Digest Of Important Case Laws – July 2014

S.2(1A):Agricultural income–Capital gains-Gains from sale of agricultural land is exempt even though purchaser intends to use the land for commercial purposes. [S.2(14),45]
The only reason the A.O. treated the land as non-agricultural land was that ‘agreement of sale’ read with ‘Irrevocable GPA’ does not indicate that land retained the character of agriculture at the time of transfer. This was also the ground raised by Revenue in the appeal that M/s. Ramky Estates and Farms P. Ltd., may put the property to commercial use, therefore, the land was meant for commercial exploitation and did not have the character of agricultural land at the time of his transfer. There is no dispute that assessee has purchased agricultural land and put to agricultural use as such earlier. The facts indicate that assessee has sold only agricultural land which was also used and put to agricultural use earlier and the purpose for which the purchaser utilized the land cannot be considered as an evidence of change of nature of land as was considered by Assessing Officer.The chargeability to tax under s. 45 arises only if on the date of sale, the land in question retained its character as a capital asset, which means, an asset, which does not answer the definition of a capital asset and which is an agricultural land would automatically be outside the scope of s. 45. It is no doubt true that the purpose for which the purchaser had purchased was totally different from what the transferor had intended to use the land in question but with the admitted finding that the lands in question were under agricultural operation on the date of sale for the purpose of considering the meaning of capital assets, it matters very little how the subsequent purchaser intended the land in question to be put to use. The Hon’ble Delhi High Court in the case of Hindustan Industrial Resources Ltd., vs. ACIT has taken a similar view. The CIT(A) in his order has followed the decision of Hon’ble Bombay High Court in the case of CIT vs. Debbi Almao and Joaqyam Almao reported in 339 ITR 59 (Bom.) (HC) which also considered similar facts and accepted the contention that no capital gains arises on the sale of agricultural land even though purchaser purchased the property with an intention of selling it for non-agricultural purposes. (ITA  No. 729/Hyd/2013, 24.10.2014.) (AY.2008-09)
DCIT v. M. Kalyan Chakravarthy(Hyd.)(Trib.);www.itatonline.org

S.2(22)(e):Deemed dividend-Loan to a share  holder-Expenditure on repair and renovation  by the company-No deemed dividend in shareholder’s hands.
The assessee had let out the premises to the company. The company incurred expenses towards construction and improvement of the factory premises which it continued to use. The AO  held that the amount was paid on behalf of the assessee and alternatively the amount spent was treated as perquisite.On appeal Tribunal held that the payment was not  a deemed dividend and the amount was also not a perquisite. On appeal by revenue , dismissing the appeal held that no money had been paid to the assessee by way of advance or loan nor was any payment made for his individual benefit. It was a case where the asset of the assessee may have enhanced in value by virtue of repairs and renovation but this could not be brought within the definition of the advance or loan to the assesse, nor could it be treated  as payment by the company on behalf of the assessee share holder or for the individual benefit of such shareholder. Appeal of revenue was dismissed.
CIT v. Vir Vikram Vaid (2014) 367 ITR 365 (Bom.)(HC)

S.2(24):Income-Capital or revenue-Carbon credit-Income on sale of Certified Emission Reduction/carbon credit  -Chargeable to tax.[S.4, 28(i)]
The value of any benefit or perquisite arising from business or profession forms part of the profit and gains of the business. Therefore, the income on sale of the Certified Emission Reduption / carbon credit which is admittedly a benefit arising out of the business of the assessee, would fall within the definition of "income" u/s. 2(24)(vd) of the Act. Therefore, income on sale of Certified emission reduction/carbon credit part of the chargeable as income. (AY. 2008-09)
Apollo Tyres Ltd. v.ACIT (2014) 149 ITD 756 /31 ITR 477 /47 taxmann.com 416 (Cochin)(Trib.)

