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]