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Business Expenditure – Certain Issues

BY

CA Chetan K. Dhabalia27 June 2010

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Presentation Outline Disallowance U/s 14A. Depreciation. Interest on interest free advances to Associate concern/relative Bad debts 36 (1) (vii). Explanation to Section 37 (1). Capital/ Revenue expenses – allowability of exp u/s 37 Software Expenses . Deferred Revenue expenses. Key man Insurance. Disallowance u/s 40 (a) (ia). Remuneration to working Partner. Remission / cessation of trading liability 41(1). Implication of Sec. 43 A. Disallowance u/s 43B. Presumptive Taxation Features – 44AD.

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Section 14A - HistoryFinance Act 2001 inserted Sec. 14 A W.R.E.F. dating back to

01/04/1961 – A.Y. 1962-63 It is introduced under the caption “ Measures for rationalization

and Simplification.Overcome the ratio laid down by S.C. in following cases:

Indian Bank Ltd. 56 ITR 77 – SC. Rajasthan State Warehousing 242 ITR 450 SC.

Observation made by SC in the above stated cases; Indivisible activity – Expenditure incurred to carry on business

would be allowed Consideration would differ in case of an Identifiable different

business which was exempt from tax ( Waterfall Estate 310 ITR 421- SC)

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Section 14A - HistoryAllowability of expenditure does not depend upon

producing of taxable or non taxable income.Assessee carrying various Business venture and they

constitute one indivisible business- entire expenditure is permissible deduction.

Deplorable as : having a retrospective effect even 40 years before.Unsettle the earlier judicial decision.Source of increased litigation

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Intention of Enacting Sec.14 A Memorandum Explaining Finance Bill 2001 explained the

basic objective for inserting Sec. 14 A was to deny the deduction in respect of expenditure which are incurred in relation to exempt income .

Circular No. 11/2001 dt. 23-7-2001 also clarify that any expenditure in relation to income which does not form part of total income can not be set off against other taxable income. It was also clarified that section is retrospective as other wise it would implied that prior to introduction of Sec. 14 A, expenditure relating to exempt income would be allowed as deduction.

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Placement of Section 14APlacement of Sec. 14 A is in Computation Chapter IV.-

Computation of total Income - Significance thereof.Heading of Section:

Expenditure incurred in relation to income not includible in total income

Operative part :“For the purpose of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under this Act”

Whether it applies to all heads of income ? Is it a Special provision having an overriding effect over other

computational provision ?

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Exempt Income. Exempt income vis – a - vis Income not forming part of total income Whether Following income are covered?

Agricultural income ( Haryana land reclamation & Dev. Corp. – 159 Taxman 271 , Kancor Flavours 312 ITR (AT) 140- Cochin)

Transaction of purchase & Sale of Units/shares – dividend earned also result in to loss – Such loss equivalent to expenditure - Wallfort Shares & Securities 310 ITR 421 (Bom), Daga Capital – 119 TTJ 289 – (Mum) (SB)

Share of profit from firm - Sudhir Dattaram Patil 2 SOT 678 – Mum, Hitesh D. Gajaria ITA No. 993/Mum/ 2007/(BCAJ), Dharamsingh Popat ITA No. 7534/mumbai/2004.

Tax free Bonds - ( Punjab National Bank 103 TTJ 908 – Del) Chapter VIA Income - (Punjab State Co operative Milk Producers Fed.

Ltd. 104 ITD 408 – Chand)

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Section 14A – Relevance of “In relation to”

Sec. 14 A (1) : “ No deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income.

Signification of “In relation to”;does it MEAN Dominant and Immediate connection between the expenditure incurred and income earned

Maharajadhiraj Madhav Rao Scindia of Gwalior v U.O.I. 1 SCC 85.

Doypack Systems Pvt. Ltd. v U.O.I. 65 Comp. Cases - SC Indo German International (P.) Ltd. V. DCIT – 185 Taxman 103

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Section 14A – Relevance of “In relation to”Different Sections uses different Phrases:

“ Directly Relatable to” – Sec. 72 AB (3) (1) “ Wholly and exclusively ” – Sec. 37 “Attributable to ” – Sec. 43 (6) explanation-, Sec. 10

(23B)“ in relation to ”– Sec. 36 (1) (ix) , Sec. 35 ( 2AB)

The word used “ in relation to” have a wider meaning than the term “ Directly relatable to, “ Wholly and Exclusively”.

