Hero MotoCorp Ltd. v. Addl. CIT

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The Tax Publishers2013 TaxPub(DT) 2242 (Del-Trib) : (2013) 156 TTJ 0139 : (2013) 060 SOT 0025 : (2013) 091 DTR 0001 Hero MotoCorp Ltd. v. Addl. CIT INCOME TAX ACT, 1961 --Business expenditure--AllowabilityProvision for raw-material vis-a-vis prior period expenses--Assessee-company created provisions at year end towards accepted increase in price of raw-materials and any excess provision was reversed or short fall was recognized in subsequent year. AO disallowed provision to extent it was reversed in subsequent year. He also disallowed adjustment for shortfall in provision created in preceding year holding it as prior period expenditure. *Held:* Not justified. Where price revision in question was on material already supplied to assessee, either consumed or lying in stock and provision itself was doubted, provision could be disallowed after proper verification. The finding of the AO is based on the submissions of the assessee that the liability does not pertain to F.Y. 2006-07 and that these pertain to earlier assessment year. This is not disputed by the assessee. The supplementary invoices belong to the next year. Hence, it is not correct to say that the liability for which provision is made has crystallized during the year. The assessee has not demonstrated the same. The company in this case makes a provision for increase in material cost on estimate basis, based on price fixation with the vendors. These provisions have been made in the consistent manner year after year. It is not denied by the Revenue that the price revision in question is on the material already supplied by the vendor to the assessee-company, which is either consumed or lying in closing stock. Thus, the expenditure in question has to be definitely allowed. The only issue is the year of allowability. Only excess provision written back is added by the AO. Out of total provision for price revision for material of Rs. 31.31 crores, excess provision of Rs. 3.01 crores was reversed in the next year, which was added by the AO. When the provision itself is doubted as not belonging to this particular year by the AO, Tribunal does not understand as to how only the excess provision is sought to be reversed. [Para 11.11] In view of the above discussions, as it is not proved by the assessee that the provision for price revision for material purchased is for material consumed during the year or that it pertains to the stock of material in closing stock, the disallowance is upheld. [Para 11.12] As regards, the quantum of disallowance, the AO is directed to verify the claim of the assessee on the correct reversal of provision and pass appropriate orders. In the result, this ground is dismissed. [Para 11.13] When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure. When the provision is higher, it is reversed in subsequent year, when the actual figures are known. Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the year. Estimation of an expense has to be considered in contradiction to actual ascertainment of the expenses. Once the actual expense has been ascertained, the liability accures in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concepts of going concern, accrual and consistency have to be taken into account by the revenue authorities while evaluating such provisions and making such adjustments. The assessee is disputing the figures of disallowance and the DRP is also expressing its inability to correct the figures. The DRP is not helpless and could have directed the AO to verify the figures and correct the mistakes, if any. In view of the above discussion, this ground of assessee was allowed for statistical purpose and direct the AO to properly verify the figures and allow the claim of the assessee. [Para 12.12] Income Tax Act, 1961 Section 37(1) INCOME TAX ACT, 1961 --Business disallowance under section 43B--Applicability of section 43B(f)Leave encashment--During the come of assessment proceeding it was noted by AO that assessee-company entered into a master policy with LIC, whereby assessee paid annual premium to LIC, which, in turn paid leave salary directly to employees and as such assessee claimed deduction for annual premium which was disallowed under section 43B(f). *Held:* Not justified. There was no direct payment of leave encashment by assessee to employee, same could not, as such, be disallowed under section 43B(f) and was to be allowed as business expenditure under section 37(1). A plain reading of the section 43B makes it clear that the above provision starts with the non-obstante clause. However, at the same time the above provision is not for allowance of any claim, and rather only puts certain restrictions on allowability of an expenditure which is 'otherwise allowable under the Act'. That means an expenditure which is otherwise allowable