Market value of assets at time of their distribution on dissolution of firm deemed as cost in hands of partner
IT : In view of provisions of section 45(4), in case of dissolution of firm, if capital assets are distributed, cost of acquisition of capital asset in hands of recipients or partners would be Fair Market Value of asset on date of transfer, which was to be taken into account for computing profit and gains of firm on transfer of capital asset on its dissolution
No reassessment to deny depreciation on windmill if all facts were disclosed by assessee to justify its claim
IT : Where assessee disclosed all material facts in support of its claim for depreciation on wind mills at time of filing return, Assessing Officer could not initiate reassessment proceedings after expiry of four years from end of relevant assessment year taking a view that assessee had not utilized its wind mills for generation of electricity and, thus, its claim for depreciation was wrongly allowed
No deemed dividend on receipt of loan if assessee wasn't a shareholder in payer-co.
June 5, 2014[2014] 45 taxmann.com 253 (Delhi)
IT : Loan granted to assessee-company, which was neither a shareholder nor a member of payer company, could not be treated as deemed dividend in hands of assessee
ACIT vs. Bilakhia Holdings P. Ltd (ITAT Ahmedabad)
A transfer of shares under a family arrangement is for a determinable "consideration" & is not "voluntary". Consequently, the shares are not received under a "gift" & the transferee cannot claim benefit of cost, and holding period, of the transferor
The members of the Bilakhia family entered into a deed of family arrangement with a view to consolidate and equalize values of the assets held by each of the parties. Pursuance to the said family arrangement, the family members transferred the shares of Nestle India Ltd and Hindustan Lever Ltd held by them as investment to the assessee, an investment company in which the individual members of the family had equal interest. The assessee sold the shares and claimed that as it had acquired the shares vide a "gift", in computing the capital gain, the cost of acquisition of the shares to, and the period of holding by, the transferors, had to be considered. The AO rejected the claim though the CIT(A) accepted it. On appeal by the department to the Tribunal HELD allowing the appeal:
(i) On the issue as to whether the shares received on family arrangement is pursuant to a "gift", s. 122 of the Transfer of Property Act 1882 provides that a transfer of moveable or immovable property can be treated as a gift only if the same is made voluntarily and without any consideration. It cannot be said that a family arrangement is "without consideration". In CWT vs. HH Vijayaba, Dowgner Maharani Saheb of Bhavnagar Palace 117 ITR 784 (SC) it was held that a family settlement or family arrangement which is to buy peace is for good consideration and creates an enforceable agreement between the parties. Consequently it cannot be said that a family arrangement is without consideration and a "gift";
(ii) On the issue as to whether this consideration can be measured in money or monies worth, the purpose of the family arrangement was to equalize the holdings between the respective families of three brothers. Therefore, it cannot be said that consideration for transfer of shares cannot be measured in terms of money or monies worth. The equalization of wealth has only monetary connotation. To avoid disputes cannot be said to be without monetary consideration as it is common knowledge that family disputes ruin the family financially. The family disputes are being settled in monetary terms by resorting to arbitration and in case such settlements is not done, matter travels to the court and the family suffers heavily not only mentally but also financially. Thus, it cannot be said that the consideration for transfer of shares was not for monetary consideration;
(iii) On the issue as to whether the receipt of shares under the family arrangement was "voluntary" or not, the term "voluntary" is defined to mean "free choice; done with free will; without any compulsion ..". The family arrangement cannot be said to be voluntary because it was enforceable and binding on the parties and with the purpose of equalization of wealth of the family members, which had monetary connotation.
