SC : Director Can Be Held liable for Company's Tax Dues

IT : The expression "tax due" used in section 179 means tax as defined in section 2(43); "tax due" will not comprehend within its ambit penalty and interest

FACTS

• In the instant case, the petitioner was an individual and the only surviving director of a company after the expiry of other director who was his father.

• The petitioner was entitled to two refunds of Rs. 38,92,957 and another Rs. 15,00,276 but the revenue under section 179, proposed to set off the company's tax liability of Rs. 28,71,84,883 with the refund payable to the petitioner.

• In the context of recovery, the petitioner filed a writ petition and the Delhi High Court ordered that the petitioner will be given a hearing and fresh order under section 179 required to be passed.

• Acting on the order of the High Court, the revenue held the petitioner as the assessee in default liable for the company's outstanding dues of Rs. 27,93,05,184.

• The Petitioner filed for rectification/amendment against which the revenue enhanced the outstanding dues of the company, and consequently, of the petitioner to Rs. 35,13,35,804. The increase was due to charging of interest and penalty.

• The petitioner contended that the company's outstanding dues were in the form of interest and penalties whereas "tax due" under section 179 does not include within its ambit interest and penalty. It was submitted that the language of the provision is clear and has to be construed in its terms.

• The revenue, however, urged that section 179 intends to shift the tax liability, in cases of such dues which are of a private company and have not been recovered, upon the directors of such private company; and that whatever is recoverable from the private company, inclusive of interest and penalties due, becomes recoverable at the hands of the directors.

HELD

• In the instant case, the principal question requiring resolution is to understand the true ambit and scope of the provisions of section 179.

• Generally, the intention of the Legislature should primarily be gathered from the language used in the statute, which in turn means that attention should be paid to what has been said as also to what has not been said.

• Again, when in relation to the same subject matter, different expressions are used in the same statute, there exists a presumption that the legislature intended such different uses, and that the words are not to be used in the same sense.

• In H. Ebrahim v. The DCIT and The Tax Recovery Officer [2011] 332 ITR 122, the Karnataka High Court held that 'what is contemplated under section 179 is the tax component and not the penalty and interest'.

• In Dinesh T. Tailor v. Tax Recovery Officer [2010] 326 ITR 85, the Bombay High Court held that in section 179(1), the expression "tax due" and, for that matter the expression "such tax" must mean tax as defined for the purposes of the Act by section 2(43); "tax due" will not comprehend within its ambit a penalty.

• In view of the above, it was opined that the structure and construct of the Act has consciously used different words to create constructive liability on third parties. The treatment of the same subject matter by using different terms – in some instances expansive and in others, restrictive - means that the Court has to adopt a circumspect approach and limit itself to the words used in the given case (in the present case, "tax due" under section 179) and not "travel outside them on a voyage of discovery".

• Thus, it was to be held that the petitioner cannot be made liable for anything more than the tax as defined in section 2 (43). The revenue was consequently directed to determine the liability of the petitioner, in the light of the finding.

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[2012] 26 taxmann.com 203 (Delhi)

HIGH COURT OF DELHI

Sanjay Ghai

v.

Assistant Commissioner of Income-tax

S. RAVINDRA BHAT AND R.V. EASWAR, JJ.

W.P.(C) NOS.  2303 & 5175 OF 2012

AND C.M. APPL. NOS. 4936 & 10572 OF 2012

OCTOBER 11, 2012

ORDER

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S. Ravindra Bhat, J. - These writ petitions challenge the orders dated 3.11.2011 and 2.7.2012 passed by the first respondent under Sections 179/154/ of the Income Tax Act (the "Act") respectively.

2. The facts, to the extent necessary for the deciding the petitions, are that the petitioner is an individual and was a director of M/s Sarvodaya Realtors Pvt. Ltd (the "Company"), which has its registered office at New Delhi. The only other director of the company was late Shri D.K. Ghai, the petitioner's father. While the petitioner was assessed by DCIT Circle-1, Dehradun, the company was assessed with the first Respondent. By letter dated 15.3.2010, the petitioner was informed by DCIT Circle-1, Dehradun that he was entitled to tax refund of Rs. 38,92,957/- and Rs. 15,00,276/- in respect of A.Y. 1999-2000 and 2003-2004. However, at the same time, he was intimated that the first Respondent had computed the outstanding tax liability of the company at Rs. 28,71,84,883/-, and proposed that the refund payable to the petitioner, be set off with the tax liability of the company. The writ Petitioner wrote a letter to the ACIT, Dehradun, on 23rd March, 2010, and inspected the record in Delhi; he claims that at this stage, he became aware of the Income tax liabilities of the company, and the order made against him on 14th November, 2007, under Section 179 of the Act. The petitioner felt aggrieved by the order and the move to recover the arrears of the company's taxes and related liabilities, from him. He preferred a writ petition before this Court. That petition was disposed of in the following terms:

"5. We have examined the said contentions. We have also looked at the quantum of demand and the legal issues raised by the petitioner. Keeping in view the aspects and questions raised, we feel that it will be appropriate and proper if the petitioner is given a hearing, and a fresh order under Section 179 of the Act is passed. There is a dispute regarding service of notice dated 27th September, 2007. The respondent in the counter affidavit has stated that Abhay Singh had informed that the petitioner was out of station and intimation may be sent to him by writing to him another letter. However, the respondent did not communicate or correspond with the petitioner thereafter. It may be noted that the notice was received by Abhay Singh on 11th October, 2007 at 12.30 pm and hearing was fixed on 15th October, 2007, i.e. just four days later. Therefore, no communication was made by the respondent to the petitioner fixing the hearing or calling for reply. On 14th November, 2007 order under Section 179 was passed. It is not clear and there is no material/evidence whether the order under Section 179 of the Act dated 14th November, 2007 was ever served on the petitioner. No steps for recovery were undertaken even after passing of the order. Keeping in view the aspects and questions raised, we feel that it will be appropriate and proper if the petitioner is given a hearing and a fresh order under Section 179 of the Act is passed.

