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Profits and Gains of Business or Profession

Rajendran Nallusamy ,
  05 December 2008       Share Bookmark

Court :

Brief :

Citation :

1. The Apex Court, in CIT vs. General Insurance Corporation (2006) 286 ITR 232, has held that in the case of issue of bonus shares, there is no fresh inflow of funds or increase in the capital employed. The reserves of the entity gets converted into share capital of the company. The total funds available with the entity remain the same, both before and after the issue of bonus shares. Accordingly, any expenditure incurred in connection with issue of bonus shares was held as revenue expenditure. This decision overrules the decision rendered in the case of Ahmedabad Manufacturing & Calico (P) Ltd vs. CIT (1986) 162 ITR 800 (Guj) and Vazir Sultan Tobacco Co Ltd vs. CIT (1990) 184 ITR 70 (AP). It applied the rationale of the decision rendered in the case of Empire Jute Co Ltd vs. CIT (1980) 124 ITR 1 (SC).

2. The Apex Court in Dr.T.A.Quereshi vs. CIT (2006) 287 ITR 547 (SC) dealt with a case of a doctor whose claim of deduction to the extent of the stocks seized was disallowed by the Madhya Pradesh High court (275 ITR 352). The apex court held that once it is found that the assessee is engaged in the manufacture and sale of any substance (including prohibited articles) the stocks seized is a business loss. It applied the precedent viz. CIT vs. Piara Singh (1980) 124 ITR 40 (SC). It was held that section 37 is applicable only for business expenditure and not to business losses. Business losses are allowable on ordinary commercial principles for computing profits. The loss of stock in trade, being a trading loss, is allowable while computing the profits of illegal business.

3. Interest on moneys borrowed for business is deductible under section 36(1)(iii). In a case where the assessee advances money to an allied concern without interest then the Revenue would naturally probe the nexus between borrowing and advancing of funds. In CIT vs. Prem Heavy Engineering Works (P) Ltd (2006) 285 ITR 554 (All) the Assessing Officer disallowed a portion of interest paid by the assessee on over draft facilities to the bank on the ground that the assessee had advanced interest free funds to its allied concern. The Court held that the assessee company’s share capital and free reserves were sufficient to advance interest free funds to its allied concern. Accordingly, the disallowance of interest was rejected. However, a contrary decision has been held in CIT vs. Abhishek Industries Ltd (2006) 286 ITR 1 (P&H). In this case, the assessee advanced money to its sister concern without charging interest. It was held that the onus is on the assessee to show that its borrowings were used for its own business. The court held that the Revenue need not establish the nexus between borrowings and interest free advances for the purpose of disallowing the interest on borrowings.

4. In CIT vs. Brittania Industries Ltd (2006) 280 ITR 525 (Cal) the assessee advanced money to concern from whom supplies were received. The advance was made immediately on the enhanced packing credit facility. The Assessing Officer disallowed interest on borrowing for the reason that the funds were given without interest to the concern in which the relatives of directors were interested. The Court held that the tribunal made a factual finding that the advances were made to the concern supplying raw material and was made in the regular course of business and further the advance was made out of the assessee’s own funds and accordingly the disallowance of interest was rejected.

5. In CIT vs. Southern Roadways Ltd (2006) 282 ITR 379 (Mad) the assessee paid postage, telegram and telephone charges in advance based on the demand raised by the telegraph department and claimed the payment as deduction. The court held that the payment by the assessee has been proved and it has been paid in pursuance of demands raised by postal, telephone and telegraph department and accordingly the amount paid is deductible upon payment notwithstanding the fact that the assessee follows mercantile system of accounting.

6. In CIT vs. Hari Vignesh Motors (P) Ltd (2006) 282 ITR 338 (Mad) the expenditure towards construction of additional building in leasehold premises was allowed as revenue expenditure as the lease deed did not provide any ownership of assets or consideration for transfer upon termination of lease.

7. Where a firm is dissolved and one of the partners takes over the business of the firm with an agreement to pay the erstwhile partners a certain sum of money every year, it was held that such payment flowed from business of the assessee and is an allowable expenditure. CIT vs. Mandovi Hotel (P) Ltd (2006) 284 ITR 129 (Bom).
8. In CIT vs. Arya Vaidhya Pharmacy (CBE) Ltd (2006) 284 ITR 335 (Mad) the assessee collected excess sales tax which was retained as a deposit. The Apex Court directed the assessee to refund the amount to the customers and the balance, which could not be refunded, was to be donated to a charitable trust for utilization for public charitable purposes. It was held that the direction of the Supreme Court is that such excess amount collected is not belonging to the assessee and hence, is not chargeable to tax as income.
9. The Karnataka High Court in CIT vs. Industrial Credit And Development Syndicate Ltd (2006) 285 ITR 310 (Karn) has held that any surplus arising in buy back of debentures would not constitute as income subject to tax liability. The Court held that such buyback is merely discharging the liability to the debenture holder by the company similar to repayment of loan.
10. In CIT vs. Sri Meenakshi Mills Ltd. (2007) 290 ITR 107 (Mad.), the assessee company had paid upfront fee to a financial institution for the purpose of availing a loan towards purchase of machinery. The court held that the upfront fee paid to the bank is mere bank charges and cannot be construed as capital expenditure. Hence, the same shall be deductible as revenue expenditure.

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