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Section 14A – “Dominant and Immediate connection”

Existence of Dominant and immediate connection with the expenditure in the form of interest and dividend income is necessary to attract disallowance u/s. 14 A ?

Onus to establish dominant and immediate connection rests with A.O. or the assessee ?

How to ascertain Dominant and immediate connection between expenditure incurred and income earned ? Intention with which expenditure is incurred.

Expenditure incurred with a view to earn taxable and tax free income simultaneously ; proportionate disallowance can be made?

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Section 14A –Determination of Expenses.EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME : How to determine/ ascertain the amount of expenditure incurred for

earning exempt income? Is it cover both direct and indirect expenses? Relevance of intention with which the expenditure is incurred. Relation between expenditure and the exempt income;

Inquiry starts with reference to expenditure incurred and to relate the same with exempt income and if such expenditure produces taxable income , inquiry should stop, or

To trace out the exempt income and then work out the expenditure incurred in relation to such exempt income.

(CIT v.Hero Cycles Ltd. ( 323 ITR 518 P & H Court )

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Rule 8D - NotifiedPursuant to Sub Sec.14A (2) , Rule 8 D inserted vide Notification

No. S.O. 547 (E) on 24-03-2008 ( 299 ITR ST -88) Prescribed the method of determining the expenditure incurred in

earning exempt income, aggregate of following : Expenditure directly relatable to exempt income Interest on borrowed funds not directly attributable to any

income then pro rata disallowance : Avg. Value of investments , income from which

Interest X does not / shall not form part of total income Average of Total Assets

½ % of average value of investments income from which does not / shall not form part of total income

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Rule 8D – Prospective or Retrospective Application

Sub Sec. (2) & (3) introduced w.e.f. A.Y. 2007-08 Provisions of Sub Sec. (2) & (3) are procedural, can

control substantive provision of Sub Sec. (1) ?Rule 8 D apply prospectively, i.e. from the date of

insertion of Rule 8 D or Sub Sec. (2) or Sec. (3) or retrospectively ?

Can it be said that Rule 8 D applies prospectively when Sub Sec. 14 A (1) applies retrospectively?

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Rule 8D – Prospective or Retrospective Application

Rule of interpretation: Procedural / Clarificatory provision applies retrospectively as it is inserted to clarify the law and to remove the doubt - Apply retrospectively even if it is stated to be applicable from a particular assessment year. CIT v Shelly Products - 261 ITR 367 (SC) CIT v Gold Coin Health foods P. Ltd. 304 ITR 308 – (SC)

Procedural/Clarificatory provision – Date of insertion loses its significance.

Can Provision of Sec. 14 A be applied by Higher forum even if not invoked by A.O. ( Aquarius Travels Pvt. Ltd. 301 ITR (AT) -111. – Top Star Exports – BOM, Hind. Tin Works Ltd. 24 DTR 88 - Del

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Application of Rule 8D Application of Rule 8 D in either of the case :

When A.O. is not satisfied with the Correctness of the expenditure incurred, or,

‘A’ claims that no expenditure incurred In earning exempt income. Provision of Sec. 14 A/ Rule 8 D applied literally – leads to severe

hardship. Equity has no consideration while interpreting taxation laws. -

Karmachari Union v U.O.I. 243 ITR 143 – SC. Disallowance of expenditure even if no exempt income is earned/

Received: Cheminvest Ltd. - 317 ITR (AT) 86 Del (SB) Everplus Securities and Finance Ltd. 285 ITR (AT) 112

Disallowance can be made even if no expenditure incurred – Winsome Textile Indus. Ltd. 319 ITR 204 ( P & H)

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Rule 8D - Certain Issues. Rule 8 D (ii) refers the word – Average value of investments – Does it

mean that Rule 8 D applies to investor and not to Dealer in Shares? Rule 8 D covers both direct and indirect expenses, contrary to

provision of main section. Whether interest directly attributable to Particular income /receipts

liable for disallowance ? Investments which does not result in to income required to be

considered in formula. Total Assets – which do not represent any tangible or intangible

assets - Is it required to be considered in part “C” of formula. Current Liabilities required to be added back ? In case of Individual/ HUF where no Balance sheet is prepared?

