S. 2(22)(e): Inter-corporate deposits (“ICDs”) are not “loans and advances” and are not assessable to tax as “deemed dividend”

S. 2(22)(e) refers to ‘loans’ and ‘advances’ and does not refer to a ‘deposit’. The fact that the term ‘deposit’ does not mean a ‘loan’ and that the two terms are two different & distinct terms is evident from the Explanation to S. 269T and S. 269SS of the Act where both the terms are used. Further, the second proviso to S. 269SS recognises the term ‘loan’ taken or ‘deposit’ accepted. Once it is accepted that the terms ‘loan’ and ‘deposit’ are two distinct terms which have distinct meaning then if only the term ‘loan’ is used in a particular section the ‘deposit’ received by an assessee cannot be treated as a ‘loan’ for that section. The Companies Act, 1956 also makes a distinction between a “loan” and a “deposit” in s. 58A, 269 & 370. The distinction between a “loan” and a “deposit” is that in the case of a “loan”, the needy person approaches the lender for obtaining the loan. The loan is lent at the terms stated by the lender. In the case of a “deposit”, the depositor goes to the depositee for investing his money primarily with the intention of earning interest. Also, s. 2(22)(e) enacts a deeming fiction and cannot be given a wider meaning than what it purports to cover. It has to be interpreted strictly. Thus, the view of the AO & CIT(A) that an Inter-corporate deposit is similar to a loan is not correct (Gujarat Gas & Financial Services 115 ITD 218 (Ahd)(SB), Housing & Urban Development Corp 102 TTJ (Del)(SB) 936 & Bombay Oil Industries 28 SOT 383 (Bom) followed)

Severe strictures passed on the AO for acts of “malfeasance by pleading apparent ignorance and acting in subterfuge and an underhand manner“. CBDT requested to train officers properly to avoid them taking the law into their own hands with complete impunity and disregard for the law

“It alarms us that unfortunately with complete impunity and disregard of the factual position, the AO repeatedly makes apparently naive misplaced, mis-guiding and factually incorrect assertions that the Tribunal was in the process of final hearing of the appeal”. These assertions indicate either a gross ignorance or ineptitude of the Department or a deliberately calculated belief that even misstatement of facts before the Tribunal could be accepted as gospel truth on a mere assertions of the government officers. Both or either of these situations are equally dangerous and fraught of dangers as vast powers have been given by the Act to the AO in order to exercise its powers and discharge the functions under the Income Tax Act

S. 153A/ 153C: Important principles of law relating to search assessments explained

Pursuant to a search u/s 132 conducted on the premises of another person, the AO issued a notice u/s 153C upon the assessee and thereafter passed an assessment order. The assessee claimed that the said assessment was not valid on the ground that (a) no books of account of the assessee were found in the premises of the other person, (b) though the AO of the searched person & the assessee was the same it was not shown that the satisfaction was recorded in the course of the assessment of the searched party and not of the assessee, (c) as no assessment was pending on the date of search, the assessment could be made only for the incriminating material found in the search & (d) as the satisfaction was recorded on 23.7.2010 and the relevant AY was 2011-12, the AO could issue a notice u/s 153C only for six preceding AYs relevant to this AY (i.e. AY 2005-06 to 2010-11) and the notice issued for AY 2004-05 was barred by limitation. HELD by the Tribunal

S. 11: Law on taxability of voluntary donations as “anonymous donations” u/s 115BBC or as “cash credit” u/s 68 in hands of charitable trust explained

The assessee, a charitable institution, received donations of Rs. 3.55 crore. It maintained a record indicating the name and address of the donor. It claimed that the said donations had been applied for charitable purposes as per s. 11 and nothing was assessable. The AO conducted a test check by sending letters to the donors. To the extent of donations aggregating Rs. 1.96 crore, the letters came back undelivered or were not replied to. The AO held that as the confirmations were not received, the said donations were “anonymous donations” and assessable to tax u/s 115BBC. He held that alternatively, the said sum was assessable as a “cash credit” u/s 68 as the identity, genuineness and credit worthiness of the alleged donors was not proved. On appeal, the CIT(A) held that the said donations could not be treated as “anonymous” u/s 115BBC though he upheld the AO’s stand that the said sum was assessable as a “cash credit” u/s 68. On further appeal by the assessee to the Tribunal HELD allowing the appeal

S. 32(1)(ii): Any right (including leasehold rights) which enables carrying on business effectively and profitably is an “intangible asset” & eligible for depreciation

S. 32(1)(ii) allows depreciation on “business or commercial rights” The expression “business or commercial rights” means rights obtained for effectively carrying on business or commerce. Commerce is a wider term which encompasses business in its fold. Therefore, any right which is obtained for carrying on business effectively and profitably has to fall within the meaning of the term “intangible asset” (Kotak Forex Brokerage Ltd 33 SOT 237(Mum) & Smifs Securities Ltd 348 ITR 302 (SC) followed)

S. 41(1): Liability outstanding for long period of time is assessable as income (despite no write-back in A/cs) if assessee unable to prove genuineness of liability

It is very improbable that payments to labour can remain outstanding for more than three years. The assessee has not been able to produce the records relating to the name, addresses and bills of the labour etc to prove that the liability continues to exist. It is accordingly a case of cessation of liability. The assessee has just continued the entry of the same in his books of account without any intention to pay back the same. The view that such sums shown as liability is assessable to tax is sanctioned by Chipsoft Technology 210 Taxman 173 (Del) (attached) where the view was taken that it would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. This view is not contrary to the view taken in Vardhaman Overseas Ltd 343 ITR 408 (Del) where the law was laid down that s. 41(1) does not apply if the amount of liability is not written back in the accounts. If both judgements are read in harmony, it can be observed that the assessee cannot be allowed to show an amount as a liability even though he has no intention to pay it back but to enjoy the same for an unlimited period without being added to his income only on the excuse that he has not written off the same in his books of accounts. However, if the facts of the case establish that the liability has been genuinely shown by the assessee and his subsequent conduct shows that he has paid back the said credits and his intention was not to enjoy the amount for unlimited period without any intention to pay back the same, then it cannot be said to be a case of cessation of liability. On facts, not only is the existence of outstanding liability of labour charges for so many years improbable in the normal course of business but the assessee has also failed to give any evidence regarding the identity & genuineness of the creditors. Accordingly it is a case of cessation of liability and s. 41(1) applies (Yusuf R. Tanwar vs. ITO followed (attached))

S. 14A & Rule 8D: Onus is on AO to show how assessee’s claim is incorrect. AO has to show direct nexus between expenditure & exempt income. Disallowance cannot be made on presumptions

(i) A disallowance u/s 14A read with Rule 8D cannot be made without recording satisfaction as to how the assessee’s calculation of s. 14A disallowance is incorrect. It is a prerequisite that before invoking Rule 8D, the AO must record his satisfaction on how the assessee’s calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax-free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions, (ii) the mere fact that some interest expenses were incurred cannot be the reason for disallowance unless the nexus between the expense and the exempt income is established, (iii) the assessee did not make any fresh investment during the year which could generate exempt income in forthcoming years, (iii) the exempt income earned during the year comprised of dividend received from an investment made in an earlier year, (iv) the interest expenditure of the year is not directly related to the earning of exempt income & (v) the AO has not pointed out any direct nexus between the interest expenditure incurred and the exempt income earned during the year (Hero Cycles Ltd 323 ITR 518 P&H) & Godrej and Boyce 194 Taxman 203 (Bom) followed)