ca. sanjay c. shah -...

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10th June 2011

CA. Sanjay C. Shah

Income under Business headSection 2(13), Business includes any of the following:-

• Trade

• Commerce

• Manufacture

• Any Adventure in the nature of Trade.

� Above definition is only illustrative and not exhaustive.

� It covers every facet of an occupation carried on by a person with a view to earnprofits.

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profits.

� The term Business u/s 28 has a very broad meaning and must be construed in abroad rather than a restricted sense.

� Control and Profit Motives are crucial tests for holding an income as businessincome or otherwise.

� If actual business is carried on by another person under the Control andsupervision of Assessee, the compensation received for exploitation of asset byassessee is a business income. S K Sahana & sons (1999) 236 ITR 432 (SC)

� However, if there is no control of assessee over the asset exploited by anotherperson the compensation received is “income from other Sources”.

Business or Capital GainVarious Parameters :

� The intention at the time of purchase

� The length of period of holding

� The frequency of transactions

� Owned fund vs. Borrowed fund

� Time devoted

� The infrastructure and set up employed

� The volume of transaction

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� The volume of transaction

� Alternative occupation/other incomes

� The ratio of purchase and sales

� Circumstances responsible for sale

� Post utilization of proceeds

� Treatment in books of account

� MOA/AOA

� No. of scripts

� Continuity and Regularity

� Past Assessments completed

Comparative Analysis

Basis Business Income Capital Gains

Taxability u/s 28 u/s 45Computation u/s 48

Types Speculative or Non-speculative STCG or LTCG

Deduction allowed

All expenses incurred for carrying on Share trading business.

Only expenses incurred in connection with the transfer.

Indexation No Indexation in any case Indexation allowed in case of LTCG

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Indexation No Indexation in any case Indexation allowed in case of LTCG

Benefit if STT paid

STT allowed as an expenditure -LTCG exempt u/s 10(36) or 10(38).-STCG chargeable at concessional rate of 15% u/s 111A.

Set-off Non-Speculative loss can be set off against any head except salary

-No loss as per S.14A-LTCG cannot be set-off against any head and has to be carried forward.

Valuation of Closing Stock

At Cost or NRV whichever is lower

At Cost

Allowability of Interest

Could be allowed u/s 36(1)(iii) Not allowed as 14A is applicable

Adventure in nature of Trade

Adventure in the nature of trade:-

1) An Adventure in the nature of trade need not be business itself. It could be

akin to business.

2) A single transaction may also constitute an Adventure in the nature of

trade.

3) Activity involved in Adventure in the nature of trade need not be allied to

the existing activity of the assessee.

4) The activity involved in Adventure in the nature of trade must have profit

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motive.

5) Whether an income is Adventure in the nature of trade is a question of

mixed law and fact.

6) Trade in the context of the definition of Business is a wider concept and

when this term is associated with the term “Adventure” the scope has

further enlarged.

7) Once there is continuity of transaction then it is nothing but carrying on a

business.

8) The motive of adventure must be associated with motive of trade.

Adventure in nature of Trade (contd.)

The motive of the Assessee can be determined by the following:-

a. Intention behind Purchase.

b. Intention behind sale

c. His overall activity to accomplish desired goal.

d. Decision must be arrived at by totality of facts and combined effect of all

transaction.

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transaction.

Adventure in nature of Trade (contd.)

Relevant Judgements On The Subject

Facts in the case of DC of Income Tax Vs. Gopal Ramnarayan Kasat

(Bombay) (2011) 240 CTR 266.

i. Assessee was an Advocate.

ii. He had the information that land which he intended to purchase was within

acquisition proceedings.

iii. Thus, his act to purchase land was definitely assailed with the profit motive.iii. Thus, his act to purchase land was definitely assailed with the profit motive.

iv. Appellant has not shown any other intention at the time of acquisition of

land other than making profit by way of compensation from Govt.

v. Plight of Farmers can not be overlooked.

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Adventure in nature of Trade (contd.) Relevant Judgements On The Subject..)

One of the observation of the Court is as under :-

Their agricultural lands are generally being purchased by interested

persons immediately before the question of land at through away

prices with their motive to encash heavy returns in the shape of hugeamount of compensation. What the farmers get out of such deal ismerely peanuts on sale of their precious land under threat or fear and

apprehension of acquisition by the Government for a consideration at a

nominal price being sale in stress while the astute purchaser notchingnominal price being sale in stress while the astute purchaser notchingrich fruits happened to be the expert of this trade We acknowledge thatwe are not acting as a moral police being our job is confined within

four corners of the IT Act. Neither we are making any allegation to any

one we have any authority to stop this malpractice being very muchprevalent whether in the country the acquisition of lands takes place

but simply out of compassion we have placed our sentiments, though

definitely not swayed by the emotions in arriving at this unbiaseddecision. To conclude, we draw the result that it was nothing but an

adventure in the nature of trade, hence right taxed in the hands of theassessee.

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RELEVENT JUDGEMENTS ON THE SUBJECT(contd..)

Final Conclusion :-

the agricultural lands were excluded from the definition of "capital

asset" and, as such, no tax was payable on the compensation received

on account of the acquisition of the said lands. From the material onrecord, it is manifest that the lands purchased by the assesses were

not purchased with an intention to hold it as a "capital asset" but were

purchased with the knowledge that the said lands are being acquiredwith the sole intention of earning huge profit on account of theirwith the sole intention of earning huge profit on account of theiracquisition. If the lands were not purchased with the intention of

holding them as "capital asset" and only with an intention of earning

huge profits on the said purchases.

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RELEVENT JUDGEMENTS ON THE SUBJECT(contd..)

Facts in the case of G. Venkataswami Naidu & Co. (1959) 35 ITA 594 (SC)

1. Assessee was owning a factory premises.

2. He started purchasing open plots adjacent to its factory so as to make his

own land more bigger and readily resalable.

3. As and when plots adjacent to factory were available for sale , assessee

carried out his plan and consolidated his holding of the said plots.

