10 most overlooked tax deductions

10 most overlooked tax deductions


It is that time of the year again when people start looking for ways to lower their tax bill. After all, there's nothing more demoralizing than watching your hard-earned income get slashed by taxes.

Still, every year lakhs of taxpayers overpay their taxes just by overlooking the breaks they deserve. The prime reason being that tax claims and deductions have been the most cumbersome process for an individual, and one is more likely to forget some breaks while making a claim.

You can, however, cut your tax bill just by claiming all the breaks you deserve. Here we take a look at some of the most overlooked tax deductions:

1) Tuition fee paid for the education of children

Believe it or not, but many taxpayers often forget to claim deduction in respect of the tuition fee paid for the education of their children.

Deduction, however, is available to an individual under Section 80C of the I-T Act in respect of tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether paid at the time of admission or thereafter to any university, college, school or other educational institution situated within India for the purpose of full-time education of any of the children of the individual.

2) Interest on loan taken for higher education

Taxpayers also tend to forget that the interest paid on an education loan taken for higher studies qualifies for deduction under Section 80E of the I-T Act. Also, effective April 1, 2008, "the said deduction is also available where the loan is taken for the purpose of higher education of spouse or children of the individual or the student for whom the individual is a legal guardian," says Sonu Iyer, tax partner, Ernst & Young. Thus, if you have taken a loan for higher education, don't forget to make your claim. Also remember that the deduction benefit on interest is allowed for maximum eight years, or till the interest is fully paid.

3) Charitable deductions

Deduction is also available under Section 80G of the I-T Act in respect of donations made by an individual to certain funds, charitable institutions and so on. There is no restriction on the amount of charity.

The rate of deduction, however, is either 50 or 100 per cent, depending on the choice of trust. Also, donations must be made to registered institutions only.

Taxpayers generally forget to claim such deductions "as they generally do not have the receipts or simply tend to lose the receipts by the end of the year, when they file the return," says Vikas Vasal, executive director, KPMG.

4) Home improvement

Expenditure incurred by an individual on repair and maintenance of house property and interest paid on loan taken for such repairs and maintenance of house property are allowed as deduction while computing income from house property. Thus, if you have gone for any home improvement project, don't forget to make your claim.

5) Deductions in respect of rent paid

Deduction to the extent of Rs 2,000 per month or 25 per cent of total income (whichever is less) is available under Section 80GG of the I-T Act in respect of rent paid by an individual on his accommodation, provided the individual does not get any house rent allowance.

6) Foreign taxes paid

Foreign Tax Credits may be claimed by an individual in respect of doubly-taxed income which is taxed in India as well as in a foreign country provided the conditions as prescribed under the Double Taxation Avoidance Agreement between India and the foreign country are satisfied.

Further, "if there is no Double Taxation Avoidance Agreement between India and the foreign country, credits may also be claimed under the Act, subject to specified conditions," informs Iyer.

7) Per diems

Per diems (allowance for daily expenses) are exempt from tax under Section 10(14)(i) of the Act read with Rule 2BB(1)(b) of the Income-Tax Rules, 1962, if the same are actually incurred on ordinary daily charges while the employee is on tour and absent from his normal place of duty.

8) Person with disability

Under Section 80U of the Act, an individual who is certified by the prescribed medical authority to be a person with disability shall be allowed a deduction of Rs 50,000 and an individual, who is certified as a person with severe disability, shall be allowed a deduction of Rs 75,000.

Further, "under Section 80DD of the Act, where an individual has incurred expenditure for the medical treatment, training and rehabilitation of a dependant, being a person with disability or has paid or deposited any amount under prescribed scheme for the maintenance of dependant, such individual will be allowed a deduction to the extent of Rs 50,000. However, if the dependent is suffering from severe disability, a deduction of Rs 75,000 will be allowed," says Iyer.

9) Medical treatment of specified ailments

Deductions of expenses on medical treatment of specified ailments (such as AIDS, cancer and neurological diseases) can be claimed under Section 80DDB.

The maximum amount of deduction allowed from gross total income is restricted to Rs 40,000 (which goes up to Rs 60,000 if the age of the person treated is 65 years or more) on condition that no medical reimbursement is received from any insurance company or employer for this amount.

In order to claim this deduction, however, you will have to submit Form 10-1 from a specialist doctor working in a government hospital in India, confirming the treatment of the disease.

10) Profit on sale of property used for residence

It would also help to remember that capital gains arising from the transfer of residential property is exempt from tax in the hands of individual under Section 54 of the Act to the extent "expenditure is incurred on the purchase of another residential house within a period of one year before or two years after the date of transfer or expenditure is incurred on construction of a house property within a period of three years after the date of transfer," says Iyer.

How are home loans treated for tax?

How are home loans treated for tax? 



If Sunil works in Mumbai and has a purchased a home in Mumbai for which he has taken home loan. Will he still get benefit under the Act for this second home in Nagpur? The answer is ‘Yes’. Benefits under Section 80C and Section 24(b) can be taken for more than one home if all these homes satisfy the requirements of the Act. The home in Mumbai satisfies the condition of self occupancy while the home in Nagpur comes within the exception of the self occupancy rule that the city of work is different. Irrespective of the number of homes the maximum limit of Rs.1L for Section80C and Rs.1.5L for Section 24(b) still apply.  Note that it does not matter if Sunil gives one home on rent. He will still be able to get the tax break.
The Income Tax Act, 1961 provides for tax benefits for assessees that have home loans. Typically a home loan is repaid to the bank / lender in monthly installments (EMIs). The installment consists of two parts - interest and principal repayment. The bank gives a detailed worksheet of the loan calculation and of the bifurcation of the EMIs paid by the borrowers. These monthly repayments are qualified for deductions from income tax. Here is the tax treatment for EMIs paid by the borrower:
Deduction under Section 80C of the Income Tax Act
The portion of the EMI paid towards repayment of principal amount of the loan can be deducted from income.  The borrower can get a tax deduction for a maximum amount of Rs. 1L each year under this section irrespective of his tax bracket. The Act requires the home loan to be towards a property for self occupation. However if the assessee’s city of employment is different from the city where he has purchased a home, he is still eligible for this deduction. So if Sunil works in Mumbai but has purchased a home in his hometown Nagpur, he can still claim a deduction under this section even if he is not actually staying in this home.
Deduction under Section 24(b) of the Income Tax Act
The interest paid towards home loan is treated as an ‘expense’ under ‘Income from house property’ and is deductible under Section 24(b) from the total income of the assessee. The maximum deduction permitted under this section is Rs.1.5L per annum.
In case of partial disbursement of loan
In cases where some part of the loan is disbursed by the bank during construction stage of the property, the tax treatment is slightly different. This portion of the interest paid prior to completion of construction of property cannot be claimed as a deduction in the year in which it is paid. However, upon completion of construction, the assessee can claim deduction for this interest under Section 24(b) in 5 equal installments, i.e., 1/5^th for each of the five years after the end of construction period. Note that the upper limit on deduction each year remains Rs. 1.5L. Assume Mr. Sunil purchased a home from Suraksha Developers in FY. 2005-2006.The property was still under construction and was completed only in F.Y 2008-2009. Some amount of loan was disbursed by the bank in FY2005-2006 and Sunil made interest payments of Rs. 1L between FY 2005-2006 and FY 2007-2008. Sunil can claim deduction of Rs. 0.2L for 5 years starting from FY 2008-2009.
In case of total disbursement of loan
If Sunil received the entire loan money in FY 2005-2006, and started paying EMI immediately, he would lose on the principal repayment deduction under Section 80C for the 3 years until construction of the property ends. This is because deduction under Section 80C can be availed only after getting possession of the property.
In case of more than one home loan
If Sunil works in Mumbai and has a purchased a home in Mumbai for which he has taken home loan. Will he still get benefit under the Act for this second home in Nagpur? The answer is ‘Yes’. Benefits under Section 80C and Section 24(b) can be taken for more than one home if all these homes satisfy the requirements of the Act. The home in Mumbai satisfies the condition of self occupancy while the home in Nagpur comes within the exception of the self occupancy rule that the city of work is different. Irrespective of the number of homes the maximum limit of Rs.1L for Section80C and Rs.1.5L for Section 24(b) still apply.  Note that it does not matter if Sunil gives one home on rent. He will still be able to get the tax break.
In case of joint home loan
What is the tax impact if Sunil has taken the home loan jointly with his father?
In this case both Sunil and his father can claim tax deduction on their return if the home too is jointly owned by them. Tax benefit can be availed in the same proportion as the burden of EMI borne by each. If Sunil pays 80 percent of the EMI and his father contributes towards the remaining 20 percent, the tax deduction will be available in the same proportion. So if principal repaid during a year is Rs.1L then Sunil can claim Rs. 0.8L under section 80C and his father can claim Rs.0.2L under the even section. If Sunil’s father does not co-own the home, then he will not get any tax deductions for EMIs paid on such loan.