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Issues - Section 14A In case of Dealer in shares :

Dominant & immediate connection with Profit/loss on sale of Shares Or

Dominant & immediate connection with dividend.SECTION 14 A APPLY TO DEALER IN SHARES

Can Sec. 14 A be made applicable to dividend income (incidental) received by a dealer in shares which were held as stock in trade even though profit on sale of such traded shares is taxable?

Theory of apportionment would apply ?

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Issues - Section 14A Interest on borrowing for Investment in shares has a direct

and proximate link with profit from trading in shares and indirect link with dividend income.?Emrald Co. Ltd. 284 ITR 586 – Bom. Whether Interest which

is allowable as deduction from Business income in case of dealer in shares can be further required to be reduced from dividend for the purpose of computing deduction u/s. 80 M?

Buying of Shares / Units Cum dividend and selling of such Shares/ Units Ex dividend. Dominant & immediate connection with dividend?

cover both direct and indirect expenses which have any relation to exempt income?

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Issues - Section 14A Expenses allowable by a provision of Sec. 36 (1) (iii)/ 37 still

liable for disallowance u/s. 14 A?

Whether Sec. 14 A is applicable in case of incidental income?Relevance of intention Dominant intention in incurring expenditure is to earn

taxable income in form of profit on sale of shares – no disallowance of expenditure ?

Distinction between main/incidental exempt income.No provision in the Act to treat incidental income as

exempt income .

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Sec. 14 A – Current Status.Writ Petition (Indian Exporters Grievances Forum & Other vs.

CIT) challenging the constitutional validity of Rule 8D has been admitted on 12.1.2010 by the Bombay High Court. Matter posted for hearing on 13/07/2010.

Tribunal appeal involving review of Daga Capital ( 312 ITR 1 – AT Mum) Decision were directed not to be heard/ blocked till 31st January,2010 or till the disposal of the matter by Bombay High Court or any other High Court whichever is earlier as directed by the President of ITAT.

Hearing in the case of Daga Capital on 12 June 2010.

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DepreciationOn BSE Membership Card ?

( Techno Shares- 323 ITR 69 (Bom) 225 CTR 337)On Goodwill :

( Kotak Forex Brokerage Limited – 33 SOT 237- Mum ) ( Skyline Caterers ( P) Ltd. v ITO – 20 SOT 266-

Mum) (Hindustan Co cola Beverages P Ltd. – 34 SOT 171-

Del)Against: ( R.G. Keswani – 116 ITD 133 – 308 ITR 271 -Mum.) ( Bharatbhai J. Vyas – 97 ITD 248 – Ahd)

License to collect Toll Tax: Ashoka Info P.Ltd 129 TTJ 77- Pune.

Non Compete Rights : Medicorp Technologies India Ltd. – 30 SOT – Chennai-

April 2009 - BCAJ

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Interest on interest free advances to Associate concern/ Relative.

Advances Given to Sister concern/ Relative – Commercial expediency. S.A. Builders Limited 288 ITR 1 – SC

Sufficiency of Interest free funds available with the assessee.Requirement of nexus to be established of funds given and received.-

Reliance utilities & Power Limited 313 ITR 340 – Bom Hotel Savera – 239 ITR 795 - Mad

Common funds involved – Rule of proportion – H.R. Sugar Factory Ltd. 187 ITR 363- All.

Interest on sticky advances given.

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Bad DebtsPrior to AY 1989-90,

requirement to established that debt have become bad debt in the previous year

Amendment: Any bad debts or part thereof which is written off as

irrecoverable in accountsWhether any debt can be treated as bad debt?

Decision to treat the debt as bad debt should be based on material that the debt is not recoverable .

Decision should be bonafide and not whimsical or fanciful. (Oman International Bank - 313 ITR 128) (CIT V Kohli Bros. Color Lab - Allhabad High Court)

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Bad DebtsDebt to be presumed to be bad when it is written off in books.

Star Chemicals P. Ltd. – 313 ITR 126 - Bom Writing off of a bad debts is sufficient evidence It is neither obligatory nor burden on the assessee to prove the

debt has become bad Issue settled by the S.C. –

No needs to establish that the debt has become bad Mere write off in accounts is sufficient. - (TRF Limited - 323 ITR

397- SC) Also not required to write off the individual debtor A/C. -

(Vijaya Bank Limited 323 ITR 166 SC )

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Bad DebtsShare Broker can claim Bad debts u/s. 36 (1) (vii) / 36 (2) in

respect of unpaid purchase price of shares purchased on behalf of its client. Claim that debt due had not been taken in to account is

tenable. Brokerage on such transaction offered to tax – “ Part of debt

taken in to account and offered to tax – Sec. 36 (2) (i) was satisfied.