4. At a convenient time assessee sold the all the piece of lands to a Mill.

5. Appellant purchased four plots in a span of 2 years with the sole intention to

sell them to the mills at a profit.

In view of the above facts it was held that transactions were in the nature of

trade.

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Speculative Transactions Section 43(5)

Specific Exclusions contained in PROVISO to Section 43(5)

a) A Contract of raw Material or traded goods to guard against loss through

future price fluctuation.

b) A contract in respect of Stock and shares to guard against loss in holdings.

c) A Contract entered into by a Member of a Forward Market in the nature of

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c) A Contract entered into by a Member of a Forward Market in the nature of

jobbing or arbitrage.

d) Derivatives Contract.

SPECULATIVE TRANSACTIONS (contd.)

Issues out of Hedging as per (b) above in the case of Bengal & Assam Co.

ltd Vs. CIT 227CTR 399 ( Calcutta)

Facts :-

a) Assessee had holding in certain shares .

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b) Assessee had entered into a transaction in forward Market by creating a

sale position first and reversing it by squaring off sale position of the same

quantity as that of his holding in shares.

c) The holding in shares remain intact for a very long time and holding

continued even after transaction in forward market was squared off.

SPECULATIVE TRANSACTIONS (contd.)

Held :-

There is no satisfactory explanation for holding the said investment by the

assessee for a very long time.

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There should be reasonable nexus as to the time of transaction in ready

market with the corresponding reverse transaction in the forward market on

both the sides to qualify for the claim of hedging.

As Shares were held for a long time there was no nexus as to the time of

transactions in both the Markets , it was held that transaction were

speculation in nature and not Hedging.

Explanation to Section 73

Where any Part of Business of Assessee Company consists of purchase an

sale of shares, the said activity shall be deemed to be considered as

speculation business.

Exceptions:-

a) A Company whose GTI consists mainly of income which is chargeable

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a) A Company whose GTI consists mainly of income which is chargeable

under the head Income from House Property and Capital Gains and income

from other sources.

b) A Company whose Principal Business is business of banking or granting

loans and advances.

Explanation to Section 73 (contd.)

Criteria decided by Courts / Tribunals to come out of rigor of Explanation to

Section 73

1. Memorandum of Association.

2. As far as first exception is concerned income earned under various heads

are to be looked into and if more than 50% of the income is out of the heads

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are to be looked into and if more than 50% of the income is out of the heads

other than Business Income then exception mentioned (a) applies.

3. Final Chargeable income under various heads are to be considered for the

aforesaid purpose. ACIT Vs. Concord Commercials Pvt Ltd ( Mumbai

Special Bench) (2005) 94 TTJ 913.

4. For 2nd Exception one has to see, if more than 50% of Asset Deployment is

in granting of loans and advances then the said exception will apply.

Certain controversies under head Business or Profession

A. Whether 2 or more businesses constitute one or separate business?

Why relevant?

1. The Computation provision laid down in Chapter IV-D i.e. Section 28 to 44D have tobe applied separately for each business.

2. Set off and carry forward of loss from each independent business will be affectedby Section 70 to 72.

3. Business or a Portion thereof may have income from a source which is exemptfrom tax. There may be a need to reapportion expenditure to Exempt business and

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from tax. There may be a need to reapportion expenditure to Exempt business andtaxable business on a rational basis.

Prithvi Insurance (1967) 63 ITR 632 (SC); B.R. Ltd VS. CIT (1978) 113 ITR 647 (SC)and Waterfall Estates Ltd Vs. CIT (1996) 219 ITR 563 (SC) has laid down followingPrinciples:-

1. Common Administrative Organization.

2. Common Management.

3. Common Business Organization

4. Common Place of Business.

5. Inter lacing and interdependence of activities

Certain controversies under head Business or Profession (contd..)

Following tests are held to be not decisive:-

1. Nature of 2 Lines, i.e. 2 different product lines or 2 different activities

2. If one business can not be conveniently carried on after the closure of the

other.

3. Entries in Books

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3. Entries in Books

B. Whether Expenditure in relation to an exempt source can be set offagainst a taxable income ?

Following Principles are laid down by Supreme Court in case of Rajasthan

State Warehouing Corporation Vs. CIT ( 2000) 242 ITR 450 (SC)

1. If Income of an assessee is derived from various heads of income he is

entitled to claim deduction permissible under the respective head whether or

Certain controversies under head Business or Profession(contd..)

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entitled to claim deduction permissible under the respective head whether or

not computation under each head result in taxable income.

2. If income of an assessee arises under any head of income from different

sources, example different house property, different securities and income

from one or more sources alone is taxable whereas income from other

sources is exempt under the Act then the entire permissible expenditure in

earning the income from that head is deductible.

3. In computing profit and gain of business or profession when an assessee is

carrying on business in various ventures and some among them yield taxable

income and others do not then the question of allowability of expenditure u/s

37 will depend on following :-

a) Allowability under the respective provision.

b) On the fact whether all the ventures carried on by him constituted one

indivisible business? If they do the entire expenditure will be permissible

deduction but if they do not the principle of apportionment of expenditure

will apply because there will be no nexus between Expenditure

attributable to Exempted income and Expenditure attributable to taxable

income.


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income.

Gauhati High Court in the case of Assam State Warehousing Corporation

(2006) 286 ITR 642 has followed the above principles.

Above Supreme Court Judgement must be read together with introduction of

Section 14A together with rule 8D which are relevant on the subject.

C. Business Discontinued –Receipts subsequent to discontinuance ?

Section 176(3A) and 176(4) makes it clear that Receipts received after

discontinuance of business or profession, such receipts be taxable in the

same manner as if business was not discontinued.

Calcutta High Court in the case of CIT Vs. Justice R.M. Dutta has passed a

Judgement holding that income received after discontinuance of Profession

is not taxable on following arguments :-


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is not taxable on following arguments :-

Section 176(4) creates 2 fictions.

• The first is any sum received after the discontinuance of profession shall be

deemed to be the income of the recipient .