S.2(31):Person-Association of persons-Individual-Land inherited by brothers by operation of law – Assessee to be assessed as individuals and not association of persons.[S. 28, 45(5)(b), Land Acquisition Act, 1894, S.28]
The assessee were brothers .Their father died leaving land to the assessee and two others who relinquished their rights in the assesee’s favour. Bequeathed land was acquired by the State Government and compensation was paid to the assessee. AO brought to tax the compensation in the status of Association of persons and taxed the interest in the year of receipt. On appeal High Court held that assessee were to be assessed as individuals and not an association of persons and that the interest was to be spread over from the year of dispossession of land, that is, the assessment year 1987-88, till the year of actual payment, which was the assessment year 1999-2000. On appeal by the revenue the Court held that land inherited by the brothers by operation of law hence assessable as individuals and not association of persons. Interest is taxable in the year of receipt and not spread over.
CIT v. Govindbhai Mamaiya (2014) 367 ITR 498/271 CTR 31/109 DTR 65 (SC)
Editorial: Judgment of Gujarat High Court in ITA no 8103 of 2009 dt 16-11-2006 was partly affirmed and partly reversed.

S. 4: Charge of income-tax–Lease rentals–Lease or finance-Agreement of lease-Entire lease rent assessable-Lessor was entitle to depreciation. [S.32]
The assessee was engaged in the business of bill discounting, hire purchase and leasing, mutual funds and insurance agency. In the returns, it offered the interest portion in the leasing transaction alone as its income. It stated that according to the amended Accounting Standards 19 dated April 1, 2001, only the income portion of the lease rental shall be offered as income and the lessor cannot claim depreciation. Accordingly, the assessee treated the lease transaction as a financial lease transaction. The Assessing Officer held that the entire lease rent was taxable as income of the lessor and the lessor was entitled to depreciation on the equipment. The Tribunal found on reading a sample lease agreement that in respect of lease of a car, the term of the lease was stated to be three years, with monthly rentals and total rentals payable. During the currency of the lease, the lessee shall insure the subject of lease and protect if from any risk. Clause 10 of the agreement stated that without the prior written consent of the lessor, the lessee shall not make any alterations, additions, or improvements to the equipment and all additions, replacements, attachments and improvements of whatever kind or nature made to the equipment shall be deemed to be parts of the property of the lessor and shall be subject to all the terms and conditions of the agreement. Clause 13 spoke about the surrender of the lease equipment upon the expiration or earlier termination of the lease agreement. It also gave the option for renewal on year to year basis on mutually agreed terms and conditions. Clause 15 dealt with payment by the lessor and clause 20 stipulated that on expiration of the lease term, if the lessee failed to deliver the equipment to the lessor in accordance with any direction given by the lessor, the lessee would be deemed to be the monthly tenant of the equipment and upon the same terms expressed in the agreement and the tenancy should be terminated by the lessor immediately upon default committed by the lessee by serving seven days’ notice. Upon termination of the lease period the lessee had to immediately return the property to the lessor in as good condition as received less normal wear, tear and depreciation. The Tribunal confirmed the order of the Assessing Officer. On appeal to the High Court:
Held, dismissing the appeals that on examination of the terms of the agreement showed that it was a simple lease agreement. If in effect the agreement was a finance agreement, the question of returning the leased item to the assessee would not arise at all. Further, the question of again affixing the name of the assessee on the property also would not arise. The monthly payment of the rent and the number of months of the lease rent payment was also clearly stated in the agreement. The entire lease rent was assessable (A. Y. 2002-2003 – 2008-2009)
Simpson and General Finance Co. Ltd v. Dy. CIT (2014) 365 ITR 328 (Mad.)(HC)

S. 4: Charge of income-tax –Capital or revenue-Business income–Sale of carbon credits-No cost of acquisition-Capital receipt.[S.28(i)]
Carbon credits not being an offshoot of business but an offshoot of environmental concern, amount received on their transfer had no element of profit or gain. Since carbon credit was not even linked with power generation, which was the business of the assessee, Tribunal was justified in its decision. There was no cost of acquisition or cost of production to get entitlement for carbon credit. Income  from sale of carbon credits was to be considered as capital receipts and not liable to tax under any head under the Income–tax Act. (AY. 2007-08)
CIT .v. My Home Power Ltd. (2014) 365 ITR 82 (AP.)(HC)

