We had earlier discuss in detail about the concepts of capital & revenue receipts & expenditures along with various case laws earlier in part –I. In case you want to refer, the part –I, please click on the link below:
Over a period of time, there are number of judgements comes from various levels of courts from different locations of India and hence it is very important to know the same for the correct treatment of capital & revenue receipts & expenditures..
Holding company–subsidiary relationship : Subsidiary and its parent are totally distinct taxpayers and therefore entities subject to income tax are taxed on profits derived by them on stand alone basis, irrespective of their actual degree of economic independence and
regardless of whether profits are reserved or distributed to share holders / participants. Principle of Lifting of corporate veil can be applied in cases of holding company–subsidiary relationship, where, in spite of being separate legal personalities, if facts reveal that they indulge in dubious method of tax evasion. Refer, Vodafone International Holdings B.V. v. UOI, 340 ITR 1
Non–compete fee : Non–compete fee received by the assessee prior to 1stApril 2003, has to be treated as capital receipt. Department has not doubted the genuineness of transaction before lower authorities, hence the Tribunal cannot contend before the High Court that the transaction is sham.(A.Y.1997‐98). Refer, Hari Shankar Bhartia v. CIT, 65 DTR 380.
Similar decision was given in the case of CIT v. V. Subbaraju 341 ITR 584, where it was held that The assessee’s land was taken by the agreement on October 31, 1998 and the award was passed on March 29, 1992. The Assessing Officer took the view that interest was a revenue receipt. The Commissioner (Appeals) and Tribunal held that the interest was a capital receipt. On appeal to the High Court, the Court held that the interest paid, for the period 1-11-1998, up to date of award (i.e. 20-3-1992) must be treated as a capital receipt.
Subsidy : Subsidy given under dispersal of Industries scheme as incentive to set up industries in areas other than Mumbai, Pune and Thane is capital receipt. (A.Ys. 2004‐05, 2005‐06, 2006‐07). Refer, Dy. CIT v. Cosmo Films Ltd, 13 ITR 340.
Similar decision given in the case of CIT v. Karaikal Chlorates Ltd, 341 ITR 624, where it was held that Power subsidy received by the assessee for encourage setting up of new industries in backward areas assessee treated the said subsidy as capital receipt. The Court held that subsidy was given for five years at a particular percentage on the total consumption is a revenue receipt. Decided in favour of revenue. (A. Y. 1995-96).
Cash compensation : Mumbai ITAT in the case of Kushal K. Bangia v. ITO held that the assessee was the member of a housing society. The housing society and it’s members entered into an agreement with a developer pursuant to which the developer demolished the building owned by the housing society and reconstructed a new multistoried building by using the FSIarising out of the property and the outside TDR available under Development Control Regulations. The assessee, as a member of the housing society, received a larger flat in the new building, displacement compensation of Rs. 6 lakhs (at Rs.34,000/‐ p.m. for the period of construction of the new building) and additional compensation of Rs.11.75 lakhs. The Assessing Officer &CIT(A) held that the said “additional compensation” was assessable as income in the assessee’s hands. On appeal by the assessee, held allowing the appeal:
In principle, though the scope of “income” in section 2(24) is very wide, a capital receipt is not chargeable to tax as income unless there is a specific provision to that effect. As the residential flat owned by the assessee in the society’s building was a capital asset in his hands, the compensation was a capital receipt. The department’s argument that the cash compensation was a “share in profits earned by the developer” is not acceptable because it proceeds on the fallacy that the nature of payment in the hands of the payer determines the nature in the hands of the recipient. However, as the said receipt reduced the cost of acquisition of the new flat, it had to be taken into when computing the gains from a transfer thereof in the future.
Specified fees : Assessee is a development authority created under the provisions of UP Urban Planning & Development Act, 1973. 90 percent of the amounts collected by the assessee by way of development fees, conversion charges of land user, stamp duty and fees on regularization of colonies were retained in the infrastructure fund account. As per office memorandum assessee has been power to collect the fees charges and functioning. The amount collected by office memorandum not being a separate independent entity of the assessee and the said memorandum having not created any overriding title of the State Government at source of collection of the specified fees/ charges, which have to be applied towards fulfillment of assessee’s object, there is no diversion of income by overriding title as regards the amounts credited to the infrastructure fund.(A.Y. 2006‐07 &2007‐08). Refer, Mussore Dehradun Development Authority v. Addl. CIT, 65 DTR 297.
