While damages or penalty which are compensatory in nature are allowable as a deduction u/s 37(1) of the Act, damages which are penal in nature and in respect of infraction of law are not allowable as a business expenditure. Amounts paid by way of damages for a contractual breach is a normal incident of business and allowable as a deduction.

Baldev Singh Kanwar vs. CIT (1997) ITR 640 overruled.

(i) In considering whether the interest paid by an assessee on loans raised for acquisition of new asset, before the same was first put to use, is to be added towards the cost of the asset or the same is to be granted as a revenue expenditure for the reason that the assessee was already in business, the provisions of s 36 (1)(iii) cannot be read in isolation but have to be read with s. 43 (1). DCIT vs. Core Healthcare 251 ITR 61 (Guj) dissented from;

(ii) S. 36(1)(iii) does not confer a deduction orrowed for the purposes of setting up a new unit even in the case of an assessee already in business. Deduction for interest on capital borrowed can be allowed only after the asset is first put to use and starts generating income;

(iii) It is implicit from Expl. 8 to s. 43(1), which provides that interest payable after the asset is put to use shall not be added to the actual cost, that interest payable before the asset is put to use has to be added to the actual cost;

(iv) In conformity with law and accounting principles, interest paid on capital borrowed for acquisition of an asset has to capitalized and cannot be allowed as a revenue deduction till the asset is put to use. There is no distinction between capital borrowed for the setting up of a new business and the expansion of an existing business;

(v) The Proviso to s. 36(1)(iii) inserted by the Finance Act 2003 is to ‘curb tax avoidance’ and is merely clarificatory

The Sick Inndustrial Companies Act is a complete code and during the pendency of a reference, an industrial company cannot apply to the High Court for sanctioning a scheme under ss. 391 to 394 of the Companies Act. The principles to deal with conflicts between two statutes is discussed in detail.

Cash in bank is conceptually different from cash in hand. It is not permissible for the Revenue to withdraw money from the attached bank accounts. However, as the order u/s 132B was not challenged, no relief given. Directions given for deposit of seized moneys in fixed deposit.

(i) The Amadeus system, by which subscribers in India are enabled to perform the functions of reservation and ticketing, represents a “business connection” because it extends to the Indian territory in the form of connectivity in India and generates income in India when the booking is completed on the subscribers’ computer;

(ii) In determining the extent of profits attributable to such business connection, one has to look into the factors like functions performed, assets used and risk undertaken. On facts, as the major part of the work was processed at the host computer in Germany, only 15% of the revenue accruing to the assessee in respect of bookings made in India can be said to have accrued or arisen in India;

(iii) In view of Circular No.23 of 23rd July 1969, where the income accruing in India is consumed by the payment made to the agents in India, no income is left to be taxed in India under the Act;

(iv) As the assessee has provided computers and connectivity to its subscribers, it has a ‘fixed place’ PE in India. As the Indian agent has the authority to entry into agreements with the subscribers and installs and configures the computers, and provides connectivity and is functionally and financially dependent on the assessee, there is also a ‘dependent agent’ PE in India;

(v) Only 15% of the revenue generated from the bookings made within India can be said to be attributable to the PE. Since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguishes the assessment and no further income is taxable in India under the DTAA.

See also Galileo International Inc vs. DDIT (ITAT Delhi) (6.1 MB), SET Satellite (Singapore) Pte Limited 106 ITD 175 & Rolls Royce Plc vs. DDIT

Where the assessee had led satisfactory evidence that its business was that of a commission agent and not a trader and 10-11 years had passed, the assessee could not be held responsible for non-appearance
of five traders to whom summons were issued by the AO.

Receipt for agreeing to refrain from carrying on a competing business under a restrictive covenant is a capital receipt and is not chargeable to tax either as a revenue receipt or as a capital gain as ss. 28(va) and 55(2)(a) are prospective and do not apply to the year in question.

See also: Saurabh Srivastava vs. DCIT (ITAT Delhi SB)

(i) Amounts received by an assessee from the foreign holding company of his employer company on redemption of stock appreciation rights, being “fruits of employment” is chargeable to tax as “salaries” despite the absence of an employer-employee relationship (ii) there is a fundamental difference between stock options and stock appreciation rights.

See also: CIT vs. Infosys Technologies (Supreme Court)

S. 158BB has to be read with the relevant Finance Act and the surcharge prescribed therein is applicable to a block assessment. The Proviso to s. 113 of the Act, though inserted by the Finance Act 2002 with effect from 1.6.2002, is clarificatory and applies to searches conducted before that date.

(i) A stock option which is subject to a ‘lock-in’ is not a chargeable perquisite u/s 17(2) on the date of grant, vesting or exercise. The benfit is purely notional.

(ii) s. 17(2)(iiia) inserted w.e.f 1.4.2000 is not clarificatory;

(iii) Every “benefit” is not chargeable unless it is in the nature of ‘income’ or specifically made chargeable;

(iv) Estimation of TDS u/s 192 in the absence of clear provisions on
valuation of “perquisite” does not justify the department treating the employer as an assessee-in-default.