CIT v Bonanza Portfolio – Delhi High Court 320 ITR 178 Del.Provisions of NPA as per RBI Norms by NBFC is deductible?

( Southern Technologies v JCIT ( SC) 320 ITR 577)

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Explanation to Section 37 (1)Expenditure incurred for any purpose which is an offence or

which is prohibited by any law: ( introduced by Finance Act 1998, w.r.e.f. 1-4-1962.

History : Controversy reg. deductibility of Extortion Money.Pranav construction 61 TTJ 145 (mum) Extortion money paid by the builder

Such business is vulnerable to extortion, hafta etc.. In the interest of the business such expenditure was essential and ITAT held that should be allowed.

Explanation to Sec. 37 (1) was added to nullify the effect of above decision.

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Applicability of Expl. to Section 37 (1)Above Explanation will have impact on :Expenditure tainted with illegality ( Penalty, fine for infraction

of law, illegal payment to government Servant etc.)Expenditure incurred in unlawful business.Penalty / fine for violation of lawPenalty/ fine/ damages recovered were compensatory in

natureAmount paid pursuant to violation of law/ inadvertent

infraction of law Moddi Venkataraman 229 ITR 534 SC

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Applicability of Expl. to Section 37 (1)Amount paid pursuant to option given by law itself.

CIT v Ahemdabad cotton Mfg. Co. 205 ITR 163 – SCRedemption fine paid to avoid confiscation of goods

N.M. Parthasarthy – 212 ITR 105 – MadrasPayment for breach of obligation like delay in fulfilling the

Government Contract.Legal Expenses incurred for defending offences committed under

the Law. CIT v Dhanrajgirji 91 ITR 544 SC

Regularisation fees paid/compounding fees paid to Municipality for violation of building Rules Millenia Developers P. Ltd. 322 ITR 401- Karnataka .

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Expenses incurred results in acquisition of Fixed Assets (FA).

Not Deductible u/s 37 (1)

Results in to Benefit of enduring Nature

Deductible U/s 37 (1)

Whether Benefits is in capital field

FA gets improved not deductible u/s 37 (1)

Benefit is in revenue field. Whether there is continuing obligation?

Deductible in year of expense.

Expense needs to be spread over a period of Benefit.

Yes

No

No

Yes

Yes

No

No

Yes

Capital or Revenue expenses

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Criteria for allowability of expenditure u/s. 37:

Expense should be incurred in the accounting year. It should be in respect of business carried on by the

assessee. It should not be on personal account. It should not be in nature of capital expenditure. It should be wholly and exclusively for purpose of

business. It should not be for any purpose which is an offence or

prohibited by law. Expenses not covered by/deductible u/s Sec 30-36.

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Software ExpensesBy acquiring software, the assessee derives

advantage in capital field. Criteria to determine whether advantage operates in capital field or revenue field:

Nature of business of the assessee – Software functions as a tool enabling the business to be carried on more efficiently.

Cost : More expensive the software – likely to be central tool and more enduring its effects adding to profit making apparatus.

Associated capital expenditureDegree of associated organizational changes

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Expenditure on ReplacementReplacement;

Can it be Considered as “ Current Repair” Can it be considered as revenue expenditure allowable u/s. 37?

Replace part not available in the market or worn out and used for 50 -60 years.

Accounting treatment indicative of nature of expenditure. ( Saravana Spinning Mills P.Ltd, - 293 ITR 201 (SC) ( Sri Mangayakarasi Mills P.Ltd [2009] 315 ITR 114 (SC) ( Ramaraju Surgical Cotton Mills [2007] 294 ITR 328 (SC)

Above decision relates to assessee which is a Textile Industry which is not a Continuous process industry.

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Expenditure on ReplacementReplacement allowable as revenue expenditure , if;

What is replaced is only a part.Replaced part is worn out and old – requires to be

replaced.Replaced assets to be sold as Junk or at nominal

value or it remains unsoldNo significant increase in production capacity after

replacement.