under any provisions of the Act, would not be allowed if such expenditure has not been actually paid as laid down in the section. This would mean that if any expenditure is found to be allowable under other provisions of the Act, section 43B prescribes further conditions of allowability if the fact when payment has actually been made in that particular year. [Para 21.14] In the present case, the assessee had made payments to LIC / Trust by way of premium. It cannot be denied that the payment is incurred wholly and exclusively for the purpose of business, i.e., employee's welfare and hence is allowable under section 37(l). [Para 21.15] In the present case, the company has created a fund under a separate trust which has entered into a master policy with LIC for payment of leave encashment to the employees. The company makes annual contribution to the trust/ LIC to keep the policy in force. The assessee pays annual premium to LIC and leave salary is paid by LIC directly to the employees and no deduction is claimed by the assessee at that point of time. Hence, one agree with the arguments of the AR of the assessee that, as there is no direct payment of leave encashment by the assessee, the same is not covered under section 43B(f). [Para 21.20] In view of the above discussions, the payment is allowable under section 37(1) and no disallowance under section 43B is warranted since the assessee has paid the premium to the LIC and the question of any payment in future to the employees towards leave encashment does not arise. [Para 21.23] Income Tax Act, 1961 Section 43B Income Tax Act, 1961 Section 37(1) INCOME TAX ACT, 1961 --Business expenditure--Disallowance under section 40(a)(ia)Warranty services vis-a-vis reimbursement of service coupon--During the course of assessment proceedings, it was noted by AO that assessee issued service coupons to customers for service/repairs of vehicles along with vehicle sold. Free service was carried out by dealers for which reimbursement was made by assessee to dealers on presentation of free service coupon handed over by customer to dealers. AO held that dealers rendered technical service of repairing the vehicle to assessee and therefore, assessee was liable to TDS under section 194J, as such, AO made disallowance under section 40(a)(ia). *Held:* Not justified. It could not be held that dealer rendered technical services as contemplated under section 194J and no TDS was required to be deducted by assessee on reimbursement to dealers. No disallowance under section 40(a)(ia), therefore,could be made. When the assessee sells vehicles to its dealers for the ascertained price, the cost of free service obligation on the part of the assessee is embedded in the concluded sale contract and sale price of the vehicle. The dealer, in turn, makes onward sales to the customers at a price which includes free service obligations. The contract between dealer and customer is independent and separate contract. The customer in terms of the sale contract with the dealer approaches the dealer for these free services. It is the customer who avails the service for the cost paid by him as part of the sale price of the vehicle he purchases from dealer during the warranty period. It is the dealer who renders the service to the customer pursuant to independent contract. The fact that the customer can approach any dealer for obtaining free service does not alter the position as it is a case of convenience and mutual arrangement drawn by the company. The reimbursement is not for services rendered by the dealer to the customer but in discharge of the warranty obligation included in the sale price. It is in term of a independent contract of sale which stipulates that the assessee should reimburse the cost incurred by the dealer if and when it performs free services to the ultimate customer. On this factual matrix, it would be wrong to hold that the dealer has rendered technical services as contemplated under section 194J to the assessee for which the assessee paid a particular amount to the dealer and non-deduction of tax at source on such payments attracts disallowance under section 40(a)(ia). [Para 29.33] In the present case the obligation incurred by the assessee at the time of sale to pay the cost of free services and is not payment made in consideration for the rendering of any managerial, technical or consultancy services as defined for the purpose of section 194J. Routine repairs which includes supply of spares does not attract section 9(1)(vii) and hence no TDS need be done under section 194J. As section 194J does not apply, disallowance under section 40(a)(ia) on the ground that no deduction of tax at source is made under section 194J is bad in law and has to be deleted. [Para 29.41] Income Tax Act, 1961 Section 40(a)(ia) Income Tax Act, 1961 Section 194J INCOME TAX ACT, 1961 --Capital or revenue