1. Business expenditure – Capital or revenue – admission fees and contribution to infrastructure development fund paid for membership stock exchange is revenue expenditure

The assessee incurred certain expenditure to become member of Coimbatore Stock Exchange. The Assessing Officer disallowed the same as Capital Expenditure. The assessee succeeded in appeal. The Department carried the matter to the High Court in appeal.

The Hon’ble Court observed that by incurring these expenditure the assessee had acquired right of trading in shares and securities at the terminals of Coimbatore Stock Exchange. To acquire the membership card, the condition precedent is that the assessee shall pay admission fee as well as the contribution to infrastructure facilities, and only after paying the same, the assessee will become entitled to trade at the terminals of the stock exchange. Without making these payments, the assessee cannot become a member. The assessee is a stock broker, without becoming a member, he cannot carry on the business. It is an admitted fact that the stock exchange allowed only their members to carry on business on the floor of the stock exchange. As per the articles, a member cannot carry on business unless he pays the admission fee, contribution to infrastructure development fund and annual fee. So, payment is necessary for the assessee to carry on the business. By becoming a member, the assessee is also entitled to the benefit of using all the facilities of the stock exchange. It cannot, therefore, be said that any enduring benefit had accrued to the assessee. It is also very difficult to say how the amount paid for becoming a member can possibly be regarded as a capital expenditure. No new assets had been created and there is no addition to or fee as well as contribution to infrastructure development fund is like nature of licence fee and it is paid only for carrying on the business. If any payment is made for the purpose of running the business effectively and efficiently, it is only revenue expenditure.

CIT vs. S. Venkatasubramanian [2007] 207 CTR (Mad.) 88

2. Business income or capital gains – Gains on sale of shares held as investment is capital gains

The assessee Company before the Hon’ble High Court held shares as stock-in-trade as well as investment. The Assessing Officer treated the capital gains in the shares held as investment as business income. On an appeal, the assessee’s claim of capital gains was accepted. The Appellate Tribunal sought the opinion of the Hon’ble High Court on this issue.

The Hon’ble Court observed that a company can hold some shares as stock-in-trade for the purpose of doing business of buying and sale of such shares, while at the same time it can also hold some other shares as its capital for the purpose of earning dividend income. Here the shares in question were held as the assessee’s capital and not as stock-in-trade. Hence, there would be capital gain and not business income.

CIT vs. N.S.S. Investment ( P) Ltd. [2007] 158 Taxman 13 (Mad.)

3. Charitable purposes – Trust providing help to poor and providing small amounts to devotees of particular deity – Trust is charitable

The petition before the Hon’ble Bombay High Court was filed on behalf of a Charitable Trust registered under the Bombay Public Trust Act with the object of propagation of Sree Rama Devi’s teachings and philosophy. Apart from this, it has been providing medical facilities, maintenance and feeding of the poor, etc. Amongst other activities, the trust is supposed to be working for the benefits of its devotees of Shree Rama Devi, having temple at Ahmednagar. The application seeking registration under section 12A was rejected on the ground that (1) the trust is for identifiable beneficiaries and not for the public at large and (2) the trust was more in the nature of private charity and benefits. The trust challenged the order before the High Court in a Writ Petition.

The Hon’ble Court allowed the petition holding that it is true that small benefits were given to a few persons. However, that by itself cannot take away the charitable character of the Trust. The fact that some of the devotees have been given small amounts on monthly basis does not mean that all the beneficiaries are identifiable. The trust has been spending for the medical benefits, poor feeding and education assistance to a large number of persons. Thus, it cannot be said that the trust was catering to the needs of only a few. The trust is a Charitable Trust eligible for registration.

Suresh Sunderrao Nayak vs. M.K. Pandey, DIT (Exemption) [2007] 288 ITR 79 (Bom)

4. Deduction – Section 80hhc – Freezing and processing charges – Part of business profits

The Assessee, apart from exporting the marine products itself, processed marine products for others for processing fees. The processing fees were treated by the Assessing Officer as not part of business profits for the purpose of computing deduction under section 80HHC. The action of the Assessing Officer was confirmed by the Appellate Tribunal.

On an appeal Hon’ble High Court observed that the business of the assessee was manufacturing and processing and export of marine products. The income derived from freezing and processing of marine products but for that operation the export could not have been made. Thus, the freezing and processing charges are business income eligible to deduction under section 80HHC.

K.R.M. Marine Exports Ltd. ACIT [2007] 288 ITR 151 (Mad.)

5. Deduction under section 80hhc – Condition to file audit report is directory

The Assessee Company filed the original return showing loss. The same was accepted. During the reassessment proceedings certain additions were proposed to be made to determine positive income. The assessee made claim of deduction under section 80HHC and filed the report in Form 10CCAC which was not filed along with the original returns. The Assessing Officer rejected the claim on the ground that the Audit Report was not filed along with the return of income. The CIT(A) confirmed the assessment order. On an appeal to the Appellate Tribunal matter was sent back to the Assessing Officer with a direction to consider the claim of deduction under section 80HHC.

