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    Important Recent Judgments

    Issue: - Provisions of Sec 40(a)(ia) and it’s retrospective application 

    CIT vs Calcutta Export Compan 1 - Supreme Court 

    Facts: - Assessee is a partnership firm and claimed export commission charges on which TDS was deducted but paid the same after the end of previous year 2004-05i.e. beyond the time limit mentioned in sec 201(1) of the Act. 

    The AO has disallowed the export commission as TDS should have paid before the end of the previous year 2004-05 as per the provisions of Sec 40(a)(ia) as stood then. 

    Assessee has filed an appeal against order of AO and CIT(A) has allowed appeal as result the export commission was allowed as deduction. 

    Revenue filed appeal against order of CIT(A) before Tribunal, which was dismissed. Revenue further appealed before High Court. The honorable High Court dismissed appeal. Finally, an appeal was filed before the honorable Supreme Court. 

    Contentions made before Supreme Court: - 

    Revenue contended that provisions of Section 40(a)(ia) being prohibitory in nature which requires the assessee to pay the TDS deducted within the time limits. 

    As per the provisions of the above-mentioned section which is relevant for the Assessment Year 2005-06, no expenditure of the nature mentioned there in be allowed as deduction while computing income under the head Business or Profession unless tax is deducted at source and the same is paid within the time limits mentioned in sec 201(1). 

    Since the assessee has paid the TDS beyond the time limit mentioned in Sec 201(1) the expenditure shall be disallowed. 

    Assessee contended that the purpose of insertion of provisions of sec 40(a)(ia) was to ensure the compliance of TDS provisions and not to punish the assessee who have deducted and paid TDS to government sooner or later and the same is supported by memorandum to Finance Act, 2005. 

    Supreme Court held that the very purpose of provisions of sec 40(a)(ia) is to ensure tax compliance. The result of application of the provisions of the said section is shifting of year in which the expenditure can be claimed as a deduction. 

    In a case where the tax deducted at source was duly deposited with the government within the prescribed time, the said amount can be claimed as a deduction from the income in the previous year in which the TDS was deducted.  

    However, when the amount deducted in the form of TDS was deposited with the government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the government. 

    Finance Act, 2008 has made an amendment to the provisions of the above section where by the deduction relating to the month of March of previous year (which is last month of the previous year) be allowed provided the tax deducted at source for the last month is paid before the due date for filing of return of income U/S 139(1) of the Act. Deduction of tax relating to any other month should be deposited before the end of the previous year. This amendment was made with retrospective effect from 01/04/2005 i.e. the date of which the section 40(a)(ia) was introduced. 

    Further Finance Act, 2010 has made an amendment which provide that all the TDS made during the previous year can be deposited before the due date for filing the return of income U/S 139(1).

    TDS results in collection of tax and the deductor discharges dual responsibility of collection of tax and its deposition to the government. Strict compliance of Section 40(a)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature, the purpose of which is to ensure tax compliance and not to punish the tax payer, 

    Legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. 

    A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section, is required to be read into the Section to give the Section a reasonable interpretation and requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the Section as a whole. 

    The purpose of the amendment made by the Finance Act, 2010 is to solve the anomalies that the insertion of section 40(a)(ia) was causing to the bona fide tax payer.

    The above view is supported by judgement of this court Allied Motors (P ) Ltd vs CIT 224 ITR 677. 

    Therefore, amended provision of Sec 40(a)(ia) of the IT Act should be interpreted liberally and equitable and applies retrospectively from the date when Section 40(a)(ia) was inserted i.e., with effect from the Assessment Year 2005-2006 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates. 

    The amendment was curative in nature, it should be given retrospective operation as if the amended provision existed even at the time of its insertion.

    Issue: - Expenditure on Software is Capital or Revenue 

    Oriental Bank of Commerce vs ACIT2 -High Court of Delhi. 

    Facts: - Assessee has spent amount towards acquiring various categories of software and charged the same as revenue expenditure. 

    AO disallowed the expenditure by holding the same as capital expenditure. 

    Assessee has filed an appeal before CIT(A) against the order of AO. The CIT(A) upheld the order of AO.

    Further appeal was made before ITAT. 

    The Assessee contended that software was a specialized one and meant for banking and bank related operation. The motive for acquiring the same was to optimize performance and streamline the efficiency of the bank. 

    Revenue contended that the software is depreciable asset for which the rates of depreciation were set out in part B of the schedule to the Income Tax Rules. 

    ITAT upheld the order of lower authorities. 

    On further appeal to High Court it held that the articles acquired are licenses. They do not confer any enduring right. The copyright licenses are used for the duration as spelt out by licensor. 

    Furthermore, the bank objective is not carry on software business, rather it uses the computer software as a tool to maximize the performance and streamline its efficiency. 

    In Asahi India Safety Glass Ltd 346 ITR 329(relying on principles in Supreme Court in case of Alembic Chemicals Works Co. Ltd vs CIT 177 ITR 377) this Court held that the expenditure which enables the profit-making structure to work more efficiently leaving the source of profit making structure untouched would be revenue expenditure. 

    Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably would be expenditure of revenue nature. 

    Mere circumstances that depreciation rate is spelt out in the schedule to income-tax is not conclusive as to the nature of expenditure and whether it resulted an enduring advantage to a particular assessee. 

    Assessee uses a specific customized software which is relevant to banking activities. Except the use of software, the nature of expenditure otherwise incurred for streamlining functions is a revenue expenditure. 

    Issue: - Whether sale less than its purchase price result in creation of Intangible? 