6. Accordingly, the impugned order dated 14th November, 2007 is set aside with a direction that the petitioner or his authorized representative will appear before the Deputy Commissioner of Income Tax, Circle 7(1), New Delhi on 29th August, 2011 at 2 p.m. He shall also file his reply to the notice under Section 179 of the Act on the said date. If required and necessary, the Assessing Officer can grant further opportunity of hearing to the petitioner. However, the proceedings under Section 179 of the Act will be disposed of within three months from the first date of hearing."

3. After the conclusion of the proceedings before the first Respondent, he made the impugned order dated 3.11.2011 holding the petitioner liable for the outstanding dues of Rs. 27,93,05,184/- of the company. It was held that the petitioner had not proved how he, the lone surviving director of the company, should not be treated as the assessee in default, and the whole amount should not be recovered from him in accordance with the provisions of Section 179(1) of the Act; furthermore, it was held that he was unable to show that the non-recovery of taxes cannot be attributed to gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

4. The Petitioner filed an application for rectification/amendment under section 154/155 of the Act. In these proceedings, the first Respondent, by the second impugned order dated 2.7.2012, enhanced the outstanding dues of the company, and consequently, of the petitioner to Rs. 35,13,35,804/-. The increase was on account of interest due under section 234A and section 234B, and penalty leviable under section 271(1)(b)/(c) of the Act.

5. The petitioner contends that the outstanding dues of the company were in the form of interest and penalties. He contended that "tax due" under Section 179 does not include within its ambit interest and penalty. It is submitted that the language of the provision is clear, and has to be construed in its terms; the Act makes a clear distinction between taxes, penalties and interest, which are distinct liabilities. Learned counsel relied on the definition of "tax" under Section 2(43) of the Act. Further, reliance was placed on the decision of the Bombay High Court in Dinesh T. Tailor v. Tax Recovery Officer [2010] 326 ITR 85 (Bom.), H. Ebrahim & Ors. v. Dy. CIT & Anr. [2011] 332 ITR 122 (Karn.), Harshad Shantilal Mehta v. Custodian [1998] 231 ITR 871 (SC) and Pratibha Processors v. Union of India, [1996] 11 SC 101.

6. Ms. Rashmi Chopra, counsel for the revenue, on the other hand, urged that a purposive interpretation of Section 179 has to be adopted. It was urged that Section 179 is intended to shift the tax liability, in cases of such dues which are of a private company and have not been recovered, upon the directors of such private company, and that whatever is recoverable from the private company, inclusive of interest and penalties due, becomes recoverable at the hands of the directors. Every director, she pointed out, is jointly and severally liable, to pay all the dues, including penalties, and interest, unless it is proved that the non-recovery was not due to gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It was emphasized that in the present case, the company had only two directors, the petitioner, and his late father, and thus, there is no scope for the petitioner to escape the liability under Section 179 of the Act.

7. Counsel for the revenue relied on Union of India and others v. Manik Dattatreya Lotlikar1988 172 ITR 1 (Bom.) and the Kerala High Court in Ratanlall Murarka and Ors. v.Income-tax Officer, "A" Ward and Ors., [1981] 130 ITR 797 (Ker.) in support of the proposition that all tax arrears would be payable by a director, under Section 179(1). It was also argued that a question of fact cannot be agitated in a writ petition and that whether the director, against whom proceedings for recovery of arrears of tax are initiated, has discharged the burden of proving that the non-recovery of the arrears of tax cannot be attributed to neglect, misfeasance or breach of duty on his part is a question of fact which should not be gone into in writ proceedings. The revenue relied on Union of India v.Praveen D. Desai [1988] 173 ITR 303 (Bom.), Sunderaraman (M.R.) v. CIT [1995] 215 ITR 9 (Mad.), and Roop Chandra Sharma v. DCIT (Assessment) [1998] 229 ITR 570 (All.). It was, lastly, contended that Section 179 enacts a statutory presumption and places the burden on the director to prove that the non-recovery was not due to his gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. For this, reliance is placed on Sunderaraman (M.R.) v. CIT [1995] 215 ITR 9 (Mad.) and the Gujarat High Court view in Indubhat T. Vasa (HUF) v. ITO [2006] 282 ITR 120 (Guj.).

8. The principal question which has to be resolved by the Court in this case is the true ambit and scope of the provisions of Section 179. Section 179(1), as it exists at present, reads as:

"(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company."

This provision, prior to its amendment, read as under:

"179. Notwithstanding anything contained in the companies Act, 1956 (1 of 1956), when any private company is wound up after the commencement of this Act, and any tax assessed on the company, whether before or in the course of or after its liquidation, in respect of any income of any previous year cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company."

9. Section 2 (43) defines "tax":

"2. In this Act, unless the context otherwise requires, -

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**

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(43) "tax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA;"

10. There are, apart from Section 179 (1), several other provisions of the Act which cast liability upon specified individuals or entities, in the event the assessee, (either an individual, partnership firm or other entity or concern, etc) defaults in payment of its dues. Section 170 provides for succession to a business "otherwise than on death" and enacts that where an assessee, carrying on any business or profession is succeeded to by another, who continues the business or profession, the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession. The successor is to be assessed for the income of the previous year after the date of succession. Section 170 (3) says that when "any sum payable" under that Section in respect of the income of such business or profession for the previous year (in which the succession took place) up to the date of succession or for a previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the Assessing Officer shall record a finding to that effect and"the sum payable" by the predecessor shall be payable by and recoverable from the successor. Thus, "any sum payable" necessarily carries a wider connotation than "tax payable". Section 177 provides that where a business or profession is carried on has been discontinued or where an association is dissolved, the Assessing Officer has to make an assessment of the total income, as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions with respect to levy of a penalty or "any other sum" chargeable under the Act are to apply. Section 177 (3) mandates that every person who was, at the time of such discontinuance or dissolution, a member of an association of persons and a legal representative of any such person who is deceased "shall be jointly and severally liable for the amount of tax, penalty or other sum payable". This again is wider than what is provided for under Section 179 (1). Section 188A, prescribes that every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year. Section 189 too uses the same terms, i.e. "amount" of tax, penalty or other sum payable in respect of a firm (while creating liability of every partner at the time of discontinuance or dissolution of a firm). Section 221(1) deals with an assessee who, in addition to the amount of arrears and the amount of interest payable under Section 220 (2) is made liable by way of penalty, to pay such amount as the Assessing Officer may direct. Hence, in the case of an assessee in default, Parliament has made a specific provision making such a person liable to pay tax and in addition thereto the amount of interest payable under sub-section (2) of Section 220 and penalty.

