K. Gopal
Advocate

1. Capital or Revenue expenditure – Advance to suppliers of tools and dyes – Moulds and dyes continue to remain the property of the manufacturer – Tooling advance paid to the vendors is non-refundable – Revenue expenditure

CIT vs. Honda Siel Power Products Ltd. [2007] 212 CTR (Del) 314

The assessee company manufactures portable generator sets in technical collaboration with Honda Motor Company of Japan. Prior to the impugned assessment year the assessee company was amortizing the advances made by it to the manufacturer of tools and dyes on the basis of the actual quantity of the components used in the production of generator sets. The payment made by the assessee company as advance was non-recoverable and the ownership of the tools and dyes remained with the manufacturer. The assessee company gets benefit of indigenous source of supply of tools and dyes for the components of the generator sets. The advance was charged to profit and loss account in the year of advance. The assessee claimed the payment of tooling advance as revenue expenditure. The Assessing Officer has however disallowed the claim of the assessee by observing that the changed method of claiming the amount paid as tooling advance as revenue expenditure was not a standard method. On appeal the first appellate authority confirmed the Assessing Officer’s action.

Being aggrieved by the Order of the CIT(A) the assessee preferred an appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal allowed the appeal filed by the assessee on the ground that the tooling advance was for facilitating the trading operations of the assessee and further that the tools and dyes continued to remain the property of the manufacturer. Therefore the expenditure on tooling advance is revenue expenditure.

The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Delhi High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that payment of advance made by the assessee for manufacturing tools and dyes which continued to remain the property of the manufacturer is a revenue expenditure.

2. Search and Seizure – Condition precedent – If the reason to believe comes into existence after issuance of the warrant of authorisation – The entire search and seizure will be illegal

Dr. D.C. Srivastava vs. Director of Income Tax (Investigation) [2007] 212 CTR (All) 527

The assessee before the Hon’ble Allahabad High Court was a practising doctor. On 21st February, 2006 the assessee was to travel from Lucknow to Delhi by Sahara Flight No. S2-6138 which was cancelled and thereafter the assessee purchased another ticket for Delhi of the international Jeddah-Delhi flight. The assessee had declared before the custom authorities that he was carrying the cash of Rs. 10 lakhs in his briefcase. The assessee had also produced a photocopy of his PAN card and further informed the Custom official that the amount which he is carrying forms part of the income. After a long waiting in the chambers of the customs officials, the officers of the IT Department who introduced themselves as officers authorized by the Director of IT (Inv.) Kanpur, seized the cash which was in possession of the assessee in spite of his strong protests.

Being aggrieved by the above seizure the assessee filed a writ petition before the Hon’ble Allahabad High Court under Article 226 of the Constitution of India. The Hon’ble High Court had allowed the petition with the observation that information given by the officers of Customs Department to the IT authorities that the petitioner has made a declaration of Rs. 10 lakhs at the airport did not constitute sufficient information for forming the belief that the said amount was unaccounted money which was not disclosed or would not be disclosed especially when the assessee has given his PAN card and therefore, the authorization under section 132 was without jurisdiction and hence entire search and seizure is illegal.

CIT vs . Chensing Ventures [2007] 212 CTR (Mad) 539

The assessee before the Hon’ble Madras High Court was a firm engaged in the business of purchase and sale of steel scraps both locally and in the mid sea. A survey action under section 133A was conducted on 18th March, 2002 in the presence of one P. Chandrasekar of the firm. During the course of survey it was pointed out to the assessee that it had made cash payment to the bank amounting to Rs. 30,00,000, out of which he was able to explain the source of cash payment to the extent of Rs. 1.50 lakhs only and for the balance amount of the Rs. 28.50 lakhs, the assessee agreed to offer it as income from undisclosed sources. The assessee filed return of income admitting a business loss of Rs. 11,95,384 and admitting an income of Rs. 28,50,000 under the head "Income from undisclosed sources". The Assessing Officer while completing the assessment, restricted the business loss to Rs. 8,20,384 and failed to set off the same against the income from other sources. On appeal the first appellate authority granted relief by directing the Assessing Officer to set off the loss against the income from other sources. Being aggrieved the revenue preferred an appeal to the Income-tax Appellate Tribunal. The Hon’ble Tribunal dismissed the appeal of the revenue.

Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Rajasthan High Court under section 260A of the Act. Hon’ble High Court upheld the order of the Appellate Tribunal and held that once the loss is determined, the same should be set off against the income determined under any other head of income. In the assessment, no reasons were given by the Assessing Officer to deny the benefit of section 71. The benefit provided under section 71 cannot be denied to the assessee.

