Case laws update - V. K. Subramani - Article published in Business Advisor, dated September 25, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVI Part 6 September 25, 2016 22 Business Advisor
Case laws update
V. K. Subramani
1. Will the payee filing income-tax return and offering
sum received for taxation provide relief to the payer
from disallowance under section 40(a)(ia) for the
assessment years preceding the assessment 2013-14?
CIT v. Ansal Land Mark Township (P) Ltd (2015) 377
ITR 635 (Del)
Facts of the case: The assessee made payments which
were liable for tax deduction at source under section 194J
of the Act. The entire claim of expenditure was disallowed by invoking
section 40(a)(ia) of the Act. The facts of the case relate to assessment years
2008-09 and 2009-10. The assessee claimed that the second proviso to
section 40(a)(ia) inserted by the Finance Act, 2012 w.e.f. 01.04.2013 would
apply retrospectively from 01.04.2005. Accordingly, it was contended that
as per second proviso to section 40(a)(ia) read with first proviso to section
201(1) such expenditure was eligible for deduction.
Issue under consideration: Whether the payee admitting the income
besides filing the return of income and furnishing a declaration, provide
relief to the payer from disallowance of expenditure envisaged under section
40(a)(ia)?
Appellate Authorities view: The tribunal decided the issue in favour of the
assessee and held that when the payee has complied with the first proviso
to section 201(1) the payer shall not be deemed to be an assessee in default
and hence eligible for consequential relief from the rigours of section
40(a)(ia).
High Court’s view and decision: The High Court firstly took note of the
first proviso to section 201(1) inserted w.e.f. 01.07.2012. It held that the
first proviso was inserted to benefit the assessee. Where a person fails to
deduct tax at source on the sum paid to resident or on the sum credited to
the account of the resident, such person shall not be deemed to be an
assessee in default in respect of such tax if the recipient has furnished the
return of income under section 139 of the Act. The intention behind the
insertion of the second proviso is to benefit the assessee.
It relied on a thorough analysis of sections 40(a)(ia) and section 201(1) made
by the income tax appellate tribunal in Rajeev Kumar Agarwal v. Addtl. CIT

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(2014) 34 ITR (Trib) 479 (Agra) where it was held that the insertion of second
proviso to section 40(a)(ia) is declaratory and curative in nature and thus
has retrospective effect from 01.4.2005 being the date from which section
40(a)(ia) was inserted by the Finance (No.2) Act, 2004.
Accordingly, the court held that the second proviso to section 40(a)(ia)
though inserted by the Finance Act, 2012 w.e.f. 01.04.2013 will have
retrospective application from the assessment year 2005-06 onwards.
Where the payee has admitted the income and complied with the
conditions of the first proviso to section 201(1), the second proviso to
section 40(a)(ia) will insulate the taxpayer from disallowance of
expenditure and this would apply on retrospective basis right from the
insertion of sub-clause (ia) to section 40(a) i.e. w.e.f. 01.04.2005.
2. Whether accumulated income must be kept in section 11(5)
investment for grant of exemption under section 11(2)?
CIT v. G.R.Govindarajulu & Sons (2015) 378 ITR 1 (SC)
Facts of the case: The assessee-trust filed its return of income for the
assessment year 1994-95 declaring „nil‟ taxable income. In the return, it
disclosed gross income of Rs 99.41 lakh representing interest, rental
income, bus collections, miscellaneous receipts and surplus from a hotel. It
applied Rs 47.28 lakh towards the objects of the trust. It stated that it was
setting apart Rs 32 lakh under section 11(2) to be spent for charitable
purposes in the following years. On these facts, it claimed that the income
for the purpose of taxation was „nil‟ under section 11 of the Income-tax Act,
1961.
The Assessing Officer found that the declaration for exercising the option for
accumulation of income under section 11(2) was not filed before filing the
return of income. Further since no amount was invested in any Government
securities, the Assessing Officer held that there was no question of giving
any further deduction on the balance of income remaining with the
assessee.
The Commissioner (Appeals) held that since the trust has set apart Rs 32
lakh in terms of section 11A Explanation II, by exercising option in the
return of income itself, it should be treated as valid exercise of option. The
Commissioner (Appeals) hence upheld the claim of the assessee as regards
accumulation of income which was upheld both by the Appellate Tribunal
and the High Court.