11. It is a sound canon of construction that when Parliament or the legislature creates duties or liabilities, the task of the Court is to carefully interpret the provisions as they are. As held in Jumma Masjid v. Kodimaniandra AIR 1962 SC 847 (quoting Vickers Sons and Maxim Ltd v Evans 1910 AC 444):

"We are not entitled to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself"

Thus, it has been sometimes held that the intention of the Legislature is to, primarily, be gathered from the language used in the statute, which in turn means that attention should be paid to what has been said as also to what has not been said. (See Mohammed Alikhan v. Commissioner of Wealth Tax 1997 (3) SCC 511; Institute of Chartered Accountants v.Price Waterhouse AIR 1998 SC 74). Another rule of interpretation which the Court has to keep in mind, in cases like the present is that when, in relation to the same subject matter, different expressions are used, in the same statute, there exists a presumption that the legislature intended such different use, and that the words are not to be used in the same sense. This was stated in Commissioner of Income Tax v. East West Import & Export (P.) Ltd. AIR 1989 SC 836, in the following observations:

"..there has been no dispute before us that the requirement "if any such shares have been in the course of such previous year" would also apply to the last requirement "are in fact freely transferable by the holders to other members of the public". The only contentious aspect is as to whether "in the course of such previous year" would mean throughout the year or any part of it. There is no direct authority indicating the true meaning of this requirement in the Explanation one way or the other. The purpose of enacting s. 23A, as pointed out in Afro's case, was to control evasion of tax.

The Explanation has reference to the point of time at two places: the first one has been stated as "at the end of the previous year" and the second, which is in issue, is "in the course of such previous year". Counsel for the Revenue has emphasised upon the feature that in the same Explanation reference to time has been expressed differently and if the legislative intention was not to distinguish and while stating "in the course of such previous year" it was intended to convey the idea of the last day of the previous year, there would have been no necessity of expressing the position differently. There is abundant authority to support the stand of the counsel for the Revenue that when the situation has been differently expressed the legislature must be taken to have intended to express a different intention. 'Course' ordinarily conveys the meaning of a continuous progress from one point to the next in time or space and conveys the idea of a period of time; duration and not a fixed point of time. "In the course of such previous year" would, therefore, refer to the period commencing with the beginning of the previous year and terminating with the end of the previous year. If that be the meaning of the phrase "in the course of such previous year", it would necessarily mean that free transferability of the shares by the holders to other members of the public should be present throughout the previous year. Admittedly that was not the position in this case as transferability was acquired only on 26th of March, 1951." (Emphasis added)

12. In H. Ebrahim v. The DCIT and The Tax Recovery Officer, [2011] 332 ITR 122 (KAR.) relied on by the Petitioner, the Karnataka High Court, which dealt with the same issue that has arisen in the present petitions, held that:

"12. Whether the Nomenclature 'tax' would include the other two components namely the penalty as well as interest, fell for consideration before this Court in the case ofSoma Sundarams (Private) Ltd. v. Commissioner of Income Tax Karnataka reported in [1979] 116 ITR 620. Indeed in the said case Section 2(43) of the Income Tax Act fell for consideration before a Division Bench of this Court. It had an occasion to examine whether interest, penalty and fine, which are payable under the provisions of the Act can be termed as income tax, this Court decidedly stated that the component 'income tax' does not include payment of penalty as well as interest. Indeed Section 179 of the Act indicates that the Directors would be liable to pay the tax due in the case, where the company is unable to satisfy the demands and gross negligence, misfeasance and breach of duty are attracted. Thus, what is contemplated under Section 179 of the Act is the Tax component and not the penalty and interest Indeed Section 126 of the Act would relate to notice of demand, which clearly indicates that the entire sum due to the Revenue is classified into three different components i.e., tax, interest, penalty or any other sum, which would not necessarily come under Section 179 of the Act. Indeed this reference would be only to the Directors of the Company. With reference to Section 222 of the Act the assessee undoubtedly is liable to pay the tax, interest and penalty. But however, the same cannot be said about the Directors of the Company. Indeed whether tax would include penalty and interest fell for consideration before the Apex Court in the case of Prathibha Processors and Ors. v. Union of India and Ors.reported in [1996] 11 SCC 101. Indeed the said decision was rendered under the Customs Act but however, the words and phrases "interest", "tax" and "penalty" fell for consideration and the Apex Court has observed thus:

"In fiscal statutes, the import of the words 'tax', Interest', penalty', etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty - which is penal in character."

Having regard to the decisions referred to above in relation to the import of words 'tax' interest and 'penalty' which would operate in different concepts, I am of the view that the said contention of Mr. Shankar is required to be accepted, inasmuch as, the phrase tax' as contemplated under Section 179 of the Act does not include penalty and interest insofar as the Directors of the Company are concerned. It is made clear that this interpretation of phrase 'tax' would not be' is under Section 179 of the Act and does not encompass the assessee. Indeed the Assessee as contemplated under Section 222 of the Act is liable to pay all the three components i.e., 'tax' 'interest' and 'penalty' and any other sum due or recoverable from him."

13. Earlier, the Bombay High Court, in Dinesh T. Tailor (supra) made a detailed analysis of the provisions of the Act, the effect of which has been discussed in the earlier part of this judgment, and after noticing the differing nature of the expressions, used by the Act, creating constructive liability, held that:

"7. … Section 179(1) refers to "any tax due from a private company" and every director of the company is jointly and severally liable for the payment of "such tax", which cannot be recovered from the company. The expression "tax due" and, for that matter the expression "such tax" must mean tax as defined for the purposes of the Act by Section 2(43). "Tax due" will not comprehend within its ambit a penalty.