A look at incomes that are not taxed!

Any monies that you receive from your company for the purpose of travel to any place in India along with your family for the purpose of leave. The claim can be made two times in a bucket of 4 years. Family includes Wife and children and also parents, brothers or sisters if they are dependent on you. The only check being that you have to maintain original bills to prove travel if the IT department asks for it.

Although the tax man has been vested with the task of collecting taxes on the incomes of the citizens, he has deemed certain kinds of incomes as “not included in total income”. Thus if any earning that you receive which falls under these incomes you don’t have to treat it as income or pay tax on it! Let’s take a look at the different incomes that are not incomes!
Agricultural Income: Any income which you receive as income from any agricultural activity is deemed as not included in total income. If your father is into agriculture and he gives you a part of the income as a gift, then you don’t need to pay tax on it, provided, your father files his tax returns.
Income for being partner in a firm: If you receive any income for being a partner of a firm which has already been assessed separately then the income need not be included in total income. Thus any share in the profits that you have in a firm according to the partnership deed is not taxable.
5000 Rupees: An amount of Upto Rs. 5000 which you receive for any reason other than as prize money and are not a recurring amount can be excluded from your total income. It seems to be a very small amount but sometimes this could be the difference between being in a higher slab or a lower slab.
Travel concession/assistance: Any monies that you receive from your company for the purpose of travel to any place in India along with your family for the purpose of leave. The claim can be made two times in a bucket of 4 years. Family includes Wife and children and also parents, brothers or sisters if they are dependent on you. The only check being that you have to maintain original bills to prove travel if the IT department asks for it.
Retirement/Death gratuity: Any payment received under a pension or death cum retirement gratuity scheme by an individual or his widow, children or dependents. The gratuity should not be more than the number of years in service multiplied by half months salary based on a ten month average. For example if the average salary for the previous ten months prior to receiving gratuity is 10000 and years in service is 15, then 15×5000=75000/- would be not included in total income.
Leave Salary: Any cash amount received as compensation for earned leave which is en-cashed at the time of retirement. (This applies only to employees of Central/State government). For employees other than government employees, the Leave salary can be en-cashed up to a limit of ten months worth of earned leave. It also specifies that the entitlement to earned leave should not exceed 30 days for each year of service. For example if you have 76 days of earned leave and total years of service is 2 years, then, only the cash equivalent of 60 days of earned leave is not added to income.
Retrenchment: Any compensation received by a workman due to the closure of his company or change in the management of the company if new terms are less favorable than what was previously applicable.
Voluntary retirement: Any amount up to a maximum of Rs 5 lakh paid at the time of voluntary retirement in accordance with and scheme of voluntary retirement of the company. But, the company paying the VRS should have a framework for VRS as prescribed by the government.
Life Insurance Policy: Any amount received as benefit from a life insurance policy including bonus payment is not included in total income. The only exception is the amounts paid as part of Key-man policies.
Provident Fund: All payment which is received from a provident fund to which the PF act applies or any PF fund of the Government is not included in total income.
Superannuation: Any payment made from a superannuation fund on the death of the beneficiary or as a refund of contributions or if the employee becomes incapacitated before retirement.
Payment of Rent: any allowance paid by an employer to an employee to meet expenditure actually incurred on the payment of rent for accommodation. But this is not allowed if the house is owned by the employee or he has not incurred the rental.
Income from Government securities: Any earnings from interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates and other instruments issued by the central government and also deposits taken by the central government.
In case of non-residents if the bond have come to us by virtue of being a nominee or survivor on the non-resident or if they have been gifted to us by a non-resident Indian who have purchased the instrument in foreign exchange and the principal and interest will not be taken out of India by the recipient of the gift, the amounts will not be added to income.
Scholarships for Education are not included in total Income.
Awards and Rewards: All payments receive in cash or kind as an award given by the Central or State Government or by a body recognized by the central government to give such awards will not be included in the total income.
Relief funds: Any amounts which are received by an individual as part of the Prime minister’s national relief fund or the promotion of folk art fund or students fund or foundation for communal harmony will be treated as not included in income.
Thus we see that although the tax man is mostly portrayed as a villain in many media, he has been liberal enough to give us the benefit of income tax free income from so many sources.
The above learnings can be applied to our personal lives in two ways. 1. Try to increase the income if any coming under any of the above heads. 2. Invest in any of the tax free avenues given above so that we may get the benefit of the investment as well as tax free income when it comes to our hands later on.

Core Principles of Reassessment under the Income Tax Act with Summary of Important Case Laws

I. Recording of reasons

1. Recording of reasons is a condition precedent to invoke jurisdiction under section 147/148. CIT vs. Rajindra Rosin & Turpentine Industries. (2008) 305 ITR 161 (Punj. & Har.)

2. Language of section 148(2) does not permit recording of reasons between date of issuance of notice and service of notice, words used by provisions in no uncertain terms require recording of reasons before issuing any notice.

Rajoo Engineers vs. Dy. CIT (2008) 218 CTR (Guj.) 53

II. Notice — Return under protest

3. When a notice under section 148 of the Income-tax Act, 1961, is issued, the proper course of action for the notice is to file the return and, if he so desires, to seek reasons for issuing the notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order.

GKN Driveshafts (India) Ltd. vs. ITO & Ors. (2003) 259 ITR 19 (SC).

III. Reasons – Recorded to be supplied

4. Reasons for notice must be given and objections of assessee must be considered. Allana Cold Storage vs. ITO (2006) 287 ITR 1 (Bom.)

5. Assessee is entitled to be supplied with the reasons in the event he challenges the notice for reassessment; assessee is not estopped from challenging the impugned notice after having submitted to the jurisdiction of the officer by filing returns.