• The said income shall be charged to tax in the year of receipts if such sum

would have been included in the total income of the person had it been

received before such discontinuance.

C. Business Discontinued –Receipts subsequent to discontinuance ?

� In order to bring the professional receipt after the discontinuance of profession afurther fiction is to be inserted viz. that such professional receipts are deemed to benot only the income of the assessee but such income is also deemed to be theincome of profession carried by the assessee during the relevant year.

� According to Section 4, Income tax has to be charged in accordance with andsubject to provisions of Income tax Act, 1961 in respect of total income of the


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subject to provisions of Income tax Act, 1961 in respect of total income of theperson. The said section does not provide that the entire total income shall bechargeable to tax. It says that chargeability of Income to tax has to be in accordancewith and subject to provisions of the Act. The income therefore has to be broughtunder one of the head falling u/s 14 of the Act and can be charged to tax only if it isso chargeable under the computation section corresponding to that head.

� Income under the head business or profession can be brought to tax only if it can beso done under the rules of computation provisions laid down in section 28 to 43A ofthe Act. If it can not be brought to tax it will escape the taxation even if it is includedin the total income u/s 5 of the Act.

However, Kerala High Court has taken a different view in the matter in thecase of United Construction Contractors Vs. CIT (1994) 119 CTR 39(

Kerala). It has held that Income earned by assessee after discontinuance of

business is to be taxed as per the provisions of Sec.176 (3A).

Even Bombay High Court in the case of COMMISSIONER OF INCOME TAX vs.

STAR ANDHERI ESTATE (1994) 208 ITR 573 (Bom.) has made certain remarkswhich are contradicting to the Judgement in the case of R.M. Datta (Supra) whichare as under :-


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are as under :-

s. 189 and s. 176(3A) and 176(4) makes it abundantly clear that the IT Act

contemplates that where a firm is dissolved, the assessment of the total

income of such firm shall be made by the ITO as if no such dissolutionhad taken place. The same is the position in the case of discontinuance

of the business of the firm. Sec. 189 keeps the firm alive for the purposes

of assessment under the Act despite its dissolution.


Sub-s. (3A) of s. 176 specifically provides that where any business isdiscontinued in a particular year, any sum received after the

discontinuance shall be deemed to be the income of the recipient andshall be charged to tax accordingly in the year of receipt, if such sum

would have been included in the total income of the person who

carried on the business had such sum been received before suchdiscontinuance. This sub-section thus creates a legal fiction. It is

intended to resolve all doubts in regard to taxability of such income onaccount of discontinuance of business in the year of receipt. Or to put

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account of discontinuance of business in the year of receipt. Or to putit differently, it makes an exception to the general rule that in order to

hold the receipts chargeable to tax, in the year of its receipt, the

business must be in existence in that year.


D) Pre-Incorporation Profits - Whether Company after incorporation is liable topay tax?

As per the judgment passed by Supreme Court in case of City Mills Distributors Pvt.

Ltd vs.CIT (1996) 132 CTR (SC) 206, a Company cannot be assessed in respect of

pre-incorporation profits.

Supreme Court held that the promoters who carried on the business and received the

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Supreme Court held that the promoters who carried on the business and received the

income when it accrued are liable to bear the burden of tax thereon.

E. Expenditure Incurred After Discontinuance Of Business - WhetherAllowable ?

� Following Principle is laid down by Allahabad High Court in case of Poddar

Industrial Corporation vs.CIT (2008) 6 DTR (All) 340:-

Deduction of expenses has to be allowed even when the business has been

discontinued and assessment is made u/s 176(3A).

� The above view is supported by Kerala High Court in case of United


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� The above view is supported by Kerala High Court in case of United

Construction Contractors vs.CIT (1994) 119 CTR (Ker) 39. In the above referred

case High Court stated that the Expenditure incurred after the discontinuance to

earn that income should be deducted if the same is incurred in the year of

receipt

F. Treatment of Income earned prior to commencement of business duringconstruction period ?

This Interest income earned on idle funds during construction period prior to

commencement of business is taxable under the head Income From other

Sources. CIT Vs. Tuticorin Alkalies Chemcials (1997) 141 CTR (SC) 387

Section 36(1)(iii) Interest on capital borrowed for business use

Interest on capital borrowed is an allowable expenditure if borrowed capital

is used for the purposes of business & profession.

Important issues are discussed as under:-

a) Interest on Borrowings for acquisition of an Asset incurred till the date an

Asset is first put to use is not an allowable expense. Such interest portion

needs to be capitalized.

b) Interest on Capital WIP is not allowable expenses. It needs to be

capitalized.

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capitalized.

c) Section 14A r.w.s 36(1)(iii), Sec. 10(2a) & Sec. 28(v) – Since there was

direct nexus between borrowings and funds invested in the Firm, then such

interest expenses is allowable u/s 36(1)(iii) against Interest income u/s

28(v). No disallowance of Interest expenses u/s 14(A) ACIT vs. Delite

Enterprises (P.) Ltd. (2011) 135 TTJ 663 (Mumbai ITAT)

d) It is not for IT department to examine the need to borrow money when

Assessee has ample Owned funds – CIT vs. Bombay Samchar Ltd (1969)

74 ITR 723 (HC Bombay)

Section 36(1)(iii) Interest on capital borrowed for business use (contd.)

e) Interest on Borrowings for Investor / Trader in Shares:

In Case of Yatish Trading Co. (P) Ltd. vs. ACIT (2011) 50 DTR (Mumbai

ITAT ) 158 it was held that

1. No disallowance u/s 14A r.w. Rule 8D for Interest on Borrowed funds

used for trading activity. Section 36(1)(iii) shall apply.

2. There should be live nexus between expenses and earning on of

exempt income before Sec. 14A can be invoked in case of Trading.

3. Interest on borrowed funds used for trading activity is allowable.

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3. Interest on borrowed funds used for trading activity is allowable.

4. Section 14A read with Rule 8D and section 36(1) (iii)

Investor Trader

Trading Income Dividend

Section 14A r.w.r 8D

is applicable for

Disallowance of

Interest.