8. The provisions of the Act make a clear distinction between the imposition of a tax on the one hand and a penalty on the other. Section 2(43) defines the expression "tax" in relation to an assessment year commencing on 1 April 1965 and any subsequent assessment year to mean inter alia Income Tax chargeable under the provisions of the Act.

10. [W]here Parliament has intended to make a specific provision imposing a liability to pay penalty apart from the tax which is due and payable, a specific provision to that effect has been made. Section 179, which falls for interpretation in the present case imposes a joint and several liability upon a director of a private company where tax due from the company cannot be recovered. The expression "tax due" cannot comprehend within the meaning of that expression a liability to pay a penalty that may have been imposed on the company."

14. In Harshad Shantilal Mehta (supra) The Supreme Court considered the provisions of Section 11(2)(a) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, under which inter alia all revenues taxes, cesses and rates due from persons notified by the Custodian under Sub-section (2) of Section 3 to the Central Government or to any State Government or Local Authority have to be paid or discharged in full. The Supreme Court considered as to whether the expression "tax" under Section 11(2)(a) would include interest or penalty under the Income Tax Act, 1961. This question was answered in the negative:

"38. One other connected question remains: whether "taxes" Under Section 11(2)(a) would include interest or penalty as well? We are concerned in the present case with penalty and interest under the Income Tax Act. Tax, penalty and interest are different concepts under the Income Tax Act. The definition of "tax" Under Section 2(43) does not include penalty or interest. Similarly, Under Section 157, it is provided that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand as prescribed. Provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. Learned Special Court judge, after examining various authorities in paragraphs 51 to 70 of his judgment, has come to the conclusion mat neither penalty nor interest can be considered as tax Under Section 11(2)(a). We agree with the reasoning and conclusion drawn by the Special Court in this connection."

15. As far as the decisions cited by the revenue are concerned, the Court notices that none of them discussed, or analyzed the different expressions used, and varying liability cast on different classes of assesses, in event of the principal or main assessee/defaulter, if one can use that expression. Manik Dattatreya Lotlikar held that the liability created is joint and several with that of the company; the High Court looked at the expression "assessee" under Section 2 (7) which includes an assessee in default. Therefore, held the High Court, a director would be an assessee deemed under Section 179; he has to satisfy all demands.Ratanlal Murarka too went by Section 2 (7) and was concerned with interest liability under Section 220 (2); the Court held that such non tax liability would have to be borne by the director of the company "despite the distinction between tax and interest emphasised by counsel for the petitioner." This court is of the opinion that the absence of any discussion about the different treatment given by Parliament to the same nature of liability, i.e. tax default of an assessee, in one instance only providing for recovery of tax, and in other cases all "amounts" or "sums" points to different nature and content of the same class of liability, which cannot be ignored. The said two decisions do not, therefore help the revenue.

16. As regards the second contention, there is no doubt about the principle that the High Court would not decide questions of fact, in proceedings under Article 226, and that whether the presumption of liability can be rebutted under Section 179 has to be gone into before the tax authorities. Nonetheless, the Court here has to deal with the assessee's fundamental argument that he is not liable to pay anything more than the tax (i.e. not liable to pay penalty or interest). A decision on that question falls within the legitimate scope of this Court's jurisdiction, as it implicates the authority of the revenue to collect such amounts from the petitioner. The objection of the revenue, is therefore, rejected as meritless.

17. In view of the above discussion, the Court is of the opinion that the structure and construct of the Act has consciously used different words to create constructive liability on third parties, in the case of default in payment of taxes by an assessee. The treatment of the same subject matter by using different terms - in some instances expansive and in others, restrictive, mean that the Court has to adopt a circumspect approach and limit itself to the words used in the given case (in the present case, "tax due" under Section 179) and not"travel outside them on a voyage of discovery" (Magor & St. Mellons RDC v. Newport Corporation 1951 (2) All ER 839). Therefore, it is held that the petitioner cannot be made liable for anything more than the tax (defined under Section 2 (43)). The first respondent is consequently directed to determine the liability of the Petitioner, in the light of the finding; the impugned orders are therefore quashed. The writ petitions are allowed in the above terms, without any order on costs.

Source : Taxmann.com

Disallowance - Sec 14A - Doesn't Require Exempted Income

Even if assessee has not earned any income which is not includible in total income, provisions of section 14A can still be invoked to disallow expenditure relatable to income not includible in total income


Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Assessment year 2008-09 - Whether earning of an income in a particular year is not a sine qua non for allowing an expenditure; and, thus, income may be 'nil', yet expenditure incurred in pursuit of earning such income is deductible - Held, yes - Whether similar proposition will apply while interpreting provision contained in section 14A(1) - Held, yes - Whether, therefore, in absence of an income which is not includible in total income, provision of section 14A can still be invoked to disallow expenditure relatable to income not includible in total income - Held, yes - Whether, however, there cannot be an assumption of some kind of in-built expenditure; some facts must be there on record to show that expenditure was actually incurred in relation to earning of exempt income - Held, yes - Assessee had made certain investments, income wherefrom was exempt - Assessing Officer disallowed expenditure incurred for earning said income under section 14A - Assessee claimed that no expenditure had been incurred for earning exempt income - Commissioner (Appeals), however, upheld order of Assessing Officer on assumption that whenever exempt income is earning, there will be some expenditure incurred in relation thereto - Whether such an assumption by Commissioner (Appeals) could not form basis for making disallowance under rule 8D - Held, yes - Whether both Assessing Officer and Commissioner (Appeals) had not examined assessee's claim at all and had not followed provisions of section 14A(1) - Held, yes - Whether, therefore, disallowance under section 14A could not be upheld - Held, yes [In favour of assessee]

The case of the assessee is two fold (i) no income has been earned and, therefore, no expenditure can be disallowed; and (ii) the Assessing Officer has not brought any evidence on record to show that any expenditure was incurred in relation to earning the income which was not includible in the total income. [Para 2]