S.4:Charge of income-tax -Public financial institutions-Interest on NPAs is not taxable-As there is a conflict on the point between two decisions, the view in favour of the assessee has to be followed. [S.43D]
Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Delhi High Court in Vasisth Chay Vyapar Ltd 330 ITR 440 (Del) has held that the interest on NPA assets cannot be said to have accrued to the assessee on the basis that “What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”“. However, the Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras) has differed with the judgement of the Hon’ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) on a similar issue, i.e. relating to interest income on NPAs. The Madras High Court followed the decision of the Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis.
We have carefully considered the submissions put-forth by the learned Departmental Representative based on the judgement of the Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon’ble Madras High Court related to non-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Madras High Court took the view that the judgement of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. also applied to the Income Recognition Norms provided by RBI and therefore it held the interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI’s guidelines. But the Delhi High Court in M/s Vasisth Chay Vyapar Ltd. has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon’ble Delhi High Court and the Madras High Court as noted by the Madras High Court in its order. As there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). (ACIT vs. The Omerga Janta Sahakari Bank Ltd. order in ITA No.350/PN/2013 dated 31.10.2013 followed)
ACIT .v. Solapur Siddheshwar Sahakari Bank Ltd. (Pune)(Trib.);www.itatonline.org

S.4:Charge of income-tax –Grant-Capital or revenue-Grant given to safeguard the interests of depositors, though used for meeting SLR requirements of RBI relatable to its banking activity, is still capital in nature. [Banking Regulation Act, S.35A]
The objective of the Government of Maharashtra to give grant to the assessee was to protect the interests of farmers and depositors from the Nanded district and for the said purpose the Government deemed it fit to provide financial assistance to the assessee-bank to enable it to regularize its functioning. Pertinently, the functioning of the bank was restrained by the RBI in the face of the restrictions imposed u/s 35A of the Banking Regulation Act, 1949. The objective and purpose of the Government was sought to be achieved by providing Rs.110 crores as a grant. The case made out by the Revenue is that the financial assistance given to the assessee-bank is for smooth running of its business and therefore it is to be regarded as a trading receipt. No doubt, the aforesaid sum has been used by the assessee for the purpose of maintain the Statutory Liquidity Ratio (SLR) as per the requirements of RBI, which enabled the assessee-bank to regularize its banking operations. So, however, the form or mechanism of subsidy is not important, as held by the Hon’ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd. (supra). The nature of subsidy has to be determined by the object for which the subsidy is given. The underlying object of the Government was to safeguard the interest of farmers and small depositors, and this object was sought to be achieved by the mechanism of providing financial grant to the assessee-bank and regularizing its normal banking activity. In this manner, it has to be deduced that the subsidy/grant in question has not been received by the assessee-bank in the course of a trade but it is of capital nature. (ITA No. 33/PN/2014,dt. 14.10.2014 ) (AY.2010-2011)
The Nanded District Central Co-op Bank Ltd. v. DCIT (Pune)(Trib.);www.itatonline.org

S.4: Charge of income-tax-Lease rent- Principal component received cannot be treated as income.
The Tribunal held that the capital component included in the lease rent being return of capital investment cannot be treated as income. (AY. 1996-97)
Hathway Industries (P) Ltd. v. Addl. CIT (2014) 163 TTJ 141 (Mum.)(Trib.)