If apparent, dominant &immediate connectionbetween Taxable income andexpense there then Sec. 14Ais N.A as no live connection

Derived as

Incidental

Income


5. For disallowance of administrative expenses; following criteria are held incorrect forpurpose of apportionment :

� Ratio of dividend income to taxable income.

� Delivery based transaction and non-delivery based transaction.

� Trading and investment activity

6. The correct basis is any of the following:-

i. Turnover

ii. Volume of transaction

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iii. Frequency and nature of transaction.

f) Interest paid or payable on account of delayed payment to MSM Enterprise as perprovision of Micro, Small & Medium Enterprises Development Act 2006 (MSMEDA, 2006)is not allowable.

g) If borrowed funds is advanced by Assessee to Sister Concern Interest-free as a measureof commercial expediency then Interest expense is allowable.

Case Law: - In case of S.A. Builders Ltd (2006) 206 CTR (SC) 631, it was held thatinterest is allowable subject to following test:-

� Loan advanced to sister concern should be for business purposes

and

� Loan advanced to sister concern should be for business purposes


h) If Assessee having Interest bearing funds & Owned funds has advanced

Interest free funds to Sister concern then interest paid is an allowable

expenditure subject to following conditions :

Case Law:- CIT vs. Reliance Utilities & Power Ltd. (2009) 221 CTR 435

(High Court Bombay)

• Assessee must have sufficient Owned funds at its disposal to advance

interest free funds

and

• Assessee fails to prove direct nexus between borrowed funds & interest

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• Assessee fails to prove direct nexus between borrowed funds & interest

free advances.

i) Penal Interest on foreclosure of Loan is allowable.

j) Interest on Indirect tax is allowable such as Service tax, VAT, Custom duty

etc. Harshad Mehta vs. Custodian & Others 231 ITR 871; Interest on

Direct Tax is not allowable e.g. Income Tax etc.

Section 32 Depreciation

• Conditions for availing depreciation

� Assessee must be owner of Asset

and

� Asset must be ready to use for business purposes

• Cut off date for claiming full depreciation is 2nd October 2010 for A.Y. 2011-12.All additions on or before 2nd October 2010 are eligible for full depreciation.

Additional Depreciation u/s 32(1)(iia)

Conditions to be fulfilled for claiming additional depreciation:-

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Conditions to be fulfilled for claiming additional depreciation:-

� New Plant & Machinery (except ships & aircraft).

� Assessee should be engaged in manufacturing activity.

� Assessee is entitled to Additional depreciation @ 20% if put to use for 180 daysor more. If Asset is put to use for period less than 180 days then Assessee willbe eligible for 10% additional depreciation instead of 20%. Balance 10%depreciation shall not be available in next year.

� Additional depreciation is eligible only in first year of Machinery put to use.

Section 32 Depreciation (contd..)

Section 32(1)(iia) is not applicable to following Assets:-

• Any machinery was used earlier either within or outside India.

• Any machinery installed in any Office or residential premises, including guest

house accommodation.

• Any office appliances or Road transport vehicles.

• Any machinery whose whole of actual cost is allowed as deduction either as

depreciation or otherwise.

Important issues covered under Depreciation are discussed below:-

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1) In case Assessee occupies any building as tenant for business purposes,

capital expenditure incurred on such building shall be treated as value of

Building on which depreciation can be claimed Explanation 1 to Sec. 32. In

other words, it is not a revenue expenditure.

2) Where an Asset is in name of Director but funds were invested by Company

then Depreciation is allowable in hands of Company provided it is used for

business purpose. CIT & ANR vs.Varanasi Auto Sales (P) Ltd. (2010) 43 DTR

115 (HC Allahabad),; CIT vs. Metalman Auto (P) Ltd. (2011) 52 DTR 385 (HC

P& H)



3) Depreciation is allowable for development of Website @ 60% in view of

amendment of Appendix I w.e.f A.Y 2003-04 DCIT vs. C.M.Y.K Printech Ltd.

(2011) 53 DTR (ITAT Delhi) 59.

4) For computing Depreciation, when tax holiday period u/s 10A, 10AA & 10B

expires, WDV shall be considered as if depreciation is claimed and allowed to

Assessee for each year in Tax holiday period.

5) Assessee bona fide installed Machinery. However, it became defective while

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5) Assessee bona fide installed Machinery. However, it became defective while

performing trial runs. It cannot be said that it was not used for business

purpose. Depreciation is allowable on such Machinery. CIT & ANR vs. Sri

Chamundeshwari Sugar Ltd (2009) 309 ITR 326 (HC Kar.)

6) Assessee acquires business along with Tangible & intangible assets including

goodwill. Assessee acquired business with its name & trademark as a going

concern. Purpose of purchasing business is to ensure continuity of business

with same reputation. In such case, acquisition of goodwill nothing but

commercial or business right. Depreciation is allowable on Goodwill. S

Raveendran Pillai vs. CIT (2011) 237 CTR (HC Kerala) 80



7) Those components and accessories which cannot function independently

except with support of Computer forms part of block of Computer. E.g.

Printer, Scanner. Climatic Systems India Ltd. vs. ACIT (2010) 2 ITR 168 (ITAT

Delhi).

Whether UPS is treated as part of Computer or not for claiming depreciation?

There are contradicting decisions passed by ITAT in following case:

� UPS is not considered as integral part of Computer. UPS can function

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� UPS is not considered as integral part of Computer. UPS can function

without Computer system and vice –versa. Nestle India Ltd. vs. DCIT

(2007) 111 TTJ 498 (ITAT Delhi);

� UPS is considered as integral part of Computer CIT vs. Orient Cermics &

Industries Ltd. (2010) 3 ITR 246 (ITAT Delhi)& S.T Reddiar & sons vs.

DCIT (2011) 135 TTJ (ITAT Coch) 480

8) Depreciation is allowed on original WDV of Asset & not on revaluation of

Asset if Firm is only reconstituted and not dissolved. Eros Theatre vs. Income

tax Officer (1990) 37 TTJ (Mad.) 234



9) Depreciation is allowed even in case any individual asset kept ready for use

but not used for certain reasons i.e Passive user. It is held that Depreciation

is to be allowed on entire block of assets and Revenue cannot segregate

particular asset from Block for reason that Asset is not put to use. CIT vs.