On an appeal by the Department under section 260A the Hon’ble High Court held that the non-furnishing of the audit report in Form 10CCAC to claim deduction u/s. 80 HHC is a defect. The condition to file audit report in Form 10CCAC is not mandatory. Thus, rejection of the claim of deduction on technical grounds is not justified.

CIT vs. Valli Cotton Traders Pvt. Ltd. [2007] 288 ITR 400 (Mad.)

6. Deduction – section 80HHD – receipts of foreign exchange covered in disclaimer certificate in form 10CCAE to be reduced from foreign exchange receipts as well as total receipts

The assessee while computing the deduction under section 80HHD reduced the foreign exchange receipts for which the disclaimer certificate were issued from both the numerator, as per the provisions of section and the denominator also. The method of computation of deduction adopted by the assessee was not accepted by the Assessing Officer.

The Hon’ble High Court while examining this question at the instance of the Department observed that it is true that sub-section (3) while setting out the multiplier that is to be applied while determining the profits derived from services rendered to foreign tourists expressly permits the deduction of the Foreign Exchange receipts in respect of which disclaimer certificates have been issued to other hotels from the total Foreign Exchange receipts, constituting the numerator of the multiplier, but does not provide for such deduction from the total receipts that constitute the denominator of such multiplier. However, a closer reading of sub–s (3) reveals that the profits derived from services provided to foreign tourists “shall be the amount which bears to the profits of the business (as computed under the head ‘profits and gains of business or profession’) the same proportion as the receipts specified in sub-section (2) as reduced by any payment referred to in sub-section (2A) made by the assessee bear to the total receipts of the business carried on by the assessee.” In other words the total receipts are only those receipts that can be said to relate to the business of the assessee and not that of other hotels for whom the assessee may have collected from foreign tourists Foreign Exchange receipts and in respect of which the assessee has not only made over such Foreign Exchange receipts to the other hotels but has also issued the necessary certificate under sub-section (2A); i.e., in Form No. 10CCAE.

CIT vs. Lotus Travels (P) Ltd. [2007] 207 CTR (Del.) 105

7. Death of partner – Deed contains the contract to the contrary – No dissolution of the firm

The assessee firm filed two returns treating the firm to be dissolved on the death of one of the partners. The Assessing Officer treated the case as that of succession relying on the clause 10 of the partnership deed which provided for continuation of the firm in the event of the death of one of the partners. The Appellate Tribunal held that the death of a partner resulted in dissolution of the firm.

On a reference by the Appellate Tribunal the Hon’ble Allahabad High Court observed that in view of the contract to the contrary contained in clause 10 of the deed even on the death of one of the partners, the firm should be deemed to have been continued by the surviving partners and did not stand dissolved. It would be a case of section 187 and not section 188 of the Act.

CIT vs. Paramount Trading Corporation [2007] 288 ITR 21 (All.)

8. Ownership of property – Section 22 – Land and building purchased in the name of wife – Income from the same cannot be added in the hands of the other person

The assessee was subject to an action of search and seizure. During the course of the search certain documents were found which suggested that the husband has purchased land in the name of his wife and constructed a house on the same. The Department treated the income from the building was treated as income of the assessee as wife did not have any source of income under section 22 of the Act. The addition was deleted by the first appellate authority and the same was confirmed by the Appellate Tribunal.

The Hon’ble Court disposing of the appeal preferred by the Department, held that the revenue failed to prove that the wife was not the real owner of the property. Thus, the income from the said property was not taxable in the hands of the assessee.

CIT vs. S.M. Anandvel (HUF) (Specified) [2007] 288 ITR 286 (Mad.)

9. Reassessment – Remarks by cit(a) are not finding to issue notice under section 148(1)

The assessee an investment company, filed returns and claimed depreciation on the leased assets. Search action was carried out and in the block assessment proceedings certain allowances and deduction claimed and allowed on the leased assets were sought to be withdrawn. However, on an appeal the CIT(A) deleted the additions and disallowances made in the block assessment order. The department on the basis of certain observations in the CIT(A) order, invoked provision of section 150 and issued notice under section 148(1).

The assessee challenged the validating of the notice by filing a Writ Petition. The Hon’ble High Court held that the extended period of limitation contained in section 150 of the Act was not available to the Revenue. Moreover on the date of passing of the block assessment order on September 29, 2000, the assessments for most of the assessment years had become time-barred and, therefore, even if the Commissioner (Appeals) were to give any directions, they would be hit by section 150(2). Once it was held that no directions had been given by the Commissioner (Appeals) for reopening the assessments, the benefit of section 150 was not available to the Revenue and the impugned notices which were time-barred under section 149 of the Act were liable to be quashed.

Lotus Investment Ltd. vs. G.Y. Wagh, ACIT [2007] 288 ITR 459 (Bom.) [2007] 207 CTR (Bom.) 245