar Schwabe India (P.)
Ltd. (95 TTJ 53) (Delhi ITAT)
Raghuraman & Chythanya
TDS
 Limitation for action under sec 201(1A)
-
In terms of the decision of the Supreme court in
State of Punjab v. Bhatinda District Co-op. Mil (P)
Union Ltd. (2007) 11 SCC 363, action must be
initiated by the competent authority under the
Act where no limitation is prescribed, as in section
201, within that period of four years : CIT v.
NHK Japan Broadcasting Corpn. [2008] 172
Taxman 230 (Delhi)
Raghuraman & Chythanya
TDS
 Advance rental
-
Amount described in lease agreement as security
deposit-agreement providing for reduction of
security deposit every six months by amount of
rent payable-security deposit was in effect
advance rent-tax to be deducted at source on
entire security deposit : CIT vs. Reebok India
Company (2007) 291 ITR 455 (Delhi)
Raghuraman & Chythanya
Concealment
 Willful concealment is not an essential
ingredient for attracting the civil liability :
DILIP N. SHROFF V. JCIT [20O7] 291
ITR 519 (SC)
 Overruled in Union of India Vs M/s
Dharmendra Textile Processors (Dated:
September 29, 2008) : 2008-TIOL-192-SC
Raghuraman & Chythanya
Deemed dividend
 Deemed dividend to be taxed in hands of
a) Recipient : Circular No. 495 dated September
23, 1987 [1987] 168 ITR (St.) 87
b) Interested person : CIT Vs. MUKUNDRAY K.
SHAH (2007) 290 ITR 433 (SC)
c) Department circular when beneficial could run
counter to law/SC decision : Dhiren Chemicals 254
ITR 554 SC
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Fringe Benefit Tax
Where employees are experts in their field and
resident of other countries and they are brought to
the rig by providing air tickets or their coming from
their place of residence to the rig, the employer
incurs the said expenditure as of necessity. It,
therefore, clearly falls within the purview of the words
“consideration for employment”. If fringe benefits are
provided for consideration for employment, which is
given or provided to the employee by way of an
amenity, reimbursement or otherwise, clearly clause
(a) of sub-section (1) shall be attracted : R & B
Falcon (A) Pty. Ltd. v. Commissioner of
Income-Tax [2008]
Raghuraman
301
& Chythanya
ITR 309 (SC)
Fresh claim after filing
of return
1. In respect of deduction claimed after return filed,
assessing authority has no power to entertain claim
made otherwise than by way of revised return :
GOETZE (INDIA) LTD. v. CIT [2006] 284 ITR
323 (SC)
2. The Apex Court has not laid down as a matter
of law that there is bar for the Assessing
Authority to entertain the claim for deduction
otherwise than by filing a revised return :
UNIVERSAL SUBSCRIPTION AGENCY (P) LTD
vs. JCIT (2007) 159 TAXMAN 64 (ALL.)
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Fresh claim after filing
of return
3 Apex court decision is applicable only to brand
new claims and not to enhanced claims : JCIT
vs. Hero Honda Finlease Ltd. (2008) 115
TTJ (Del) (TM) 752
4. Apex court verdict does not dilute the power of
appellate authorities : CIT v. Jai Parabolic
Springs Ltd. [2008] 172 Taxman 258
(Delhi)
Raghuraman & Chythanya
Q&A
Thanks
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