Premium paid by co-operative banks on securities falling in “Held to Maturity” categories must be amortized over the period remaining to maturity:

Assessee, a co-operative bank, is required to deposit certain amount in Government securities as per RBI’s guidelines and is to hold the same till maturity in order to maintain Statutory Liquidity Ratio (SLR). In certain cases, such securities are acquired at a value higher than face value of such securities. Premium so paid by the assessee in acquiring such securities was claimed by the assessee as loss amortised over entire period of security which came to be disallowed by AO. CIT(A) confirmed AO’s order whereas ITAT decided the issue in favour of the assessee. On Revenue’s appeal, Hon’ble High Court observed that the assessee, being a co-operative bank, was bound by RBI’s securities. As per such directives, assessee had to invest certain amount in Government Securities and hold the same till maturity. CBDT’s circular No.17 of 2008 clearly spells out that premium on acquisition of investments classified under HTM (i.e. Held to Maturity) category should be amortized over the period remaining to maturity. Such instructions, having been issued u/s 119(2) of the Act, are binding on the Revenue. Considering the above, Hon’ble High Court was of the view that ITAT had rightly decided the issue in favour of the assessee. Accordingly, Revenue’s appeal was dismissed.

[CIT vs. Rajkot Dist. Co. Op. Bank Ltd. – Tax Appeal No.56 of 2013]

In absence of a relationship as that of “Contractor” and “Sub-contractor”, tax is not to be deducted at source u/s 194C:

AO made disallowance u/s 40(a)(ia) for failure on the part of the assessee to deduct tax at source u/s 194C while making the certain payments and the same came to be confirmed by CIT(A). On further appeal, Hon’ble ITAT deleted such disallowance aggrieved by which, Revenue preferred tax appeal. Hon’ble High Court observed that assessee had entered into a contract with M/s. IPR according to which it was to provide specified no. of vehicles to M/s. IPR and perform the work of transportation of employees of M/s. IPR in lieu of which it shall be paid transportation charges by M/s. IPR. Assessee had, in addition its own vehicles, obtained vehicles of other owners which were used in discharging the aforesaid duty. It was the payment made to such vehicle owners which came to be disallowed u/s 40(a)(ia) for non-deduction of tax at source u/s 194C since AO was of the view that assessee had given sub-contract to such vehicle owners and hence, it was required to comply with TDS provisions. It was further observed that the entire task was performed by the assessee. Contractual arrangement between the assessee and M/s. IPR was such that assessee couldn’t have assigned such work to a sub-contractor without prior permission of M/s. IPR. Assessee had merely hired vehicles from concerned owners for discharging its duties. Further, revenue had not brought on record any material to establish that the owners of the vehicles had performed the task of transportation. Thus, there was no relationship of a contractor and sub-contractor between the assessee and such vehicle owners in absence of which question of deducting tax at source u/s 194C doesn’t arise at all and consequently, disallowance u/s 40(a)(ia) is not called for. Accordingly, Revenue’s appeal was dismissed.

[CIT Vs. Mukesh Travels Co. – Tax Appeal No.937 of 2013]

Non-utilization of the amount of donation by the donee cannot lead to denial of deduction u/s 80G(5) in the hands of the donor:

Assessee claimed deduction u/s 80G(5) in respect of donation made to a Trust a part of which came to be disallowed by AO on the count that the donee had neither fully utilized the funds, nor had it transferred the unutilised fund to Prime Minister’s National Relief Fund before the time permitted. Such claim was allowed by ITAT. On Revenue’s appeal, Hon’ble High Court observed that it was an undisputed fact that donation made by the assessee was deductible u/s 80G(5). It was also not in dispute that it was the donee which neither utilized the funds nor transferred it to Prime Minister National Relief’s Fund as provided u/s 80G(5C). As per Explanation 2 to S.80G, deduction to which an assessee is entitled to in respect of any donation made to an institution or fund to which sub-section (5) applies shall not be denied merely on the count that subsequent to such donation, any part of income of the institution or fund becomes chargeable to tax due to non-compliance with any of the provisions of S.11, 12 or 12A. In the given case, breach of conditions prescribed u/s 80G(5C) by the donee trust shall render the concerned amount taxable in the hands of such donee trust by virtue of S.12(3). However, it will not have any effect on the deduction to which assessee is otherwise entitled to on such donation. Hon’ble High Court was of the view that ITAT had correctly observed that if the donor is also taxed alongwith taxing such amount in the hands of donee, it shall amount to double taxation. In light of the above, Revenue’s tax appeal was dismissed.

[CIT Vs. Gujarat Co. Op. Milk Marketing Federation Ltd. – Tax Appeal No.758 of 2013]

First Proviso to section 2(15) is applicable only to the fourth limb of definition of “Charitable purpose” i.e. advancement of any other object of general public utility:

Assessee is a charitable trust engaged in the activity of breeding milk cattle, improving quality of cows and oxen and other related activities. AO, relying on newly added Proviso to section 2(15) w.e.f. 01.04.10, held that assessee-trust can’t be considered as one created for charitable purposes since considerable income was generated from the activity of milk production and sale. Accordingly, he denied the benefit of Sections 11 & 12 to the assessee. AO’s order came to be confirmed by CIT(A). On further appeal, ITAT decided the issue in favour of the assessee aggrieved by which, Revenue preferred tax appeal. Hon’ble High Court observed that the first Proviso to section 2(15) which provides for exclusion of certain activities from the definition of “Charitable activities” in case if it involves carrying on any activity in the nature of trade, commerce or business is applicable only to the fourth limb of definition of “Charitable purpose” i.e. advancement of any other object of general public utility. From the speech of Finance Minister and Circular No.11 of 2008 dated 19.12.2008 issued by CBDT, it was further observed that the aim was not to exclude genuine charitable trust of general public utility but to exclude activities in the nature of trade commerce or business which are masked as “charitable purpose”. From the objects of the assessee-trust, it was apparent that all the objects were of the general public utility. Profit making was neither the object nor the aim of the assessee-trust. It was also not the principal activity. Merely because while carrying out the activities for achieving the objects of the trust, if certain incidental surplus is generated, that will not render the activity to be in the nature of trade, commerce or business. In light of the above, it was held that ITAT had not committed any error in deciding the issue in favour of the assessee. Accordingly, Revenue’s appeal was dismissed.