expenditure--Sponsorship and launch of new vehile expenses--Sponsorship expenses and expenses on and launching of new vehicles did not give enduring benefit and as such not capital in nature. The issue whether the expenditure in question is in the capital field or in the revenue field has to be decided on the facts of the case. This is a case where the assessee has incurred an amount of Rs. 26.92 crores towards advertising, launch of new models of two wheelers. Launch expenses cannot be held to be in the capital field. It does not result in assessee having enduring benefit in the form of the capital asset. Similarly, expenditure of Rs. 54.61 crores incurred towards sponsorship of events cannot be considered as incurred in the capital field. Income Tax Act, 1961 Section 37(1) INCOME TAX ACT, 1961 --Business income--Profits chargeable to tax under section 41(1)Remission of liability--Assessee-company was engaged in manufacture of two wheelers, had recieved Rs. 500 from customers against booking of vehicle till 1990 and said deposits along with interest was to be adjusted by assessee-company against sale price of vehicle at the time of delivery. However, after 1996 assessee stopped accruing interest and issued press note that depositors could claim the amount back and on account of same certain amount remained outstanding in books. AO held outstanding amount as benefits or perquisite under section 28(iv) vis-a-vis remission of liabilities. *Held:* Not justified. As assessee intended to honour claim and disclosed it as liability in books, it amounted to acknowledgement of debt and as such, there was no remission or cessation of liability. Addition in this case is made under section 28(iv). The issue in question is whether the assessee can be said have received any benefit or perquisite arising from the exercise of business or profession and if so whether the said benefit or perquisite can be said to have accrued to the assessee during the impugned assessment year. From the material facts on record, it is found that there are some claims coming forth from the customers who have deposited the amounts and the assessee honored the claims. It is altogether a different matter that the number of claims is very less due to efflux of time. When the assessee intends to honour the claim and therefore carried the liability in its books of account, it is not correct to say that there is remission of liability. The fact that the assessee continued to disclose the impugned amount as a liability in the balance sheet itself amounts to acknowledgemnt of the debt and as such, there is no remission of liability. Even otherwise, the deposit amounts were received during 1990 and there is no special circumstances to consider the above mentioned deposit amount as income of the assessee for the impugned assessment year. The revenue has not brought on record any such material to indicate that the alleged remission of liability towards the deposit amount occurred during the impugned assessment year. Even otherwise, when an amount is received in cash, section 28(iv) does not apply as held by the Bombay High Court in the case of Mahindra & Mahindra Ltd. (supra). The jurisdictional High Court in the case of Jindal Equipments Leasing & Consultancy Services Ltd. [Para 64.16] By applying the above binding propositions laid down by the Jurisdictional High Court, there is no merit in the action of the AO in considering the deposit amount as income of the assessee under section 28(iv) of the Act. Hence the same is deleted. [Para 64.17] Income Tax Act, 1961 Section 41(1) Income Tax Act, 1961 Section 28(i)(iv) INCOME TAX ACT, 1961 --Head of income--Business income or capital gainsInvestment in shares and securities--During assessment proceedings, AO noted that assessee, manufacturer of two wheeler vehicles, invested certain sum in shares and mutual funds and port folio management systems, etc., and gains realised from such securities were disclosed as capital gains. AO held that it was business income in stead of capital gains. *Held:* Not justified. It was not the case that assessee was indulged in day-to-day trading in securities as such and neither securities were shown as stock-in-trade nor there was frequency of sale/purchase, hence, income from sale of securities was to be treated as capital gains and not as business income. The Gujarat High Court in the case CIT v. Rewashanker A. Kothari (2006) 283 ITR 338(Guj.) after examining earlier judgements on the question had laid down the following parameters /tests to determine when income from transactions in shares/ securities should be treated as 'income from business' or the gain has to be taxed under the 'Capital gains'. [Para 65.21] The business of the assessee is not to deal in shares and securities. The investment was made with a view to earn capital appreciation and to use the spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs. 22.61 crores from investments held in shares and mutual funds. [Para 65.29] It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock-in-trade. The assessee has shown the investments in shares both at the beginning and closing of the year as an investment only and not as stock-in-trade. [Para 65.30] The assessee has valued the investments at cost as per Accounting Standard 13- Accounting for Investments and not in accordance with Accounting Standard -2 which deals with valuation of inventories. [Para 65.31] The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This treatment by the assessee was accepted by the Revenue for the past years. [Para 65.32] The assessee had earned income from both long term and short term capital gains which means the assessee has also held shares for a period of more than 12 months. [Para 65.33] The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs. [Para 65.34] The co-ordinate bench of the Delhi Income Tax Appellate Tribunal in the case of Narendra Gehlaut v. Jt. CIT (2012) 52 SOT 255 (Delhi) held that despite borrowing, gains on shares assessable as Short term capital gains and not business profits. The decision is rendered considering the CBDT Circular No 4/ 2007 and various judicial precedents on the subject. [Para 65.35] Out of the total sale value of Rs. 13,690.84 crores realized from the investments, an amount of Rs. 12,330.33 crores relates to sale of short term debt mutual funds and liquid funds in which the transactions are effected on daily basis (i.e. surplus amounts are invested and the withdrawals are made in a short span depending on the business needs of the assessee). These funds were invested mainly into money market instruments, short-term corporate deposits and treasury. Most schemes have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. [Para 65.36] The AO has brought the transaction to tax under the head 'Business income' mainly on the ground that the volume of the transaction of such investments was high and the assessee is undertaking the trading of stocks and mutual funds regularly and systematically. However, Tribunal observe that there is not much frequency in sale/purchase of investments, from analysis carried out at page 526 of objections in Form 35A. It is not the case that the assessee has indulged in regular trading in shares on day-to-day basis. [Para 65.37] The Mumbai Bench of the Tribunal in the case of Janak S. Rangwalla v. Asstt. CIT (2007) 11 SOT 627 observed that mere volume and magnitude of transcation will not alter the nature of transcation if the intention was to hold the shares as investment and not in stock-in-trade. [Para 65.38] Out of the total income earned from mutual funds, almost 67.34 per cent of the total income earned from investments made in mutual funds was for a period of more than one year. [Para 65.39] Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity. [Para 65.40] In view of the above factual matrix it emerges that assessee is: (i) not a trader in stocks; (ii) Intention of holding the shaes as investment/ stock is manifest; (iii) Sales are effected by delivery; (iv) Department has itself in earlier years taxed such transactions under the head 'Capital Gains'.[Para 65.41] Considering these facts and applicable judicial precedents on the issue, the income in question can be taxed only under the head 'Capital Gains' and not under the head 'Business income'. This ground of the assessee is allowed. [Para 65.42] Income Tax Act, 1961 Section 14 Income Tax Act, 1961 Section 28(i) Income Tax Act, 1961 Section 245 INCOME TAX ACT, 1961 --Business expenditure--Disallowance under section 40(a)(i)Non-deduction of TDS on advertisement or royalty payment--During assessment proceedings, it was observed by AO that assessee-company had made payments to 'GCC' Singapore and 'N' Singapore, in relation to sponsorship of various sports events organized by ICC, whereby assessee was entitled to advertise on billborads at venue and advertisement space in official brochure/website of ICC, etc. AO holding that the payment made to Singaporian parties was royalty and as such since assessee did not deduct TDS under section 195, disallowed payment under section 40(a)(ia). *Held:* Not justified. Payments made to 'GCC' and 'M' Singaporian parties were purely for advertisement and publicity of brand name of assessee and was not in nature of royalty for use of any trade mark or brand name in view of Article 12 of DTAA between India and Singapore and also payees were having no Parmanent Establishment in India, amount received by 'GCC' and 'N' were not taxable in India, as such no TDS was required under section 195 and as no disallowance under section 40(a)(ia) warranted. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 2242 (Del-Trib) : (2013) 156 TTJ 0139 : (2013) 060 SOT 0025 : (2013) 091 DTR 0001

