5 Situations Two Persons Can Claim Depreciation During the Same Year ?

The law of claiming depreciation on asset of business is regulated through section 32 of the Income Tax Act . Further Income Tax Rule provides depreciation rate for various class of assets. Now as it happens with businesses, one needs to reorganize through various ways like amalgamation, or changing the structure of the business etc….

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Postal & Insurance Agents :What Deductions Allowed ?

The persons who are insurance agent or postal agents who receives commission for selling various kinds of investments and insurance products of  insurance companies and postal department. One reader Vasantha , Trichy  has asked  ”I am a mutual fund broker, LIC agent & Postal agent. I am getting income by way of commission for my agentship. Please guide me under which head I should show my commission income in itr-4. What is the maximum expenditure can I deduct from my gross income.

The readers were informed that even though the income from insurance commission falls under the head “Income from business ” , so the return has to be filed is ITR-4 , but it is also a fact that the 

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Private Trust :7 Tax Planning Tips You Can Actually Use !

Since every indivdiual is provided a basic exemption limit ,the central point of tax planning is to have more tax entities. Each entity gets basic exemption from tax which in aggregate exempts quite a substantial amount of income from tax. When you create a private trust,what you are doing is creating a separate tax entities….

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Section 73: mututal Fund Units not Covered !

While it is clear that Explanation to Section 73 is applicable on shares of a company and units purchase and sale does not come within its purview, there can be sepculative trade in case of mutual fund units u/s 43(5) and if any loss arises from such trades in iunits, it can not be adjusted with business income. This issue was before Kerala High Court in CIT vs Periakaramalai Tea & Produce Co. Ltd.[ 2011] 238 CTR 449 (KER.) which although gave final verdict in favour of assessee , but only because of Apex court judgment in Appolo Tyres on defferent issue.

Facts Related to Reassessment Case under Section 147

The assessee company, producer and seller of tea, purchased units of UTI on cum-dividend basis shortly before declaration of dividend from a company. Thereafter, it sold said units to the same company at a lower price, i.e., ex-dividend immediately after receiving dividend. In the purchase and sale of units, the assessee suffered a loss which was set off against other business profits.
The A.O considered the purchase and sale of units as Â?speculation businessÂ? within teh meaning of Explanation to section 73 and held that the assessee was not entitled to set off the loss arising out of the same against its business profits by virtue of section 73(1).
However, the Commissioner (Appeals) as well as did not agree with A.O and based on the decision of Tribunal in the case of Appollo Tyres Ltd., which got confirmed by Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 / 122 Taxman 562 .

The issue before , Kerala in Periakaramalai Tea & Produce Co. Ltd vs Cit 238 CTR 449 (KER.) [2011] was

Whether purchase and sale of units, though not coming within the description of shares of a company, can constitute speculation business particularly, the way in which the assessee has done it.

Kerala held on issue of Reassessment Proceeding under Section 147

The Kerala held vide its order 30-09-2010 as under :

In the first place, in our view, Explanation under section 73 does not define or exhaustively deal with speculation business. On the other hand what this Explanation says, is that when a company other than an investment company or banking company is engaged in purchase and sale of shares of other companies, such activity shall be deemed to be speculation business. This Court in Apollo Tyres Ltd.Â?s case (supra) rightly held that units of U.T.I. cannot be treated as shares of a company and so much so, Explanation to section 73 is not attracted and the HonÂ?ble Supreme Court confirmed the said finding of this Court. We do not think there can be any controversy on this issue because units issued by U.T.I. are neither shares nor even equal to the shares of a company. However, the question is whether purchase and sale of units, though not coming within the description of shares of a company, can constitute speculation business particularly, the way in which the assessee has done it.

We notice that speculation business visualised under the various provisions of the Income-tax Act do not limit it to purchase and sale of shares of a company alone. First reference of speculation business is found in Explanation 2 to section 28 where it is defined as a business involving speculative transactions. Speculative transaction is defined under section 43(5) of the Act which is as follows :

“S.43(5) “Speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.”

What is clear from the above definition is that speculative business is not limited to purchase and sale of stocks or shares alone, but purchase and sale of any commodity in a speculative manner will also be a speculative transaction and when it is done in the course of business or as part of business, it becomes speculation business. We do not find any artificial definition given to speculation business in the Act and in our view, the normal literal meaning of speculation applies to Income-tax Act as well. The literal meaning of speculation contained in the dictionary is investment with the hope of gain but with possibility of loss, gamble recklessly etc. In this case we have already noticed that the assessee purchased 15 lakh units in May 1990, i.e., shortly before declaration of the dividend and the sale is immediately after declaration of dividend and both the transactions are with one company which gave loan for the purchase of the units and also repurchased the same units as stated above. The speculation involved is obvious i.e., the possibility of getting more in tax saving combined with the dividend likely to be received over the loss suffered and expenditure incurred by way of interest and charges paid to the broker. Therefore, in our view, the transaction of purchase and sale of units when done as a business in a speculative manner, the loss therefrom could be set off only against profit arising in speculation business in terms of section 73(1) of the Act. Assessee in fact claimed set off of loss from speculation business against income from tea plantation which in our view, is not admissible by virtue of the prohibition contained in section 73(1) of the Act.