[DIT Vs. Sabarmati Ashram Gaushala Trust – Tax Appeal No.1162 of 2013]

Charges paid to electricity board on account of failure to consume contracted amount of electricity is an allowable expenditure:

AO disallowed business expenditure being payment made by the assessee to the electricity board on the count that the same was expended towards penalty. ITAT observed that the assessee had to pay higher charges to the electricity board for failing to consume contracted amount of electricity, which as per the agreement would result into higher rate of electricity charges. Hence, ITAT held that such amount could not have been disallowed. While holding so, ITAT permitted the AO to verify that the charges were levied for the period prior to the sale of property. On Revenue’s appeal, Hon’ble High Court also held that merely because the assessee failed to consume minimum committed electricity and therefore ended up paying higher rate of electricity, such payment cannot be categorised as penalty. ITAT had, therefore, correctly deleted the disallowance. Accordingly, Revenue’s appeal was dismissed.

[CIT Vs. Rajkot Jilla Co. Op. Cotton Marketing Union Ltd. – Tax Appeal No.797 of 2013]

Depreciation on computers installed in factory premises is allowable @ 60%:

Assessee installed certain computers in its factory premises and claimed depreciation available on computers i.e. @ 60%. AO restricted claim of depreciation to 20% after holding that such computers should be treated either as office appliances failing which they would form part of plant and machinery and in either case, depreciation shall be available at 20%. CIT(A) allowed depreciation on such computers @ 60%. On Revenue’s appeal, ITAT, while deciding the issue in assessee’s favour, held that it cannot be said as a universal proposition of law that computers are always used only in offices and not in manufacturing activities. On further appeal, Hon’ble High Court held that had AO shown that computers formed part of integrated manufacturing process, his stand that the same would form part of plant and machinery might have had some basis. In the given case, no such material was there on record. It was not as if computers cannot be installed for direct use in manufacturing activity and thereby forming part of machinery used in such activity. There may be number of ways in which installation of a computer may enhance and improve the efficiency. Also there was nothing on record to suggest that computers were part of plant and machinery. Hence, it was held that decision of CIT(A) and ITAT treating the same as simplicitor computers and granting de[recitation at the rate prescribed under the law calls for no interference. Resultantly, Revenue’s appeal was dismissed.

[CIT Vs. Gujarat Alkalies and Chemicals Ltd. – Tax Appeal No.942 of 2013]

“Chlorine Toners” used for transportation of chlorine gas are essentially “gas cylinders” and are eligible for depreciation @ 60%:

Assessee claimed depreciation @ 60% on chlorine toners used for transportation of chlorine gas generated in its caustic soda plant which came to be restricted to 15% by AO on the count that such toners were part of “Plant and machinery” and cannot be categorized as “Gas cylinders”. CIT(A) allowed depreciation on such toners. On Revenue’s appeal, ITAT observed that such chlorine toners looked exactly like cylinders as was evident from its pictures. Assessee had also filed a certificate signed by Executive Director of the assessee to the effect that such toners were used for transportation of compressed chlorine gas generated in caustic soda plant, were capable of being filled up by 900 kgs. net weight of compressed chlorine gas and such toners were technically gas cylinders. It was further observed that “Gas cylinder” or “Cylinder” has been defined under “Gas Cylinder Rules, 1981” as any closed metal container having a volume exceeding 500 millilitre but not exceeding 1000 litres intended for storage and transport of compressed gas including LPG container fitted to a motor vehicle as its fuel tank but not including any other such container fitted to a transport or under carriage. As per Appendix-I to I.T. Rules, gas cylinders were entitled to depreciation @ 60%. In light of the above, ITAT held that such toners were essentially gas cylinders and accordingly, depreciation is allowable on the same @ 60%. On Revenue’s appeal Hon’ble High Court, relying on the decision in the cases of “CIT vs. Goyal MG Cases Ltd. – 296 ITR 72 (Del)” and “CIT vs. Chemplast Sanmar Ltd. – 296 ITR 81 (Mad)”, upheld the ITAT’s order. Accordingly, Revenue’s appeal was dismissed.

[CIT Vs. Gujarat Alkalies and Chemicals Ltd. – Tax Appeal No.942 of 2013]

Section 80P(4) shall not apply to an assessee which is not a “Co-operative bank”:

Assessee is a co-operative credit society engaged in carrying on the business of banking or providing credit facilities to its members and claims deduction u/s 80P(1) by virtue of provisions contained in section 80P(2)(a)(i). AO disallowed the said deduction on the count that as per section 80P(4), provisions of section 80P would not apply in relation to any co-operative bank other than primary agricultural credit society or primary co-operative agricultural and rural development bank. Both, CIT(A) as well as ITAT, reversed the decision of AO. On Revenue’s appeal, Hon’ble High Court observed that CBDT had, vide circular no.133 of 2007 dated 09.05.2007 clarified that section 80P(4) will not apply to an assessee which is not a “Co-operative bank”. In the given case, assessee is admittedly not a “Credit co-operative bank” but is a “Credit co-operative society”. Hence, it was held that exclusion clause of section 80P(4) shall not apply and accordingly, Revenue’s appeal was dismissed.

[CIT Vs. Jafari Momin Vikas Co-op. Credit Society Ltd. – Tax Appeal Nos.442, 443 and 863 of 2013]

Penalty u/s 271(1)(c) cannot be levied on disallowance made u/s 40(a)(ia) for failure to deduct tax at source u/s 194C:

AO levied penalty u/s 271(1)(c) on disallowance made u/s 40(a)(ia) on account of failure to deduct tax at source on certain payments covered u/s 194C. Such penalty came to be deleted by CIT(A) as well as ITAT. On Revenue’s appeal, Hon’ble High Court found that ITAT applied decision in the case of Reliance Petroproducts Pvt. Ltd. – 322 ITR 158 (SC) and observed that merely on account of disallowance of certain claim, penalty cannot be imposed. ITAT had also recorded that the question of disallowance u/s 40(a)(ia) in respect of transporters had given rise of diversified opinion. Further, genuineness of expenditure was not in question. Disallowance was made on the count that tax was not deducted at source. In light of the above, Hon’ble High Court dismissed Revenue’s appeal.