As regard the first issue, none of the parties has cited any case. Therefore, the issue is to be decided on the basis of statutory language and general principles of interpretation of law. Sub-section (1) of section 14A contains a provision to the effect that for the purpose of computing the total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The factual position in this case is that no such income is statedly earned in this year although interest on NSCs has accrued as per the terms and conditions. Other investments may not have yielded income in this year but are capable of yielding the income. The question is whether the word 'income' should be interpreted narrowly or widely? The narrow interpretation would be that only when such income is actually earned, the expenditure can be disallowed. The wider meaning would be that even if no income is earned in a particular year but the investments are capable of earning the income, the expenditure relatable to holding of the investments becomes disallowable. In this connection, a reverse provision contained in section 57(iii) may be examined, which allows the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly or exclusively for the purpose of making or earning such income from income chargeable under the head 'income from other sources'. There are a number of decisions which hold that the earning of the income in a particular year is not sine qua non of allowing expenditure. Thus, the income may be nil, yet the expenditure incurred in pursuit of earning such income is deductible. Similar proposition will apply while interpreting the provision contained in section 14A(1). Therefore, the first line of argument of assessee is disagreed with. [Para 3.1]

[2012] 18 taxmann.com 333 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'F'

Relaxo Footwears Ltd.

v.

Additional Commissioner of Income-tax, Range-15, New Delhi*

R.P. TOLANI, JUDICIAL MEMBER

AND K.G. BANSAL, ACCOUNTANT MEMBER

IT APPEAL NO. 4645(DELHI) OF 2011

[ASSESSMENT YEAR 2008-09]

JANUARY 6, 2012

No Disallowance on Non Deduction of TDS on Reimbursement for Expenses

Mitra Logistic Pvt. Ltd.  V. ITO  -  There is no dispute about the fundamental posit ion that as long as the payments are for reimbursements, and not expenditure, the tax deduct ion obligations do not come into play and accordingly, disallowance u/s. 40(a)(i ) cannot be made either. In support of thisproposition, our attention is invited to a coordinate bench decision in the case of Satyendra Jhunjhunwalla –vs. – ITO (ITA No. 1988/Kol. /2009; order dated 11.11.2011). He, however, fairly submits that as this aspect of the matter, i.e. payment being in the nature of reimbursement , has not been examined by the authorities below, the matter can be restored to the file of the Assessing Officer for fresh adjudication in the light of the above principle. 

INCOME TAX APPELLATE TRIBUNAL, KOLKATA

I .T.A. No. : 1216 & 1217/ Kol . / 2011

Assessment years : 2006-07 & 2008-09

Mitra Logistic Pvt. Ltd.  V. ITO  

&

I .T.A. No.: 1387 & 1388/ Kol . / 2011

Assessment years: 2006-07 & 2008-09

ITO v. Mitra Logistic Pvt. Ltd.