Sham Transactions: Transaction within four corners of law can be treated as “sham” & “colourable device” by looking at “human probabilities”. Refer, Killick Nixon Ltd vs. DCIT.
Reimbursement : Charges towards reimbursement of expenses cannot be included in income. Refer, CIT v. Siemens Aktiongesellschaft, 177 Taxman 81 (Bom.),
Sales Tax Deposit : The High Court in CIT v. Southern Explosives Co. (2000) 242 ITR 107 (Mad.), has held that the receipt of the amount for payment of sales tax and keeping it in deposit would amount to a “revenue receipt” and it would form part of the assessee’s income, hence the collection of contingency deposit against payment of sales tax would form revenue receipt, the matter decided in favour of revenue. (A. Ys. 1996-97 & 1997-98).
Retention Money : The issue referred for the consideration of Third Member was whether the retention money is accrued in the year of retention or in the year of actual receipt of the retention amount from the contractee s departments after the clearance of effect liability claims .The third member held that assessee had no right to receive the money by virtue of the contract between parties and the assessee also had no right to enforce the payment and therefore the assessing officer could not include the retention money in the assessment year when actually this amount had not been paid to the assessee. The Tribunal held that the retention money in the contract is assessable only in the year of receipt , that too after clearance of the defect liability.(A.ys.2003‐04 to 2005‐06). Refer, ACIT v. Chandragiri Construction Co, 147 TTJ 249/73 DTR 20(TM ) (Cochin)(Trib.).
TDR Premium : Mumbai High Court in the case of CIT v. Jai Hind CHS Ltd, held that tdr premium received by Co‐op Hsg. Society from its members is exempt on ground of “mutuality”.
Suspense Account : The court held that when there is no possibility of any one claiming any amount against surplus in the suspense account maintained by the assessee, the assessee cannot treat it as liability or provision for liability ,further as and when the claim is made the appellant has to make any payment the same is allowable as a deduction in the year in which the claim is made , therefore the Tribunal is right in rejecting the claim of the assessee in respect of arrears carried over for several years .However in respect of excess found during the previous year need not be treated as income. The High Court confirmed the order of Tribunal in respect of arrears brought forward except Rs.95,000/- which is the excess found in the previous year. Refer, Catholic Syrin Bank Ltd v. Addl.CIT, 251 CTR 430 (Ker.)(High Court) .
Deceased Partner : The issue before the Tribunal was whether the amount paid by the assessee to Mrs Mehru Minoo Shroff, wife of late Dr M.S.Shroff is first charge on receipts of firm in terms clause 13 of the partnership deed executed on 1-4-2003. Held that, as there was an absolute contractual obligation imposed on the continuing firm/partners by the partnership deed to pay an amount of 2% of the gross receipts subject to maximum of 3 lakhs p.a. to the legal heir of the deceased partner, it was a first charge on the receipts of the continuing firm/partners and constituted a diversion of income by overriding title. The claim of assessee was allowed. (A.Y. 2007-08)(ITA no 1560/2012 Bench ‘D’ Dated 3-8-2012). Refer, Shroff Eye Centre v. ACIT.
Subvention receipt : The assessee a 100 percent subsidiary of a German company which is engaged in the activity of housing finance. The holding company granted subvention assistance to the assessee .It was done on the evaluation of the holding company that the assessee was likely to on account of its business activity , incur losses which would be substantial if not entirely eroded .The Assessing Officer held that subvention receipt was by way of casual receipt and liable to tax . On appeal, Commissioner (Appeals) held that receipt was capital in nature . On appeal by revenue, the Tribunal also confirmed the order of Commissioner (Appeals). On appeal to the High Court, it was held that the subvention assistance received by assessee from its holding company to recoup losses likely to be suffered by it, was a capital receipt not liable to tax. Appeal of revenue was dismissed. Refer, CIT v. Deutsche Post Bank Home Finance Ltd , 209 Taxman 313 (Delhi).
In case you have any further clarification, feel free to contact me at taxbymanish@yahoo.com or else you can view more articles & news related to Indian tax & finance at http://taxbymanish.blogspot.in/.
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