[CIT Vs. Dahyabhai Veljibhai Patel – Tax Appeal No.793 of 2013]

Filing of audit report at the assessment stage instead of filing it alongwith return of income is construed as sufficient compliance for claiming deduction u/s 80IB:

AO disallowed the deduction claimed u/s 80IB of the Act merely on the count that the audit report was not filed alongwith the return of income. The said claim was allowed by CIT(A). On Revenue’s appeal, Hon’ble ITAT observed that the though the assessee had not filed the audit report alongwith the return of income, the same was furnished before AO at the assessment stage. It was also observed that the Hon’ble Gujarat High Court, in the case of “CIT vs. Gujarat Oil and Allied Industries – 201 ITR 325 (Guj)”, has held that the requirement of filing audit report alongwith return of income is procedural in nature and audit report filed at the assessment stage shall be construed as sufficient compliance of the same. Following the said decision, assessee’s claim u/s 80IB was allowed. Accordingly, revenue’s appeal was dismissed.

[DCIT vs. Anoli Holdings Pvt. Ltd. – ITA No.3175/Ahd/2010]

No disallowance can be made u/s 14A r.w.r. 8D if interest income is more than interest expenditure:

AO found that the assessee-company is a partner in several partnership firms and has earned profits from such firms which have been claimed as exempt u/s 10(2A). Also, the assessee had paid interest on unsecured loans during the year under consideration. AO therefore took a view that assessee invested such borrowed funds in various partnership firms and earned exempted income. Consequently, he made disallowance u/s 14A r.w.r. 8D. Hon’ble ITAT observed that the assessee had sufficient own funds and hence, it was of the view that it was unfair on the part of revenue to presume that borrowed funds had been utilised for the purpose of making investment in such partnership firms. It was further observed that interest income earned by the assessee was more than the interest expenditure. Hon’ble ITAT, following the order in the case of “ITO vs. Karnavati Petrochem Pvt. Ltd. – ITA No.2228/Ahd/2012”, held that when the interest income was more than interest expense, AO was not justified in invoking the provisions of S.14A r.w.r. 8D. Accordingly, the impugned addition was deleted.

[Safal Reality Pvt. Ltd. vs. ACIT – ITA Nos.2334/Ahd/2012 & 1842/Ahd/2013]

Depreciation on vehicles cannot be disallowed merely because such vehicles have been registered in the name of director of an assessee-company:

AO disallowed depreciation on cars on the count that such cars were bought and registered in the name of the director of the assessee-company. On appeal, CIT(A) observed that payment in respect of such cars was made by the assessee. Such cars were sued for the business of the assessee. Accordingly, CIT(A) allowed the claim of depreciation in such cars. On Revenue’s appeal, Hon’ble ITAT also observed that assessee had made payments of such cars. The said cars were included in the block of assets of the assessee and were used for assessee’s business. In light of the above, Hon’ble ITAT also held that there was no reason to interfere with the order of CIT(A). Accordingly, Revenue’s appeal was dismissed.

[DCIT vs. Nandan Exim Ltd - ITA Nos.601 & 225/Ahd/2011 and 2419/Ahd/2010]

Gift received by an HUF from uncle of Karta of such HUF shall be not be taxable in the hands of HUF:

AO made an addition in the hands of the assessee-HUF in respect of sum introduced by Karta of the HUF during AY 2005-06. The said addition was made since he was of the view that HUF can’t have any relatives and hence, sum received by HUF from its Karta is to be taxed as gift u/s 56(2). Hon’ble ITAT observed that the Karta of the HUF had received a gift from his uncle (brother of his father). It was an undisputed fact that the said gift was accepted by the donee as Karta of the HUF. Hon’ble ITAT was of the view that HUF is basically “a group of relatives”. It was further observed that for the purpose of S.56(2)(vii) introduced w.e.f. 01/10/09, “Relative” in case of HUF includes “any member thereof”. Considering the aforesaid scenario, it was held that the assessee-HUF had received gift from a relative who is uncle of Karta of the assessee-HUF (i.e. “Brother or sister of either of the parents of an individual). Hence, the gift was not chargeable in the hands of the assessee-HUF.

Note: Hon’ble ITAT has, in the case, treated uncle of Karta of assessee-HUF as relative of HUF by adopting liberal interpretation. However, in case of a gift received by any HUF after 01/10/09 from any person other than member of such HUF shall be taxable in light of Explanation to S.56(2)(vii) according to which only “Members” of HUF are considered to be relatives of an HUF.

[HARSHADBHAI DAHYALAL VAIDHYA HUF Vs. ITO – ITA No.1527/Ahd/2010]

Interest received on FDR made from grant received from Govt. can’t be considered as assessee’s income if such interest is to be treated as part of the grant as per the terms of release of such grant:

AO made addition in respect of interest on FDR received by the assessee which was confirmed by CIT(A) but deleted by ITAT. On Revenue’s appeal, Hon’ble High Court observed that the assessee received grant from Central Govt. (CG) and the same was deposited in bank as FDR. AO made the impugned addition since he found that the assessee had claimed refund in respect of TDS on such interest deducted by the concerned bank. ITAT found from the letter issued by CG while releasing the grant that interest earned on grant already released shall form part of central grant limit. Hence, relying on decisions in the case of “Gujarat Municipal Finance Board vs. DCIT – 318 ITR 317 (Guj)” and “Gujarat Power Corporation Ltd. vs. ITO – 354 ITR 201 (Guj)], the impugned addition was deleted. Hon’ble High Court also held that in light of the aforesaid stipulated condition and the two decisions cited above, such interest shall be treated as part of grant received from CG and hence, it can’t be treated as assessee’s income. Accordingly, Revenue’s appeal was dismissed.

[CIT vs. Sar Infracon Pvt. Ltd. – Tax Appeal No.855 of 2013 and 828 of 2013]

Depreciation on electric fittings which are integral part of plant and machinery can be claimed at @25%:

Assessee claimed depreciation on electric fittings @ 25% which was restricted by AO to 15% being the rate of depreciation on electrical fittings. CIT(A) allowed the claim of depreciation @ 25%. On revenue’s appeal, Hon’ble ITAT observed that the assessee is engaged in the business of running a multiplex theatre. The electric fittings included equipment connected to projector and other film exhibition systems. It was observed that Hon’ble Rajasthan High Court, in the case of “CIT vs. RG Ispat Ltd. – 272 ITR 383”, has held that where a particular structure is merely helpful in carrying on the activities of assessee, it may not be a plant but if it is an integral part of plant and machinery or portion of that building is an integral part of plant and machinery, then that should be considered as plant in view of the Hon’ble Apex Court’s decision in the case of “CIT vs. Karnataka Power Corporation – 247 ITR 268 (SC)”. In the assessee’s case, electric fittings were essential part of the film exhibition and not ancillary to its business. Without such electric items, the projector as well as exhibition systems cannot be run. Hence, it was held that such electric fittings were part and parcel of the plant & machinery and assessee was entitled to depreciation @ 25%. Accordingly, Revenue’s appeal was dismissed.