Date of pronouncing the order: June 19, 2012

O R D E R

Per Pramod Kumar:
1. These two sets of cross appeals are directed against separate but material by identical orders dated 10th August , 2011 passed by the CIT(Appeals) in the matter of assessments u/s. 143(3) of the Income Tax Act, 1961 for the assessment years 2006-07 and 2008-09. As these appeals were heard together and these appeals involve some common issues, all the four appeals are being disposed of by this consolidated order.
2. We will first take up the appeals for A.Y. 2006-07.
3. In appeal fi led by the Revenue (i.e. 1387/Kol. /2011), grievance raised is as follows:-
“On the facts and in the circumstances of the case, the ld. CIT(A)-VI II erred in law in deciding the appeal in favour of the assessee by deleting the addition u/s. 40(a)(ia) relating to transportation charges of Rs.86,04,049/ – where tax was not deducted at the time of payments/ credit”.
4. Learned representatives fairly agree that as the assessee had filed all the relevant Form 15J with the Department on 05.06.2008, and also before the CIT(A) during the appellate proceedings, the case of the assessee is squarely covered in his favour, by decisions of the coordinate benches in the cases of, among other, Capital Transport Corporation of India –vs. – ITO (ITA No. 1753/Kol. /2009). We see no reasons to take any other view of the matter than the view so taken by the coordinate bench, and hold that, in view of the fact that the assessee has duly filed all the relevant 15J declarations, the CIT(A) was justified in deleting impugned disallowance of Rs.86,04,049/ – u/s. 40(a) (ia) r.w.s. 194C.
5. The appeal of the Revenue is thus dismissed.
6. In the appeal fi led by the assessee (ITA No. 1216/Kol. /2011) for AY 2006-07, grievances raised are as follows : -
(1) For that in the facts and circumstances of the case the assessment order passed was in violation of principles of natural justice hence is bad in law and be quashed. (2) For that in the facts and circumstances of the case the learned Assessing Officer and learned Commissioner of Income Tax (Appeals) erred in disallowing Rs.14,55,480/ – being reimbursement security expense u/s. 40(a)(ia) . The said amount being a reimbursement the disallowance was not cal led for. Thus the disallowance be reversed. (3) For that in the facts and circumstances of the case the learned Assessing Officer and learned Commissioner of Income Tax (Appeals) erred in disallowing Rs.52,032/ – being reimbursement service charges u/s. 40(a)(ia). The said amount being a reimbursement the disallowance was not cal led for. Thus the disallowance be reversed. (4) For that in the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in disallowing Rs.50,000/ – being accounting charges u/s.40(a) (ia). The disallowance was unjustified and be reversed.
(5) The appellant craves leave to press new, additional grounds of appeal or modify, withdraw any of the above grounds at the time of hearing of the appeal .
7. As regards the above grievances, learned counsel for the assessee submits that there is no dispute about the fundamental position that as long as the payments are for reimbursements, and not expenditure, the tax deduct ion obligations do not come into play and accordingly, disallowance u/s. 40(a) (i ) cannot be made either. In support of this proposition, our attention is invited to a coordinate bench decision in the case of Satyendra Jhunjhunwalla –vs. – ITO (ITA No. 1988/Kol. /2009; order dated 11.11.2011). He, however, fairly submits that as this aspect of the matter, i.e. payment being in the nature of reimbursement , has not been examined by the authorities below, the matter can be restored to the file of the Assessing Officer for fresh adjudication in the light of the above principle.
8. Learned Departmental Representative does not oppose the prayer of the assessee, but relies upon the orders of the authorities below nevertheless.
9. In view of the above discussions, we are of the considered view that the matter is to be restored to the file of the Assessing Officer for verification as to whether the payments are in the nature of reimbursements or not, and with a direct ion that if the payments are indeed in the nature of reimbursements, the disallowance u/s. 40(a) (i), to that extent, will stand deleted. We order so.
10. The appeal of the assessee is thus allowed for statistical purposes in the terms indicated above.
11. To sum up, so far as A.Y. 2006-07 is concerned, while appeal of the AssessingOfficer is dismissed, the appeal of the assessee is partly allowed in the terms indicated above.
12. We now take up the cross appeals for the AY 2008-09.
13. Grievance raised in appeal fi led by the revenue (i.e. 1388/Kol. /2011) is as follows: -
“On the facts and in the circumstances of the case, the ld.  CIT(A)-VI II erred in law in deciding the appeal in favour of the assessee by deleting the addition u/s. 40(a)(ia) relating to transportation charges of Rs.96,01,585/ – where tax was not deducted at the time of payments/ credit”.
14. Learned representatives fairly agree that as the assessee had filed all the relevant Form 15J with the Department on 05.06.2008, and also before the CIT(A) during the appellate proceedings, the case of the assessee is squarely covered in his favour, by decisions of the coordinate benches in the cases of, among other, Capital Transport Corporation of India –vs. – ITO (ITA No. 1753/Kol. /2009). We see no reasons to take any other view of the matter than the view so taken by the coordinate bench, and hold that, in view of the fact that the assessee has duly filed all the relevant 15J declarations, the CIT(A) was justified in deleting impugned disallowance of Rs.96,01,585/ – u/s. 40(a) (ia) r.w.s. 194C.
15. The appeal of the Revenue is thus dismissed.
16. In the appeal filed by the assessee for AY 2008-09, grievances raised are as follows : -
(1) For that in the facts and circumstances of the case the assessment order passed was in violation of principles of natural justice hence is bad in law and be quashed.
(2) For that in the facts and circumstances of the case the learned Assessing Officer and learned Commissioner of Income Tax (Appeals) erred in disallowing Rs.4,51,110/ – being reimbursement staff travelling charges u/s. 40(a)(ia). The said amount being a reimbursement the disallowance was not called for. Thus the disallowance be reversed.
(3) For that in the facts and circumstances of the case the learned Assessing Officer and learned Commissioner of Income Tax (Appeals) erred in disallowing Rs.10,32,427/ – being reimbursement security charges u/s. 40(a)(ia). The said amount being a reimbursement the disallowance was not cal led for. Thus the disallowance be reversed.
(4) For that in the facts and circumstances of the case the learned Assessing Officer and learned Commissioner of Income Tax (Appeals) erred in disallowing Rs.42,000/ – being reimbursement service charges u/s. 40(a)(ia). The said amount being a reimbursement the disallowance was not called for. Thus the disallowance be reversed.
(5) For that in the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in disallowing Rs.50,000/ – being accounting charges u/s.40(a) (ia). The disallowance was unjustified and be reversed.
 (6) The appellant craves leave to press new, additional grounds of appeal or modify, withdraw any of the above grounds at the time of hearing of the appeal .
17. As regards the above grievances, learned counsel for the assessee submits that there is no dispute about the fundamental posit ion that as long as the payments are for reimbursements, and not expenditure, the tax deduct ion obligations do not come into play and accordingly, disallowance u/s. 40(a) (i ) cannot be made either. In support of this proposition, our attention is invited to a coordinate bench decision in the case of Satyendra Jhunjhunwalla –vs. – ITO (ITA No. 1988/Kol. /2009; order dated 11.11.2011). He, however, fairly submits that as this aspect of the matter, i.e. payment being in the nature of reimbursement , has not been examined by the authorities below, the matter can be restored to the file of the Assessing Officer for fresh adjudication in the light of the above principle.
18. Learned Departmental Representative does not oppose the prayer of the assessee, but relies upon the orders of the authorities below nevertheless.
19. In view of the above discussions, we are of the considered view that the matter is to be restored to the file of the Assessing Officer for verification as to whether the payments are in the nature of reimbursements or not, and with a direct ion that if the payments are indeed in the nature of reimbursements, the disallowance u/s. 40(a) (i), to that extent, will stand deleted. We order so.
20. The appeal of the assessee is thus allowed for statistical purposes in the terms indicated above.
21. To sum up while both the appeals filed by the Assessing Officer are dismissed, both the appeals filed by the assessee are allowed for statistical purposes in the terms indicated above.
22. The order is pronounced in the open court immediately upon conclusion of hearing today on 19th day of June, 2012.

10 POINTS TO REMEMBER IN BUDGET 2012-13 : by

10 POINTS TO REMEMBER IN BUDGET 2012-13

1. New Tax slabs/Income Tax rates;

 

 

New Income Tax slab	Rates of Income Tax
Income up to Rs. 2 Lacs	0%
Income from Rs. 2 Lacs to 5 Lacs	10%
Income from Rs. 5 Lacs to 10 Lacs	20%
Income from Rs. 10 Lacs and above	30%

 

 

2. Goods and Services Tax shall be applicable from August, 2012 and Direct Tax Code has been deferred for the time being.

 

3. Health insurance deduction shall be allowed upto Rs. 5000 for preventive health checkup.

 

4. Introduction of strict anti tax avoidance measures like compulsory reporting requirement of assets held abroad etc.

5. Purchase of jewellery above Rs. 2 lacs shall come under tax net.

6. Service Tax @ 12% shall be applicable on all services except those in negative list like; Govt. services, entertainment, public transport, pre school and high school education etc.

7. PAN Card No. shall be used as a common identifier for all tax purposes/matters.

8. Senior citizens shall be exempted from advance tax payments.

9. Branded silver jewellery shall be exempted from excise duty.

10. Tax exemption upto 50% on the investments upto 50,000/- in Rajeev Gandhi Equity Scheme/Fund for the people having income below Rs. 10 Lacs.

Brijesh Baranwal
Practicing Chartered Accountant

Note:
1. The above write up is only for awareness purpose and should not be considered as expert opinion.
2. Please feel free to share with your friends and everyone without any copy right issues.