Berger Paints India Ltd vs. ACIT & Ors (2004) 266 ITR 462 (Cal)

6. If assessing officer rejects objections filed to notice under section 148 he shall not proceed further in matter for a period of four weeks from date of receipt of service of said order on objections, on assessee.

Asian Paints Ltd. vs. Dy. CIT (2008) 296 ITR 90 (Bom.)

7. Reassessment framed by the assessing officer without disposing of the primary objection raised by the assessee to the issue of reassessment notice issued by him was liable to be quashed.

MCM Exports vs. Dy CIT (2009) 23 DTR 356 (Guj).

8. Notices issued under sections 142(1) and 143 (3) without disposing of the objections raised in response to the reasons recorded held to be invalid.

Premier Ltd vs. Dy CIT WPNo 2340 dt 22-10-2008 (Bom)

IV. Issue of notice by successor

9. Assessing officer recording reasons for assessment and assessing officer issuing notice under section 148 must be the same person. Successor assessing officer cannot issue notice under section 148 on the basis of reasons recorded by predecessor assessing officer. Notice issued invalid and deserves to be quashed.

Hynoup Food and Oil Industries Ltd. vs. ACIT (2008) 307 ITR 115 (Guj.)

10.  The notice prescribed by section 148 cannot be regarded as a mere procedural requirement. It is only if the said notice is served on the assessee that the ITO would be justified in taking proceedings against the assessee. If no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the ITO would be illegal and void.

• Y. Narayan Chetty vs. ITO (1959) 35 ITR 388 (SC),
• CIT vs. Thayaballi Mulla Jeevaji Kapasi (1967) 66 ITR 147 (SC)
• CIT vs. Kurban Hussain Ibrahimji Mithiborwala (1971) 82 ITR 821 (SC)

1. Where notice was not sent by registered post nor served upon assessee in any other manner whatsoever, proceedings for assessment were void.

CIT vs. Harish J. Punjabi (2008) 297 ITR 424 (Del.)

12. Time limit for issue of notice- s. 143(2)

When period for issue of under section 143(2) not expired, reassessment held to be invalid. CIT vs. Qatalys Software Technologies Ltd (2009) 308 ITR 249 (Mad).

VI. Reasons – Non-application of mind

13. A.O. having communicated to the auditor that a certain decision of a High Court did not apply to the facts of the petitioner case but later rejected the objections raised by the petitioner to the notice u/s. 148 taking a contrary view without giving any reasons as to why he has departed from the earlier view that the decision was not applicable there was total non-application of mind on the part of the AO, impugned communication is set aside and the matter is remanded back to the AO for de nevo consideration.

Asian Cerc Information Services (P) Ltd vs. ITO (2007) 293 ITR 271 (Bom)

VII. Approval and Sanction

14.  The court held that, it is not only the formation of the required belief by the Income Tax Officer to take recourse to assessment or reassessment but he is further statutorily required to record his reasons and must necessarily obtain sanction of the Commissioner or the Board as the case may be.

• Chhugmal Rajpal vs. S.P. Chaliha (1971) 79 ITR 603 (SC)
• Johari Lal (Huf) vs. CIT (1973) 88 ITR 439 (SC)

15.  CIT having mechanically granted approval for reopening of assessment without application of mind, the same is invalid and not sustainable.

• German Remedies Ltd. vs. Dy. CIT (2006) 287 ITR 494 (Bom)
• United Electrical Company (P) Ltd. vs. CIT & Ors (2002) 258 ITR 317 (Del)

VIII. Disclosure of Primary Facts

16. Statement of unconnected person

In the absence of any material before the AO a statement by an unconnected person did not constitute reason to believe that assessee income had escaped assessment especially when the assessee had produced all the material and relevant facts and therefore the reassessment proceedings could not be sustained.

• Praful Chunilal Patel vs. M.J. Makwana, ACIT (1999) 236 ITR 832 (Guj)
• JCIT & Ors vs. George Williamson (Aassam) Ltd. (2002) 258 ITR 126 (Guj)

IX. Re-opening beyond 4 years bad in Law

17. Jashan Textiles Mills P. Ltd. vs. DCIT (2006) 284 ITR 542 (Bom)

18.  Assessee having fully and truly disclosed all the material facts necessary for the assessment as required by the AO the precondition for invoking the proviso to S. 147 was not satisfied and therefore AO acted wholly without jurisdiction in issuing notice u/s. 148 beyond four years period mentioned in S. 147.

Wel Intertrade (P) Ltd. & Anr. vs. ITO (2009) 308 ITR 22

19.  Tribunal having concluded that all the material facts were fully and truly disclosed by the assessee at the time of original assessment, invocation of provisions of S. 147 after the expiry of four years from the end of the relevant asst. year was not valid.

CIT vs. Kapil Dev (2009) 177 Taxman 6 (Del)

G.N. Shavo (Wine) (P) Ltd. vs. ITO & Anr (2003) 260 ITR 513 (Cal)

20.  AO who allowed assessee is claim for deduction under S. 80HHD was well above of the primary facts and therefore assessments could not be reopened after the expiry of four years on the ground that income had escaped assessment on account of excessive relief u/s. 80HHD.

Sita World Travels (India) Ltd vs. CIT (2005) 274 ITR 186 (Del)

21.  Assessee having made full disclosure of material facts in the return which was accompanied by several enclosures, assessment could not be reopened beyond four years from the end of the relevant asst. year for the reason that certain income has been wrongly assessed under the head ‘Capital gains’ instead of ‘Profits and gains’ of business or profession.

Gujarat Fluorochemicals Ltd. vs. DCIT (2008) 15 DTR (Guj)

22.  A.O. having accepted the claim of the assessee for deduction u/s. 80-O on the basis of details furnished by the assessee it cannot be said that the assessee had not made full and true disclosures of all material facts for claiming deduction and therefore, notices u/s. 148 issued after expiry of 4 years from the end of relevant asst. year were wholly illegal and without jurisdiction.

Universal Subscription Agency (P) Ltd. vs. Jt. Comm. of Income Tax (2007) 293 ITR 244 (All)

23.  There was no failure on the part of assessee to disclose a material fact where rateable value of the property was enhanced by the Municipal Corporation after assessment for assessment year 1991–92 to 1993-94 had been computed, hence reopening of assessment after expiry of four years from the end of relevant assessment year was barred by the Proviso to S. 147.

CIT vs. Tirathram Ahuja (HUF) (2008) 6 DTR (Del) 335.

24. There being no whisper in the reasons supplied to assessee that income escaped assessment by reason of assessee’s failure to make a full and true disclosure of all material facts necessary for assessment, notice u/s. 148 issued beyond four years from the end of relevant asst. year was barred by limitation under proviso to S. 147, hence without jurisdiction.

Haryana Acrylic Manufacturing Co. vs. CIT and Anr (2009) 308 ITR 38 (Del.)

X. Reassessment with in four years

25. An assessment order passed after detailed discussion cannot be reopened within a period of 4 years unless the AO has reason to believe due to some inherent defect in the assessment.