[DCIT vs. Anoli Holdings Pvt. Ltd. – ITA No.3175/Ahd/2010]

Proportionate interest can’t be disallowed u/s 14A if investments in shares have been made from interest free funds:

AO found that the assessee had made investment in the shares and securities of its group companies and it also had substantial interest bearing secured loans and unsecured loans. Assessee had also paid substantial interest and financial charges during the year under consideration. AO therefore took a view that interest bearing business funds had been diverted and utilized for the purpose of making the aforesaid investment and hence, he made disallowance of proportionate interest expenses u/s 14A. On appeal, CIT(A) observed that the said investments were made in earlier years and that too from interest free funds available with the assessee. Also, the assessee was having substantially high share capital and reserves as compared to such investments. Hence, it cannot be presumed that any part of interest bearing borrowed funds was utilized for the said investments. In light of the said facts, CIT(A) deleted the impugned disallowance and his order was further upheld by Hon’ble ITAT.

[DCIT vs. Nandan Exim Ltd - ITA Nos.601 & 225/Ahd/2011 and 2419/Ahd/2010]

It is not a mandatory requirement to fully utilize the permissible FSI so as to claim deduction u/s S.80IB(10):

AO disallowed assessee’s claim for deduction u/s 80IB(10) on the count that the assessee that the assessee was not the owner of the land on which the housing project under consideration was developed. CIT(A), while confirming the said disallowance, further observed two things viz. a) one particular flat was of 1517.47 sq. ft. i.e. more than 1500 sq. ft. and b) assessee had not properly utilized the area of land i.e. the assessee had not developed one acre of land because, as per permissible FSI, more no. of residential units in multi-storied buildings could have been constructed. On appeal, Hon’ble ITAT held that the issue as to ownership of land is squarely covered in favour of the assessee vide the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Radhe Developers – 341 ITR 403 (Guj). As regards improper development of land, it was held that it is not a mandatory requirement to fully utilize the permissible FSI and there was no condition as to FSI u/s 80IB(10). Thus, the deduction u/s 80IB(10) was restricted only in respect of flat of 1517.47 sq. ft.

[Kamleshkumar Gandalal Shah vs. ITO – ITA No.2709/Ahd/2010 &

 Kamleshkumar Gandalal Shah HUF vs. ITO – ITA Nos.2710-11/Ahd/2010]

No addition can be made u/s 41(1) merely because some liabilities are outstanding at the end of the year:

AO made addition u/s 41(1) in respect of liabilities outstanding at the end of the year which was confirmed by CIT(A). On appeal, Hon’ble Tribunal observed that the liabilities were outstanding at the end of the given year and there was no material on record to prove that the said liabilities had ceased to exist. Assessee had not even written off the said liabilities in books of accounts. In light of the above, the Hon’ble Tribunal, following the ratio laid down in the case of “CIT vs. Nitin S. Garg” – 71 DTR (Guj) 73 / 22 taxmann.com 59 (Guj), deleted the said addition.

[Shri Ahmedabad Flexible Tube Mfg. & Yarn Proc. Co. P. Ltd. vs. ITO – ITA No.3133/Ahd/2011]

AS-7 is applicable to a “Contractor” and not to a “Developer”:

Assessee is engaged in the business of sale/purchase of TDR and earns income by way of stallage and construction activity. During the year under consideration, assessee received advance booking amount on account of construction activity and the same was shown as WIP following the “Project completion method”. AO was of the view that assessee must follow “Percentage completion method” as per AS-7. Hence, he rejected assessee’s books of accounts and estimated profit @ 8% of the booking advance. The said addition was deleted by CIT(A). On Revenue’s appeal, Hon’ble ITAT observed that in earlier year, Hon’ble ITAT had held that the assessee was not a “Contractor” but was a “Developer” who awarded contracts to different contractors for executing civil, electrical, plumbing work, etc. Hence, AS-7 was not applicable to the assessee. Also, no construction activity was carried out during the year under consideration. Assessee had merely received advances and there was no certainty of revenue recognition at that stage. Also, all the significant risks and ownership at that juncture vested in the hands of the assessee. Hence, like addition was deleted in earlier year by the Hon’ble ITAT. Following the earlier year’s order, Hon’ble ITAT deleted the impugned addition.

[ITO vs. M/s. Meeti Investment and Consultancy P. Ltd. – ITA No.1714/Ahd/2010]

Penalty u/s 271D cannot be levied in respect of cash deposited in bank by director of company for making urgent payments to suppliers of machinery:

AO found that the assessee had received loans in cash from its director which was in contravention of S.269SS and hence, he levied penalty u/s 271D. The said penalty was confirmed by CIT(A). On further appeal, Hon’ble ITAT observed that it was assessee’s first year of operation. Construction of factory building and installation of plant was in progress and the assessee had applied to a bank for loan for the same. However, the assessee was in urgent need of funds for making payments to the suppliers of machinery. To make such payments, director of the assessee deposited funds in assessee’s bank account which in turn were used to make payments to the suppliers within 1 to 5 days of receipt of such funds. Prior to such deposits, assessee had nominal bank balance. It was not the case of Revenue that such transactions were not genuine or that the suppliers of such machinery were not genuine. Transaction of purchase of such machinery was also not doubted. Also AO had not given any finding that the assessee had mala fide intention of disclosing concealed or undisclosed money. In light of the above facts, Hon’ble ITAT held that no penalty can be levied u/s 271D in the given case.