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Software expenses Software expenses is revenue or capital expenditure - three test

needs to be applied: Amway India enterprise – Del SB – 301 ITR ( AT) 1

Ownership test : (Tata consultancy Services – 271 ITR 401 ) Licensee is the owner to the extent right comprised in the

license.- Limited ownership. Right over tangible assets.Enduring Benefit:

Duration of time for which right acquired. software become obsolete due to technological innovation &

advancement. Life of software is shorter say less than 2 years – revenue

expenditure. Amway India enterprise -301 ITR 1 (AT) – DEL – SB, Varinder Agro Chem. Ltd. 309 ITR 272 ( P & H)

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Software expensesFunctional test - Expenditure incurred operates to

add up profit earning apparatus:Utility to businessmanLimited Economic life.

Up gradation of computer software - Is it revenue expenditure?G.E. Capital Services Ltd. – 300 ITR 420- DelK and Co. 181 CTR 378 ( Del)Sundaram Clayton 321 ITR 69 ( Mad)

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Deferred Revenue Expenditure Nature of Revenue Expenditure. Expenditure identifiable over a Specified period of time. Expected period over which benefits likely to accrue

Madras Indus. Inv. Corp Ltd. 225 ITR 802 – SC Upfront payment of interest for a period of 5 years – is it revenue expenditure/ deferred

revenue expenditure ( Taparia Tools 260 ITR 102)

Results in to creation of assets ( Tangible /Intangible) / advantage of enduring nature in Capital field.

Existing Business/ On going Business. Relevance of Book entry.

Kedarnath Jute Mfg Co. Ltd. 82 ITR 363- SC. Tutocorin Alkali & Chemicals Ltd.- 227 ITR 172 . Ashima Syntex Limited – Abad – SB. – 310 ITR -1 (AT) Useful decision: Denso India Limited 318 ITR 140 – Del.

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Deferred Revenue ExpensesExpenditure claimed as deferred revenue expenses for certain

years and then charged to PL on occurrence of event – whether allowable as deduction in that year?.Alankar Business Corporation Ltd. Vs. - 298 ITR 18 ITAT

Chennai1/10th of Exp. allowed earlier. In subsequent year A.O. Can

disallow the exp. On the ground that there is no concept like deferred revenue expenditure . Sportsfield Amusments vs. ITO (2009) 122 TTJ 572 (Mum.)

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Keyman Insurance PremiumDeductibility of Premium Paid.CBDT Circular Clarified that premium paid on Keyman Insurance

policy be allowed as business expenditure( Circular No. 762 dt. 18/02/1998 145 CTR (St) 5 – Para 14.1,2,3 of the circular)

Keyman is employee or director, premium is paid by employer, Thus premium paid by : Proprietor – Explanation to Sec. 10 (10 D ) Partnership firm – P.G. Electronics ltd. 98 TTJ 896 (Del). B.N.

Exports – 323 ITR 178- Bom. Company ( Sunita Finlease Ltd. 118 TTJ 263 )

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Keyman Insurance PremiumTaxability of receipt :

In the hands of employee – profits in lieu of Salary – Sec. 17 (3) (ii).

In the case of the Employer who pays premium – Sec. 28 (1) (Vi).

In the case of any other person – Sec. 56 (2) (iv).Sec. 10 (10 D)- Sub clause (b) carves out exception to

exemption provided in Sec. 10 (10D).Applicability of Sec. 14 A. _ Aggarwal Packaging 112

ITD 240 – Pune ( up to 1-10-1996)

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Disallowance u/s. 40(a) (ia) Deterrent Provision Applicable w.e.f. A.Y. 2005-06, with a view to augment the compliance of

TDS provision . Applicable to payment made for :-

Interest Commission/Brokerage Fess for professional services/Technical Services. Amount payable to Resident contractor / sub contractor for carrying

out any work. Rent/ royalty (applicable w.e.f. A.Y. 2006-07)

Whether provision of Section 40 (a) (ia) are Ultra vires / Constitutionally Valid Rakesh Kumar & Co. vs. UOI (2009) 178 Taxman 481 / (2009) 24 DTR 67

(P&H). Tube Investment of India Ltd. V. ACIT (Mad) – 185 Taxman 438

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Disallowance u/s. 40(a) (ia)Can a recourse be made to Board Circular No.

