Nut Crackers

Direct Taxes

Questions & Answers

Q.1 During the course of survey, can the assessing office record a statement on oath as per sub-clause (iii) of sub-section 3 of section 133A of I.T. Act from any person? Whether such statement taken during the course of survey has evidentiary value for being used as relevant to any proceedings under the Act, including the reopening of an assessment under section 147 of the I.T. Act?

Ans. Clause (iii) of sub-sec.3 of sec.133A empowers the authority to record the statement of any person which may be useful for, or relevant to, any proceeding under the Act. However, such statement should not be on oath. The said section does not empower to administer oath before recording the statement. Such power is u/s. 132(4) of the Act [Please refer Paul Mathews and Sons vs. CIT (2003) 263 ITR 101 (Ker.) and CIT vs. S. Khader Khan Son (2008) 300 ITR 157 (Madras)]. The Madras High Court held that in view of the scope and ambit of the materials collected during the course of survey action under sec.133A shall not have any evidentiary value. In Ashok Manilal Thyakkar vs. Asstt. CIT (Ahmedabad) (2005) 279 ITR (A.T.) 143 at 161, it was held “The statement of the assessee recorded under the provisions of section 133A(3)(iii) can be said to be useful or relevant to the assessment proceedings only in the circumstances when there is a material on record to prove the existence of – it cannot be said that only on the basis of statement given by the assessee the disclosed income was assessable as lawful income of the assessee.” In my opinion, such a statement can be used with caution, if based on clinching material and after confronting the deponent.

Q.2 An assessee transferred immovable property, executing an agreement of sale receiving consideration and notarized the document. The parties to the agreement did not submit the agreement of sale with the registering authority. They also did not execute any sale deed. The assessee invoking section 45 read with section 2(47) offered capital gain on the transaction. Can the Assessing Officer invoke section 55A and refer to the Valuation Officer and adopt the market value, duly invoking section 50-C of the I.T. Act and add the difference as understated consideration for the purpose of computing capital gains?

Ans. Only when a deed is presented for registration, the recorded value can be substituted by the value adopted or assessed by any stamp valuation authority for the purpose of payment of stamp duty. The stamp valuation authority is entitled to assess market value of the property under transfer. In the case of the querist, no deed of sale has been submitted for registration before the registering authority, hence, sec. 50C of the Act cannot be invoked (please refer Navneet Kumar Takkar vs. ITO (2008) 110 ITD 525 (Jodhpur ITAT). Sec.55A empowers an Assessing Officer to make a reference to the Valuation Officer, with a view to ascertain the fair market value of a capital asset, for the purposes of computing capital gain but in the prescribed conditions. The reference shall be valid in law. However, such valuation is only an opinion of a technical person and is not binding on the assessee or/and the tax administration. The assessing officer should provide its copy, seek objections and decide by a reasoned order, not in a mechanical manner. The valuation can be challenged in appeal. An issue relating to computation of cost of construction came before the Hon’ble Supreme Court in Smt. Amiya Bala Paul vs. CIT (2003) 262 ITR 407. The Hon’ble Court mentioned that a report of the Valuation Officer u/s.55A may be considered by the Assessing Officer as a piece of evidence, if it is relevant. It also held that the assessing officer has no general powers of enquiry to make a reference in circumstances different than expressly set out under the said section. To overcome such a situation, sec.142A has been inserted by the Finance (No.2) Act, 2004 with retrospective effect from 15-11-1972. The Assessing Officer would be competent to make a reference to the Valuation Officer to make an estimate of the value of any investment referred to in sections 69, 69A or 69B. Thereafter, the position of such report shall be similar to that of the report mentioned earlier. The value finally shall be deemed as fair market value and difference between the recorded value and such value would be assessable under the said sections.