Oswal Agro Mills Ltd. 197 Taxman 25 (HC Delhi)

10) Condition of use of Asset for purpose of business can be examined only in

the first year when Asset is purchased. In subsequent years, use of block of

Assets is to be examined. Existence of individual Asset in Block itself

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Assets is to be examined. Existence of individual Asset in Block itself

amounts to business use. In other words, use of each & every individual

asset in subsequent years is not necessary to claim depreciation. Swati

Synthetics Ltd. vs. ITO (2010 ) 38 SOT 208 (ITAT Mumbai)

11) Section 43A:- From AY 2003-04 and subsequent years’, Enhanced cost

arising due to foreign exchange fluctuation arising on payment to Foreign

vendors is added to actual cost.



12) Unabsorbed Depreciation for AY 1997-98 to AY 2001-02 was considered as

“Unabsorbed Depreciation allowance” & it was not becoming part of the

current year’s depreciation in the next Assessment year.

W.E.F. AY 2002-03 it was provided that unabsorbed depreciation shall

become part of the current year’s depreciation in the subsequent year. With

the result the said unabsorbed depreciation was also available for set-off

against other heads of Income.

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The question thereof arose as to whether unabsorbed depreciation for AY

1997-98 to AY 2001-02 which has remained unabsorbed till AY 2001-02

could be considered as part of current year’s depreciation for AY 2002-03

onwards. In view of the Amendment in section 32(2) applicable from AY

2002-03 onwards.

It is now held that Unabsorbed Depreciation for AY 1997-98 to AY 2001-02

cannot be considered as current year’s depreciation for AY 2002-03

onwards. DCIT vs. Times Guaranty Ltd. (2010) 131 TTJ (Mumbai ITAT) (SB)

257



13) Provisions of Section 50C are applicable to transfer of Depreciable Assets

covered by Section 50 and therefore Capital Gain arising from such transfer

have to be computed by adopting Stamp Duty Valuation.

Income Tax Officer Vs. United Marine Academy (2011) 138 TTJ *( Mumbai

ITAT) (SB) 129

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ITAT) (SB) 129

14) Fiction created in sub-ss. (1) and (2) of s. 50 is restricted only to the mode

of computation of capital gains contained in section 48 and 49 and does not

apply to other provisions and therefore an assessee is entitled to exemption

under s. 54E in respect of capital gain arising on the transfer of a long-term

capital asset on which depreciation has been allowed.

COMMISSIONER OF INCOME TAX vs. ACE BUILDERS (P) LTD.

(2006) 281 ITR 210 (HC Bom)



15) Adjustment of sale proceeds against Opening WDV or Additions ?

+ + =Opening WDV Rs. 100

Additions upto 2.10.2010Rs. 200

Additions after 2.10.2010Rs. 300

WDV so increased

Rs. 600

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To be adjusted against ??

Sale ProceedsRs. 400


Section 43(1) – Actual Cost of Asset

Expln. to Sec. 43(1)

Type of acquisition Determination of Actual Cost to Assessee

Expln. 2 Assessee acquired Asset

by Gift or inheritance

WDV of previous owner

Expln. 3 Asset purchased are

second hand

AO is empowered to determine actual cost of

asset for claiming depreciation if of opinion that

purchase of assets was a colourfull transaction

to avoid tax. First Leasing Company of India Ltd

vs. ACIT (2005) 94 TTJ 649.

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vs. ACIT (2005) 94 TTJ 649.

Expln. 4 Circular of Purchase & Sale

transaction by Assessee

WDV in the hands of previous owner at the time

of reacquisition of Asset

OR

Actual cost at which Assessee reacquired the

Asset, whichever is lessExpln. 4A Sale & Lease back WDV in the hands of previous owner or lessee

at time of lease back.

Expln. 5 “Building” used for personal

purposes is subsequently

introduced for business

purpose.

Cost of construction OR purchase less notional

Depreciation upto year in which asset is

introduced for business use. Rate of

depreciation as applicable in year of introduction


Section 43(1)



Expln. 6 Asset transferred by Holding Co. to

subsidiary or vice-versa provided both

conditions are satisfied:-

1. Subsidiary should be wholly owned

by Holding.

2. Transferee should be Indian Co.

WDV of transferor is Actual cost to

Transferee

Expln. 7 Transfer of Asset by Amalgamating Co. Actual cost to Amalgamated Co. =

39

Expln. 7 Transfer of Asset by Amalgamating Co.

to Amalgamated Indian Co.

Actual cost to Amalgamated Co. =

WDV in the hands of amalgamating

company on date of amalgamation

Expln. 7A Transfer of Asset by demerged

company to Resulting Indian Co

Actual Cost to resulting Co. = WDV of

Demerger Co.

Expln. 9 Asset acquired on which there is levy of

excise duty or custom duty

Excise duty / Custom duty to the extent

Cenvat availed shall be reduced from

Actual cost

Expln. 10 Subsidy / grant provided by

Government or statutory authority for

acquisition of Asset

Actual cost shall be reduced by subsidy

or grant provided for claiming

depreciation


Section 43(1)



Expln. 11 Asset brought into India by a Non

resident Assessee for business purpose

Actual cost reduced by notional

depreciation calculated as if Asset was

used in India since acquisition.

Expln. 12 Capital Asset acquired under Scheme for

corporatisation of approved Recognized

Stock exchange in India

Cost incurred had there been no

corporatisation shall be deemed to be

actual cost

40


Section 43(6) – WDV of an Asset

� Explanation 2 – WDV to Amalgamating Co. shall be WDV of Amalgamated Co

as on date of Amalgamation. In other words, proportionate depreciation (from

1st day of previous year in which amalgamation takes place till the date of

Amalgamation) shall be reduced from Opening WDV of Amalgamating Co. to

determine WDV to Amalgamated co.