CIT vs. Lakhani Marketing (P&H High Court)
S. 14A disallowance cannot be made if the assessee has no tax-free income in the year
From the reading of s. 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:- a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), s. 14A of the Act cannot be invoked (Hero Cycles 323 ITR 518 (P&H) and Winsome Textile 319 ITR 204 (P&H) followed)
CIT vs. Triveni Engineering & Industries Ltd (Allahabad High Court)
S. 271(1)(c)/ 271(1B): If, in the assessment order, AO directs initiation of penalty on specific issues but not on others, he is not entitled to levy penalty on the other issues
Undoubtedly, as held in Mak Data 358 ITR 593 (SC), the AO has to satisfy himself whether penalty proceedings should be initiated or not during the course of assessment proceedings and he is not required to record his satisfaction in a particular manner or reduce it into writing. However, in the present case there is no direction whatsoever by the AO in respect of the specific head of interest on the SDF loan, on which the penalty was deleted by the Tribunal. This omission in the case of the SDF loan stands in sharp contrast to those items where the AO has specifically directed the initiation of penalty proceedings u/s 271(1)(c). Consequently, the Tribunal was justified in deleting the penalty u/s 271(1)(c) in respect of the SDF loan
Kansai Nerolac Paints Ltd vs. DCIT (Bombay High Court)
S. 254: If a legal issue is raised (even for the first time) ITAT has the duty to deal with it and cannot remand it to lower authorities
The Tribunal should have answered the legal issue itself. The Tribunal was not prevented in any manner and in law from considering a purely legal issue for the first time, more so, if this legal issue goes to the root of the matter. The issue was an impact and legal effect of a order of amalgamation and winding up of the assessee thereto on the penalty proceedings have been initiated and were continuing. If they were initiated prior to the order of the winding up passed or the scheme of amalgamation being sanctioned, then, whether the subsequent act of a order sanctioning the scheme would permit continuation of the proceedings against an entity or company which is wound up and in terms of the provisions contained in the Act was, thus, a clear legal issue. It should have been answered by the Tribunal, particularly when it had admitted the question or ground and also the additional evidence filed by the assessee. The only two documents which required to be looked into were the scheme of amalgamation and the order passed in pursuance thereof by this Court. If that was the admitted factual position and based on which the legal issue was raised, then, the Tribunal was obliged to answer the legal question. Its omission to answer it, therefore, is vitiated in law. The Tribunal is a last fact finding Court and equally if it could have been approached by the assessee both on law and fact, then, in the given circumstances, the Tribunal should have answered this issue and its failure to do so can safely be termed as not performing its duty in law. The direction to remit and to remand it to the AO is not justified and in the peculiar facts and circumstances noted above
HC : Allows deduction for 'genuine' payment of director's gurantee commission, ITAT order reversed
Controls & Switchgear Contractors Limited
June 05 2014
HC reverses ITAT ruling, deletes disallowance for guarantee commission payment to directors, in connection with financial assistance availed by assessee company;HC disallows interest on borrowings as assessee artificially borrowed its owned funds through a circuitous route
June 5, 2014[2014] 45 taxmann.com 257 (Karnataka)
IT: Deduction on account of lease rental was not allowable when lessor had not purchased any machinery
IT: Where assessee furnished some particulars, but details of parties as well as amount of alleged creditors under various heads were not furnished, 10 per cent of total advances be treated as unexplained cash credit
IT: Where assessee had invested its borrowed fund in a company but said company advanced said sum to another company which again invested said sum in assessee company, interest on borrowed capital need disallowance as borrowed fund was utilized for non-business purposes
NEW DELHI, JUNE 05, 2014: THE issues before the Bench are - Whether the assessing officer has powers u/s 37(1) to go into that aspect of relationships between the assessee and auto dealers where the commission paid is to be reduced every year merely because it was done in the initial years and Whether the fact that the commission payable was 90% in the first year and reduced to some extent in the latter years, is a consideration for the AO to conclude that, it necessarily has to be reduced further in the succeeding year. And the verdict goes in favour of the assessee.