Techspan India (P) Ltd & Anr vs. ITO (2006) 283 ITR 212 (Del) German Remedies Ltd vs. DCIT & Ors. (2006) 285 ITR 26 (Bom)

XI. Reassessment – Change of opinion

26.  Amendment as per Direct Tax Laws (Amendment) Act, 1989 w.e.f. April 1, 1989 as also of sec. 148 to 152 have been elaborated in Circular No. 549, dated October 31, 1989. A perusal of clause 7.2 of the said circular makes it clear that the amendments had been carried out only with a view to allay fears t that the omission of the expression reason to believe” from sec. 147 would give arbitrary power to AO to reopen past assessments on a mere change of opinion i.e. a more change of opinion cannot form basis for reopening a completed assessment.

CIT vs. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del) (FB)

27.  Assessee having already filed his objections to the impugned notice u/s. 148 contending that it is a case of change of opinion and the issuance of notice was not justified, without making out a case of lack of jurisdiction the objections are to be considered by the competent authority and not in writ proceeding.

Jagdish Prashad Gupta vs. JCIT & Anr. (2006) 283 ITR 585 (Del)

28.  Issue regarding addition of amount of deferred taxation for computing book profits u/s. 1 15JB having been raised by the AO at the time of original assessment u/s. 143(3) and no addition having been made by AO on the account on being satisfied with the explanation of the assessee reopening of assessment on the very same issue suffered from change of opinion in the absence of any fresh material hence invalid.

M.J. Pharmaceuticals Ltd. vs. CIT (2008) 297 ITR 119 (Bom)

29.  In determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage.

Raymond Woollen Mills Ltd. vs. Income Tax Officer and Others (1999) 236 ITR 34 (S.C.)

30.  Points not decided while passing assessment order under section 143(3) not a case of change of opinion. Assessment reopened validly.

Yuvraj vs. Union of India (Bom.) (2009) 315 ITR 84.

31.  Change of opinion, bad in law

CIT vs. Former Finance (2003) 264 ITR 566 (SC)

XII. Reason to believe — Satisfaction.

31. Reopening is not permissible on borrowed satisfaction of another Assessing Officer. CIT vs. Shree Rajasthan Syntex Ltd. (2009) 212 Taxation 275 (Raj.)

XIII. Audit objection

32. AO having granted benefit of S. 72A to the assessee in respect of unabsorbed depreciation of the amalgamating company after the assessee had furnished the relevant particulars and the AO was satisfied about the eligibility of the assessee for the benefit of S. 72A are not applicable to the facts of the case amounted to a case of change of opinion and, therefore, reassessment proceedings cannot be sustained.

Stock Exchange Ahmedabad vs. ACIT (1997) 227 ITR 906 (Guj) Apollo Hospital Enterprises Ltd. vs. ACIT (2006) 287 ITR 25 (Mad.)

33. AO having reopened the assessment at the benefit of the Audit department while disagreeing with the later objection and without entertaining his own belief that the income of the assessee had escaped assessment on the ground that assessee had claimed loss on the basis of erroneous computation as indicated by the audit party reopening is not sustainable, notice u/s. 148 quashed.

Rajesh Jhaveri Stock Brokers (P) Ltd. vs. ACIT (2006) 284 ITR 593 (Guj)

34.  AO having communicated to the auditor that a certain decision of a HC did not apply to the facts of the petitioners case but later rejected the objections raised by the petitioner to the notice u/s. 148 taking a contrary view without giving any reason as to why he has departed from the earlier view that the decision was not applicable, there was total non-application of mind on the part of AO; matter remanded back to AO for de novo consideration.

Asian Cerc Information Services (P) Ltd vs. ITO (2007) 293 ITR 271 (Bom)

35.  Reassessment was not valid as the AO held no belief on his own at any point of time that income of assessee had escaped assessment on account of erroneous computation of benefit u/s 80HHC and was constrained to issue notice only on the basis of audit object.

Adani Exports vs. DCIT (1999) 240 ITR 224 (Guj)

1. 36. Audit Objection cannot be the basis for reopening of assessment to income tax by the revenue. Indian & Eastern Newspaper Society vs. CIT (1979) 119 ITR 996 (SC).

37.  AO having allowed assessee’s claim for depreciation in the regular assessment and reopened the assessment pursuant to audit objection, it cannot be said that he had formed his own opinion that the income had escaped assessment, and the reopening being based on mere change of opinion, same was not valid.

IL & FS Investment Managers Ltd. vs. ITO & Ors (2008) 298 ITR 32 (Bom) Vijaykumar M. Hirakhanwala (HUF) vs. ITO & Ors (2006) 287 ITR 443 (Bom)

XIV. Reasons to believe – Survey subsequent

38. Detection of excess stock or unaccounted expenditure as renovation of business premises at the time of survey u/s. 133A in a subsequent year, could not constitute reason to believe that such discrepancies existed in earlier years also and, therefore, reopening of assessments for those years on the basis of aforesaid reason to believe was not valid.

CIT vs. Gupta Abhushan (P) Ltd. (2008) 16 DTR (Del) 76

XV. Reassessment – Interpretation of High Court decision

39. Reopening of assessment on the basis of wrong interpretation of High Court decision was invalid. Assam Co. Ltd vs. UOI & Ors (2005) 275 ITR 609 (Gau)

XVI. Supreme Court decision cannot be the basis

40. The ITO cannot seek to reopen an assessment under section 147 on the basis of the Supreme Court decision in a case where assessee had disclosed all material facts.

Indra Co. Ltd. v. ITO (1971) 80 ITR 559 (Cal.)

XVII. Ignorance of board circular is not sufficient

41. The mere fact that the ITO was not aware of the circular of the board is not sufficient to reopen the assessment. Dr. H. Habicht v. Makhija (1985) 154 ITR 552 (Bom.)

XVIII. Notice – 143 (2).

42. Proceeding u/s. 147 cannot be initiated once return is filed by the assessee and no assessment is finalized by AO; since inquiries had been initiated u/s. 143(2) it became mandatory that they should have culminated in an order u/s. 143(3).

KLM Royal Dutch Airlines vs. ACIT (2007) 292 ITR 49 (Del)

43. Notice u/s. 143(2) cannot be issued after the expiry of 12 months from the end of the month in which the return was furnished reopening of assessment without any fresh material and without assigning any reason cannot be sustained.

Bapalal & Co. Exports vs. JCIT (2007) 289 ITR 37 (Mad)

XIX. Intimation – Section 143(1)

44. So long as the ingredients of section 147 are fulfilled, Assessing Officer is free to initiate proceeding under section 147 even where intimation under section 143(1) has been issued; as intimation under section 143(1)(a) is not assessment there is no question of treating reassessment in such a case as based on change of opinion.

Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC)

XX. Reassessment – Valuation report

1. AO had no jurisdiction to reopen the concluded assessments on the strength of valuation report of valuation officer obtained subsequently and that too not in exercise of powers u/s. 55A impugned notices under S. 148 quashed.

Prakash Chand vs. Dy. CIT & Ors (2004) 269 ITR 260 (MP)

1. Assessing Authority having made a detailed enquiry before making the assessment of the petitioner u/s. 143(3) the impugned notice u/s. 148 was issued only on the basis of change of opinion and was therefore, invalid, notice was also illegal on the ground that it was based on the valuation report of cost of construction.

Girdhar Gopal Gulati vs. UOI (2004) 269 ITR 45 (All)

47.  Mere DVO’s report cannot constitute reason to believe that income has escaped assessment for the purpose of initiating reassessment and therefore Tribunal was justified on holding that the reassessment proceedings initiated on the basis of DVO’s report were invalid ab initio, more so when it has found that the DVO’s report suffers from various defects and mistakes.