Document Submitted to Bank Cannot be Taken for making P&l Entry by A.O.

AO not justified in drawing monthly P&L A/c taking into account statement of stock filed by assessee with bank and disallow losses incurred - [2012] 19 taxmann.com 72 (Delhi - Trib.)

I. Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of profit - Assessment year 2007-08 - Assessee was a manufacturer of conveyor belts which were supplied mainly to Government undertakings - In course of assessment proceedings Assessing Officer issued summons under section 131 to bank requiring it to furnish statement of stock given by assessee - Assessee, for purpose of availing credit facilities had been providing information to said bank - On basis of information supplied by bank and details of monthly sales, purchases and direct expenses, Assessing Officer drew up profit and loss account on monthly basis - After undergoing such exercise Assessing Officer found that there was loss for three different months - As assessee did not offer any explanation, Assessing Officer disallowed such losses and made addition - Whether method of drawing up separate profit and loss account by Assessing Officer on monthly basis could not be approved as same was against norms of any business or guidelines issued by ICAI - Held, yes - Whether, therefore, addition made by Assessing Officer was to be deleted - Held, yes [In favour of assessee]

II. Section 14 of the Income-tax Act, 1961 - Income - Chargeable as - Assessment year 2007-08 - Whether cenvat credit available to assessee is not liable to tax as it does not constitute income in hands of assessee - Held, yes [In favour of assessee]

III. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2007-08 - Assessee debited certain amounts on account of liquidated damages and miscellaneous adjustments for delayed supplies made to Government undertakings - Assessing Officer denied deduction on ground that they were not allowable under section 36(1)(vii), read with section 36(2) - Whether since it is a common feature in contract business that on delayed supplies deductions are made and sometimes entire sale proceeds are not received and are subject to certain deductions by purchaser, deductions so made would be allowable as business expenditure - Held, yes  [In favour of assessee]

IV. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2007-08 - Assessee incurred expenses on foreign travel by its partners - Whether since assessee had not given any evidence, proving business purpose requiring those foreign visits, said expenditure was to be disallowed - Held, yes [In favour of revenue]

[2012] 19 taxmann.com 72 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'E'

Assistant Commissioner of Income-tax

v.

Murcury Rubber Mills*

RAJPAL YADAV, JUDICIAL MEMBER

AND K.D. RANJAN, ACCOUNTANT MEMBER

IT APPEAL NO. 3489 (DELHI) OF 2010

[ASSESSMENT YEAR 2007-08]

SEPTEMBER 23, 2011

Settlement Commission Income Tax & Wealth Tax About

1.1	Income-tax Settlement Commission / Wealth-tax Settlement Commission was set up under section 245B of Income-tax Act 1961/Section 22B of Wealth-tax Act, 1957, respectively, w.e.f. 1.4.1976 with its headquarters at New Delhi. It is a quasi judicial body. It has been set up as a result of recommendations made by Direct Taxes Enquiry Committee (Popularly known as Wanchoo Committee). The objective of setting up this Commission is to provide a body comprising of persons of integrity and outstanding ability, having special knowledge of and experience in, problems relating to direct taxes and business accounts, for settling across the board, tax liabilities in complicated cases with doubtful benefit to revenue avoiding endless and prolonged litigation and consequential strain on investigational resources of Income-tax Department.
1.2	Originally the Commission consisted of a Chairman and two other Members. However, w.e.f. 10.9.1986 it consists of a Chairman and as many Vice-Chairmen and Members as the Central Government thinks fit. The change has been made to augment strength of the Commission to facilitate quicker disposal of cases and to liquidate arrears of pending cases. The jurisdiction, powers and authority of the Commission are exercised by its Benches which will ordinarily be presided over by the Chairman or one of the Vice-Chairmen. The Bench for which the Chairman is the presiding officer is the Principal Bench and the other Benches are known as the Additional Benches.
1.3	Four Benches of the Commission are functioning. The Delhi Bench is known as the Principal Bench. The other Benches are functioning at Mumbai, Calcutta and Chennai and these are known as the Additional Benches.
1.4	If Members of a Bench (including its presiding officer) differ in opinion on any point, the point is decided according to opinion of majority. But if the Members are equally divided, they state the point or points on which they differ, and make reference to the Chairman who shall either hear the point or points himself or refer the case for hearing on such point or points by one or more of the other Members of the Settlement Commission and such point or points shall be decided according to opinion of Majority of the Members of the Settlement Commission who have heard the case, including those who first heard it DO SHARE

Section 2(22)(e) Deemed Dividend - Everything you need to know

Introduction

Section 2(22)(e) of Income Tax Act,1961 has been one the most helpful provision for checking the evasion of Income Tax. It has been introduced in the Finance Act, 1955 and this had created a vibration in the economy and tax laws because for the first time the Loans & Advances to shareholders are treated as Income for Shareholders. There had been a question of Constitutional Validity of this provision which has been in favor of revenue in the case of Navnitlal C. Jhaveri v K K  Sen, AAC [1965] 56 ITR 198 (SC).

Why the Section 2(22)(e) introduced??

In a case held at Delhi High Court CIT v. Raj Kumar (2009) 181 Taxmann 155 the following para were written which explains the reasons very well:

“Section 2(22)(e) of the Income Tax Act, 1961 plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having companies pay or distribute, what would legitimately be dividend in the hands of shareholders, money in the form of advance or loan.”

Extract from Section 2(22)..

 “(e)  any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) ⁹⁷[made after the 31st day of May, 1987, by way of advance⁹⁸ or loan to a shareholder⁹⁸, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits⁹⁹ ;……..” there are some exception which does not be included in definition of dividend.

Scope of Deemed Dividend

From a Bird View of the provision we could bifurcate the clause into the following 5 Checkpoints.

A.      Nature of Payments 

B.      Types of Company

C.      Persons to be Charged of

D.      Amount

E.       Point of Charging

A.      Nature of Payments :-

·         Providing Loans and Advances for or on behalf of Individual benefits of such Shareholder. Except when Loan or advance is granted in the ordinary course of its business and    lending of money is a substantial part of the company’s business.