Hero MotoCorp Ltd. v. Addl. CIT

INCOME TAX ACT, 1961

--Business expenditure--AllowabilityProvision for raw-material vis-a-vis prior period expenses--Assessee-company created provisions at year end towards accepted increase in price of raw-materials and any excess provision was reversed or short fall was recognized in subsequent year. AO disallowed provision to extent it was reversed in subsequent year. He also disallowed adjustment for shortfall in provision created in preceding year holding it as prior period expenditure. Held: Not justified. Where price revision in question was on material already supplied to assessee, either consumed or lying in stock and provision itself was doubted, provision could be disallowed after proper verification.

The finding of the AO is based on the submissions of the assessee that the liability does not pertain to F.Y. 2006-07 and that these pertain to earlier assessment year. This is not disputed by the assessee. The supplementary invoices belong to the next year. Hence, it is not correct to say that the liability for which provision is made has crystallized during the year. The assessee has not demonstrated the same. The company in this case makes a provision for increase in material cost on estimate basis, based on price fixation with the vendors. These provisions have been made in the consistent manner year after year. It is not denied by the Revenue that the price revision in question is on the material already supplied by the vendor to the assessee-company, which is either consumed or lying in closing stock. Thus, the expenditure in question has to be definitely allowed. The only issue is the year of allowability. Only excess provision written back is added by the AO. Out of total provision for price revision for material of Rs. 31.31 crores, excess provision of Rs. 3.01 crores was reversed in the next year, which was added by the AO. When the provision itself is doubted as not belonging to this particular year by the AO, Tribunal does not understand as to how only the excess provision is sought to be reversed. [Para 11.11] In view of the above discussions, as it is not proved by the assessee that the provision for price revision for material purchased is for material consumed during the year or that it pertains to the stock of material in closing stock, the disallowance is upheld. [Para 11.12] As regards, the quantum of disallowance, the AO is directed to verify the claim of the assessee on the correct reversal of provision and pass appropriate orders. In the result, this ground is dismissed. [Para 11.13] When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure. When the provision is higher, it is reversed in subsequent year, when the actual figures are known. Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the year. Estimation of an expense has to be considered in contradiction to actual ascertainment of the expenses. Once the actual expense has been ascertained, the liability accures in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concepts of going concern, accrual and consistency have to be taken into account by the revenue authorities while evaluating such provisions and making such adjustments. The assessee is disputing the figures of disallowance and the DRP is also expressing its inability to correct the figures. The DRP is not helpless and could have directed the AO to verify the figures and correct the mistakes, if any. In view of the above discussion, this ground of assessee was allowed for statistical purpose and direct the AO to properly verify the figures and allow the claim of the assessee. [Para 12.12]

Income Tax Act, 1961 Section 37(1)

INCOME TAX ACT, 1961

--Business disallowance under section 43B--Applicability of section 43B(f)Leave encashment--During the come of assessment proceeding it was noted by AO that assessee-company entered into a master policy with LIC, whereby assessee paid annual premium to LIC, which, in turn paid leave salary directly to employees and as such assessee claimed deduction for annual premium which was disallowed under section 43B(f). Held: Not justified. There was no direct payment of leave encashment by assessee to employee, same could not, as such, be disallowed under section 43B(f) and was to be allowed as business expenditure under section 37(1).