275/201/95/IT(B) dt. January 29,1997- where it was conceded by the Board that where tax has been paid by the deductee, no demand could be made on the Deductor.

Board Circular conceding abatement of liability of the deductor was incorporated in Sec. 191 by way of Explanation which was inserted w.e.f.1-6-2003.

Is it possible to take a stand that since the tax is paid by the deductee, the liability of tax Deductor abates ?

Can a deductor claims deduction of expenses in the year of advance - S.A. Tax paid by the deductee.

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Disallowance u/s. 40(a) (ia)Useful reference be made to decision of Supreme

Court in the case of Hindustan Coca Cola Beverages P. Ltd. 293 ITR 226 SC.

Short deduction – Since Sec. 40 a (ia) did not refers to “ the whole or part of tax” unlike sec. 201.

A.P. High Court in Rajgopal v UOI held that there is nothing in sec. 201 “ to treat the employer as a defaulter where there is a shortfall in the deduction” ( 233 ITR 678, 693-698 ).

Pursuant to this there was an amendment in Sec. 201 – the word ‘ the whole or part of any tax’ was included by the Finance Act, 2001 w.r.e. from 1-4-1962

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Disallowance u/s. 40(a) (ia) Rigor of Sec. 40 a (ia) was reduced by Amendment by the Fin Act, 2008 w.r.e.f 1-4-

2005 in respect of TDS on expenses related to Last month of the previous year. Such TDS paid on or before the due date of filing the return, such expenses would not be disallowed.

Rigor of disallowance was diluted substantially by the amendment made by the Finance Act 2010 w.e.f. AY 2010-11.

Sec. 40a (ia) was amended to provide that now disallowance would be attracted if TDS is not paid on or before the due date for filing the return of income.

Can above amendment apply retrospectively i.e. from AY 2005-06.

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Disallowance u/s. 40(a) (ia) – Certain IssuesTransaction fee paid to stock exchange on the basis of volume of

transaction is payment for use of facilities provided by stock exchange and not for any services , hence disallowance can not be made u/s 40(a) (ia). Kotak Securities Ltd. vs. Addl. CIT (2009) 24 DTR 214 (Mum.)

(Trib.) - 141 TTJ 241 ( Mum)Trade Discount allowed to customer is liable for disallowance

section 194H ? – ITA No. Coch./ 2008 – (S.D. Pharmacy Pvt. Ltd. v. DCIT – BCAJ July, 2009). ACIT V Samaj – 77 ITD 365 – Cuttack Bharti Celluar Ltd. – 294 ITR ( AT) 283 – Kol Cargill Global - 34 SOT 424 (Del)- BCAJ March 2010 - 9

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Disallowance u/s. 40(a) (ia) – Certain IssuesIf there is no agreement for hiring of truck and assessee

is utilising truck for its own use whether the same will be covered under 194C and consequently disallowed u/s 40(a) (ia). DCIT Vs. Satish Aggarwal and Co. 317 ITR (AT) 196

(Amrit)R.R. Caryying Corporation V ACIT (Ctk) 126 TTJ 240

Whether hire charges for hiring truck/ vehicle would be covered u/s. 194 C or u/s. 194 I

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Disallowance u/s. 40(a) (ia) – Certain IssuesCommission paid to whole time director did not come under the

purview of section 194 H or 194J – hence no disallowance u/s 40 (a) (ia)

Biri Binding charges made through Munshis who are part of the labourers can not be considered as commission u/s 194H and disallowed u/s 40 (a) (ia) Jahangir Biri Factory (P) Ltd V DCIT (Kol ‘C’) – 126 TTJ 567

Supply of outsourced manufactured goods by contract manufacturers constituted outright sale and not contract of work within the scope of section 194C and hence such payment could not be disallowed u/s 40(a) (ia) BDA Engineers Ltd – 281 ITR 99- Bom.

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Disallowance u/s. 40(a) (ia) – Certain IssuesDisallowance u/s. 40 a (ia) can be invoked only if the expenses

are outstanding and payable at the year end and can not be invoked where expenses were paid before the year end despite TDS either not deducted or remains payable. Teja Construction - [2010] 5 taxmann.com 61

(Hyd. - ITAT)Partial DeductionShort deductionCapital assets on which TDS deductible – Not deducted – effect

on the claim of depreciationTDS deducted under wrong section under bonafide belief.