S.4:Charge of income-tax- Interest on NPAs, even if credited to the Profit & loss account, is not chargeable to tax.[S.145,Maharashtra Co-operative Societies Act, 1960 ]
While constructing its Profit & Loss Account to arrive at its net Profit or Loss, a Co-operative Society is required to show interest accrued/accruing on amounts of Overdue Loans separately. This is precisely what has been done by the assessee in the present case. The aforesaid requirement of the manner of construction of Profit & Loss Account, prescribed under the Rules of the Maharashtra Co-operative Societies Act, 1960, has prompted the assessee to draw up its Profit & Loss Account in the manner we have noted above qua the interest on NPAs. Therefore, it cannot be accepted that the manner or presentation of account which ostensibly is in compliance with the statutory provisions governing the assessee, can be a factor to evaluate assess ability or otherwise of an income. In our considered opinion, it would inappropriate to be merely guided by a presentation in the annual financial statements to infer assessee’s perception that an income had accrued, without considering the entries made in the financial statements in toto. In the present case, it is quite clear that assessee has drawn up its annual financial statement in compliance with the requirements of the statutes under which it functions and/or is incorporated. Therefore, the issue with regard to non-recognition of income on NPAs is required to be adjudicated having regard to the relevant legal position and not on the basis of the presentation in the annual financial statements. At this stage, we may also refer to the judgement of the Hon’ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co., (1962) 46 ITR 144 (SC) for the proposition that a mere book keeping entry cannot be assessed as income unless it can be shown that income has actually resulted. In the present case, the crediting of gross interest in the Profit & Loss Account, which includes interest on NPAs cannot be taken as a proof that such income has accrued to the assessee unless the statutory guidelines applicable on the said subject are ignored. Obviously, when the banking institutions following mercantile system accounting are permitted to treat the income on NPAs as assessable on receipt basis, such a position cannot be ignored in the case of present assessee merely because of a presentation in the annual financial statements. Even otherwise, we notice that the RBI guidelines permit that interest income on NPAs be parked in a suspense account and it is not necessary that it has to be brought to the Profit & Loss Account by the assessee. However, in the present case, as seen earlier, assessee has credited the gross amount of interest on credit side of the Profit & Loss Account and simultaneously shown on the debit side of the Profit & Loss Account, the amount of interest on NPAs. In other words, instead of netting of the interest the two amounts have been shown separately one on the credit side and other on the debit side. The net effect of the said presentation is the same. Therefore, in our view, the lower authorities have misguided themselves in rejecting the claim of the assessee for non-recognition of interest income on NPAs. (ITA No. 495/PN/2012, Dt. 29.09.2014.)(AY.2008-09)
The Solapur District Central Co-op, Bank Ltd. v. ACIT (Pune)(Trib.);www.itatonline.org

S.5: Scope of total income-Accrual-Advance business receipts-No income could be said to have accrued to assessee on receipt of advance.[S.263]
Assessee which is engaged in the business of hotels, resorts, and clubs offered holiday schemes for its card members to utilize ‘rooms nights’  by payment of some advance . In case of non utilisation of said facility, assesse would refund back said some to card members along with surrender value. Assessee was required to refund advances more than 99 percent in cash. Assessee has the said advances as liability in the balance sheet. AO accepted the method of accounting followed by assessee. CIT revised the order and directed the AO to pass fresh order assessing the advance as income. Tribunal allowed the appeal of assessee. On appeal by revenue the dismissing the appeal the Court held that since the assessee was required to refund advance is more than 99 percent in cash, assessee incurred liability and no income could be said to have accrued to assessee on receipt of advance.(AY.2005-06)
CIT .v. Pancard Clubs Ltd. (2014) 206 Taxman 141 (Bom.)(HC)

S. 5 : Scope of total income – Accrual-Real income-Development agreement – Consideration was not determinable with reasonable certainty, postponing recognition of income  was held to be justified.[S.145]
AO treated development agreement as a transaction giving rise to accrued income of sale of future property. Tribunal held that neither possession of property had been given to ultimate buyer, nor assessee had received any substantial consideration. Agreement entered into by assessee herein was only for sale of piece of property and sale would take place only after completion of construction and after assessee’s share of property was identified. when consideration was not determinable with reasonable certainty, assessee was justified in postponing recognition of income and it was appropriate to recognize income only when it was reasonably certain that ultimate realization was possible. (AY. 2008-09)
Dy.CIT .v. S.P. Real Estate Developers (P.) Ltd. (2014) 149 ITD 617 / 47 taxmann.com 281 (Hyd.)(Trib.)