� Explanation 2A – In case of any Asset from a Block of Assets is transferred

41

� Explanation 2A – In case of any Asset from a Block of Assets is transferred

from Demerged Co. to Resulting Co. then WDV of Block of Asset shall be

� WDV to Demerged Co. pursuant to Demerger = WDV of Block of Asset of

demerged Co (less) WDV of Asset transferred to Resulting Co.

� WDV to Resulting Co. = WDV of transferred Asset immediately before

demerger.

Section 35D – Preliminary Expenses

1. Eligible Assessee : - Company and Resident Person (other than Company)

2. Quantum of Deduction :- 1/5th of Qualifying amount for each of 5 successiveyears

3. Expenses incurred for following purpose are eligible for Deduction u/s 35D :-

� For preparation of feasibility report or project report or conducting marketsurvey or Engineering services, provided work is carried out by Assessee orany concern approved by Board.

� Legal expenses for drafting agreement between Assessee and any otherperson for setting up of business

42

� Any other expenses not eligible for deduction under any other provisions of Act

4. Apart from above mentioned expenses, following expenses are also eligible to“Company Assessee” :

� Legal Charges for drafting MOA & AOA

� Printing charges of MOA & AOA

� Fees for registration of company under Companies Act, 1956

� In connection with IPO of shares or debentures, expenses in nature ofUnderwriting commission, Brokerage, charges for drafting, tying, printing andAdvertisement of prospectus

Section 35D – Preliminary Expenses (contd..)

5. Qualifying Amount shall be the following:-

Assessee being Indian Company Other Assessee

Eligible expenses actually incurred OR5% of {Cost of Project or Capital Employed in business, at Assessee option} whichever is lower

Eligible expenses actually incurred OR

5% of Cost of Project

whichever is lower

43

Thus for Manufacturing Company, Cost of project is beneficial option and for

Trading Company, capital employed is beneficial option.

6. Preliminary expenses as per books are fully written off in the year of incurring

expenses, as per Guidance Note on audit of Miscellaneous Expenditure.

7. Share Capital enhancement expenses is not eligible for deduction u/s 35D

8. Stamp duty paid on debenture issue is allowable expenses for deduction u/s

35D provided object of issue is for extension of undertaking or for setting up

new undertaking. CIT vs. Mahindra Ugine & Steel Co. Ltd. (2001) 169 CTR

(HC Bombay) 191

Section 40 – Disallowance while computing Business Income

1. Section 40(a) – Expenses for non-payment / non-deduction of TDS

Section Nature of expensescovered

Payable to Whom Time limit of payment ofTDS for allowance ofexpenses

40(a)(i) Any interest, royalty, fees

for technical services or any

sum chargeable under thisAct including salaries

Non resident

(including Foreign

Company) in India

OR any personoutside

From April to February – Due

date is 31st March

For March month- If paid

before March then due date

is 7th April; if unpaid as on

31st March then due date is

30th April.

44

2. 40(a)(ic) – Amount paid on account of FBT

3. 40(a)(iia) – Amount paid on account of Wealth-Tax.

4. 40(a)(iii) – Amount paid / payable as Salary Outside India or to Non-

Resident, and if tax has not been deducted.

5. 40(a)(v) – Any tax paid by employer on behalf of employee w.r.t perquites

received in kind.

30th April.40(a)(ia) Interest, Commission, Rent,

Technical or Professional

fees, amount payable to

Contractor or sub-contractor

Resident Assessee For any month of TDS

deduction - On or before due

date of filing Return ofIncome

Section 40 – Disallowance while computing Business Income (contd.)

Below are some important issues:

1. Time limit mentioned above in case of section 40(a)(ia) is amended by

Finance Act 2010. However above due date is amended retrospectively from

AY 2005-06. Bansal Parivahan (India) P Ltd vs. ITO (2011) 53 DTR (Mumbai

ITAT ) 40; Golden Stables Lifestyle Centre Pvt Ltd vs. CIT ITA no

5145/Mum/2009 (Mumbai ITAT );

2. When there is no element of income and the payment is only as a

reimbursement of expenses then no disallowance can be made u/s 40(a)(ia)

Utility Powertech Ltd. vs. ACIT (2010) TIOL 545 ITAT (Mumbai ITAT.) ; ACIT

45

Utility Powertech Ltd. vs. ACIT (2010) TIOL 545 ITAT (Mumbai ITAT.) ; ACIT

vs. Grandprix Fab (P) Ltd. (2010)128 TTJ 60 (ITAT Delhi)

3. TDS u/s 194C / 194J refer to any sum paid. If gross amount of the bill

includes Reimbursement of expenses then TDS is deductible on entire

amount. If there is separate bill for reimbursement then TDS is not deductible.

Circular No 715 dt. 8th August 1995 “Question 30 “

4. TDS is deductible on Interest on loan taken from NBFC such as Kotak

Mahindra Prime Ltd, Reliance Capital Ltd, Tata Finance etc

Section 40 – Disallowance while computing Business Income (contd.)

Below are some important issues:

5. TDS u/s 194I needs to be deducted on Rent amount exclusive of Service

tax. However in case of 194C or 194J words used is “any sum paid”. Hence

TDS u/s 194C or 194J is deductible on Gross amount inclusive of taxes.

Circular No. 4 of 2008 dt. 28/4/2008 & Letter F. No 275/73/2007-IT(B) dt.

30/6/2008

6. A person paying interest or any sum to a Non – resident is liable to TDS u/s

195 only if sum is chargeable to tax in India and not otherwise GE India

Technology Centre (P) Ltd. vs. CIT & ANR (2010) 234 CTR (SC) 153

46

Technology Centre (P) Ltd. vs. CIT & ANR (2010) 234 CTR (SC) 153

7. Partners of Firm executed transportation contracts undertaken by Firm by

using trucks owned by Partners. Firm acted as agent in routing payment to

Partners, it cannot be held that there was a separate contract between firm

and partners. Thus such payments could not be disallowed u/s 40(a)(ia) in

hands of Firm for non deduction of TDS.CIT vs. Grewal Brothers (2011) 240

CTR 325 (High Court of Punjab & Haryana)

Section 40(b) – Disallowance in case of Firm

1. Interest paid to partner is not deductible unless following conditions are

satisfied :-

� It should be authorized & in accordance with Partnership deed

� It should be for period after date of Partnership deed

� Rate of interest should not exceed 12%p.a.