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Supreme Court’s view & decision: The Apex Court as regards the claim of
exemption/ deduction prescribed 3 stages which are as follows:
(i) The assessee would be entitled to have the deduction of the entire
amount which has actually been spent and applied for charitable purposes
(i.e.) in furtherance of the objects of the trust.
(ii) The assessee is entitled to set apart 25% (presently 15%) of the total
income for charitable purposes even if not spent in the year in question and
when the option is exercised in this behalf stating that income up to 25%
(presently 15%) which is set apart would be spent in the succeeding years.
(iii) The assessee would be entitled to deduction of the remaining amount,
by virtue of section 11(2), to extent it is invested in the Government
securities as mentioned in section 11(5).
It accordingly held that the exercise of option by the assessee is possible by
filing the return of income and indicating such accumulation under section
11(2). It approved that the High Court and the authorities below were right
in their approach. It held that the law does not mention any specific mode of
exercising the option. The only condition is that the option has to be
exercised before filing of the return. If the option is exercised when the
return is filed it is enough and is in conformity with the provisions
contained in section 11 of the Act.
The Apex Court held that since the amount accumulated under section
11(2) was not invested in approved securities under section 11(5), it
has not fulfilled the conditions for accumulation of income for
application in the subsequent years.
Thus the trust was eligible for 25% (15% now) being the amount deductible
on gross receipt of Rs 99.41 lakh and on the resultant, deduction of the
actually applied amount of Rs 47.28 lakh. The balance would be chargeable
to tax as income of the trust.
The essence of the Apex Court decision is that the accumulation under
section 11(2) when not kept in approved investments, such amount is not
eligible for exemption. With respect, the decision of the Supreme Court
does not reflect that it was upholding the view of the Assessing Officer
though the rationale of the decision is on that line.
It may be noted that from the assessment year 2016-17 onwards, as per
second proviso to section 11(2) the declaration for accumulation under
section 11(2) has to be furnished mandatorily before the „due date‟ specified
under section 139(1) for furnishing the return of income.

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3. When the order under Central Excise is set aside under that law,
whether the income-tax recovery, which is consequent to reassessment
of income based on the said set aside order, should also be kept in
abeyance?
Sidhi Vinayak Metcom Ltd v. Union of India (2015) 378 ITR 372 (SC)
Facts of the case: On the basis of Central Excise proceedings, the income
tax assessments of the assessee for the assessment years 2010-11 and
2011-12 were reopened leading to an additional income-tax demand of Rs
64 lakh. The Commissioner (Appeals) permitted the assessee to pay the tax
demand in instalments. Later, due to default in making payment of first
instalment, the assessee‟s bank account was attached.
The assessee filed writ before the High Court which was dismissed. A special
leave petition was filed before the Apex Court to consider the subsequent
event, viz. that the orders of the Central Excise authorities were set aside by
the CESTAT. Accordingly, the assessee contended that the income tax
recovery proceedings should also be kept in abeyance pending adjudication
under excise law since that was the basis for initiation of reassessment
proceedings.
Decision of the Supreme Court: The Apex Court took note of the
subsequent event where the CESTAT had set aside the order passed under
the central excise law and remitted the matter to the adjudicating authority
for fresh decision.
It held that it would be appropriate for the assessee to approach the
Commissioner (Appeals) with whom the appeal was pending with an
application for stay bringing the aforesaid events to the notice of the
Commissioner (Appeals). It expressed confidence that the Commissioner
(Appeals) shall consider the application on merits and pass appropriate
orders thereon.
4. When the tribunal has recorded its findings in detail, whether any
The Apex Court took note of the subsequent event where the
CESTAT had set aside the order passed under the central
excise law and remitted the matter to the adjudicating
authority for fresh decision.