Q.3 Ramesh has opened a demat account with a city based sub-broker. He daily invests amounts in shares of some of the companies. He also sells on the same day or subsequently at the franchisee centre. On these facts:

(a) Whether the daily transactions shall have to be treated as investment and tax is to be calculated under section 111-A of the Act.
(b) Whether the daily transactions amount to trading activity and therefore constitute income from business?
(c) What about security transaction tax and its treatment?
(d) Whether the futures and options trading will be treated as business under the I.T. Act?

Ans. An assessee can be a trader/dealer in shares and can also be an investor. In case of the former, income shall be assessable as income from business and in case of the latter, as capital gain. Normally it shall depend on frequency of transactions. Please refer Circular of the Board which is not of binding nature on an assessee but shall be relied upon by the Assessing Officer. In such circumstances, it is advisable to deal in different names, maintain separate account books and account with the broker, preferably not same broker. It shall all depend on totality of facts and circumstances. [Please refer CIT vs. N.S.S. Investments Pvt. Ltd. (2005) 277-ITR-149 (Madras); CIT vs. S. Ramaamurthan (2008) 217-CTR-206 (Madras)]. Section 111A talks of tax on short-term capital gains in specified circumstances. It should be chargeable to STT.

Q.4 Is the Assessing Officer justified in initiating penalty proceedings in the case of a protective assessment? Pursuing it further, can he impose the penalty during the pendency of the matter in the substantive appeal of the same addition considering that there shall be no appeal in the case of a protective assessment?

Ans. A protective assessment is permissible but protective penalty is impermissible. Framing of protective assessment is not specifically specified under the Act but is judge made law. The Hon’ble Supreme Court in the case of Lalji Haridas vs. ITO (1961) 43 ITR 387 has laid down the relevant circumstances. Penalty proceedings are distinct, have to be strictly construed. If there is any ambiguity or doubt about the implementation of the penal provision, the benefit must be given to the assessee. The action of the Assessing Officer is illegal. [Please refer CIT vs. Supersteel (Sales) Co. (1989) 178 ITR 451 (Calcutta); Metal Stores vs. CIT (1990) 186 ITR 612 (Guwahati) and CIT vs. Behari Lal Pyare Lal (1983) 141 ITR 32 (P & H)].

Q.5 In order to claim depreciation an assessee has to be the owner of the asset and should have used the asset during the year. In the concept of user, is the asset required to be actually used for claim of depreciation? Is passive user or state of ‘kept ready for use’ good enough for claim of depreciation? Is non-user of asset different from passive user?

Ans. For claiming of depreciation u/s. 32 of the Act, there are twin conditions (i) ownership and (ii) user of the asset. A passive user of an asset is user as held by Delhi High Court in CIT vs. Refrigeration and Allied Industries Ltd. (2001) 247 ITR 12 after referring to the case of the Supreme Court in liquidators of Pursa Limited vs. CIT (1954) 25 ITR 265. When an asset is kept ready for use, depreciation is admissible [Please refer Swroop Vegetable Products India Ltd. (2005) 277 ITR 60 (Allahabad); CIT vs. Nahar Export Limited (2008) 296 ITR 419 (P & H) and CIT vs. Southern Petro Chemical Industries Corporation Ltd. (2008) 301 ITR 255 (Madras)]. Even where the machinery is kept ready for use and could not be put to use, the assessee would be entitled to depreciation as everything ages with the passage of time and even if the machinery is kept ready for use, there is a normal depreciation of value. “Non-user” and “passive user” are different and are not one and the same. If there is non-user, the depreciation shall not be admissible.

Q.6 Sec. 36(1)(vii) of the Income-tax Act dealing with deduction of bad debts has been amended with effect from 1-4-1989. In the post-amended era, whether an assessee is still under an obligation to prove that only a bad debt is written off? If so, what is the difference between pre amendment and post amendment law?

