Digest Of Important Case Laws – October 2014

S. 2(14) : Capital assets–Agricultural land-Land within 5 Kms of Local Municipal committee- Assessable as capital gains.
During relevant year assessee sold certain land situated in village  which is situated within 5 Kms. of limits of local Municipal Committee, hence liable to be assessed as capital gain. Order of Tribunal was to be set aside and that of AO was restored (AY. 2002 – 03)
CIT .v. Khazan Singh (2014) 225 Taxman 22((Mag.)/ 46 taxmann.com 238 (P&H)(HC)

S.2(22)(e) :Deemed dividend –Only registered share holder of a company can be said to be shareholder-Not beneficial entitled to shares.
It is only person whose name is entered in Register of shareholders of company as holder of shares who can be said to be a shareholder qua company and not a person beneficially entitled to shares, therefore, it is only where a loan is advanced by company to registered shareholder and other conditions set out in section 2(22)(e) are satisfied, said amount of loan would be liable to be regarded as deemed dividend within meaning of said section.(AYs. 2006 – 07 to 2008 -09)
CCIT .v. Sarva Equity (P.) Ltd. (2014) 225 Taxman 172 / 44 taxmann.com 28 (Karn.)(HC)

S. 2(22)(e) :Deemed dividend-Loan from company-Assessable as deemed dividend.
Assessee taking substantial part of loan from a company in which he was a director and having substantial interest.Assesseefailed to establish that substantial part of business of company was money-lending.Amount includible as income of assessee as deemed dividend.  (AY. 2008-2009)
Krishna Gopal Maheshwari v. Addl. CIT (2014) 363 ITR 280 / 223 Taxman 33 (All)(HC)

S. 2(22)(e) : Deemed dividend–Lease for its director-Released some other company in which directors had substantial interest-Cannot be assessed as deemed dividend.
Where assessee company having taken a property on lease from its directors, re-leased same to another company in which those directors had substantial interest, security deposits received by assessee from said company in terms of re-lease agreement being an amount received in normal course of its business activity, could not be brought to tax as deemed dividend under section 2(22)(e). (AYs. 2002-03, 2005-06 and 2006-2007)
ACIT .v. Madras Madurai Properties (P.) Ltd. (2014) 64 SOT 159 (URO) / (2011) 9 taxmann.com 93 (Chennai)(Trib.)

S. 2(42B) : Capital gains–Long-term capital gains–Short-term capital gains—Right under agreement was acquired in February 2005- Assessable as short term capital gains.[S.2(29A), 45]
Agreement for purchase of property under attachment to bank in June 2001.Consideration for sale paid in February 2004.Sale of property to third person in February 2005. Rights under agreement acquired only in February 2004 hence gains on sale of property assessable as short-term capital gains. (AY 2005-2006)
Lachmandas and Sons v. Dy. CIT (2014) 363 ITR 315 (Ker)(HC)

