REPORTED DECISIONS

1. Business expenditure – Interest on borrowed capital – Year of allowability – Project completion method – Interest identifiable with that project allowable when project is complete and income thereof offered for taxation – A.Ys. 1993-94, 1996-97 and 1997-98

Wall Street Construction Ltd. vs. JCIT (2006) 102 TTJ 505 (Mum) (SB); Order dated 22-9-2005

In the case of a builder following project-completion method of accounting, the determination of profits chargeable to tax is postponed to the year in which the project is competed or is substantially completed. The true profits in such a case can be determined only when entire cost of the project, direct or indirect, including finance cost is added to the value of work-on-progress. This proposition is also fortified by the matching concept. In the present cases, the assessees have identified interest cost and have allocated such cost to difference projects in the books of account, but deduction in respect of interest is claimed u/s. 36(1)(iii) against the income of some other projects which are completed during the relevant years. This procedure results into distortion of the correct profits which must be determined as per the project-completion method of accounting followed by the assessees. Where an assessee is following project-completion method of accounting, the interest identifiable with that project should be allowed only in the year when the project is completed and the income from that project is offered for taxation.

2. Business expenditure – Disallowance u/s. 14A – Expenditure towards dividend and interest income – Interest expenditure not related to earning of dividend and interest income – No disallowance u/s. 14A – AY 2001-02

Escorts Ltd. vs. ACIT (2006) 102 TTJ 522 (Del); Order dated 31-1-2006

For applying provisions of sec. 14A, two steps are required to be followed; i.e., firstly, the income which do not form part of the total income have to be identified and secondly, the expenditure which is related to such income has to be identified. Expenditure incurred ‘in relation to an income’ can be of two types; i.e., expenses directly relatable to the earning of the said income and second, expenses which do not have any direct nexus but can be said to be indirectly related to earning of income. Thus, where the investments in shares and mutual funds were predominantly made by the assessee in earlier years and no investment was made out of borrowings in the relevant year, and the interest yielding loan was advanced in an earlier year, it could be therefore held that, no part of interest cost incurred by the assessee during the relevant year can be related to earning of dividend and interest income which are exempt u/s.10(33) and 10(23G), respectively and therefore can be no disallowance u/s. 14A. However, in the absence of separate accounts by which management and administrative expenses attributable to earning of dividend and interest income can be segregated, same have to be estimated on ad hoc basis on consideration of the relevant facts.

Everplus Securities & Finance Ltd. vs. DCIT [2006] 101 ITD 151 (Del); Order dated 17-3-2006

Where main activity of assessee-company of making investment in shares of group companies was to acquire and retain control of group companies and not to earn profit by trading in said shares, such activity could not be regarded as carrying on of business for purpose of section 28.

4. Remission or cessation of trading liability – Sec. 41(1) – Amount received on issuance of NCD – Forfeiture thereof for non-payment of call money – Is a capital receipt – Not taxable u/s. 41(1) even if considered as business receipt – A.Y. 1997-98

Prism Cement Ltd. vs. JCIT (2006) 101 ITD 103 (Mum); Order dated 23-3-2006

The earnest money or an advance amount received on account of issuance of NCDs, if forfeited on account of non-payment of call money, the loan liability would only convert into a capital receipt. It would not assume a character of revenue receipt or business receipt because NCDs were not issued in the course of regular business of the assessee as evident from the facts of the case. Assessees main business was of cement and it was in the process of set up of cement manufacturing plant during the impugned assessment year. Hence, the amount received by the assessee in lieu of issuance of NCDs, which were forfeited later on account of non-payment of call money, assumed character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If one would consider that receipt to be a business receipts, even then it would not be taxable to tax under the provisions of section 41(1) inasmuch as there was no allowance or deduction of that liability in the earlier years. There is also no provision in the Act according to which such type of receipts are chargeable to tax. Therefore the revenue was not justified in treating that receipt as revenue receipt.

5. Search & Seizure – Block assessment – Levy of surcharge u/s. 113 – Insertion of proviso w.e.f. 1-6-2002 – substantive proviso and has no retrospective operation – Where Finance Acts did not provide prior to 1-6-2002, no surcharge chargeable

Merit Enterprises vs. DCIT (2006) 101 ITD 1 (Hyd) (SB); Order dated 26-4-2006

Proviso to s. 113 providing for levy of surcharge on undisclosed income in block assessment, which was inserted w.e.f.
1-6-2002, is a substantive provision and has no retrospective operation. Finance Acts did not provide for a separate and independent charge for levying surcharge on undisclosed income of a block period and, therefore, prior to insertion of proviso to s. 113 surcharge was not chargeable.