[Makewell Inducto Cast Pvt. Ltd. vs. JCIT – ITA No.2235/Ahd/2013]

Depreciation on vehicles cannot be disallowed merely because such vehicles have been registered in the name of partner of an assessee-firm:

AO disallowed depreciation on motor vehicles on the count that such vehicles were registered in the name of the partner of the assessee firm. On appeal, CIT(A) observed that the said vehicles were reflected in the assesse-firm’s balance-sheet under the head “Fixed Assets”. Assessee had raised loans for purchasing some of those vehicles. Further, AO had accepted running and maintenance expenses debited by the assessee which makes it abundantly clear that the said vehicles were purchased from the funds of the assessee and were used for assessee’s business purposes. CIT(A), placing reliance in the case of “Mysore Minerals vs. CIT – 239 ITR 775 (SC)”, held that depreciation on such vehicles was allowable and the said order was further confirmed by Hon’ble ITAT.

[ACIT vs. Gopal Fabrics – ITA No.3338/Ahd/2010 and 463/Ahd/2013]

Interest expenses cannot be disallowed if there are substantial interest free funds as against interest free advances:

AO found that the assessee had charged interest on advances from only two parties and hence, he disallowed interest expenses on the count that assessee failed to charge interest on rest of the advances. The said addition came to be deleted by CIT(A). on Revenue’s appeal, Hon’ble ITAT found that the assessee had substantial interest free funds in the form of partners’ capital and the amount of concerned advances was less than such interest free funds. Hon’ble ITAT, following the decision in the case of “CIT vs. Raghuvir Synthetics Ltd. – (2013) 217 Taxman 178 (Guj), held that where huge funds were available without any interest liability with the assessee and there was no evidence to hold that borrowed money was utilized for the purpose of such advances, disallowance of interest was unwarranted. Accordingly, CIT(A)’s order was upheld and revenue’s appeal was dismissed.

[ACIT vs. Gopal Fabrics – ITA No.3338/Ahd/2010 and 463/Ahd/2013]

No addition can be made u/s 41(1) in respect of sundry creditors merely because the same are outstanding for last few years:

AO made addition u/s 41(1) in respect of “sundry creditors for exports” appearing in Balance-sheet since the same were outstanding for last few years. On appeal, CIT(A) observed that S.41(1) comes into play when an assessee obtains, in cash or in kind, any amount out of the expenditure allowed earlier. Alternatively, assessee must have obtained benefit by way of remission or cessation of trading liability. The third scenario in which the provisions can be invoked is when the assessee unilaterally writes off the liability. In the given case, none of the above mentioned events took place. It was also observed that the said liability continued to be outstanding even at the end of given year. Hence, CIT(A) deleted the said addition. On Revenue’s appeal, Hon’ble ITAT held that CIT(A)’s order was in conformity with the decision in the case of “CIT vs. Nitin S. Garg – 22 taxmann.com 59 (Guj)” and hence, no interference was required in CIT(A)’s order. Accordingly, Revenue’s appeal was dismissed.

[ACIT vs. Gopal Fabrics – ITA No.3338/Ahd/2010 and 463/Ahd/2013]

No disallowance can be made u/s 40A(3) if cash payments are made to “Broker” who is required to make cash payments on behalf of the assessee:

AO made disallowance u/s 40A(3) in respect of cash payments made towards freight charges since the same were in excess of limit prescribed u/s 40A(3). The said disallowance was confirmed by CIT(A). On appeal, Hon’ble ITAT observed that the assessee had not made such cash payments to individual truck owners. Rather, such payments were made to “Brokers” through whom the trucks were arranged and such brokers, in turn, made cash payments to individual truck owners. As per Rule 6DD(k), no disallowance u/s 40A(3) is called for if cash payments in excess of the prescribed limit are made to “Agent” who in turn is required to make cash payments on behalf of the assessee. It was thus held that the term “Broker” is akin to “Agent” and hence, disallowance u/s 40A(3) is unwarranted.

[Chartered Logistics Ltd. vs. ACIT – IT(SS)A Nos.37 to 40/Ahd/2013 &

 ACIT vs. Gyanchand Gandhi HUF - IT(SS)A Nos.41 to 44/Ahd/2013]

Exemption u/s 54EC can be availed by a Trust even if investments in the prescribed bonds are made in the name of trustees/beneficiaries of the trust:

AO denied deduction u/s 54EC to the appellant trust on the count that investments in the bonds of RECL were made in the name of the trustees/beneficiaries of the trust and not in the name of the assessee-trust. Hon’ble ITAT observed that the assessee-trust was settled in accordance with the directions of Will of Late Shri Popatlal N. Vora to hold and administer his properties and assets. As per one of the clause of the Trust Deed, the period of distribution of the corpus of the trust was 18 years from the death of Late Shri Popatlal N. Vora. Lock-in-period for investments prescribed u/s 54EC is 3 years. Since the period of three years from date of investment in bonds of RECL ended beyond the period of 18 years (as mentioned above) at the end of which the corpus was to be distributed, it was decided to make the said investment in RECL bonds in the name of the trustees/beneficiaries of the assessee-trust. Following the view taken in the case of “ITO vs. Smt. Saraswati Ramanathan – 116 ITD 234 (Delhi)”, the Hon’ble ITAT extended wider and liberal interpretation to the term “assessee” used u/s 54EC and held that the assessee-trust was rightly eligible for exemption u/s 54EC even if the investment in the prescribed bonds has been made in the names of trustees/beneficiaries of the assessee-trust.

[Popatlal N. Vora Inheritance Trust vs. ITO – ITA No.2365/Ahd/2010]

No disallowance can be made u/s 40(a)(ia) for late deduction of tax at source:

AO found that the assessee had made certain advance payments, deducted tax at source on the same in the month of March and deposited it to the credit of Govt. in the month of April. However, from the concerned ledger, AO observed that only a part of the said sum was paid/credited in the month of March. AO was of the view that on balance sum paid/credited in earlier months, TDS ought to have been made in the month of February or earlier month as the case may be i.e. at the time of payment or credit whichever is earlier and accordingly, such TDS ought to have been deposited to the credit of Govt. before 31^st March. Since, that was not done, he made disallowance u/s 40(a)(ia). Hon’ble ITAT was of the view that late deduction of tax at source shall not suffer from the rigours of disallowance u/s 40(a)(ia). Placing reliance on “CIT vs. Royal Builders – ITA No.520 of 2012”, it was held that even if TDS has been made in the month of March for payments/credits made in earlier months, since such TDS has been deposited before due date of filing return of income, disallowance u/s 40(a)(ia) is unwarranted.