CIT vs. Smt. Meena Devi Mansinghka (2008) 303 ITR 351

1. Reference to the valuation officer only in the course of the assessment. Reopening on the basis of valuation report not valid.

Manjusha Estate Pvt. Ltd. v ITO (2009) 314 ITR 263 (Guj).

1. Where apart from the valuation report which was relied upon by the ITO there was no material before him to come to the prima facie conclusion that the assessee had received the higher consideration than what had been stated in the sale deed, reassessment would not be justified.

ITO vs. Santosh Kumar Dalmia (1994) 208 ITR 337 (Cal.) XXI. Rectification

50.  Dept. having taken one of the two possible views in the matter of calculation of deduction u/ss. 10B and 80HHE assessment cannot be reopened by taking the other view more so when the CIT (A) has already quashed the rectification u/s. 154 which was made on the very same ground.

Western Outdoor Interactive (P) Ltd. vs. A.K. Phute, ITO & Ors (2006) 286 ITR 620 (Bom)

1. Allowance u/s. 80HHC having been granted by the ITO in rectification proceedings the remedy against lay with the dept. either u/s. 154 or S. 263 and not S. 147 further reassessment having been made on a date earlier than fixed same was bad. Alternative remedy was no bar for the maintainability of writ in such circumstances.

Smt. Jamila Ansari vs. ITO & Anr (1997) 225 ITR 490 (Addl)

1. Rectification proceedings initiated and dropped

i)  Dept. having taken one of the two possible views in the matter of calculation of deduction u/ss. 10B and 80HHE assessment cannot be reopened by taking the other view, more so when the CIT(A) has already quashed the rectification u/s. 154 which was made on the very same ground.

Western Outdoor Interactive (P) Ltd. vs. ITO (2006) 286 ITR 620 (Bom)

ii)  Rectification and reassessment due to audit objection on interpretation law, cannot be the basis for reopening of assessment.

CIT vs. Lucas T.V.S. Ltd. (2001) 249 ITR 306 (SC)

XXII. Direction of the Higher Authorities

53.  Revisional authority having directed the AO to adjudicate specific issues which were addressed and examined by him, assessment made by the AO on a higher total income by assuming more powers than that of the revisional authority is patently illegal and without jurisdiction.

N. Seetharaman vs. CIT (2008) 298 ITR 210 (Mad)

54.  The assessing officer for the assessment year 2000-0 1 recorded a specific note in the assessment order which indicated that the assessment order was passed under the dictates of the Commissioner. The Supreme Court in the challenge to the reopening for the same assessment year held that the assessment order passed on the dictates of the higher authority being wholly without jurisdiction, was a nullity. Therefore with a view to complete the justice to the parties, the Supreme Court directed that the assessment proceedings should be gone through again.

CIT vs. Greenworld Corporation (2009) 314 ITR 81 (SC).

XXIII. Amendment of Laws

55. No notice u/s. 148 having been served on the assessee prior to re-opening of assessment, assessment made u/s. 147 was bad in law; argument based on S. 292BB was not sustainable on the facts of the case.

CIT vs. Mani Kakkar (2009) 18 DTR (Del) 145

XXIV. Cases where full disclosures are not made

56. AO having accepted the claims of the assessee for deduction u/s. 80-O on the basis of details furnished by the assessee, it cannot be said that the assessee had not made full and true disclosure of all material facts for claiming deduction and therefore notice u/s. 148 issued after expiry of 4 years from the end of relevant assessment years were wholly illegal and without jurisdiction.

Universal Subscription Agency (P) Ltd vs. JCIT (2007) 293 ITR 244 (All)

XXV. Information

57. Information for reassessment should be based upon good faith and not mere pretence or purely subjective satisfaction.

S. Narayanappa vs. CIT (1967) 63 ITR 219 (SC) Culcutta Discount Co. vs. ITO (1961) 59 (SC) 41 ITR 191.

XXVI. Discloure in balance sheet

58. Disclosure in balance sheet also amounts to disclosure.

CIT vs. Corporation Bank Ltd. (2002) 254 ITR 791 (SC)

XXVII. Jurisdiction — Second Appeal

59. Jurisdiction can be challenged in Second Appeal.

Investment Corpn. Ltd. vs. CIT (1992) 194 ITR 548 (Bom) (556) N. Nagaganath Iyer vs. CIT (1996) 60 ITR 647 (Bom) (655)

1. 60. Appeal was pending before ITAT and the matter was subject matter of appeal before CIT (A). Metroauto Corpn vs. ITO (2006) 286 ITR 618 (Bom)

Note: Provisio to section 147 was inserted by the Finance Act, 2008, w.e.f. 1-4-2008

1. Dealing with the powers of 263, the court held that when the Commissioner (A) passes the order the entire order of AO, merges with the order of CIT (A), hence 263 cannot be initiated in respect of any other issue. The same principle will apply to reassessment under section 147 of the Act.

CIT vs. P. Munercherjii and Co. (1987) 167 ITR 671 (Bom.)

XXVIII. Scope of Powers

62.  Since the proceedings under section 147 are for the benefit of the revenue and in the assessee, and are aimed at gathering the escaped income of the revenue and an assessee and are aimed at gathering the escaped income of an assessee the same cannot be allowed to be converted as revisional or review proceedings at the instance of the assessee, thereby making the machinery workable.

CIT vs. Sun Engineering Works (P.) Ltd. (1992) 198 ITR 297 (SC)

1. Proceeding under section 147 are for the benefit of the revenue and not the assessee and hence the assessee cannot form the be permitted to convert the reassessment proceedings as his appeal or revision in disguise and seek relief in respect of items earlier rejected, or claim relief in respect of items not claimed in the original assessment proceedings unless relatable to the escaped income and reagitate concluded matters. Allowance of such a claim in respect of escaped assessment in the case of reassessment has to be limited to the extent to which they reduce the income to that originally assessed. Income for the purpose of reassessment cannot be reduced beyond the income originally assessed.

K Sudhakar S. Shanbhag vs. ITO (2000) 241 ITR 865 (Bom.)

1. Statements by the third party cannot form the basis

A mere confessional statement by the third party (who is the lender of the assessee) that he was the mere name lender and that all his transactions of loans were bogus, without naming the assessee as one who had obtained bogus loans, would not be sufficient to hold that the assessee’s income had escaped assessment

S.P. Agarwalla Alias Sukhdeo Prasad Agarwalla vs. ITO (1983) 140 ITR 1010 (Cal)

65.  Assessing Officer cannot launch an inquiry on grounds not covered in reassessment notice. Where the Assessing Officer initiated proceedings for reassessment on the only ground that the assessee had claimed excess depreciation by adopting a higher rate as against the normal rate, he would not be justified in launching inquiry into issues which were not connected with the claim for depreciation. A letter issued to the assessee requiring the assessee to furnish information on issues in respect of which there was no allegation of any escapement or under assessment of income either in the reasons recorded or during the course of proceedings under the section would tantamount to reviewing the whole assessment which is not permissible. The letter was therefore vacated.

Vipin Khanna vs. CIT (2001) 251 ITR 782 (Del.)

XXIX. Block Assessment

66. Re-opening of assessment of a particular assessment year which was included in the block period — block assessment held to be invalid being barred by limitation. Merely because block assessment is time barred, the department cannot have reasons to believe that income has escaped assessment. And assessment for a particular year cannot be re-opened on that ground.