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Remuneration to working PartnerSec. 40 (b) amended which enhance the limit of remuneration

payable to partner w.e.f. AY 2010-11.Proposal made on 6th July 2009.Due to amendment, whether firm is required to amend the deed

to provide enhanced limit.Circular No. 739 March 25,1996 requires that P. ship deed should

specify either the amount of remuneration payable to each working partner or lay down the manner of quantifying such remuneration.

Is circular going beyond Sec. 40 (b). The Act uses the term “authorize” and not “quantify”. Suman Construction – 121 TTJ 847 ( Pune)

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Remission / Cessation of trading liability.Remission/cessation - Trading Liability of more than three years ;

Limitation of period of three years (Sugauli Sugar works Pvt. Ltd. – 236 ITR 518- SC) Impact of explanation 1 to Sec. 41 (1) – Remission / cessation

of liability by unilateral Act. when the assessee has not unilaterally written off

(DSA Engineers 30 SOT 31 (Mum))(Himalaya refrigeration & Air cond. 91 TTJ Del)

No new amount credited in the accounts of creditor – Addition Can not be made u/s. 68. Question of genuineness of creditors can be questioned only in the year in which credited Shri Vardhman Overseas P. Ltd. 24 SOT 393 – Del.

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Remission / Cessation of trading liability. Whether provision of Section 41 (1) are applicable even if assessee is showing

some amount as liability in its books? CIT V. G.P. International (229 CTR 6 - P & H)

Whether liability is presumed to be ceased to exist since the same is outstanding for more than 6 years? CIT V. Smt. Sita Devi Juneja. (187 Taxman 96 - P & H)

Waiver of loan received and such loan is written back – is it chargable u/s. 41 (1)? Mindteck ( India) Ltd. 122 ITD 486 (mum)Remission of trade Advances – Saden Vikas India P. Ltd. – 320 ITR 538 - Del

Forfeiture of Share Capital/ unpaid call money on issue of Debentures – Is it liable to tax u/s. 41 (1) and or u/s. 28 (iv)

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Implication of Sec. 43 A. Exchange Loss in relation to Capital Assets . Adjustment to actual cost of imported assets acquired in foreign currency

adjustment to such carrying cost needs to be made at each balance sheet date or

at the time of making payment AS 11, exchange fluctuation arising on account of reinstatement of

monetary items to be charged to P & L A/c. New Notification on AS 11 dated 31 March 2009 provides irrevocable

option to account for exchange difference: in respect of depreciable assets – added/deducted from the cost of

depreciable assets. in case of other assets exchange diff is accumulated to “Foreign

Currency Monetary item translation difference Account”

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Implication of Sec. 43 A.Treatment u/s. 43 A : Amendment in Sec. 43 A w.e.f. AY 2003-04

permits adjustment to the cost of fixed assets “ at the time of making payment”

Thus adjustment to actual cost of assets made on cash basis.Prior to amendment adjustment to carrying cost of assets can be

made at each balance sheet date Woodward Governor India P. Ltd. 312 ITR 254 – S.C. Arvind Mills Limited 193 ITR 255 – SC

Depreciation is allowable on enhanced cost due to capitalisation of foreign exchange loss: Maruti Udyog 320 ITR 729 - SC

Surplus received on cancellation of foreign exchange forward contract for discharging borrowing for import of equipment – liable to tax ? Garden Silk Mill Limited – 320 ITR 720 Guj

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Implication of Sec. 43 A.Exchange difference arising in foreign currency

transaction on revenue items: Loss due to foreign exchange fluctuation is unrealized

loss and liability payable would be contingent/notional liability till payment ?

Such liability / loss is claimed u/s. 37. whether expenditure would cover loss.

Business loss are deductible on ordinary principles of commercial accounting .

Requirement of expenditure laid out or expended to be met. Such liability is incurred when the borrowings were made in foreign currency and subsequent increase/decrease in such liability should be accounted for.

Gain arises department taxed it on the basis of accrual and loss arises Dept. sought to allow it on payment basis.

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Roll over charges for foreign currency contracts – Application of Sec. 43 A

Foreign Currency loan availed – To ensure availability of foreign currency for repayment – Assessee enter in to a forward contract- Roll over premium paid for rolling over the balance value of contract for payment of next installment.

Payment of “ roll over premium charges” capital expenditure or revenue in nature.