Ans. Prior to the 1989 amendment to sections 36(1)(vii) and 36(2), an assessee had to establish that the debt has become bad during the previous year and the Assessing Officer may allow or disallow the claim. In other words, irrespective of the write off claimed by the assessee, the deduction was still dependent on the finding of the Assessing Officer that in which previous year the debt has become bad and based on which the Assessing Officer could allow the deduction either in an earlier assessment year or in a later assessment year which is different from the assessment year in which the assessee has written off the debt as bad debt. As explained by the Circular No. 551 dated 23-1-1990, the amendment has been brought to do away with all the complications involved in determining the issue of deductibility of bad debts under section 36(1)(vii) and to rationalize the provisions. The amendment decided the year in which the deduction has to be allowed, as the year in which the assessee has written off the debt as bad debt in the books of account. The amendment has also done away with the requirement of establishing that the debt has become bad. As a caution, it is advisable that the assessee proves prima facie that it became bad or irrecoverable while writing off. [Please refer DCIT vs. Oman International Bank (2006) 100 ITD 285 (Mum.) (SB); CIT vs. Morgan Securities and Credits Pvt. Ltd. (2007) 292 ITR 339 (Delhi) and CIT vs. Autometers Ltd. (2007) 292 ITR 345 (Delhi)].

Q.7 In Bajaj Shevashram’s case 151 Taxman 233 (Raj), it was held that an assessee is entitled to write off deferred revenue expenditure over the period of enduring benefit. Whether the concept of deferred revenue expenditure is allowable under the tax laws? If so, how the period of apportionment is to be decided?

Ans. The concept of deferred revenue expenditure is an accountancy concept to arrive at true and fair income and there is no provision under the Act to write off revenue expenditure over the years. However, the Hon’ble Supreme Court in Madras Industrial Investment Corporation Ltd. vs. ITO (1997) 25 ITR 802 approved of the said accountancy concept. It is judge made law. The Rajasthan High Court in CIT vs. Shree Rajasthan Syntex Ltd. (2004) 269 ITR 461 allowed liability to pay premium on redemption of debentures is revenue expenditure to be spread proportionately to the entire period up to the date of redemption. Reference can also be placed on Hero Honda Motors Ltd. vs. JCIT (2006) 103 ITD 157 (Delhi AT). The period of spreadover is primarily a question of fact and is to be allocated during the period of enduring benefit.

Q.8 In CIT vs. Arawali Constructions 259 ITR 30 (Raj), it was held that cost of software is to be capitalised. Is this ratio still valid under the changing technological era? Is every application software to be capitalised? Whether software forms part of computer hardware for claim of depreciation at the rate of 60 per cent? What is the latest judicial thinking on these issues?

Ans. All computer softwares cannot be considered as requiring identical treatment because what matters is the nature of the software. Where the Assessing Officer treats all such outlay on different software as capital expenditure, it would require further consideration. Software should now be treated as goods after the decision in Tata Consultancy Services vs. State of Andhra Pradesh (2004) 271-ITR-401 (SC). Where it is found to be capital expenditure, it would be entitled to depreciation at 25 per cent up to the assessment year 2002-03 and 60 per cent from the assessment year 2003-04. In respect of the issue, whether it would be capital or revenue expenditure, the Tribunal in Amway India Enterprises vs. Deputy CIT (2008) 301-ITR (AT) 1 (Delhi) (SB) remanded the matter. In my humble opinion, the view of the Hon’ble Rajasthan High Court in 259 ITR 30 is not good law and deserves to be reconsidered.

Q.9 Replacement cost of certain major parts of machinery is always a controversy as to whether it is capital or revenue. In the past, in Janakiram Mill’s case 275 ITR 403 (Mad) it was held that replacement of core machinery would be deductible as current repairs u/s. 31 and would also be eligible for deduction u/s. 37. Recent Apex Courts judgments have altered this legal position. Please explain whether assessee can claim replacement cost u/s. 37 if not u/s. 31(i) of the Act? What is the final ratio laid down by the Apex Court?