[ACIT vs. M/s. Vijay Industries – ITA No.774/Ahd/2013]

Penalty cannot be levied merely on account of disallowance of certain expenses debited to P&L a/c:

AO levied penalty on disallowances made in respect of Income-tax, FBT and donations which came to be confirmed by Ld. CIT(A). On further appeal, Hon’ble ITAT observed that assessee had debited all the said expenses to P&L a/c under the head “Financial charges”. However, due to inadvertent mistake of the audit staff of CA who was entrusted with the work of compilation of accounts and preparation of return of income, the said expenses remained to be disallowed while computing the income. Disallowing such expenses skipped the attention of the concerned CA since the said expenses were grouped under the head “Financial charges”. All the necessary facts were furnished before AO and hence, there was neither any concealment of income nor any inaccurate particulars of income were furnished. Thus, the Hon’ble ITAT, while following the decisions in the cases of “Reliance Petro Products – 322 ITR 158 (SC)” and “Pricewater House Coopers Pvt. Ltd. – 348 ITR 306 (SC)”, deleted the penalty.

[Ganpatbhai M. Mistry Furnisher Pvt. Ltd. vs. ACIT – ITA No.1662/Ahd/2012]

No addition can be made in respect of contract income in absence of any real income:

AO made addition in respect of advance received by the assessee for construction of a bungalow which came to be confirmed by Ld. CIT(A). On further appeal, the Hon’ble ITAT observed that the advance received by the assessee was shown on liability side under the head “Unsecured loans” whereas expenditure incurred on such construction work was shown on the asset side under the head “Receivable against construction work”. AO made the impugned addition to the extent of difference between such advance received and expenditure incurred by treating the same as contract income. It was also observed that the assessee had received further sum towards such construction work in subsequent year. However, since the assessee couldn’t complete the given work, the said project was abandoned and the assessee returned the advance received in excess of expenditure incurred by it on such project. Thus, the assessee had earned no real income on the said project. In light of the above, the said addition was deleted.

[N.G. Patel & Associates vs. DCIT – ITA No.223/Ahd/2010]

Commission paid to commission agents on the basis of sales is an allowable expenditure:

AO disallowed commission paid to the commission agents at a rate ranging between 3 to 5% which was partly deleted by Ld. CIT(A). On further appeal, Hon’ble ITAT observed that AO made the said disallowance on the general observations and had merely given the theory of commission allowable u/s 37. AO had not pointed out any specific instance on the basis of which such commission can be held to be bogus. The fact is that such commission was paid on the basis of sales made through such agents. Assessee had established the identity of such agents. Confirmation, ITRs, Balance-sheet, P&L a/c and bank statement of the payees were also furnished which proved that such payees had shown the concerned commission receipts as income. Such commission was paid either during the year under consideration or in the subsequent year. Assessee had even established the consistency of payment of such commission. No disallowance was made on account of such commission paid in earlier years. In light of the above, the said disallowance was fully deleted by the Hon’ble ITAT.

[M/s. Heatex Engineering Co. Pvt. Ltd. – DCIT – ITA Nos.2695 & 2752/Ahd/2012]

“Club expenses” incurred for subscription and club facilities are allowed as business expenses:

AO made disallowance in respect of “Club expenses” incurred for subscription and club services since he was of the view that there was no nexus of such expenditure with the business of the assessee. Hon’ble ITAT found force in the argument of the assessee that it was necessity of the business to allow membership of the senior Managers who entertained various persons for business purposes and that there was no element of any personal nature in such expenses. Hon’ble ITAT further observed that identical expenses were allowed as business expenses by the Hon’ble ITAT in assessee’s own case in earlier year by considering decision in the case of “CIT vs. Sundaram Industries Ltd. – 240 ITR 335 (Mad)”. Further, Revenue had not brought on any evidence on record that such expenses were not incurred for business purposes. In light of the above, such club expenses were allowed as business expenses and the impugned addition was deleted.

[MUNJAL AUTO INDUSTRIES LTD. Vs. ACIT – ITA No.2123/Ahd/2010]

Remuneration to partners u/s 40(b) can be claimed from additional business income disclosed during survey u/s 133A:

AO disallowed remuneration paid to partners u/s 40(b). Hon’ble ITAT observed that the assessee had disclosed certain additional income during the course of survey u/s 133A as “Business income” in respect of excess stock and claimed deduction in respect of remuneration to partners on such additional business income. AO treated the said income as “Income from other sources” and consequently disallowed deduction u/s 40(b). The assessee had made disclosure in respect of excess stock as business income as was apparent from the statement recorded u/s 133A. Further, Revenue had not brought on record any evidence that the appellant had any other sources of income other than that disclosed by the assessee. It was thus held that such income was business income and qualified for the purpose of remuneration to partners.

[DCIT Vs. M/S. NEW RAMESH KIRANA STORES – ITA Nos.1891/Ahd/2010]

Depreciation can be claimed on assets even if such assets are used for business purpose only for part of a year and hired out for the remaining period:

AO observed that the assessee had given certain plant and machinery on hire and earned rental income. AO took a view that since such assets were not used for assessee’s own business and hence, he disallowed proportionate depreciation in such assets given on hire. Hon’ble ITAT observed that it was not the case of Revenue that such assets given on hire were not at all used for assessee’s own business for a single day during the year under consideration. Instead of keeping such machinery idle, assessee hired out the same and earned rental income. Hon’ble ITAT was of the view that even if such machinery remained idle for part of the year, then also depreciation ought to have been allowed on such assets. The fact that such machinery had been rented out had no consequence on allowance of depreciation on machinery that had fallen within the block of assets for the year under consideration and used for the business purpose for part of the year. In light of the above, assessee’s claim of depreciation in such hired-out assets was allowed.

[JSIW INFRASTRCUTURE PVT. LTD. Vs. ACIT – ITA 348/Ahd/2013]

S.194C is not applicable in absence of any contract and consequently, disallowance u/s 40(a)(ia) is unwarranted:

AO made disallowance u/s 40(a)(ia) in respect of freight charges paid to truck owners without deducting tax u/s 194C. The said disallowance was deleted by CIT(A). On revenue’s appeal, Hon’ble ITAT observed that the assessee was engaged in the business of transportation of goods by trucks. The said work was carried out by trucks owned by the assessee as well as trucks hired from other truck owners. Assessee merely hired the trucks of other truck owners and duties of such truck owners were restricted to the extent of transporting goods from one place to another. Neither such truck owners were ever confronted with the main contractor of the company nor did they step into the shoes of the assessee before them. They were not at all sub-contractors acting on behalf of the assessee in respect of main contract undertaken by the assessee from the main contractor. Also there didn’t any exist any written or oral agreement between the assessee and such truck owners. Further, the arrangement between the assessee and the companies was such that the assessee was alone responsible for executing such contracts without any right of sub-contract. During the transit of goods through such trucks not owned by the assessee, entire risks and rewards lie with the assessee. Such truck owners have not contributed to any work over and above rendering trucks on hire along with drivers. Hence, it was held that provisions of S.194C shall not come into play and consequently, no disallowance u/s 40(a)(ia) is called for.