4. Recording of satisfaction by ao is sine qua non for purposes of initiating penalty under section 271(1)(c)

CIT vs. Jai Bharat Maruti Ltd. [2007] 212 CTR (Del) 250

The issue before the Division bench of the Hon’ble Delhi High Court was whether the satisfaction of the Assessing Officer may be discerned from the order of assessment making the initiation of penalty valid?

The assessee before the Hon’ble Delhi High Court was a limited company. While passing the Assessment Order the Assessing Officer has observed as follows: "Assessed. Issue necessary forms. Charge interest. Give credit for prepaid taxes. Penalty proceedings under s. 271(1)(c) have been initiated separately". Thereafter, the Assessing Officer has levied penalty by passing an order under section 271(1)(c) of the Act. On appeal the first appellate authority confirm the action taken by the Assessing Officer. Being aggrieved by the above order, the assessee preferred an appeal before the Income-tax Appellate Tribunal. Hon’ble Tribunal followed the dictum laid down in CIT vs. Ram Commercial Enterprises Ltd. [2001] 167 CTR (Del) 321 and set aside the penalty order passed by the Assessing Officer.

The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Delhi High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that it being not descendible from a reading of the assessment order that the Assessing Officer was satisfied, even prima facie, that a case for initiating penalty proceedings under section 271(1)(c) was made out, the same cannot be sustained in law.

5. Depreciation – User for business – Active or passive use

CIT vs. Heera Financial Services Ltd. [2007] 212 CTR (Mad) 532.

The assessee before the Hon’ble Madras High Court was a limited company. During the impugned assessment year, the assessee bought positive film rolls for a sum of Rs. 6,35,982 on 30th Aug., 1996 and entered into an agreement with one M/s. Shivashree Pictures on 30th Aug., 1996 for leasing the films. In the P&L A/c for the period ending on 31st March, 1997, lease rent was disclosed as Rs. 1,97,500. The assessee claimed depreciation on the films leased out. But, subsequently, on account of the strike in the film industry, the lessee returned the film rolls to the assessee in September, 1997 stating that the film rolls could not be used by it and accordingly, requested for cancellation of lease agreement. The assessee was following mercantile system of accounting and accordingly, it had credited the lease rent in the accounts and also claimed depreciation. The lease rent which was accounted as income during the period ending on 31st March, 1997 and which could not be recovered was written off as bad debt during the accounting year 31st March, 1998. The Assessing Officer reopened the assessment and held that the lease rent offered by the assessee at Rs. 1,97,500 was claimed as bad debt in the subsequent assessment year and therefore, disallowed the depreciation originally allowed and withdrew the depreciation of Rs. 6,35,985. On appeal the first appellate authority granted relief to the assessee following the ratio laid down by the court in CIT vs. Vayithiri Plantation Ltd. [1980] 18 CTR (Mad.) 9: [1981] 128 ITR 675 (Mad.) wherein it was held that the assets "kept ready for use" were eligible for depreciation / development rebate.

Being aggrieved by the above order of CIT(A), the revenue preferred an appeal before the Income-tax Appellate Tribunal. Hon’ble Tribunal upheld the order of the CIT(A)
and dismissed the appeal filed by the Revenue.

The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Madras High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that the lessee having failed to use the film rolls due to strike in film industry, there was passive user and assessee-lessor was entitled to depreciation on the film roll.

6. Deduction of Tax at Source on salary – Liability only with regard to amount paid by employer

CIT vs. Woodward Governor India P. Ltd. [2007] 295 ITR 1 (Delhi)

The assessee before the Hon’ble Delhi High Court was a joint venture between Mr. Keshav Thiran and his associates and M/s. Woodward Governor Company, USA. During the impugned assessment year the assessee had engaged one Kenneth Allen Axelsen as a managing director. He was paid a sum of Rs. 66.19 lakhs by the American collaborator by way of annual salary. The assessee was not aware that the foreign collaborator was paying salary to Kenneth Allen Axelsen. However the assessee deducted tax at source on the salary which it was paying to its managing director. The Assessing Officer made the addition under section 192 by observing that the assessee was required to deduct tax at source even on the salary component paid by the foreign collaborator. Being aggrieved by the above order the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). However the first appellate authority upheld the action taken by the Assessing Officer.

Being aggrieved by the above order of CIT(A), the assessee preferred an appeal before the Income-tax Appellate Tribunal. Hon’ble Tribunal allowed the appeal in favour of the assessee.

The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Delhi High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that as regards the liability to deduct tax at source in terms of section 192 of the Income-tax Act, 1961, the assessee was only liable to deduct tax at source on the payment that it made to its managing director and it could not be burdened with the liability of deducting tax at source on any other payment, either by way of salary or otherwise which Kenneth Allen Axelsen received from some other sources. Thus, the assessee was not liable to deduct tax at source on payments received by its managing director from the foreign collaborator by way of salary.