1. Damages paid for breach of contract deductible as Business Expenditure

Jamna Auto Industries vs. CIT [2008] 299 ITR 92 (P&H) [FB]

The assessee before the Hon’ble Punjab and Haryana High Court was a Partnership firm. The assessee firm had entered into an agreement with M/s. Deutsche Strahil Metail of Berlin a German firm for supply of certain goods of a particular value. The agreement so arrived at, however, could not be acted upon by the assessee as it did not have the requisite import licence for material intended to be imported. On a dispute being referred to the arbitrator, the assessee had to pay damages to the German firm in terms of the award dated 29th July, 1974 for failure to perform its part of the contract. The assessee firm in its return for the assessment year 1975-96 claimed deduction of the aforesaid amount as business expenses on account of damages for breach of contract. The AO initially allowed the claim of the assessee but withdrew the deduction in reassessment proceedings by referring to the decision of the Jurisdictional High Court in the case of Cineramas vs. CIT [1977] 110 ITR 762 (P&H) in which it has been held that infraction of law, including breaches of obligations are not normal incidents of business and penalties and the damages paid in connection with such infractions and breaches are not expenditure laid out or expended wholly and exclusively for the assessee’s business. On appeal the first appellate authority as well as the Income Tax Appellate Tribunal, Chandigarh Bench, upheld the view taken by the Assessing Officer.

Being aggrieved by the Order of the Appellate Tribunal, the assessee filed an appeal before the Hon’ble Punjab & Haryana High Court under section 260A of the Act. Compensation paid by assessee was on account of breach of contract which does not fall in the category of payment of penalty for breach of any law. The Hon’ble Court followed its own decision in the case of CIT vs. S.A. Builders P. Ltd (2008) 299 ITR 88 (P&H). Thus, it was held that amount paid as damages for breach of contract is eligible for deduction as business expenditure.

2. Concealment penalty – Explanation 5 to section 271(1)(c) – Income disclosed for the earlier years is within the scope of Explanation 5

CIT vs. (1) Kanhaiyala (2) Kanhaiyala Sarupaia [2008] 299 ITR 19 (Raj.)

The assessee before the Hon’ble Rajasthan High Court was searched during the previous year relevant to A.Y. 1988-89. The assessee in his statement recorded during the couse of search u/s 132(4). While filing the return of income for the A.Y. 1988-89 the assessee revised returns for the earlier five years and sought a spreadover of the income disclosed during the course of search. The revised returns for the earlier years were scrutinised and were accepted by the department. However, the AO initiated proceedings u/271(1)(c). The assessee contended that if the Explanation 5 is invoked to levy penalty u/s 271(1)(c) then the assessee’s case is protected by the exceptions made out in the said explanation on satisfying certain conditions, being, firstly, if during the course of search, the assessee gives a statement under section 132(4) admitting that the available funds were acquired out of his undisclosed income, the second being that the return of income under section 139(1) will be furnished, the third being the manner in which the income has been derived will be stated and the last being that the tax and interest on the income disclosed is paid. The Assessee’s case satisfied the above conditions. The A. O. levied penalty under section 271(1)(c) which was confirmed by the first Appellate Authority. The assessee’s appeal was allowed by the Appellate Tribunal against with the department carried the matter before the Rajasthan High Court.

The Order of the Appellate Tribunal was confirmed by the Hon’ble High Court with the following observations:

“Explanation 5 to section 271(1)(c) of the Income-tax Act, 1961, provides that where in the course of a search initiated under section 132, the assessee is found to be the owner of any assets mentioned therein, and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income, for any previous year, which has ended before the date of the search, but the return of income for the said year has not been furnished before the said date, or where such return had been furnished before the said date, such income has not been declared therein, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall for the purpose of imposition of a penalty under sub-section (1)(c) be deemed to have concealed the particulars of his income, or furnished inaccurate particulars of income. Significantly, such concealed income could be for any previous year, and could be required to be disclosed in such particulars previous years. It is to this language of Explanation 5, that two exceptions are carved out, by using the word “unless”. Sub-clause (2) provides that it would not be treated as undisclosed or concealed income, if the assessee, in the course of the search, makes a statement under section 132(4), that any asset found in his possession or under his control has been acquired out of his income, which has not been disclosed so far in his return of income to be furnished before the expiry of the time specified in sub-section (1) of section 139, and also specifies in the statement, the manner, in which such income has been derived, and pays tax, together with interest, if any, in respect of such income. Sub-clause (2) does no provide any eventuality in which the immunity conferred by this clause may be taken away, or may be lost, except where the assessee fails to pay tax, together with interest, if any, in respect of such income, in any particular assessment year only. In the language of section 132(4) read with sub-clause (2) of the Explanation 5, there is nowhere the requirement, that the assessee should undertake to show that asset, in a return of any particular assessment year, to be entitled to claim the immunity. When the parent provision contemplates the income to be permissible in any previous years, obviously sub-clauses (1) and (2), which are in the nature of proviso to this Explanation, have to be read in line therewith, and therefore, if the disclosure of the asset has been made, then the assessee cannot be prohibited from showing that the income related to any one or more of the previous years before the date of the search, at the pain of the immunity conferred by sub-clause (2) of Explanation 5 being taken away.”

3. Notional interest on refundable interest free deposit – Is not taxable as income from House Property under section 23(1)(A)

CIT vs. Asian Hotels. Ltd. [2008] 215 CTR (Del.) 84

In this case the assessee had received interest free deposits in respect of shops given on rent. The A.O. while finalising the Assessment Order has added to the assessee’s income notional interest on the interest free deposit @ 18% simple interest p.a. on the ground that by accepting the interest free deposit, a benefit had accrued to the assessee which was chargeable to tax u/28(iv) of the Act. On appeal the first appellate authority reversed the order of the Assessing Officer and held that since the interest free deposit would automatically result in an increase in the profits, any further addition of the notional income on such deposits was imaginary and unrealistic and therefore, deleted the addition.

Being aggrieved by the above order of the CIT(A), the revenue preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal dismissed the appeal of the revenue and upheld the order of the CIT(A).

Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Delhi High Court under dection 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal and held that the notional interest on refundable interest free deposit received by landlord from tenant is neither taxable as business income under s. 28(iv) nor as income from house property under section 23(1)(a).

4. Capital Gains – Cost of acquisition can only be the cost on the date of the actual acquisition

CIT vs. Janhavi Investments Pvt. Limited [2008] 215 CTR (Bom.) 72

The assessee before the Hon’ble Bombay High Court was a private limited company. The assessee has acquired certain shares of M/s. Bharat Forge Ltd. in the year 1977. On the original holding the assessee received bonus shares in the F.Y. 1981-82 and additional bonus shares in the F. Y. 1989-90. All the shares were held as stock-in-trade up to 2-11-1987. On the sale of the shares while working on capital gain, the assessee computed fair market price on 1-4-1981. The A.O held that since the assessee was holding the shares as stock-in-trade upto 2-11-1987 and as the shares were not capital asset as on 1-4-1981. On appeal the first appellate authority partly allowed the claim of the assessee. Being aggrieved by the order of the CIT(A) the assessee preferred an appeal before the Appellate Tribunal. The Tribunal allowed the appeal of the assessee by relying on the judgment of the jurisdictional High Court in the case of Keshavji Karsondas vs. CIT [1994] 207 ITR 737 (Bom).

Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Bombay High Court under section 260A of the Act. The Hon’ble High Court dismissed the appeal filed by the Revenue and held that the assessee was entitled to indexed cost of acquisition as on 1-4-1981, eventhough the shares were held as stock-in-trade as on that date and were converted into capital asset on 6-11-1987.