Can it be said that Sec. 43 A is appliacble to exchange rate difference and not to roll over charges.

Purpose of loan availed needs to be looked in to. If loan is finance for fixed assets then roll over charges be added to cost of fixed assets. However if roll over charges for working capital/ revenue items then it may be expensed out. [ ACIT v Elecon Engineering Limited – SC 322 ITR 20 ]

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Disallowances u/s - 43 B Whether balance in PLA be allowed as deduction? Unutilised Modvat Credit be allowed as a deduction?

Glaxo Smithkline Consumer Health care Limited – 110 TTJ 183 – Chd – SB

Excise Duty amt. Kept in “Account current” – allowable? Raj and San Deeps Ltd. 293 ITR 12 ( P & H)

Incidence of duty is different from incidence of interest; Interest on tax or duty – Whether such interest partakes the same

character as Tax /Duty u/s. 43 B? Custom duty – Hind Motors Ltd v CIT 218 ITR 450. Interest on Sales Tax. - Padmavati Raje Cotton Mills Ltd 239 ITR 355. Interest on Municipal Taxes - Orient Beverages Ltd 247 ITR 230.

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Disallowances u/s - 43 BTax to be construed in wider sense.Term ‘tax’ u/s 43B is tax simpliciters/ includes interest

chargeable for non payment/ delayed payment. Shree Pipes Case - 209 CTR 444 – Raj)

Essentially interest is regarded as tax for the purpose of recovery of tax

Service tax liability outstanding at the year end liable for disallowance u/s. 43 B ?ACIT V Real Image Media Technologies P. Ltd. – 114 ITD

573

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Disallowances u/s - 43 B Deletion of 2nd Proviso (Sum payable by way of Contribution to P.F.

etc) – operates retrospectively ? [ CIT v Alom Extrusion – 319 ITR 306- SC ]

Employees Contribution if paid after the due date but before the due date of filing of the return would be eligible for deduction. [ AIMIL Ltd. - Del H.C. ITA No. 1063 of 2008 – BCAJ March 2010,

Pink Pen Pvt. Ltd. BCAJ – April 2010 Page 25)

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Sec. 44 AD – Presumptive Taxation – Features.

Applicable w.e.f. AY 2011-12. Applies to Individual, HUF & Firm ( Other tan LLP) ANY BUSINESS except plying, hiring, leasing goods carriage Will not apply if above eligible assessee claiming deduction u/s.

10 A, 10 AA, 10 B, 10 BA & deduction claimed u/ch VIA – in respect of certain income

Not required to maintain books of account, not required to pay Advance tax.

8 % of total turnover or gross receipts or higher income declared shall be deemed to be Profits & gains of business.

If assessee claims income lower than 8 % then required to maintain books of A/c and get it audited u/s. 44 AB.

Eligible Firm can claim deduction of Remuneration & Interest from presumptive income.

Depreciation deemed to have been allowed, WDV to be calculated accordingly.

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Sec. 44 AD – Presumptive Taxation – Issues

Is it applicable to professionals Business – Sec. 2 (13) & profession Sec. 2 (36) are

seperately defined. Separate limits for audit u/s. 44 AB. ( G.K. Choksi & Co. 295 ITR 376- SC )

Turnover will include VAT, Service Tax etc ? In case of Speculative business, How Turnover will be

determined. – Guidance Note on Tax Audit issued by ICAI – Para 5.11 (a)

ITR 4 & 5 – BS Part A required to give details of Sundry Debtors, Creditors, Stock in trade, Cash Balance.

Similarly P & L – Part A requires to state Gross receipts, Gross Profit, Expenses & Net Profit.

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Sec. 44 AD – Presumptive Taxation – Issues.

Individual/HUF claiming Profits less than 8 % - will he required to comply with TDS provisions as he required to get his books of account audited u/s. 44 AD?

Will individual/HUF having turnover more than Rs. 40 lakhs in the preceding Asst. Year and in Current year covered u/s. 44 AD liable for TDS provision ?

Will the firm required to comply with TDS provision ? Whether in all the above cases Non compliance leads to

disallowance u/s. 40a (ia) and be added to such presumptive income?

Can the Addition be made u/s. 68 in presumptive taxation? Devi Prasad 72 ITR 194 SC. Krishna Mining 83 ITR 860 AP Aggarwal Engg. Co. 302 ITR 246.

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