Ans. Sec. 31 of the Act permits deduction of any expenditure incurred on account of current repairs. Finding that expenditure of enduring nature is being allowed under the said section, an Explanation has been inserted by the Finance Act, 2003 with effect from 1-4-2004, which says that any expenditure in the nature of capital expenditure shall be not current repairs. Sec. 37(1) is wider and allows any expenditure for purposes of business excluding personal expenditure and capital expenditure. The Hon’ble Supreme Court in CIT vs. Saravana Spinning Mills P. Ltd. (2007) 293 ITR 201, held that ‘replacement of worn out ring frames as not lcurrent repairs”. It has expressed in detail the meaning of the expression ‘current repairs’. It rightly held that the basic test was to find out whether expenditure was incurred to ‘preserve and maintain’ an already existing asset, and the expenditure must not be to bring a new asset into existence or to obtain new advantage. It referred to the decision of Ballimal Naval Kishore vs. CIT (1997) 224 ITR 414 (SC). Whether it is capital expenditure, it shall be primarily a question of fact. If the expenditure is incurred to facilitate the business and to reduce the revenue expenditure, an assessee can claim in view of decision of the Supreme Court in Empire Jute Co. Ltd. (1980) 124 ITR 1 at 10 (SC).

Q.10 What is the legal obligation cast on a company assessee in establishing share application money/share capital with respect to criteria u/s. 68? Is an AO authorised to assess such receipts in the hands of company u/s. 68?

Ans. The three criteria as to (i) identity; (ii) genuineness; and (iii) capacity has to be established in respect of a cash credit u/s. 68. The company should provide name and address, establish identity and that the share application was genuinely and really made by the applicant. After establishing the identity and genuineness, capacity need not be proved by the company. Reliance can be placed on CIT vs. Stellar Ltd. (2001) 251-ITR-263 (SC); Shree Barkha Synthetics Ltd. vs. A.C.I.T. (2006) 283-ITR-377 (Raj.); CIT vs. First Point Finance Ltd. (2006) 286-ITR-477 (Raj.) and CIT. vs. AKJ Granites Ltd. (2008) 301 ITR 298 (Rajasthan) and many more similar decisions.

Q.11 Is expenditure incurred by a lessee on the leased premises for renovating/repairs, to be treated as revenue expenditure? What is the implication of Explanation (i) of sec. 32(1) of the Act?

Ans. It shall be primarily a question of fact as to whether it is capital expenditure or a revenue expenditure. If it is found that expenditure incurred on the leased property is in the nature of capital expenditure, depreciation would be admissible under Explanation 1 of section 32(1) of the Act.

Q.12 An assessee has let out building property, which is part of his stock-in-trade and claimed the rental income as business income. Is he right in doing so? If an assessee develops a commercial complex only for leasing purposes, what would be the nature of such income? If the lessor assessee provides many other facilities along with the leased premises, what are the implications?

Ans. If the assessee is a dealer or developer of property and such property is stock-in-trade, the rental income should not be considered as income from house property but should be considered as business income. The Hon’ble Supreme Court has laid down the principles in Universal Plast Ltd. vs. CIT (1999) 237 ITR 454. However, if the dominant intention is to earn rental, it shall be income from house property. In respect of a commercial complex or a Mall, it can be claimed as exploitation of business asset and assessable as business income. No precise test can be laid down. [Please refer Atma Ram Properties (P) Ltd. vs. J.C.I.T. (2006) 102-TTJ-345 (Delhi AT). One can examine ratio of CIT vs. Chugan Das & Co. (1965) 55-ITR-17 (SC), CIT vs. Shambhu Investment (P) Ltd. (2001) 168-CTR (Cal.) 237 : (2001) 249-ITR-47 (Cal.), CIT vs. New India Maritime Agencies (P) Ltd. (2002) 178-CTR (Mad.) 34 : (2002) 256-ITR-513 (Mad.) and CIT vs. Chennai Properties & Investments Ltd. (2004) 186-CTR (Mad.) 409 : (2004) 266-ITR-685 (Mad.) relied on; S.G. Mercantile Corporation (P) Ltd. vs. CIT 1972 CTR (SC) 8 : (1972) 83-ITR-700 (SC), Karanpura Development Co. Ltd. vs. CIT (1962) 44-ITR-362 (SC) and CIT vs. National Storage (P) Ltd. (1963) 48-ITR-577 (Bom.). Reliance can also be placed on PFH Mall & Retail Management Ltd. vs. ITO, Kolkata (2007) 16-SOT-83 (Kol.). Number of supporting decisions have been dealt with. Querist may also refer to CIT vs. Neha Builders (P) Ltd. (2007) 164-Taxman-342 (Gujarat).