S. 4:Income chargeable to tax-Mutuality-Transfer Fees received  by Co-op Housing Society  from incoming & outgoing members (even in excess of limits) is exempt on the ground of mutuality.
The assessee, a Co-operative Housing Society, received a sum of Rs.39,68,000 on account of transfer of flat and garage and credited it to ‘general amenities fund’ as well as ‘repair fund’. The assessee claimed that the said receipt is exempted from tax on the ground of mutuality. However, the AO held that the principles of mutuality will not apply. However, the CIT(A) and Tribunal allowed the assessee’s claim by relying on Sind Co-operative Housing Society vs. ITO 317 ITR 47. On appeal by the department to the High Court HELD dismissing the appeal:
The very issue and the very question was raised repeatedly in the case of the assessee society. Repeatedly the Revenue has failed in convincing the Tribunal that Sind Co-operative Housing Society will not cover the Society’s case. The contribution is made to the repair fund or to the general fund and credited as such. While it may be true that it is occasioned by transfer of a flat and garage, yet, we do not see how merely because there was cap or restriction placed on the transfer fees or the quantum thereof, in this case the principle of mutuality cannot be applied. The underlying principle and of a co-operative movement has been completely overlooked by the Revenue. The Revenue seems to be of the view that a Co-operative Housing Society makes profit, if it receives something beyond this amount of Rs.25,000. There has to be material brought and which will have a definite bearing on this issue. If the amount is received on account of transfer of a flat and which is not restricted to Rs.25,000/- but much more, then different consideration may apply. However, in the present case, what has been argued and vehemently is the amount was received by the Society when the flat and the garage were transferred. Therefore, it must be presumed to be nothing but transfer fees. It may have been credited to the fund and with a view to demonstrate that it is nothing but a voluntarily contribution or donation to the Society, but still it constitutes its income. However, for rendering such a conclusive finding there has to be material brought by the Revenue on record. Beyond urging that it has been received at the time of a transfer of the flat and credited to such a fund will not be enough to displace the principle laid down in the decision of Sind Cooperative Housing Society. The attempt of the Revenue therefore is nothing but overcoming the binding judgment of this Court. In the present case, the Commissioner and the Tribunal both have held that the receipt may have been occasioned by the transfer but the principle of mutuality will still apply. It is a typical relationship between the member of the Co-operative Society and particularly a Housing Society and the Society which is a body Corporate and a legal entity by itself that is forming the basis of the principle laid down by the Division Bench. Co-operative movement is a socio economic and a moral movement. It has now been recognized by Article 43A of the Constitution of India. It is to foster and encourage the spirit of brotherhood and co-operation that the Government encourages formation of Co-operative Societies. The members may be owning individually the flats or immovable properties but enjoying, in common, the amenities, advantages and benefits. The Society as a legal entity owns the building but the amenities are provided and that is how the terms “flat” and the “housing society” are defined in the statute in question. We do not therefore find any reason to deviate from the principle laid down in Sind Co-operative Housing Society’s case and which followed a Supreme Court judgment.( ITA no. 1474 of 2012, dt. 18/12/2014.)
CIT .v. Darbhanga Mansion CHS Ltd. (2015) 113 DTR 217 (Bom.) (HC), www.itatonline.org

S. 4 : Income chargeable to tax- Diversion of income by over-riding title-Application of income’-Contribution of 1% of net profit to the Cooperative Education Fund maintained by National Cooperative Union is an application of income- Cannot be allowed as deduction.[S.37(1)]
The amount contributed by assessee to the National Cooperative Union, New Delhi is appropriation from the net profits. There is a right to receive the income independent of accrual and receipt of income by the assessee before third party could lay claim to any part of it. Since income reached assessee before it reached to a third party, there is no diversion. There is no payment in the year of losses. Therefore, payment under section 63(1)(b) is only an appropriation of profit. Moreover, this amount paid during the year is also not out of the profits of this year but profits of earlier year. Therefore, on that count also amount cannot be allowed as deduction during the year.( ITA no. 1580/Hyd/2013, dt. 31.12.2014.’A’) (AY. 2010-2011)
A.P. Mahesh Co-op. Urban Bank Ltd. .v. DCIT (Hyd.)(Trib.); www.itatonline.org

S. 4 : Charge of Income-tax–Capital or revenue-Compensation-Restrictive covenant-Non compete fee-For five years-Part of business-Not deprived the source of business activity- Assessable as revenue receipt. [S. 28(i)]
Assessee was engaged in manufacture of dyestuffs and chemicals, pharmaceuticals and pesticides, pigments and composites, etc. During relevant year, assessee sold its Oral Hygiene Business (OHB) to another concern namely CPL. Assessee also entered into a non-compete agreement in terms of which it agreed to refrain from competing with CPL for a period of five years. In return of income, assessee declared amount of non-compete fee as a capital receipt. AO, however, treated amount of non-compete fee as a revenue receipt and, accordingly, brought same to tax. It was noted that OHB sold by assessee was not a part of its core business. Further, by agreeing to a restrictive covenant, assessee was not deprived of a source of business activity rather assessee transferred a particular activity under scheme of business restructuring and to avoid adverse and tough situation in future. Even otherwise, restriction under agreement was only for limited period of five years and not for permanent or indefinite period. (AY. 1995-96)
Novartis India Ltd. .v. DCIT (2014) 64 SOT 182 (URO) / 45 taxmann.com 341 (Mum.)(Trib.)