Smt. Mira Ananta Naik (2009) 183 Taxman 40 (Bom.)

67. From reading of clause (d) of the explanation one can clearly visualize a prohibition on determination of loss for the first time in a proceeding under section 147 on the basis of a return of loss filed in pursuance of a notice under section 148.

Koppind (P.) Ltd. vs. CIT (1994) 207 ITR 228 (Cal)

XXXI.    Reassessment in pursuance of an order/direction

68. The assessment or reassessment made by virtue of an order has to be confined to item in respect of which such finding or direction is given, it is not open to the AO to deal with other item of escaped income.

CIT vs. Moduri RajaiahGari Kishtaiah (1980) 123 ITR 494 (AP).

69.  As regards persons other than the assessee, who are not intimately connected with the assessee, no valid finding or direction can be given at all against them.

CIT vs. Omkarmal Meghraj (H.U.F.) (1974) 93 ITR 233 (SC) (240) CIT vs. S. Raghubir Singh Trust (1980) 123 ITR 438 (SC)

70. Direction to make an assessment or reassessment which has became time barred is not valid. K.M. Sharma vs. ITO (2002) 254 ITR (SC).

71. Remarks that reassessment proceedings could be taken. Not a finding or direction within meaning of section 150. Approval of Commissioner not obtained before issue of notice of reassessment — notice not valid.

Lotus Investments Ltd. vs. Asst. CIT (2007) 288 ITR 459 (Bom).

XXXII. Appeal

72.           In appeal against the order under section 147, the Deputy Commissioner (Appeals) cannot enhance the
assessment by adding new items of escaped income.

CIT vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC).

XXXIII. Order set aside by the Commissioner

73. When the assessment is set aside by the commissioner under section 263, no fresh order was passed, issue cannot be said to be escaped assessment, hence the reassessment notice held to be bad in law, void ab initio and illegal.

Ador Technopark Ltd. vs. DCIT (2004) 271 ITR 50 (Bom.)

XXXIV. Writ

74. A writ petition would be maintainable to challenge invocation of proceedings for reassessment even though it was open to the assessee to challenge the same before the assessing officer during assessment as also challenge the same before the Appellate authorities after the reassessment proceedings were completed.

Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC).

75. Writ petition challenging reassessment can not be thrown out at the threshold on the ground that it is not maintainable.

Techspan India (P) Ltd vs. ITO (2006) 283 ITR 212 (Delhi).

Read more: http://www.taxguru.in/income-tax-case-laws/core-principles-of-reassessment-under-the-income-tax-act-with-summary-of-important-case-laws.html#ixzz0p1KFecfF

Scholarship/Stipend received EXEMPT u/s10(16): Dr. Rahul Tugnait v.ITO

CASE LAW DETAILS

Decided by: ITAT, CHANDIGARH BENCH `SME-B’, In The case of: Dr. Rahul Tugnait v.ITO, appeal No. :ITA NO. 197/CHD/2008, Decided on: JUNE 30, 2008

RELEVENT PARAGRAPH

5. Even if this appeal is viewed with angle of section 15 of the Act, which speaks about chargeability of salary. Section 15 of the Act is reproduced- herewith:-

“The following income shall be chargeable to income tax under the head “Salaries”-

a). any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

b). any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer through not due or before it became due to him;

c). any arrears of salary paid or allowed to him in T7Te previous year by or on behalf of an employer or a former employer, if not charged to income tax for any earlier previous year.

[Explanation 1} For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when thesalary becomes due.

[Explanation 2] Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.

For getting salary normally there must be employee – employer or master – servant/agent relationship. The distinction between a servant or as agent can be summarized as under:-

i. Generally a master can tell his servant what to do and how to do and how to do it.

ii. Generally a principle cannot tell his agent how to carry out his instructions;

iii. A servant is under more complete control than an agent;

i. Generally a master can tell his servant what to do and how to do and how to do it.

ii. Generally a principle cannot tell his agent how to carry out his instructions.

iii. A servant is under more complete control than an agent;

iv. Generally, a servant is a person who not only receives instructions from his master but is subject to his master’s right is control instructions but is generally free to carry out those instructions according to his own direction.

v. Generally a servant qua servant has no authority to make contracts on behalf contracts on behalf of his principal.

vi. Generally an agent is paid commission upon effecting the result which he has been instructed by his principal to achieve.

vii. Generally a servant is paid wages or salary.

For ascertaining whether a person is a servant or an agent, a rough and ready test is whether under the terms of his employment the employer exercises a supervisory control in respect of the work entrusted to the person. Aservant acts under the direct control/supervisory control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him form time to time by his principal/controller/supervisor. But this test is not universal in its application and does not determine in every case, having regard to the nature of employment, that he is aservant. A person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. Generally if may be possible to say that the greater the amount of direct control over the person employed, the stronger is the conclusion the possibility of the services rendered being in the nature of principal and agent. It is not possible to lay down any precise rule to distinguish one kind of employment from the other. The nature of the particular business and the nature of the duties of the employee will require to be considered in each case in order to arrive at a conclusion as to whether the person employed is aservant or an agent. In each case the principle for ascertaining remains the same.

Section 16 of the Act speaks about deduction from salaries whereas section 17 speaks about “salary”, “perquisite” and “profits in lieu of salary” etc. A conjoint reading of section, 15, 16 and 17 nowhere includes scholarship/ stipend which have been mentioned in section 10(16) of the Act. Therefore, it can be said that the stipend/scholarship has been specifically precluded from the mischief of sub clause (1) & (2) of section 17 of the Act.

If the aforesaid sections are analyzed by keeping them in juxtaposition, with the terms and conditions used in the bond, it can be said that it is neither asalary /wages nor perquisite. Even the Hon’ble Calcutta High Court in the case of CIT v. Jnan Parkesh Ghosh [62 Taxman 151 (Cal)] went to the extent that the professionals rendering the incidental services are not servants. Our above view is further forttfied by the following decision:-

i. Lakshimnarayana Ram Gopal & Son Ltd vs. State [25 ITR 449 (SC)]

ii. Ramprasad v. CIT [86 ITR 122 (SC)].

iii. Piyare Lal Adishwar Lal v. CIT [40 ITR 70 (SC)]

Therefore, unless and until a master servant relation is brought on record by the revenue, suggesting that the assessee is an employee of the college, the stand of the revenue cannot remain on its legs.

We are also tempting to reproduce some of the relevant portion with regard to section 10(16) from the commentary of Acharya Shuklendra:

“Scholarships granted to meet the cost of education [cl.(16)] – Clause (16) exempts the /scholarships granted to meet the cost of education. Where the assesses receives a trainee stipend from a U.S. Hospital to aim him in his pursuit of study and research and not for Hospital to aid him in his pursuit of study and research and not for services rendered and the services, if any are only incidental to the course of practical training, such a stipend would be ascholarship and would be exempt under cI.(16). In fact, this clause recognizes statutorily the departmental instructions issued in this behalf under the 1922 Act.