Facts of the case
The assessee is engaged in the business of corporate insurance agency. It conducts business through extensive Maruti dealers' networks consisting of over 300 sales outlets and 400 dealer workshops spread throughout the country. It was a 100% owned subsidiary of Maruti Suzuki India Ltd, and had a business arrangement with National Insurance Co. Ltd as its licensed corporate insurance agent. It had filed a return for AY 2006-07 declaring an income of Rs.2,66,26,206/-. During assessment, AO issued notice u/s 143 (2) and the assessee filed its reply. The AO held that the assessee had debited Rs. 8,99,89,136/- as commission paid to Maruti dealers, on a total sum of Rs. 6,29,92,395/-. This amounted to 70% of the total receipts of insurance commission. For the preceding years, the payments made to Maruti dealers were 70%, 79% and 93.66%. The AO restricted the commission to 60% and thus disallowed Rs.89,98,913/-. On appeal, CIT(A) allowed assessee's contentions. On further appeal, Tribunal had allowed the appeal on the basi that the revenue's argument that commission payable during the initial years, after setting up of business might have been warranted, whereas for the AY 2006-07 a decline in such commission could be justified. The matter was remitted for reconsideration to the AO to decide the matter afresh. The assessee had applied u/s 254 (2) seeking rectification of the ITAT's order, which was eventually allowed on 14.1.2011. The Revenue filed a Writ Petition 2012-TIOL-711-HC-DEL-IT – which was considered by HC and allowed, where it was held that the conspectus of circumstances in the case did not warrant the ITAT's exercise of jurisdiction for rectification u/s 254 (2). The assessee sought review of that judgment but without avail.
Before HC, the assessee's counsel had contended that CIT(A) had examined the entire records including the fact that for the previous period, i.e., AY 2005-06, the CIT had considered and noticed that the percentage of commissions shared with dealers had been in the range of 93.67%, 79% and 70.09%. It was contended that the Tribunal itself noticed order of 9.10.2009 and upheld the CIT (A)'s factual findings in 2005-06. Arguing against the Tribunal's findings (that the disallowance in this case made by the AO beyond 60% was unjustified), counsel had submitted that the sole discretion as regards the amount of commission to be given, parted or shared, (being a commercial decision) lies exclusively within the domain of enterprise, i.e., the assessee. So long as the AO was satisfied whether the amounts were actually paid and the expenses incurred were genuine, he cannot question the reasonableness of the amount, on the basis of the percentage being high or excessive.
On the other hand, the Revenue's counsel had urged that apart from the agreement, which broadly contained the condition with respect to the commission sharing, there was no material on the record to indicate that assessee had, in fact, agreed on year to year basis for differing rates of commission. Emphasizing that since the assessee and its dealers were party to a written agreement, the business on this condition, argues the Revenue, was significant. Counsel had also submitted that AO itself possesses the jurisdiction to determine reasonableness of the extent of commission, in the sense that commercial expediency u/s 37 (1) was to be read along with power conferred u/s 40A (2), which requires the factoring of fair market value of similar deductions/expenses.
Held that,
++ this Court has considered the submissions. Whether the parties were required to reduce the rates of commission for each year into writing, in the opinion of the Court, is not an aspect which could have been gone into by the AO. The way parties entering into a voluntary commercial transaction spell out their relationship, is a matter of contract, which except by statutory supervision, the AO cannot go into, at least under Section 37 (1), given that the exclusive domain of deciding whether the expenditure is warranted, is that of the assessee. The decision is entirely a business related one. If the matter is viewed from this perspective, the fact that the commission was 90% in the first year and reduced to some extent in the latter years ipso facto is not a consideration for the AO to have concluded that, it necessarily had to be reduced to 60% for the fourth year, i.e., 2006-07; no support in terms of the contract or expressed provision of law or rules has been cited in support of the AO's determination in this regard. This Court is also satisfied that TDS payments were made in respect of the dealership commission parted or shared by the assessee, as is evident from the records. In view of the above findings, this Court is of the opinion that the question of law is to be answered in favour of the assessee and against the Revenue. The appeal is accordingly allowed.
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