2. Any amount paid as Salary, Bonus, Commission or Remuneration by firm to

partner is not deductible in computation of Firm unless following conditions

are satisfied :-

47

are satisfied :-

� It should be authorized & in accordance with Partnership deed

� It should be for period after date of Partnership deed

� Remuneration should not exceed the limit as described under :

Book Profits Remuneration as % of Book profit

On first Rs 3 lacs of book profit or in

case of Loss

1.5 lacs or 90% of book profit

whichever is higher

Balance of Book profit 60% of such balance amount

Issues On Section 40(b)

1. Salary to partner is allowable deduction to the extent mentioned in s. 40(b) if

it was so authorized by the deed of partnership and there is no need to

quantify the amount in the deed itself—CBDT, by way of Circular No. 739,

dt. 25th March, 1996, issued under s. 119, could not have substituted the

term "authorise" in s. 40(b) by the term ‘quantify’, which was a legislative

function—Deed of partnership authorizing payment of salary to partners, AO

was not justified in disallowing the same on the ground that it was not

quantified in the said deed

48

Assistant commissioner of income tax vs. Suman construction (2009) 121

TTJ (Pune) 847 & Durga Dass Devki Nandan vs. ITO (HC Himachal

Pradesh) (2011) 55 DTR (HP) 101

2. No Disallowance of Interest if interest is paid to Individual when HUF is a

Partner.

3. No Disallowance of Interest if interest is paid to HUF when Individual is a

Partner

1. Any sum payable by way of tax, cess or fee such as Service tax, VAT,

Sales tax etc

2. Employers contribution to Provident fund, superannuation fund, gratuity

fund or any other fund for employees’ welfare

3. Sum payable as Leave encashment

4. Sum payable as Interest on loan from scheduled Bank

5. Sum payable as bonus, commission where such sum is not payable as

profit or dividend.

Section 43B – Certain Deductions only on actual payment

49

Important issues arising from this section :

a) When levy is in nature of taxation only then the same is governed by

provision of section 43B. In case of CIT vs. Mcdowell and Co Ltd (2009)

314 ITR 167 (SC), Court has noted that bottling fees for acquiring a right

of bottling of IMFL which is determined under Excise Act and Rules is

payable as consideration for acquiring exclusive privilege. It is neither fee

nor tax but consideration for grant of approval by Government.

b) Service tax is payable on receipt basis. Service tax billed but not collected

from Client does not become payable to Government. Hence 43B is not

attracted on Service tax accrued but not due. ACIT vs. Real Image Media

Technologies (P) Ltd. (2008) 116 TTJ (Chen.) 964. However the matter is

not free from doubt.

c) Employees’ contribution to Provident fund is governed by Section 43B. i.e. it

is allowable if paid within due date of filing return of income. CIT vs. Lakhani

Rubber Works (2010) 232 CTR (P&H) 350

Section 43B – Certain Deductions only on actual payment (contd.)

50

d) Explanation 3D to Section 43B - Interest converted into Loan from Financial

Institution shall not be deemed to have been actually paid for claiming

deduction.

e) Circular no. 496 & 674:-

Sales tax under sales tax Deferment Scheme

a) If State Government makes an amendment under relevant law that Sales Tax deferred shall be treated as actually paid, the same shall be allowed u/s 43B

b) Sales Tax liability converted into loan allowable u/s 43B.

Presumptive Taxation

1. Section 44 AD

a) Applicability :-

Assessment Year

Assessee Nature of business

From A.Y

2011-12

Applicable to any Resident

Individual, HUF or Partnership

Firm.

In respect of any Business

other than business of plying,

hiring or leasing of goods

carriage referred to in

sec.44AE.

Prior to A.Y

2011-12

Any Assessee. In respect of business of civil

construction or supply of labour

51

b) Not applicable to Limited Liability Partnership Firms.

c) Scheme is optional and cannot be thrust upon the assessee.

d) Profits deemed to be higher of:-

• 8% of Gross Receipts or Total Turnover.

or

• Actual profit claimed by the assessee.

2011-12 construction or supply of labour

for civil construction.

Section 44 AD (contd.)

e) Partnership Firms are allowed an additional deduction from the profits

computed as per the provisions of this section in the form of salary and

interest paid to partners subject to provisions of sec.40(b).

f) No deduction under sec.10A,10AA,10B & 10BA is allowed.

g) No deduction in respect of heading C “Deduction in respect of certain

incomes” under Chapter VI-A is allowed.

h) Applicability of sec.44AA & 44AB when turnover or gross receipts of

52

business exceed Rs.60 lakhs.

i) Applicability of sec.44AA & 44AB when turnover or gross receipts of

business does not exceed Rs.60 lakhs however assessee claims a profit

less than 8% of Turnover and his total income exceeds the maximum

amount not chargeable to income tax.

j) Once Sec.44AD applies, provisions of sec.40(a)(ia) are not applicable.

(D.Rathinam vs. DCIT (2010) TIOL 552 ITAT(Mad.))


k) No requirement for maintenance of books of accounts.

l) However Maintenance of following records even in the years in whichassessee opts for presumptive taxation is essential:-

� Basic register for determining Gross Turnover or Gross Receipts.

� Fixed Asset records.

m) Upon opting for presumptive taxation scheme under Sec. 44AD, there isno obligation to explain individual entry of cash deposits in bank, unlesssuch entry has no nexus with the business of the assessee.(CIT vs.