[ACIT vs. Chartered Logistics Ltd. – IT(SS)A Nos.115 to 118/Ahd/2013 &

 ACIT vs. Gyanchand Gandhi HUF - IT(SS)A Nos.111 to 114/Ahd/2013]

Depreciation @ 40% on vehicles used for running on hire is allowable even in absence of separate agreement with various parties to whom such vehicles are let out on hire:

AO denied depreciation at higher rate i.e. 40% on vehicles since he was of the view that the said vehicles were not used for running them on hire and the same was confirmed by CIT(A). On appeal, Hon’ble ITAT observed that the assessee had claimed depreciation @ 40% on trucks and JCBs used for running the same on hire. Assessee had furnished ledger of “Carting income” in respect of income earned on various trips made by it and complete details such as name and addresses of parties to whom such vehicles were given on hire, details of trips and rate at which income was earned had been furnished. Hon’ble ITAT was of the view that since the vehicles were given to various parties on trip basis, separate agreement for carting income for each trip with each party is practically not possible. In light of the above, depreciation at higher rate i.e. 40% on such vehicles was allowed.

[M/s. Tirupati Construction Co. vs. ACIT – IT(SS)A Nos.178 to 182/Ahd/2009 & 73 to 75/Ahd/2009]

Disallowance u/s 40(a)(ia) cannot be estimated by extrapolating rate for other years:

AO made disallowance u/s 40(a)(ia) @ 0.5% of total freight payments which was deleted by CIT(A). On appeal, Hon’ble ITAT found that during the course of search, certain incriminating material w.r.t default in TDS compliances were found for years subsequent to the concerned years. However, no such material was found for the year under consideration. Hence, AO extrapolated the data for subsequent years and estimated the impugned disallowance @ 0.5%. It was held that before making disallowance u/s 40(a)(ia), the pre-requisite conditions are that AO must bring material on record to show that the assessee was liable to deduct tax at source in respect of expenditure specified in that section, assessee has defaulted in deducting TDS or making payment of such TDS after deduction and assessee has claimed deduction in respect of such expenditure. Since AO failed to discharge the burden which was on him under law, CIT(A) was right in deleting the said disallowance.

[ACIT vs. Chartered Logistics Ltd. - IT(SS)A No.35 & 36/Ahd/2013 – 08/11/2013]

Jewellery upto 500 gms per married lady and 100 gms per male member cannot be seized at the time of search and is also considered to be explained:

A search took place at the residence of the assessee and certain jewellery was found. AO didn’t consider the plea of the assessee that such jewellery was received on marriage and various other auspicious occasions. He therefore allowed benefit of 200 gms of jewellery per married lady and 100 gms per male member and made an addition in respect of the access amount towards unaccounted investment in jewellery. Hon’ble ITAT took a view that as per CBDT’s instruction no.1916, jewellery to the extent of 500 gms per married lady and 100 gms per male member is considered to be reasonable for not seized at the time of search. Further, it was also mentioned that various High Courts have interpreted this limitation of seizure as explained as jewellery received by them on marriage and other occasions. In light of the above, the Hon’ble ITAT upheld the order of CIT(A) deleting the said addition.

[ACIT Vs. YASH DEVENDRA VAYLA – ITA No.652/Ahd/2010]

Method of accounting can be changed if such change is bona fide, scientific, accurate and complies with statutory requirements of AS-9 and S.5 of the Act:

AO, on finding that the assessee had changed the method of accounting during the year under consideration, took a view that on account of such change, assessee had shown less profit and hence, he made addition in respect of the same which came to be deleted by CIT(A) and ITAT. On Revenue’s appeal, Hon’ble High Court observed that the CIT(A), while deleting the said addition, found that earlier, assessee used to account for “advances received from sponsors” as income and “expenses incurred on such projects” as expenditure in the very same year irrespective of the fact whether the said project was completed or not in the said year. However, during the year under consideration, the new method of accounting adopted was such whereby advances received and expenses incurred only in respect of completed projects were accounted for in P&L a/c whereas advances and expenses in respect of incomplete projects were shown in B/S under the head “Advances” and “Work-in-progress” respectively. Such change in method of accounting was bona fide, more accurate and scientific. It was in line with the statutory requirements of AS-9 on “Revenue Recognition and Section 5 of the Income-tax Act. Hence, the new accounting system was permissible under the law. Also, AO had neither pointed out any defect in the books of accounts, nor established that that on account of change in method of accounting, assessee’s profit cannot be deduced. Hence, rejection of such method of accounting was not sustainable and consequently, the impugned addition was deleted. The said order was confirmed by ITAT and even Hon’ble High Court held that ITAT’s order didn’t require any interference. Accordingly, Revenue’s appeal was dismissed.

[CIT vs. Mapin Publishing Pvt. Ltd. – Tax Appeal No.902 of 2013]

Penalty u/s 271(1)(c) cannot be levied on disallowance made u/s 40(a)(ia) by invoking legal fiction:

AO levied penalty u/s 271(1)(c) on disallowance made u/s 40(a)(ia). Hon’ble ITAT observed that the assessee had debited expenses in respect of payments made to C & F agents. However, tax was not deducted at source while making such payments since the assessee was under a bona fide belief that no TDS was required to be made on the same because such payment was in the nature of reimbursement and no element of income was involved in the same. It wasn’t towards any services rendered by such agents. It was further observed that such expenses were duly debited in P&L a/c. The concerned disallowance was made on account of difference in opinion as to applicability of TDS. AO had not alleged that the said payment was non-genuine, bogus, excessive or unreasonable. Disallowance u/s 40(a)(ia) was made by merely invoking the legal fiction. It was thus held that disallowance u/s 40(a)(ia) will not attract penalty for furnishing inaccurate particulars of income. Accordingly, the penalty was deleted. Reliance was also placed on the decision of the Hon’ble Apex Court in the case of “CIT vs. Mother India Refrigeration Pvt. Ltd. – 155 ITR 711 (SC)” wherein in was held that legal fictions are created for some definite purpose and the same must be limited to that purpose and should not be extended beyond that legitimate filed.