S. 5 : Scope of total income–Accrual of income-Civil suit pending-Income has not accrued hence deletion  of addition was held to be justified.
Assessee state ware housing-corporation was engaged in business of warehousing and incidental activity. Assesseehad raised higher warehousing bills to circle stamp depot than that reflected in its books.AO  made addition as income. Tribunal has deleted the addition . On appeal Court held that  the  said income had not accrued to assessee as circle stamp depot had resisted said demand and filed a civil suit, hence deletion of addition was held to be justified .(AY. 2004 -05)
CIT .v. Gujarat State Warehousing Co. (2014) 225 Taxman 182 / 43 taxmann.com 301 (Guj.)(HC)

S. 5 : Scope of total income–Method of accounting-TDS  credit-Real income has materialized, has to be examined in context of commercial and business realities of situation in which assessee is placed and not with reference to system of accounting.[S. 145,199]
Assessee-individual was working as consulting engineer and commission agent/dealer in air-conditioning. During assessment proceeding, AO observed that in balance sheet certain amount was shown under heading ‘contingent Income’. AO further observed that credit for TDS for said income had been claimed though receipt was not offered for taxation and, therefore, he treated said amount as income for current assessment year. It was found that commission earned from Dealer had been offered for taxation on basis of completion of service and installation contract in respective year and this method had been consistently followed year to year by assesse.  This method was also seen in consonance with accounting method AS-9 in respect of service contract and installation fee which states that revenue be recognized only when equipment is installed and accepted by customer. Since work related to installation and erection of equipment had been completed in subsequent assessment years, accrual of income happened only in subsequent years and, when assessee got an enforceable right to receive same. In view of above, addition made by AO was rightly deleted by CIT (A).(AY. 2009-10)
Addl.CIT .v. Vinay V. Kulkarni (2014) 64 SOT 131 / 46 taxmann.com 370 (Pune)(Trib.)

S. 5 : Scope of total income–Income–Accrual-Interest on grants-Short term deposit in bank- interest earned on short-term deposits could not be said to have accrued as income to assessee.
Assessee-company was a Special Purpose Vehicle created for purpose of implementing projects funded under Industrial Infrastructure Upgradation Scheme by Department of Industrial Policy and Promotion. During year it received grant from Central Government and kept amount in short-term deposits in bank, as same was not immediately utilized. It earned interest income on such deposits and claimed that interest income had overriding charge on it and hence could not be treated as its income . Central Government had given a clear instruction that interest on short-term deposits either had to be refunded back to Government or to be adjusted against future grants to be released for implementing project. In view of aforesaid instruction interest earned on short-term deposits could not be said to have accrued as income to assessee. Matter remanded. (AY. 2007-08 and 2008-09)
Hyderabad Pharma Infrastructure & Technologies Ltd. .v. Addl.DIT (2014) 64 SOT 179 / 45 taxmann.com 339 (Hyd.)(Trib.)

S. 5 : Scope of total income –Income-Accrual-2 percent grant towards administrative purposes- Matter remanded.
Assessee-company was a Special Purpose Vehicle conceived by Department of Industrial Policy and Promotion [DIPP].During a meeting held on 9-12-2004, DIPP pointed out that 2 per cent of amount calculated from central grant shall be made available for incurring administrative expenses by assessee. CIT(A) treated 2 per cent of grant towards administrative expenses as income of assessee. Tribunal held that  before treating 2 per cent of grant to be income of assessee had to factually ascertain whether such grant had actually been sanctioned to assessee. Matter remanded. (AYs. 2007-08 and 2008-09)
Hyderabad Pharma Infrastructure & Technologies Ltd. .v. Addl. DIT (2014) 64 SOT 179 / 45 taxmann.com 339 (Hyd.)(Trib.)