(i) Concept of scholarship and extent of exemption – By scholarship as ordinarily understood, we mean anything which makes education free of charge, or at a confessional rate of fees. In section 10(16) however, scholarship is not used in that sense of something in educational opportunity which is given free. The basic postulate of a scholarship in cIause (1.6) is that it is an income receipt. Nevertheless, it is excluded from the total income by being brought under section 10. The view of the Income tax statute of a “Scholarship” , therefore, differs from the popular of dictionary view of a “Scholarship” . Whereas under the popular view, scholarship is education made available gratis, the sense in which the same expression is used in the Income tax Act is positive payment made to a scholar for pursuit of his education. The considerations which make up the concept of a “Scholarship for meeting the cost of education” in s. 10(16} are that the payment is intended to be an income receipt in the hands of the scholar and that whatever is paid is intended to meet the cost of education of the recipient. Since the purpose of the payment is to meet the cost of education, the question whether the quantum of payment is adequate or inadequate, or, is or is not in excess of the requirements are all beside the point. It is enough if the whole object of the payment is to meet the cost of education of a person and no further enquiry is called for in order toe exclude the amount form the taxable income u/s 10(16). If the payment is only for the cost of education the fact that the recipient does not spend the whole of the amount or saves something out of it or utilizes it for other purposes would not detract from the character of the payment being one forscholarship . Circulars issued by the Central Board have also proceeded on a liberal understanding of the provisions of s. 10(16). Accordingly, where a professor of mathematics is granted a grant-in-aid by a foreign university for doing advanced research in the filed of mathematics, the amount of granl-in aid would bescholarship under cl(16), and exempt even if a part or it had been utilized for the purposes of maintaining wife and children. The discretionaryscholarship granted by the employer to the children of employees cannot be treated as a perquisile in the hands of children of employees because no right is created in their favour. Even if such scholarship is regarded as a perquisite, it would be exempt under clause (16) in the hands of the recipient. However, an amount paid to the assessee in the for services as an intern in a medical hospital, where service as an intern is necessary for a person who joins a medical school, cannot be regarded as ascholarship so as to qualify for exemption under this clause”.

(ii) Instances of scholarships: – The following are the instances of scholarships exempt under clause (16) as recognized by the department.

[1] Annual allowance granted to retiring research scientists by CSIR, New Delhi

[2] Stipend of research fellowships for working under the National Commission for the compilation of History of Scientists in India under the auspices of National Institute of Scientists of India

[3] Fulbright grants described as ‘maintenance allowance’ given to Fulbright students.

[4] Fulbright grant described as `maintenance allowance “given to American tutors prosecuting studies in India.

[5] Junior/Senior fellowships awarded by the Department of Atomic Energy.

[6] Financial assistance to teachers in the universities for undertaking research of learned work in science subjects and humanities.

[7] Maintenance allowance granted to foreign trainees under the scheme of the International Association for the exchange of students for Technical Experience.

[8] Research fellowship in engineering, technology, humanities and science subject

[9] Junior and Senior research fellowships awarded by CSIR.

[10] National research fellowship and fellowships to German nationals awarded by the Ministry of Education.

Viewed from aforesaid different angles and facts of the present appeal. It can be said that the scholarship/ stipend received by a student from College/Govt for pursuing higher studies, cannot be termed as salary. Therefore, this appeal of the assessee is allowed.

I want to make it clear that i have received a copy of the recent Judgement from Taxman and I am just reproducing the same AO not permissible to place himself in the position of the management of the assessee to decide about reasonable expenditure for a particular business purpouse

Business Expenditure : An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of section 37(1) unless it is shown that the contract itself was a sham document and was made with an ulterior motive.

                  

• It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose.

HIGH COURT OF DELHI

CIT

v.

Micromatic Machine Tools P.Ltd.

ITA 587/2010

May 19, 2010

FACTS

 

While dismissing the appeal filed by the Revenue, it was noted by the Tribunal that nothing had been brought on record, by the Assessing Officer, to suggest that the expenditure was not incurred for the business purpose of the assessee. In the opinion of the Tribunal, if somebody, other than the assessee, benefited from the expenditure incurred by it, that would not be a relevant factor if the expenditure was incurred wholly and exclusively for the business of the assessee.

HELD

 

Section 37(1) of the Income Tax Act, to the extent it is relevant, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purpose of the business or profession would be allowed in computing the income chargeable under the head “Profit and Gains of the Business or Profession.”

In the case before us, there is no dispute that the assessee company had actually incurred the expenses claimed by it for participating in the exhibition. The only question, which the Assessing Officer could examine, was whether the expenditure had been incurred solely for the purpose of business of the assessee-company or not. Admittedly, the assessee-company was the sole Selling and Servicing Agent for the products being manufactured by its Principals. The assessee-company was also engaged in selling the spare parts of the machinery being manufactured by its Principals. As noted by both, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, the agreement, between the assessee company and its Principals, obliged the assessee-company to contribute 50% of the expenditure incurred on participation in the exhibition, though during the year in question, the assessee-company contributed only 31.6% of that expenditure, the balance having been contributed by its Principals. Therefore, the assessee-company was under a contractual obligation to contribute half of the expenses incurred on participation in the exhibition. It would be difficult to say that the expenses incurred in performance of the contractual obligation of the assessee-company would not be expenditure for the business of the assessee-company. An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of Section 37 (1) of the Act unless it is shown that the contract itself was a sham document and was made with an ulterior motive. What is required to be established is a nexus between the expenditure incurred and the business purpose of the assessee. It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose. The matter has to be seen purely from the viewpoint of the management of the assessee, taking its commercial interests into consideration.

JUDGMENT

V.K. JAIN, J. (ORAL)

1. This is an appeal impugning the order dated 30.01.2009, passed by the Income Tax Appellate Tribunal, whereby it dismissed the appeal filed by the Revenue, being ITA No.1253/Del/2007, against the order passed by the Commissioner of Income Tax (Appeals), allowing the appeal filed by the assessee, against the assessment order for the Assessment Year 1998-99.

                         

2. The assessee-company is engaged in the business of marketing machine tools for certain manufacturers. During the year in question, the assessee incurred expenses, amounting to Rs 20.42 lakhs for participating in the exhibition IMTEX-1998. The vouchers in respect of the aforesaid expenditure were produced before the Assessing Officer, who noticed that the expenditure incurred on the exhibition during the Assessment Year 1997-98 being only Rs 2,67,162/- there was an eight fold increase in the expenditure, though the commission income earned from the sale had decreased to Rs 2.15 crore in the Assessment Year 1998-99, as against Rs 2.43 crores earned in the Assessment Year 1997-98. The Assessing Officer, therefore, added back Rs. 18 lakhs out of the aforesaid expenditure, to the income of the assessee company. In the appeal filed by the assessee, the Commissioner of Income Tax (Appeals) confirmed the disallowance only to the extent of Rs 9 lakhs.

3. Cross appeals against the order of the Commissioner of Income Tax (Appeals) were filed by the Revenue and the assessee. The Tribunal restored the issue back to the CIT (Appeals), taking the view that the basic question, which needed to be addressed, was whether the expenditures were wholly for the business purposes or not. It was held that if the expenses were found to be incurred exclusively and wholly for the business of the assessee, it would be irrelevant that they have increased eight times.