Even though our view is in favour of the Revenue, we are bound to follow the decision of the Supreme Court in Apollo Tyres Ltd.Â?s case (supra) wherein the Supreme Court has confirmed judgment of this Court on identical issue. Therefore, following the judgment of the Supreme Court in Apollo Tyres Ltd.Â?s case (supra) we dismiss the departmental appeal.

Thus , the assessee and taxpayer should always take note of the aforesaid judgment of the Kerala in a case of reassessment proceeding under section 147

Section 73: Nature of Activity Important For Deciding Principal Busienss !

The assessee-company , engaged in the business of financing by way of granting loans and advances and earning interest therefrom and also dealing in stock and shares , filed a return declaring a total loss after adjusting the business income of interest from loans and advances. In view of the provisions of Explanation to section…

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Explanation to Section 73: Nature of Principal Business Important !

The assessee-company was daling in shares as well as earning income from business of trading in steel, yarn, fabrics as also from service charges.Its computation of gross total income showed loss under the head business wherease dividend was poistive income under the head ” income from other sources”.The dividend income was earned on shares held…

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No 14A Disallowance if Dividend Received on Stock-in-Trade

The assessee a dealer in shares and securities earned dividend income from shares. The assessee claimed expenditure on brokerage of arranging interest free loan which was for payment of conversion cost of its stock of partly paid shares into fully paid shares.
The Assessing Officer disallowed this amount on the ground that it was spent for earning exempt income. On appeal, while the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal restricted disallowance to the extent related to earning of dividend income as the loan had been utilized for the purchase of shares and the profit earned by sale of those shares was offered as business income. The Tribunal, therefore, directed the Assessing Officer to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law.
Before the High Court, the assessee contended that it had incurred expenditure for purchasing shares. 63 per cent of the shares so purchased were sold and the income derived there from was offered to tax as business income and the remaining 37 per cent of shares remained unsold and yielded dividend and, therefore, no expenditure could be attributed to the said dividend income.

The issue before in CCI vs JCIT,Udupi Range [2012] 20 taxmann.com 196 (Kar.) was

Whether the provisions of Section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation?

Hon’ble held vide its order 2/28/2012 as under :

When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63 per cent of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37 per cent of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside

No 14A Disallowance , If No Interest Bearing Fund Used For Earning Exempt Income

The assessee-company was engaged in the manufacturing of cycles and parts of two-wheelers in multiple units. It earned dividend income. The Assessing Officer disallowed certain expense under section 14A(3).The CIT (Appeals) although partly upheld the addition, the Tribunal allowed assessee fully on its finding that the entire investment had been made by the assessee out of the dividend proceeds, sale proceeds of shares, debenture redemption. Thus , in its view, said funds were without any burden of interest expenditure. The Tribunal held that there was no evidence to show that interest bearing funds had been invested in the investments which had generated the ?tax exempt dividend income?. It, therefore, deleted the entire addition made by way of disallowance under section 14A.

The issue before PUNJAB & HARYANA High Court in CIT vs Hero Cycles Ltd.* 323 ITR 518 was

Whether on the facts and in law, the Hon?ble ITAT was legally justified in deleting the disallowance of Rs. 3,48,04,375 under section 14A of the Income-tax Act, 1961 by ignoring the evidence relied on by the Assessing Officer and holding that a clear nexus has not been established that the interest bearing funds have been vested for investments generating tax-free dividend income.

Hon’ble PUNJAB & HARYANA High Court held vide its order 11/7/2009 as under :

In view of the finding recorded by the Tribunal, it was clear that the expenditure on interest was set off against the interest income and the investment in the shares in question was out of the dividend proceeds. Therefore, the disallowance under section 14A was not sustainable. Whether in the given situation any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the revenue, that directly or indirectly some expenditure is always incurred, which must be disallowed under section 14A, and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. Disallowance under section 14A requires finding of incurring of expenditure. Where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the instant case, finding on that aspect against the revenue was not shown to be perverse. Consequently, disallowance was not permissible.

ANDHRA PRADESH HC: Compensation for Land Acquisition Busienss or Investment?

