Direct taxes :Interesting case laws

For Sec 41 of income tax act and its deeming provisions to apply, there must be a deduction of expenditure, loss or a trading liability in a previous year. The deduction for the loss, expenditure or trading liability should have been duly allowed by the assessing authorities. In the year where there is any recovery of such deduction in the form of recovery of loss or expenditure or where there is a remission of trading liability, the same shall be brought to tax as deemed profits u/s 41.

Treatment of expenses in relation to issue of bonus shares:

When Bonus shares are issued, they are just capitalisation of reserves and do not involve fresh issue of capital or dilution of equity base. They do not create any enduring benefit for the assessee. Therefore under the given cirucmstances, there is no way that expenses related to issue of bonus shares can be treated as capital expenditure. They are revenue expenses deductible from business income

Treatment of expenses incurred on behalf of sister concerns

The same will be allowed as business expenditure if proved to the satisfaction of the Assessing officer that the sister concerns are vital business interests of the assessee and incidental to its operations.

Additional grounds of appeal can be raised even at the tribunal stage even if not raised before the first appellate authority provided there are reasonable grounds for raising the appeal at a later stage and the intitial omission was not wilful with an intent to deceive.

Scientific research expenditure incurred need not be related to the assessee's business for availing the deduction u/s 35.

Amount paid to retiring partner of a firm out of accumulated profits will be considered distribution of accumulated capital of the firm and Sec 45(4) shall come into force as this transaction will be treated as a transfer u/s 2(47). Though it is intended to assume control over the firm, the payment is capital in nature

Holding company receives assets on voluntary liquidation of the 100% subsidiary , the transaction will not be treated as transfer by virtue of Sec 47 which deals with transactions not regarded as transfer. Sec 47 specifically provides that Where there is a transfer of a capital asset from 100% subsidiary to holding and holding company is an indian company, the transaction shall not be liable to tax.

Where a judgement for enhanced compensation has been appealed against by the IT authorities, the same shall not accrue or be taxed in the hands of the assessee until the finality of judgement in the high court.

Mere extension of an old building will not be construed as construction of a new house for purposes of claiming exemption u/s 54F

Distribution of capital asset on dissolution of a firm to ex partners to repay the debts owed to them in the form of capital contributed by them in the past will not be covered under the mischief rule of interpreting 45(4). In the above case, yes there is distribution of capital asset on dissolution but when the same is made to ex partners, the same shall not be considered transfer that would attract capital gains.

Even where a firm is dissolved and assets are distributed and thereby taken over by a partner for his own business, the transaction will be regarded a transfer and capital gains will be attracted in the hands of the firm u/s 45(4)

where a person is a partner in a firm as a karta in representative capacity of the HUF and where his wife is a partner in the firm, he cannot be considered to be holding substantial interest in the firm based on his representative capacity and therefore salary paid to his wife will not be clubbed in his hands.

Income is accumulated in a trust on behalf of the beneficiary who is a minor and will accrue to him only upon attaining majority age..therefore until then income does not accrue to the minor. The same shall not be clubbed as it is not ready to use by minor.

What is manufacturing is a moot question u/s 80IB,,A new identifiable product must emerge from the same to render a process as manufacture

For purposes of Sec 80P, godowns and warehouses form part of cold storage and such incomes from cold storage would be exempt.

The powers to transfer cases are contained under sec 127 of the IT act. The DGCC or commissioner will have the power to transfer cases from one assessing officer to another. The assessee will be given the opportunity to be heard but cannot demand that a particular officer or a particular area be the jurisdiction for assessment. The authority effecting the transfer will go ahead with the same if it is to his satisfaction that the area where cases are being transferred has some business connection with the assessee.

As far as Sec 147 reassessment proceedings are concerned, the same can be initiated only when the assessing authority has enough reason to believe and not mere reason to suspect that income has escaped assessment. The books of accounts of the previous year were found to be defective and best judgement assessment was carried out but the same cannot be a reason for assuming that income would have escaped assessment in the previous years. There should be material evidence in posession of the authority to prove that income has escaped assessment for a particular year

If the assessee has failed to claim a particular deduction in the original return, he may claim the same by filing a revised return within the stipulated time period. A question of law can also be raised in the presence of the ITAT provided it has an impact on the income tax liability of the assessee. This was a landmark judgement where for the first time a question of law was raised in front of the apellate tribunal instead of the courts in goetze India vs CIT

Where the assessee had made certain notings in his private diary and the same was not fully disclosed in the books of account, in respect of a sale transaction of a land, such diary if seized by IT authorities will tantamount to the difference being treated as undisclosed income liable to tax. The income shall be treated as income escaping assessment and notice shall be issued u/s148 as there is sufficient material in posession and reason to believe income has escaped assessment.

Where a method of accounting has been followed regularly by the assessee year on year consistently and the same has been accepted by the tribunal, the latter cannot disallow deductions by taking a contrary stand in a fresh assessment year

Failure to furnish audit report within prescribed time as required by sec 44AB will result in penalty proceedings being initiated by AO u/s 271B. The assessee will be given an opportunity of being heard and if his reply is not convincing penal provisions will have effect. But if AO does not initiate action against the assessee then the order can be considered prejudicial to revenue and Sec 263 revisionary powers of the commissioner shall have effect.

Where penalty has been levied under Sec 271 C for not deducting tax at source, the same cannot be levied again for non payment and non filing of return as where no tax has been deducted, the question of payment and filing of TDS returns do not arise. Its a matter of substance over form. Penalty can be levied only once in respect of a particular offence. There can be no levy of penalty for an offence arising as a consequence to the offence for which penalty has already been levied.

Before the assessing officer embarks on a search mission u/s 132, if the Assessee discloses his income he can escape levy of penalty for concealment

Once a revised return has been accepted by the assessing officer or the department, the same cannot be acted upon for levy of penalty. A revised return is filed to rectify a defect in the original return and hence the same cannot be proceeded against with penal proceedings post filing of the same.

Sec 194 H does not apply to stamp vendors whereby stamp papers are sold at a discount to such vendors by the treasury. These stamp vendors are not considered agents of the treasury and no tax shall be deductible at source. These are just buyers and they are not rendering any service for them to charge commission. They are merely buying and selling and thats not service

For sec 194C to apply whats relevant is a contract for work and not a contract for sale. A contract for sale will not attract TDS provisions.

Sec 195 provisions shall apply to any payment in the nature or which carries the character of income

U/s 206C, TDS on liour price will be deducted inclusive of excise duty and relevant taxes as purchase price includes all of that