A plain reading of the section 43B makes it clear that the above provision starts with the non-obstante clause. However, at the same time the above provision is not for allowance of any claim, and rather only puts certain restrictions on allowability of an expenditure which is 'otherwise allowable under the Act'. That means an expenditure which is otherwise allowable under any provisions of the Act, would not be allowed if such expenditure has not been actually paid as laid down in the section. This would mean that if any expenditure is found to be allowable under other provisions of the Act, section 43B prescribes further conditions of allowability if the fact when payment has actually been made in that particular year. [Para 21.14] In the present case, the assessee had made payments to LIC / Trust by way of premium. It cannot be denied that the payment is incurred wholly and exclusively for the purpose of business, i.e., employee's welfare and hence is allowable under section 37(l). [Para 21.15] In the present case, the company has created a fund under a separate trust which has entered into a master policy with LIC for payment of leave encashment to the employees. The company makes annual contribution to the trust/ LIC to keep the policy in force. The assessee pays annual premium to LIC and leave salary is paid by LIC directly to the employees and no deduction is claimed by the assessee at that point of time. Hence, one agree with the arguments of the AR of the assessee that, as there is no direct payment of leave encashment by the assessee, the same is not covered under section 43B(f). [Para 21.20] In view of the above discussions, the payment is allowable under section 37(1) and no disallowance under section 43B is warranted since the assessee has paid the premium to the LIC and the question of any payment in future to the employees towards leave encashment does not arise. [Para 21.23]

Income Tax Act, 1961 Section 43B

Income Tax Act, 1961 Section 37(1)

INCOME TAX ACT, 1961

--Business expenditure--Disallowance under section 40(a)(ia)Warranty services vis-a-vis reimbursement of service coupon--During the course of assessment proceedings, it was noted by AO that assessee issued service coupons to customers for service/repairs of vehicles along with vehicle sold. Free service was carried out by dealers for which reimbursement was made by assessee to dealers on presentation of free service coupon handed over by customer to dealers. AO held that dealers rendered technical service of repairing the vehicle to assessee and therefore, assessee was liable to TDS under section 194J, as such, AO made disallowance under section 40(a)(ia). Held: Not justified. It could not be held that dealer rendered technical services as contemplated under section 194J and no TDS was required to be deducted by assessee on reimbursement to dealers. No disallowance under section 40(a)(ia), therefore,could be made.

When the assessee sells vehicles to its dealers for the ascertained price, the cost of free service obligation on the part of the assessee is embedded in the concluded sale contract and sale price of the vehicle. The dealer, in turn, makes onward sales to the customers at a price which includes free service obligations. The contract between dealer and customer is independent and separate contract. The customer in terms of the sale contract with the dealer approaches the dealer for these free services. It is the customer who avails the service for the cost paid by him as part of the sale price of the vehicle he purchases from dealer during the warranty period. It is the dealer who renders the service to the customer pursuant to independent contract. The fact that the customer can approach any dealer for obtaining free service does not alter the position as it is a case of convenience and mutual arrangement drawn by the company. The reimbursement is not for services rendered by the dealer to the customer but in discharge of the warranty obligation included in the sale price. It is in term of a independent contract of sale which stipulates that the assessee should reimburse the cost incurred by the dealer if and when it performs free services to the ultimate customer. On this factual matrix, it would be wrong to hold that the dealer has rendered technical services as contemplated under section 194J to the assessee for which the assessee paid a particular amount to the dealer and non-deduction of tax at source on such payments attracts disallowance under section 40(a)(ia). [Para 29.33] In the present case the obligation incurred by the assessee at the time of sale to pay the cost of free services and is not payment made in consideration for the rendering of any managerial, technical or consultancy services as defined for the purpose of section 194J. Routine repairs which includes supply of spares does not attract section 9(1)(vii) and hence no TDS need be done under section 194J. As section 194J does not apply, disallowance under section 40(a)(ia) on the ground that no deduction of tax at source is made under section 194J is bad in law and has to be deleted. [Para 29.41]

Income Tax Act, 1961 Section 40(a)(ia)

Income Tax Act, 1961 Section 194J

INCOME TAX ACT, 1961

--Capital or revenue expenditure--Sponsorship and launch of new vehile expenses--Sponsorship expenses and expenses on and launching of new vehicles did not give enduring benefit and as such not capital in nature.