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substantial question of law arises for the High Court or the Supreme
Court to interfere?
Video Master v. Joint CIT (2015) 378 ITR 374 (SC)
Facts of the case: The assessee, a partnership firm, was subjected to
search under section 132 and at the time of search one of the partners of
the firm gave a statement about the undisclosed income of the firm.
Subsequently, the assessment was challenged before the tribunal which
remanded the case for fresh hearing.
In the second round, the tribunal gave a detailed order recording its
findings, viz. the confession made by the partner and other evidences
available on record. The assessee filed an appeal before the High Court
which was dismissed on the ground that no substantial question of law
arose in this case. The assessee filed appeal before the Supreme Court.
Decision of the Supreme Court: The Apex Court held that the tribunal has
recorded its factual findings in detail and it is not possible to say that this is
a case of no evidence at all inasmuch as evidence in the form of this
statement made by the assessee himself and other corroborative materials
which were available on record. It also held that when there is no
substantial question of law involved, the dismissal of the appeal by the High
Court is also valid.
5. Whether legal expenses for protecting the business by the erstwhile
partners of the firm forming AOP to acquire trademark, copyright and
technical know-how of the firm a deductible expenditure?
Mangalore Ganesh Beedi Works v. CIT (2015) 378 ITR 640 (SC)
Facts of the case: Three partners of the erstwhile firm formed an AOP
(being the assessee) who subsequently bid for tangible and intangible assets
of the dissolved firm. Two significant issues emerged, viz. (i) legal expenses
incurred by the AOP of Rs 12.25 lakh; and (ii) eligibility for depreciation in
respect of trademarks, copyrights and technical known-how acquired in a
bid.
The Assessing Officer rejected the claim of legal expenses and also
depreciation in respect of intellectual property rights, viz. trademarks,
copyrights and technical know-how by holding that the amounts paid
represent only goodwill and for which no depreciation could be allowed.
Decision of the Appellate Authorities: The Commissioner (Appeals)
allowed the claim of legal expenses but rejected the claim of deduction or

6. Volume XVI Part 6 September 25, 2016 27 Business Advisor
depreciation on the intellectual property rights. Thus the decision was partly
in favour of the assessee and Revenue.
The tribunal allowed the claim of the assessee by holding that the legal
expenses incurred were neither personal in nature nor unreasonable. The
expenses incurred did not pertain to the period prior to the AOP taking over
the going concern but were incurred after the business was taken over and
they related to legal proceedings which were pending in the High Court. As
regards depreciation on intangibles the tribunal allowed the claim of
deduction/ depreciation of the assessee.
The High Court did not accept the view of the tribunal as regards legal
expenses. With regard to intangibles, the High Court tacitly accepted the
trademarks and copyrights as intangible assets. It, however, denied the
benefit of deduction claimed by the assessee under sections 35A and 35AB
on the ground that what was auctioned was only goodwill and no amount
was spent towards acquisition of trademarks, copyrights.
Decision of the Supreme Court: There was a clear finding of fact by the
tribunal that the legal expenses were incurred after the formation of AOP
which were incurred for protecting its business. It held that there was no
reason to reverse the finding of fact recorded by the tribunal in the absence
of any material to conclude that the findings were perverse.
The legal expenses incurred were not personal in nature nor were
unreasonable. It was incurred for defending the business of going concern
and for protecting its interests.
As regards intangible assets, it held that the amount bid was based on net
value of the going concern. The Revenue had not proved that the payment
was towards goodwill and not for trademarks. It, accordingly, held that the
assessee could claim depreciation on the intangibles, viz. trademarks,
copyrights and know-how.
(V. K. Subramani is Chartered Accountant, Erode.)
The Commissioner (Appeals) allowed the claim of legal
expenses but rejected the claim of deduction or depreciation
on the intellectual property rights.