Direct tax laws update - V. K. Subramani - Article published in Business Advisor, dated October 25, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume IX Part 2 October 25, 2014 17 Business Advisor
Direct tax laws update
V. K. Subramani
1. Deduction of interest on service tax liability
In CIT v. Kaypee Mechanical India (P) Ltd (2014) 108 DTR
(Guj) 237, the assessee omitted to collect service tax
though it was obliged to collect the same from the
receivers of service. It paid Rs 32.44 lakh which
comprised Rs 23.07 lakh towards service tax and Rs 9.37
lakh towards interest. The claim was negatived with
regard to service tax for the reason that it was not
reflected in the financial statements and the interest
component was disallowed on the ground that it was incurred for infraction
of law. The CIT (Appeals) allowed the claim. The tribunal also allowed the
claim by reasoning that when there was no collection, it is impossible to
route the same through profit and loss account and hence the expenditure
claim is deductible. As regards interest payment it was reasoned that the
payment was compensatory in nature hence was allowed. The court held
that the amount in question was expended by the assessee during the
course of business, wholly and exclusively for the purpose of business. If the
assessee had taken proper steps and charged service tax from the recipient
of service and deposited the same with the Government then there would
not have been any question of assessee expending such sum. It is only
because the assessee failed to do so, that it had to expend the said amount
though it was not his primary liability. However, this cannot be stated to be
a penalty for infraction of law. Thus the claim of the assessee incurred in
the course of business and being compensatory in nature was held as
deductible in full.
2. Deduction of franchise fee for use of trademark
In CIT v. Jubilant Foodwork (P) Ltd (2014) 108 DTR (Del) 329, the assessee
The court held that the amount in question was expended by
the assessee during the course of business, wholly and
exclusively for the purpose of business.

2. Volume IX Part 2 October 25, 2014 18 Business Advisor
incurred expenditure towards franchise fee to use trademark. It entered into
a collaboration agreement with the foreign company under which the foreign
company provided technical aid and information for manufacture of low
tension and high tension switch gears and right to sell the said products.
The assessee paid 20,000 sterlings in five instalments of 4,000 sterlings
each. This was capitalised and not claimed as revenue expenditure. The
franchise fee was fixed at 3% of the entire sale, i.e. turnover of the assessee
in India. It was payable annually and was not a lump sum payment. On
termination of agreement or failure to pay franchise fee, the assessee would
lose the right to use the said trademark. The court referred to precedent in
CIT v. Salora International Ltd (2009) 308 ITR 199 (Del) and held that, by
paying franchise fee, no new asset came into existence and the rights under
the agreement were for the tenure of the agreement and no enduring benefit
was derived by the assessee. The brand or the trademark was not owned by
the assessee. Thus the payment was only for use of trademark and hence is
revenue expenditure.
3. Brokerage and cancellation charges paid in connection with earlier
sale of capital asset and deduction of the same at the time of
subsequent sale
In CIT v. Kuldeep Singh (2014) 108 DTR (Del) 161, the assessee entered into
an agreement for sale of property and received Rs 10 lakh as advance.
Subsequently the agreement was cancelled and the assessee refunded
advance amount and additionally Rs 5 lakh as cancellation charges. He also
incurred Rs 2.50 lakh as brokerage to a person who acted as a mediator in
the said deal. Subsequently, the assessee sold the capital asset and claimed
the cancellation charges and brokerage relating to terminated contract as
expenditure incurred wholly in connection with the transfer of capital asset.
The claim of the assessee was disallowed in assessment.
The court held that the tribunal has found the factual position and it cannot
be challenged that the payments were not genuine. It held that the tribunal
has rightly held that the expenditure was incurred wholly and exclusively in
The court referred to precedent in CIT v. Salora International
Ltd (2009) 308 ITR 199 (Del) and held that, by paying
franchise fee, no new asset came into existence.

3. Volume IX Part 2 October 25, 2014 19 Business Advisor
connection with the said transaction and hence is a deductible expenditure.
4. Finding by tribunal that income assessable in another assessment
year is adequate to overcome limitation rule
In CIT v. PP Engineering Work (2014) 108 DTR (Del) 195, the question before
the court was whether a finding by the tribunal in an appeal for one
assessment year that certain income is not taxable in that year but taxable
in some other earlier year would overrule the time limitation prescribed in
section 149. Earlier, the tribunal held that the AO cannot reopen the case
based on its own findings due to application of time limitation contained in
section 149.
The court held that on co-joint reading of section 150(2) read with
Explanations 2and 3 to section 153, the time limitation contained in section
149 will not apply. Precedent in Rural Electrification Corpn. Ltd
v.CIT(2013)355 ITR345(Del.) was referred to and applied to Explanation 2 to
section 153 which says that once an income is excluded from one
assessment year as relating to another year, reopening of the other year is
possible as it would amount to reopening in consequence of or to give effect
to any finding or direction contained in that order. Thus the court reversed
the findings of the tribunal.
5. Multiple sale deeds and investment in section 54EC bonds and
eligibility of exemption
In CIT v. Late.R.Krishnaswamy through LR K.Sridhar (2014) 108 DTR (Mad)
71, the assessee received entire sale consideration much before the
execution of sale deed. There was no agreement as contemplated by section
53A of the Transfer of Property Act,1882.
The issue was receipt of sale consideration in two financial years and claim
by the assessee that the capital gain would arise in the later year after sale
of entire undivided share in the property though reinvestment was made on
piecemeal basis over a period of time.
The court held that there was no transfer or deemed transfer on receipt of
entire consideration as the possession was not handed over to the buyers
then. The claim that the transfer was complete only when entire asset was
sold and possession was given at a later date was also rejected by the court.
The court held that the sale deed signifies the transfer and hence from each
sale deed execution, the reinvestment in section 54EC bonds is to be
considered for allowance of exemption.
(V. K. Subramani is Chartered Accountant, Erode)