The government acquired the land bought by the assessee and awarded the compensation which was unsatisfactory for the assessee.Therefore ,an appeal before the Civil Court was filed .The court enhanced the compensation . TheA.O treated the assessee’s share in the said compensation amount as income from business. However ,the assessee filed an appeal to the AAC, contending that the lands purchased by him were agricultural lands and what was realised was only a surplus over and above the investments which resulted only in capital accretion and as such the ITO was not justified. The appellate authority rejected this contention on the ground that the purchase of lands was not a casual purchase of investment but an adventure in the nature of trade. So it was immaterial whether the lands were agricultural or not and the profit out of the transaction had to be treated as business income. On further appeal before the Tribunal, the revenue contended that any transaction of purchase followed by re-sale could either be an investment or an adventure in the nature of trade and since the property was purchased after the notification issued by the Government, it could not be an investment and, therefore, it had to be treated as an adventure in the nature of trade. The Tribunal upheld the AAC’s order

The issue involved before Hon’ble Court in case of Ch. Atchaiah 156ITR78 was

ANDHRA PRADESH High Court vide its order dt 12/30/1983 held as under :

In view of the fact that the assessee was aware of the notification of the Government for acquisition of the lands before he purchased the said lands, it was clear that he purchased lands only to receive compensation from the Government. He also knew at that time that he would not get compensation beyond the rate mentioned in the sale deed under which he himself purchased the said lands since the law regarding compensation was well settled that it is the market value prevailing as on the date of notification but not on the date of acquisition that should be taken into consideration for fixing the market value. If that be so, the assessee did not purchase the lands with the sole intention to make profit. It was, therefore, too much to imagine that the assessee expected even at the time of purchase of the lands that he would receive compensation far and above the sale consideration mentioned in his own sale deed. To say that the assessee purchased the lands in question with the sole intention to get compensation far and above what was mentioned in the sale deed was nothing but indulging in conjecture and speculation. Merely because he received compensation of an higher amount, an argument could not be built up that he purchased the lands in question with the sole intention that he would make profit from out of the transaction.
In order to hold that the profit assessable to income-tax arises from a transaction which is an adventure in the nature of trade, regard must be had to the character and circumstances of the particular venture. If the venture was one consisting simply of an isolated purchase of some article against an expected rise in the price and a subsequent sale, it must be impossible to say that the venture was in the nature of trade. Where the purchase has been made solely and exclusively with the intention to re-sell it at a profit and the purchaser has no intention to hold it for himself or to enjoy it or to use it, the transaction is an adventure in the nature of trade.
In the instant case, it was clear that the assessee’s transaction was one consisting simply of an isolated purchase of the lands’ without any intention that they would be re-sold for any profit as such, as the question of re-sale did not arise in view of the notification issued by the Government for acquisition of the said lands. Further the lands were purchased not to sell but only to get compensation at the rate to be fixed by the civil court according to the principles of law which were in vogue. Merely because the petitioner purchased the lands which were notified for acquisition by the Government to get compensation, the purchase of the property by the petitioner, being an isolated transaction, could not become an adventure in the nature of trade. He got the higher compensation as a casual and non-recurring receipt. His getting higher compensation as a result of the award by the civil court could not make the purchase a venture in the nature of trade.
Accordingly, the Tribunal was not justified.

BOMBAY HC: Premium Received on Work For Sublease Land

The assessee-company, Toy an agreement, took on sub-lease certain land on payment of premium and annual lease rent. Subsequently, it entered into agreements with two of its sister concerns, for giving on sub-lease some land out of the land taken earlier. It was also agreed between the parties that the assessee would undertake to lay out the adjoining roads and fill in and level the land to the road level without any extra charges. All these sub-lease deeds were not registered for certain reasons. Consequent upon these agreements the assessee-company received certain amount by way of premium from one concern in the year 1963 and another concern in the year 1967. However, since it had incurred expenditure on filling and levelling of the land, etc., the assessee-company offered the surplus for taxation as long-term capital gains in the relevant assessment years. The ITO held that as the transactions amounted to an adventure in the nature of trade, the surplus arising from the transactions was taxable as business income. On appeal, the AAC confirmed the ITO’s orders. On second appeal, the Tribunal, however, reversed the ITO’s orders on the ground that the assessee was not a dealer in lands and the two transactions of sub-leasing did not also amount to an adventure in the nature of trade. Hence, according to the Tribunal, the surplus was not taxable as its business income.

The issue involved before Hon’ble Court in case of Jolly Bros. (P.) Ltd 171ITR280 was

BOMBAY High Court vide its order dt 8/27/1987 held as under :

The Tribunal found that the assessee-company’s business was not to buy and sell land, and one of its business activities was to promote companies. The assessee-company acquired certain rights over some land in terms of agreement, but the sub-lease deed was not executed and registered. Certain, portions out of this land were given on further sub-lease to its sister concerns. No doubt, the assessee-company incurred considerable expenditure in laying out the adjoining roads and in filling and levelling the land up to the road level. However, keeping in view the facts found such as the assessee was not a dealer in land, the nature of rights it acquired and the fact that the portions out of the land were sub-leased to its sister concerns only, it was difficult to find fault with the Tribunal’s finding. Accordingly, the excess amounts realised by the assessee-company was not its income from business.