The issue whether the expenditure in question is in the capital field or in the revenue field has to be decided on the facts of the case. This is a case where the assessee has incurred an amount of Rs. 26.92 crores towards advertising, launch of new models of two wheelers. Launch expenses cannot be held to be in the capital field. It does not result in assessee having enduring benefit in the form of the capital asset. Similarly, expenditure of Rs. 54.61 crores incurred towards sponsorship of events cannot be considered as incurred in the capital field.

Income Tax Act, 1961 Section 37(1)

INCOME TAX ACT, 1961

--Business income--Profits chargeable to tax under section 41(1)Remission of liability--Assessee-company was engaged in manufacture of two wheelers, had recieved Rs. 500 from customers against booking of vehicle till 1990 and said deposits along with interest was to be adjusted by assessee-company against sale price of vehicle at the time of delivery. However, after 1996 assessee stopped accruing interest and issued press note that depositors could claim the amount back and on account of same certain amount remained outstanding in books. AO held outstanding amount as benefits or perquisite under section 28(iv) vis-a-vis remission of liabilities. Held: Not justified. As assessee intended to honour claim and disclosed it as liability in books, it amounted to acknowledgement of debt and as such, there was no remission or cessation of liability.

Addition in this case is made under section 28(iv). The issue in question is whether the assessee can be said have received any benefit or perquisite arising from the exercise of business or profession and if so whether the said benefit or perquisite can be said to have accrued to the assessee during the impugned assessment year. From the material facts on record, it is found that there are some claims coming forth from the customers who have deposited the amounts and the assessee honored the claims. It is altogether a different matter that the number of claims is very less due to efflux of time. When the assessee intends to honour the claim and therefore carried the liability in its books of account, it is not correct to say that there is remission of liability. The fact that the assessee continued to disclose the impugned amount as a liability in the balance sheet itself amounts to acknowledgemnt of the debt and as such, there is no remission of liability. Even otherwise, the deposit amounts were received during 1990 and there is no special circumstances to consider the above mentioned deposit amount as income of the assessee for the impugned assessment year. The revenue has not brought on record any such material to indicate that the alleged remission of liability towards the deposit amount occurred during the impugned assessment year. Even otherwise, when an amount is received in cash, section 28(iv) does not apply as held by the Bombay High Court in the case of Mahindra & Mahindra Ltd. (supra). The jurisdictional High Court in the case of Jindal Equipments Leasing & Consultancy Services Ltd. [Para 64.16] By applying the above binding propositions laid down by the Jurisdictional High Court, there is no merit in the action of the AO in considering the deposit amount as income of the assessee under section 28(iv) of the Act. Hence the same is deleted. [Para 64.17]

Income Tax Act, 1961 Section 41(1)

Income Tax Act, 1961 Section 28(i)(iv)

INCOME TAX ACT, 1961

--Head of income--Business income or capital gainsInvestment in shares and securities--During assessment proceedings, AO noted that assessee, manufacturer of two wheeler vehicles, invested certain sum in shares and mutual funds and port folio management systems, etc., and gains realised from such securities were disclosed as capital gains. AO held that it was business income in stead of capital gains. Held: Not justified. It was not the case that assessee was indulged in day-to-day trading in securities as such and neither securities were shown as stock-in-trade nor there was frequency of sale/purchase, hence, income from sale of securities was to be treated as capital gains and not as business income.