[M/S. ELECTRO POWER ENGINEERS Vs. ACIT – ITA No.2153/Ahd/2010]

Penalty u/s 271(1)(c) cannot be levied on income disclosed by an assessee at the time of moving application u/s 273A before CIT:

AO levied penalty u/s 271(1)(c) on long term capital gain (LTCG) declared by the assessee. Hon’ble ITAT observed that such LTCG was not declared in the original return of income, but was declared subsequently along with application u/s 273A before CIT for waiver of penalty to be levied u/s 271(1)(c). Alongwith the said application, assessee filed revised computation of total income duly reflecting such LTCG arising on sale of ancestral property. On the basis of the said information, AO reopened the assessment and computed the income on the basis of return of income filed by the assessee in pursuance to notice issued u/s 148. Thereafter, penalty was levied on such LTCG. AO did not detect any concealment while framing the assessment. Rather, the assessee himself had declared the LTCG arising on such land transaction. Department came to know about income from such land transaction only after the same was disclosed by the assessee. It was established that failure to disclose correct income did not arise from any fraud or any wilful negligence on his part and hence, the penalty was deleted.

[PARESH CONTRACTOR Vs. ITO – ITA Nos.2125 to 2127/Ahd/2010]

Trust can claim depreciation on assets even if cost of such assets has been allowed as deduction on account of it being application of income:

AO disallowed depreciation on assets claimed by the assessee-trust on the count that the entire cost of such assets had been allowed as a deduction on account of it being application of income. He was of the view that allowing the claim of depreciation on such assets shall tantamount to double deduction. Hon’ble ITAT was of the view that allowing such a claim of depreciation shall not lead to double deduction since allowing exemption u/s 11(1) in respect of cost of acquisition of asset is not akin to allowing deduction of any expenditure for the purpose of computing income. In fact, it is an incentive provision that extends benefit of exempt income to a trust to the extent of cost of such assets. Income of a trust remains the same only. Revenue’s contention that allowing claim of depreciation will result into cash surplus being available with the assessee that goes outside the books also has no legs to stand because even if claim of depreciation is allowed, it has no impact on cash availability with the assessee. Further, income of a trust has to be computed on commercial principles. Accordingly, it was held that claim of depreciation is allowable on such assets.

[ITO Vs. SARDAR PUBLIC CHARITABLE TRUST – ITA Nos.285 & 286/Ahd/2013]

Sales tax refund received by the transferee of the business subsequent to transfer of entire business cannot be taxed u/s 41(1) in the hands of transferor:

AO made addition u/s 41(1) in respect of sales tax refund. Hon’ble ITAT observed that the appellant-firm had, during the year under consideration, transferred all its assets and liabilities to M/s. Hemraj Trading Co. (HMT) and the said sales tax refund was received by HMT subsequent to such transfer. Earlier, Hon’ble ITAT had set aside the said matter to the file of AO with a direction to tax the said sum in the hands of the assessee only if such sales tax refund has been given by HMT to the partners of the appellate-firm. In the second round of litigation, the partners of the assessee-firm had placed their affidavits before AO stating that they haven’t received such refund. Still, AO made the said addition which was confirmed by CIT(A). It was thus held that the addition so made was against the directions of the Hon’ble ITAT and hence, the same was deleted. However, the Hon’ble ITAT stated in its order that the revisionary authorities under the sales tax realised their mistake and had demanded such refund back from HMT along with interest. Further, the said matter was under litigation. Hence, in case such refund was received by partners of the appellant-firm, then AO shall be free to proceed as per law.

[VIRAJ TRADING CO. & ORS. Vs. ITO – ITA Nos.2588 to 2590/Ahd/2010]

No addition can be made in respect of on-money merely on the basis of third party’s statement recorded u/s 131(1A) and certain notings on rough papers found at third’s premises during search:

AO made an addition in respect of on-money paid by the assessee towards purchase of a land which was deleted CIT(A) and ITAT. On Revenue’s appeal, Hon’ble High Court observed a search was conducted at the premises of a third party and certain notings on rough papers were found. AO also recorded statement of a third party u/s 131(1A). On the basis of such statement and the said notings, AO made the impugned addition. There was no material or evidence that any on-money was paid by the assessee. Further, the said land had a registered document and the value had been accepted by the registered authority for the purpose of stamp duty. AO had also not referred the matter to DVO for determining the market value of the said land as of the date of registration. Even the statement of the said third party was a self-serving statement without any supporting evidence. In light of the above, ITAT held that such third party evidences could not be a base for the impugned addition and deleted the same. Hon’ble High Court didn’t find any error in ITAT’s order. Consequently, Revenue’s appeal was dismissed.

[CIT vs. Kantibhai Revidas Patel – Tax Appeal No.910 of 2013]

No addition can be made u/s 2(22)(e) if after merging all the accounts of the concerned company maintained by the assessee, the final balance is Nil:

AO made addition u/s 2(22)(e) in respect of loan advanced to the assessee by the Pvt. Company in which he had substantial interest. Hon’ble ITAT observed that the assessee maintained four separate accounts of the said company in his books viz. Current account, Deposit account, Share investment account and Loan account. AO, on perusal of the loan account, found that assessee had withdrawn certain sum on various dates through cheques from the said company and at the end of the year, assessee transferred money from his current account and deposit account to the loan account and hence, balance of the loan account was Nil at the year end. Thus, AO worked out the loan advanced by the company to the assessee and made the impugned addition u/s 2(22)(e) as deemed dividend. It was further observed that after merging all the four accounts maintained by the assessee, the final balance was Nil. It was thus held that, on the whole, the assessee did not owe any money to the company and hence, it cannot be said that the assessee had taken any loan or advance from the said company. Hence, question of any deemed dividend doesn’t arise at all. Accordingly, the impugned addition was deleted.

[ACIT Vs. SHRI CHUNILAL HARIBHAI GAJERA – ITA No.1497/Ahd/2012]