·         Loan or Advances can be with Interest or without interest.

·         A notional payment by way of book entries will not be included it has been clarified in G.R. Govinda Rajolu Naidu v CIT (1973) 90 ITR 13 (Mad). Where the Court has given the emphasis on outgoing or flow of money from the company to the shareholder.

·         Early payments of any future Liability which is not yet due is define as Advances in - CIT v Srinivasan (K.) (1963) 50 ITR 788 (Mad) 

·         To Elaborate into the term “Advances” Delhi High Court applied the rule of construction of noscitur a sociis, which lead to a result that the advances which are obligated to repayments are only covered in Section 2(22)(e) for example Advances for Supplies to give them a commercial transactions are not covered in this provision. This is still not a settled matter and Courts has given some contraventional views.

·         Some of the Case Laws are as Follows :

o   ACIT v Harsad V. Doshi (2011) 49 DTR 181 (Trib) (Chennai), Imprest Balance by Directors are not covered in definition of Advances.

o   M.D. Jindal v. CIT [1986] 28 Taxman 509 (Cal.), Advances in kind are also covered under the Provision.

·         Payments on behalf of or for the individual benefit of such shareholder

o   In the Case of CIT v. L. Alagusundaram Chettiar[1977] 109 ITR 508 (Mad.), Company gives Loan to employee and employee gives loan to assesse on the same date, held liable to deemed dividend.

·         Exception of Clause (ii) of Section 2(22) had made it Loans and Advances in case of Ordinary course of Business which has a substantial part of business, out of this provision, but still in depth there is a need to understand these terms.

o   In the case of Jhamu V. Sughend v DCIT (2006) 284 ITR (AT) 82 (Mum) court has relied upon the de facto of the Situation in case and relied that no license of finance is required to prove the Ordinary Course of Business as Lending Business.

o   In the case of CIT v V.S. Sivasubramaniam (1998) 231 ITR 656 (Mad) Madras High Court has ruled that ‘Ordinary course of business’ shall mean that the loan or advance should be given to such shareholder at the same rate and terms as it is given to other borrowers.

o   To substantially is required to be checked on case to case basis no test rules had been ruled yet.

B.      Types of Companies:-

Only Loans and Advances from Closed held companies are covered in this provision and there is no distinguish between Indian and Foreign Company has been done in the provision which make this section applicable on Foreign Companies also but still subjected to DTAA. In define the term closed held no elaboration has been given in the Act but in general context it means in which public is not a substantially interested. Section 2(18) defines “Company which is having substantially public interest “which is as follows:

a.       Government Companies (40% or more by Government / RBI).

b.      Company u/s 25 of Companies Act, 1956

c.       Not Having Share Capital and declared by the Board to be such company.

d.      Mutual Benefit Finance Company

e.      Company >50% Equity Shares are with Co-operative Societies.

f.        Public Co. Listed on Recognized Stock Exchange.

f.

   Some of the proved Definition of Closely held companies are:

1.       Private Limited Company

2.       Public Limited Company not listed on Recognized Stock Exchange.

C.      Persons to be Charged of :-

·         Shareholder Having 10% or more voting power of Beneficial Interest in the company

·         Above person having a share with the fixed rate of Dividend i.e. Preferential Shares are not covered.

·         Loans and Advances Given to…

o   HUF, Firm, AOP, BOI, Company in which shareholder is a partner or Member and have substantial interest I.e. 20% or more of income of that concern belongs to shareholder.

o   Beneficiary Shareholder Only – The one who does not appear in Register of Members but have beneficial Interest.

·         If Payment is to a concern of which assesse is a shareholder

o   Only if Substantial Interest in the concern.

o   Explanation 3(b) to Section 2(22) defines Substantial Interest:-

§  Other than Company – beneficially entitled by not less than 20%

§  Company – beneficially had 20% or more.

o   Such a Loans & Advances would be added in the total income of Shareholder and not that concern.

§  This is a settled issue by the following judgments.

·         CIT v. Ankitech (P) Ltd. (2011) 11 taxmann.com 100 (Delhi)

·         CIT v. National Travel Services (2011) 202 Taxmann 327 (Delhi)

·         CIT v Universal Medical Pvt. Ltd. (2010) 190 Taxman 144 (Bom)

D.      Amount To Be Taxed:-

Amount of Advance or Accumulated Profits (Whichever is higher)

·         Accumulated Profits is a wide term and need to be defined in depth.

o   Supreme Court has ruled that Accumulated Profits should be seen in the light of commercial profits and not the assessed income, refer P.K. Badiani v. CIT (1976) 105 ITR 642 (SC)

o   Depreciation should be at the Rates of Income Tax Act,1961

o   Accumulated Profit Should be up to the date of Payment of Loans & Advances or say Distribution as per Expl. 2.

§  Supreme Court has been against this in the case of CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC) by ruling that “The profit accruing during the year cannot be considered as an accumulated profit for the purpose of section 2(22).

o   Accumulated Profit is to be see as a whole sum not the share of particular shareholder, this statement is supported by CIT v. Bhagwat Tewari (1975) 105 ITR 62 (Cal.)

·         Popular Judgments to define Accumulated Profits are as follows :

o   CIT v. MAIPO India Ltd. (2008) 24 SOT 42 (Delhi) - Security Premium should not be included.

o   S. Kumaraswami v.ITO [1961] 43 ITR 423 (Mad.) – Income From Exempt Sources are also Covered in Accumulated Profits.

o   CIT v V. Damodaran (1972) 85 ITR 59 (Ker.).  – Provision for Tax & Dividend are not to be included

·         No Income once added as deemed dividend would be added under this provision even if not adjusted in Books for Accounts, refer P. K. Badiani v. CIT (1976) 105 ITR 642 (SC)

E.       Point of Charging :-

As per Section 8(a) “Deemed Dividend” accrues in the ‘previous year’ in which the payment.

No Amount derived from Carry Forward of Loan could not be treated as Deemed Dividend. – Refer CIT, Panaji – Goa v. Parle Plastics Ltd. (2011) 196 Taxmann 62 (Bom.)

By Udit Mathur
CA Final Student
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