The Gujarat High Court in the case CIT v. Rewashanker A. Kothari (2006) 283 ITR 338(Guj.) after examining earlier judgements on the question had laid down the following parameters /tests to determine when income from transactions in shares/ securities should be treated as 'income from business' or the gain has to be taxed under the 'Capital gains'. [Para 65.21] The business of the assessee is not to deal in shares and securities. The investment was made with a view to earn capital appreciation and to use the spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs. 22.61 crores from investments held in shares and mutual funds. [Para 65.29] It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock-in-trade. The assessee has shown the investments in shares both at the beginning and closing of the year as an investment only and not as stock-in-trade. [Para 65.30] The assessee has valued the investments at cost as per Accounting Standard 13- Accounting for Investments and not in accordance with Accounting Standard -2 which deals with valuation of inventories. [Para 65.31] The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This treatment by the assessee was accepted by the Revenue for the past years. [Para 65.32] The assessee had earned income from both long term and short term capital gains which means the assessee has also held shares for a period of more than 12 months. [Para 65.33] The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs. [Para 65.34] The co-ordinate bench of the Delhi Income Tax Appellate Tribunal in the case of Narendra Gehlaut v. Jt. CIT (2012) 52 SOT 255 (Delhi) held that despite borrowing, gains on shares assessable as Short term capital gains and not business profits. The decision is rendered considering the CBDT Circular No 4/ 2007 and various judicial precedents on the subject. [Para 65.35] Out of the total sale value of Rs. 13,690.84 crores realized from the investments, an amount of Rs. 12,330.33 crores relates to sale of short term debt mutual funds and liquid funds in which the transactions are effected on daily basis (i.e. surplus amounts are invested and the withdrawals are made in a short span depending on the business needs of the assessee). These funds were invested mainly into money market instruments, short-term corporate deposits and treasury. Most schemes have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. [Para 65.36] The AO has brought the transaction to tax under the head 'Business income' mainly on the ground that the volume of the transaction of such investments was high and the assessee is undertaking the trading of stocks and mutual funds regularly and systematically. However, Tribunal observe that there is not much frequency in sale/purchase of investments, from analysis carried out at page 526 of objections in Form 35A. It is not the case that the assessee has indulged in regular trading in shares on day-to-day basis. [Para 65.37] The Mumbai Bench of the Tribunal in the case of Janak S. Rangwalla v. Asstt. CIT (2007) 11 SOT 627 observed that mere volume and magnitude of transcation will not alter the nature of transcation if the intention was to hold the shares as investment and not in stock-in-trade. [Para 65.38] Out of the total income earned from mutual funds, almost 67.34 per cent of the total income earned from investments made in mutual funds was for a period of more than one year. [Para 65.39] Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity. [Para 65.40] In view of the above factual matrix it emerges that assessee is: (i) not a trader in stocks; (ii) Intention of holding the shaes as investment/ stock is manifest; (iii) Sales are effected by delivery; (iv) Department has itself in earlier years taxed such transactions under the head 'Capital Gains'.[Para 65.41] Considering these facts and applicable judicial precedents on the issue, the income in question can be taxed only under the head 'Capital Gains' and not under the head 'Business income'. This ground of the assessee is allowed. [Para 65.42]

Income Tax Act, 1961 Section 14

Income Tax Act, 1961 Section 28(i)

Income Tax Act, 1961 Section 245

INCOME TAX ACT, 1961

--Business expenditure--Disallowance under section 40(a)(i)Non-deduction of TDS on advertisement or royalty payment--During assessment proceedings, it was observed by AO that assessee-company had made payments to 'GCC' Singapore and 'N' Singapore, in relation to sponsorship of various sports events organized by ICC, whereby assessee was entitled to advertise on billborads at venue and advertisement space in official brochure/website of ICC, etc. AO holding that the payment made to Singaporian parties was royalty and as such since assessee did not deduct TDS under section 195, disallowed payment under section 40(a)(ia). Held: Not justified. Payments made to 'GCC' and 'M' Singaporian parties were purely for advertisement and publicity of brand name of assessee and was not in nature of royalty for use of any trade mark or brand name in view of Article 12 of DTAA between India and Singapore and also payees were having no Parmanent Establishment in India, amount received by 'GCC' and 'N' were not taxable in India, as such no TDS was required under section 195 and as no disallowance under section 40(a)(ia) warranted.