53

such entry has no nexus with the business of the assessee.(CIT vs.Surinder Pal Anand,192 Taxman 264 (P&H) High Court)).

n) Assessee opting for the scheme is not required to pay advance tax, but willhave to pay tax while filing the Return of Income.

o) Assessee is mandatorily required to file Return of Income in ITR-4Scommonly known as Sugam from A.Y 2011-12 unless-

Assessee is not maintaining books of accounts u/s 44AA and is getting hisaccounts audited u/s 44AB.


Comparison of section 44AD before amendment and after amendment

ISSUE UPTO A.Y. 2010-11 FROM A.Y. 2011-12 ONWARDS

Turnover Limit Turnover Upto 40 Lacs Turnover Upto 60 Lacs

Businesses covered Civil Construction or Supply of labour for

Civil Construction

All Businesses

Applicability of Tax

Audit to Businesses

other than 44AD

Turnover of 44AD Business are not to

be considered for the purpose of

determining applicability of 44AB to

other Businesses

No Such Provision is existing. That means

that turnover of 44AD Business will have

to be included in the figure of Turnover of

other Businesses for the purpose of

determining applicability of 44AB

Return of Income ITR :-4 ITR :-4S for Individual and HUF

54

Return of Income ITR :-4 ITR :-4S for Individual and HUF

ITR-4 for Firms

Details required in

the Return of Income

for 44AD Business

Gross receipts,

Gross Profits,

Expenses,

Net Profit,

Sundry Debtors,

Sundry Creditors,

Stock in trade,

Cash Balance.

Sundry Debtors,

Sundry Creditors,

Stock in trade,

Cash Balance,

Gross receipts,

Net Profit.

Possibility of having

details of other

businesses

incorporated in the

return

It was possible as Form No :-4 was a

composite Return of all Business

Not possible

Applicable to All Assessee Individual, HUF and Partnership Firm

2. Section 44AE

a) Applicability :-

� Assessee owning not more than ten goods carriages at any point of time

during the year.

and

� Engaged in the business of leasing , plying & hiring of goods carriage.

b) Scheme is optional.

c) Determination of Profit:-

55

c) Determination of Profit:-

d) Partnership Firms are allowed an additional deduction from the profits

computed as per the provisions of this section in the form of salary and

interest paid to partners subject to provisions of sec.40(b).

Nature of Vehicle Taxable Income per month or part thereoffor each vehicle

Heavy Goods Vehicle Rs.5000/- or an amount claimed by Assessee

whichever is higher

Other than Heavy Vehicle Rs.4500/- or an amount claimed by Assessee

whichever is higher

Section 44 AE (contd.)

e) No specific exclusion from deduction under Chapter VI-A.

f) In case of an Assessee opting for sec.44AE, compulsory tax audit undersec.44AB is not applicable even if the turnover exceeds Rs.60 lakhs.

g) Provisions of sec.44AA & 44AB shall be applicable only if the assesseeclaims profits & gains lower than those determined as per the provisions ofsec.44AE.

h) Once Sec.44AD applies, provisions of sec.40(a)(ia) are not applicable.(D.Rathinam vs. DCIT (2010) TIOL 552 ITAT(Mad.))

i) No requirement for maintenance of books of Accounts.

56

i) No requirement for maintenance of books of Accounts.

j) Upon opting for presumptive taxation scheme under sec.44AD, noobligation to explain individual entry of cash deposits in bank, unless suchentry has no nexus with the business of the assessee. (CIT vs. Surinder PalAnand,192 Taxman 264 (P&H) High Court))

k) Applicability of provisions of sec.44AE in case of assessee engaged incomposite business of employing both owned vehicles and vehicles hiredfrom others.(Anil Ramgopal Mali (HUF) vs. ACIT (2010)47 DTR (Pune)(Trib) 153))

3. Section 44 AF

Provisions of sec.44AF which provide scheme for presumptive taxation in

case of retail trade are withdrawn w.e.f. 01-04-2011.The same can now be

governed by amended provisions of sec.44AD of the Act.

57

Points of distinction between 44AD and 44AE

Sr. No. Issues 44AD 44AE

1. Applicability. Applicable to all Resident

assessee’s except for

Companies and LLP’s.

Applicable to all Assessee’s

including Company and

LLP’s.

2. Inclusion of

turnover for

calculating

monetary limits

under sec.44AB.

Turnover of 44AD Business

will have to be included in the

figure of Turnover of other

Businesses for the purpose of

determining applicability of

Turnover of 44AE business

should not be included in

the figure of Turnover for

the purpose of deciding

applicability of 44AB

58

under sec.44AB. determining applicability of

44AB

applicability of 44AB

3. Turnover in

excess of Rs.60

lakhs.

Upon the turnover or receipts

exceeding Rs.60 lakhs,

assessee shall be governed

by provisions of sec.44AA and

44AB instead of sec.44AD.

Even in the event of

turnover exceeding Rs.60

lakhs, assessee can opt to

pay tax u/s 44AE and shall

not be governed by

provisions of sec.44AA and

44AB.

4. Deduction under

Chapter VI-A

No deduction in respect of

heading C-‘Deduction in

respect of certain incomes’

under Chapter VI-A.

No such specific exclusion.

Points of distinction between 44AD and 44AE (contd.)

Sr. No

Issues 44AD 44AE

5. Applicability of

provisions of

sec.44AA & 44AB.

Applicable when turnover or

receipts exceed Rs.60 lakhs or

when assessee declares a profit

lower than 8% of turnover and

his income exceeds the basic

exemption limit

Applicable only when

assessee declares a profit

lower than that calculated

under sec.44AE.

6. Maintenance of

Books of Accounts

No requirement to maintain

complete set of books of

accounts however following

Similarly even under

Sec.44AE there is no

requirement to maintain

59

accounts however following

records are essential to be

maintained:-

a. Register for determining

Gross Turnover or Gross

Receipts.

b. Record for calculating W.D.V

of fixed assets.

requirement to maintain

books of accounts however a

record for calculating W.D.V

of fixed assets needs to be

maintained.

7. Payment of Advance

Tax

Assessee opting for the scheme

is not required to pay advance

tax but will have to pay tax while

filing the return of income

No such exclusion from

payment of advance tax.

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