Q.13 These days it is quite common that a landowner instead of making an outright sale prefers to give land for development purposes to a builder, by virtue of which he receives constructed area as his consideration. In this scenario, when is the landowner liable for capital gains? What are the implications of roll over benefit u/s. 54/54F in the hands of landowner? Whether provisions of sec. 50C apply?

Ans. Sections 2(47)(v) and (vi) are too wide and cover a case of agreement in the nature of part performance u/s. 53A of T.P. Act or any agreement or arrangement effecting transfer or enjoyment of property. If the land is given for development under a development agreement, possession is transferred, power to sale is given, it may amount to transfer u/s. 2(47)(v)/(vi) of the Act liable to capital gains (Please refer Chaturbhuj Dwarkadas Kapadia vs. CIT (2003) 260 ITR 491 (Bombay) and Jasbir Singh Sakaria (2007) 294 ITR 196 (AAR). However, it shall depend upon the facts and the clauses in the development agreement. Please refer to Dnyashwar N. Mulik vs. A.C.I.T. (2006) 152-Taxman-25 (Pune AT). If there is a transfer u/s.45 read with sec.2(47) of the Act, the liability for capital gain would arise on the date of transfer. Roll over benefit u/s.54/54F can be claimed by the land owner. Provisions of sec. 50C shall apply if the development agreement is registered under the Stamp Act., as dealt hereinbefore for the Query No. 8.

Q.14 Whether an assessee engaged in rendering job works to exporters is eligible for deduction u/s. 80HHC? What is the present legal position?

Ans. If the job work/processing charges are intimately connected with export trade and are found to be income from business, such charges may not be excluded for computation for the purposes of sec. 80HHC [please refer CIT vs. Sharda Chemicals (2007) 209 CTR 143 (Raj.)]

Q.15 Travelling expenses incurred by a business assessee are liable for Fringe Benefit Tax (FBT). An exemption is provided u/s. 115 WB(3). In respect of non-resident employees deputed for work in India, whether this exemption would be available for the travelling expenses incurred in moving such people from their country of residence to India?

Ans. A non-resident who brought in employees to the place of work in India and back to their homes abroad incurring transportation cost would be liable for fringe benefits tax as ruled in R and B Falcon (A) Pty. Ltd., In re (2007) 289-ITR-369 (AAR). It was ruled that the non-resident as an employer is liable for FBT. It was further ruled that such transportation cost would fall under “conveyance” and “tour” and “travel” in clauses (F) and (G) of section 115WB(2). The Supreme Court has now found in R and B Falcon (A) Pty. Ltd. vs. CIT (2008) 301-ITR-309 that since the non-resident had a permanent establishment in India and carried on business in India having employees, the jurisdiction for liability for FBT cannot be avoided.

Q.16 An institution, in order to obtain income exemption status, as per its permitted activity needs to apply for registration u/s. 12AA before Commissioner of Income Tax. Such Commissioner is obliged to act upon such application with in the prescribed time limit. If a Commissioner does not take any action in respect of such application, what are the legal implications?

Ans. Time limit set u/s. 12AA for passing order on an application for registration of the trust is mandatory. If the Commissioner fails to pass such an order within the specified time limit, registration shall be deemed to be allowed as held in Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust vs. CIT (2008) 299 ITR (A.T.) 161 (Delhi) (SB).