4. During the course of hearing before the Commissioner of Income Tax (Appeals), after the matter had been remanded by the Tribunal, it was submitted on behalf of the assessee that as per the agreement of the assessee-company with its Principals, whose products were being marketed and serviced by it, the assessee-company had incurred expenditure on technical exhibition, to promote the products of the Principal Companies and part of the expenditure was to be borne by the assessee-company. It was pointed out that the assessee company had borne only 31.6% of the expenses incurred on the exhibition and there was increase in the sale of the products, on account of sale promotion activities such as participation in the exhibitions. The eight fold increase in the expenses was attributed to the exhibition being held every three years. It was pointed out that in the past also, there was increase in the expenditure during Assessment Years 1992-93 and 1995-96, when exhibitions were held.

5. It was noted by the Commissioner of Income Tax (Appeals) that as per the agreement between the assessee and its Principals, the assessee was required to meet 50% of the expenditure incurred on exhibition, whereas it had contributed only 31.6% of the same, the balance having been contributed by the Principals. It was also noted that the IMTEX exhibition was held every three years and there was steep increase in the exhibition expenditure. He was of the view that since there was a direct co-relation between the commission earned by the assessee and the sale of the products of the Principals, any expenditure for the purpose of increasing sale would be a valid business expenditure in the hands of the assessee.

6. While dismissing the appeal filed by the Revenue, it was noted by the Tribunal that nothing had been brought on record, by the Assessing Officer, to suggest that the expenditure was not incurred for the business purpose of the assessee. In the opinion of the Tribunal, if somebody, other than the assessee, benefited from the expenditure incurred by it, that would not be a relevant factor if the expenditure was incurred wholly and exclusively for the business of the assessee.

                         

7. Section 37(1) of the Income Tax Act, to the extent it is relevant, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purpose of the business or profession would be allowed in computing the income chargeable under the head “Profit and Gains of the Business or Profession.”

8. In the case before us, there is no dispute that the assessee company had actually incurred the expenses claimed by it for participating in the exhibition. The only question, which the Assessing Officer could examine, was whether the expenditure had been incurred solely for the purpose of business of the assessee-company or not. Admittedly, the assessee-company was the sole Selling and Servicing Agent for the products being manufactured by its Principals. The assessee-company was also engaged in selling the spare parts of the machinery being manufactured by its Principals. As noted by both, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, the agreement, between the assessee company and its Principals, obliged the assessee-company to contribute 50% of the expenditure incurred on participation in the exhibition, though during the year in question, the assessee-company contributed only 31.6% of that expenditure, the balance having been contributed by its Principals. Therefore, the assessee-company was under a contractual obligation to contribute half of the expenses incurred on participation in the exhibition. It would be difficult to say that the expenses incurred in performance of the contractual obligation of the assessee-company would not be expenditure for the business of the assessee-company. An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of Section 37 (1) of the Act unless it is shown that the contract itself was a sham document and was made with an ulterior motive. What is required to be established is a nexus between the expenditure incurred and the business purpose of the assessee. It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose. The matter has to be seen purely from the viewpoint of the management of the assessee, taking its commercial interests into consideration.

9. In the case before us, the genuineness of the contract between the assessee-company and its Principals for sharing the expenditure incurred on participation has not been disputed by the Assessing Officer. In any case, since the assessee-company was the sole agency appointed for marketing and servicing, etc. of the machines manufactured by its Principals, participation in the exhibition was likely to be beneficial to the assessee-company, since increase in the sale of the product on account of promotional activities undertaken during the exhibition is to result in proportionate increase in the commission, being paid to the assessee company, by its Principals. So long as the participation in the exhibition ensued to the benefit of the assessee-company in the form of increased commission on the products sold and serviced by it, it would be immaterial that part of the benefit on account of promotional activities undertaken during the exhibition would also accrue to the manufacturers of the machines being sold and serviced by the assessee-company. In any case, in the case before us, the Principals of the assessee company have contributed more than 68% of the expenditure incurred on participation in the exhibition.

                         

10. In CIT vs. Chandulal Keshavlal & Co.: 38 ITR 601, the assessee, which was the Managing Agent, getting commission under an agreement with the managed company, had waived aportion of the commission payable to it. Upholding the partwaiver of the commission, it was held by the SupremeCourt that if the payment or the expenditure is incurred for the purpose of the trade of the assessee, it does not matter that the payment may inure to the benefit of a third party. The Court was of the view that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade.

11. In Sassoon J. David and Co. Pvt. Ltd., vs. CIT, Bombay: 118 ITR 261, the Supreme Court observed that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of its business and that such expenditure may be incurred voluntarily and without any necessity. The Court was of the view that if the expenditure is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. Relying upon its decision in the case of Chandulal Keshavlal & Co. (supra), it was held that the fact that somebody, other than the assessee, also benefited by the expenditure should not come in the way the expenditure being allowed by way of a deduction. The case of the assessee before us stands on a stronger footing since, besides the expenditure being in the business interest of the assessee-company, it was also a contractual obligation incurred by it under the agreement it had with its Principals

12. For the reasons given in the preceding paragraphs, we find no reason to interfere with the view taken by the Income Tax Appellate Tribunal. No substantial question of law arises for our consideration.

The appeal is accordingly dismissed.

Recent Judgement:Real Estate Developer - Sale of land held as stock-in-trade to be treated as business income and not capital gains

Income tax - real estate developer - sale of land held as stock-in-trade to be treated as business income and not capital gains: ITAT

MUMBAI, MAY 18, 2010: IN case of land transactions there appears to be a trend to escape from paying tax by forming a partnership firm. In this case also, the issue is whether the partnership firm constituted by the assessee with four other persons was constituted only for the purpose of tax evasion, and whether once it is held that firm was bogus then the profits accrued on transfer of land held as stock in trade is to be assessed as "business profits".

Facts fo the case

Assessee, a builder, acquires rights over one plot located at Ghat-Koper. He enters into partnershipv(PF) with four other persons on 17.04.2003 and retires from the firm after 7 days after receiving his share of profit and development expenses. AO takes the view that the creation of PF was a camouflage and the real purpose was tax evasion. Before the CIT(A) the assessee argues that whatever has been received by the assessee on retirement is taxable as capital gain but the taxable event will arise only when he sold the properties received by him on retirement.

Revenue filed appeal before the ITAT which has held that,

++ The device of constituting partnership firm with the assessee as one of its partners and then his retirement after 11 days on the basis of retirement deed, the stamp papers for which were purchased simultaneously with the formation of the partnership firm, do go to show that the assessee was not genuinely inducted in and then removed from the firm as partner in the said firm. On the other hand the reality of the transaction which can be viewed by the naked eyes is that the assessee agreed to sell development right in Ghatkopar plot to the four persons.

++ In order to extinguish or defer the genuine tax liability on account of such transaction of sale, a circuitous route was adopted by which the assessee was to first join the partnership firm and then retire from it within few days leaving the development right in Ghatkopar plot with the firm for the agreed consideration. We, therefore, hold that the assessee was neither genuinely inducted in nor actually retired as partner from the firm;

++ It is trite that any profit or gain on the transfer of stock in trade is regarded as business income and there is no question of assessing any part of it under the head `Capital gains'.

++ Under such circumstances and further considering the fact that the assessee himself showed income of Rs 30,61,451 as assessable under the head `Profits and gains of business or profession', the entire income from this transaction is to be regarded as "business income" and no part of it can be taxed under the head `Capital gains'.

Revenue's appeal partly allowed.

(In the case of DLF Universal Limited (2010-TIOL-16-ITAT-DEL-SB) it was held that partnership firm was bogus and the profits on transfer of land bank were held to be capital gains and not business profits - Editor's Note)