    Flipkart India Pvt. Ltd vs Asst. CIT- ITAT Bang 

    Facts: -The Assessee is a company. During the relevant previous year, it was engaged in the business of wholesale trader/distributor of books, mobiles, computers and related accessories. 

    Assessee purchased goods at higher price and selling them lower price. AO was of the view that the action of the Assessee in selling goods at less than cost price was not a normal business practice. 

    Assessee explained that sale through electronic form (e-commerce) as against the traditional sale through retail outlets had just begun in 2012. Since e commerce was in its nascent stage, it was very difficult to create trust and awareness of sale through e-commerce. The volume of sales was very low. One of the ways to increase volume of sales and attract buyers to e-commerce was to offer discounted prices. Higher volume of sales will lead to economies of scale. 

    AO concluded that the strategy of selling goods at lower than cost price was to establish customer goodwill and brand value (marketing intangibles) in the long run and reap benefits in the later years. 

    Hence, selling at a price below prices is not an irrational economic behaviour. It is a clearly thought strategy to establish a monopoly in market by brand building by generating consumer goodwill. This strategy naturally leads to generation of intangible assets and enduring benefit.

    Therefore, the loss to the extent it is created due to predatory pricing should be regarded as capital expenditure incurred by the Assessee and should be disallowed. 

    AO further concluded that the value of marketing intangibles is an asset and entitled for depreciation @25%. 

    AO referred to three approaches of valuation of intangibles prescribed by OECD in its convention of Base Erosion and Profit Shifting (BEPS) viz., cost approach, income approach and market approach. The AO adopted cost approach in which a reasonable profit margin is attributed to the cost of purchases and to the extent the profit is foregone by the Assessee was to be considered as the value of intangible. 

    Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). The CIT(A) confirmed the order of the AO. The CIT(A) in exercise of his powers of enhancement u/s.251(2) of the Act also withdrew depreciation of 25% on the intangible assets allowed by the AO while computing total income, because though the Assessee incurred expenses for creating intangible assets but was not owner of the intangible. The Hon’ble Karnataka High Court in W.P.No.6533 of 2018 (T-IT) by its order dated 15.2.2018 has directed the Tribunal to hear the appeal filed by the Assessee. 

    Assessee contended that Income under the head “Income from Business or Profession” has to be computed in accordance with Sec.28 to Sec.44DB of the Act. The starting point of computation of income from business has to be therefore the sales as recorded by the Assessee in its books of accounts. The books of accounts of the Assessee have not been rejected. In such circumstances the AO cannot resort to a process of estimating income of the Assessee. 

    Assessee contended, inter- alia, relying on the judgement of Supreme Court in SA Builders Vs. CIT 288 ITR 1(SC) an expenditure incurred for as a measure of commercial expediency should be allowed as a deduction. 

    The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the business. The expenditure may not have been incurred under any legal obligation, but it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 

    What is commercial expediency in a given facts and circumstances of a case is the sole discretion of the Assessee and not of the revenue authorities. 

    Assessee further contended that there was no acquisition of any intangibles nor was there any outflow towards acquiring intangibles. The revenue authorities have presumed that the Assessee has incurred expenditure when there is no basis for coming to such conclusion. To say that an expenditure has been incurred or accrued to an Assessee there should either be an outflow of funds or incurring of a liability. There was no such outflow or accrual of liability during the previous year. 

    Revenue contended that the business model of the Assessee by following predatory pricing was to create asset base of customers and build brand value/goodwill or any other form of intangibles. 

    Despite making losses, the Assessee’s shares are being purchased by investors at a high premium. In this regard two instances of purchase by venture capitalists of the shares of the Assessee of Re.1/- in the previous years relevant to AY 15-16 and 14-15 at a premium of ? 1899/- and ? 595/- respectively. such high share premium is justified only because of the asset base created by the Assessee in the form of brand value. 

    The ITAT held that the income of the Assessee in the present case would fall within Sec.28(Iof the Act.

    Section 145 of the Act provides how income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” has to be computed and it lays down that such income shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) of Section 145 provides that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Sub-Section (3) of Section 145 provides that Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

    It is thus clear from the statutory provisions that the starting point of computing of income from business is the profit or loss as per the profit and loss account of the Assessee. The AO cannot disregard the profit or loss as disclosed in the profit and loss account, unless he invokes the provisions of Sec.145(3) of the Act. In the present case AO has not invoked provisions of Sec 145(3) and as a result AO was not empowered to go beyond the book results. 

    The Supreme Court in case of Calcutta Discount Company 3 held that when one trader transfers his goods to another trader at a price less than the market price, the taxing authority cannot take into consideration the market price of those goods, ignoring the real price fetched. Income which has accrued or arisen can only be subject matter of total income and not income which could have been earned but not earned. 

    Assessee is liable to tax on income which accrues or arises as per sec 5 of the Act. There was no provision in the Act by which AO can ignore the sale price declared by the assessee and proceed to enhance sale price without material to show that assessee has realized higher sale price. 

    The honorable Supreme Court in case of B.C Srinvasa Setty4 for creation of intangibles like say goodwill it is not possible to ascertain in terms of money the cost of acquisition of goodwill; it is equally impossible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill which led to the increase in its value. It is therefore not possible to say that profits foregone created goodwill or any other intangibles or brand to the Assessee. 

    The argument on the existence of intangibles/brands or goodwill was on the basis of purchase of Assessee’s shares at a premium by investors. Despite making losses, the Assessee’s shares were purchased by investors at a high premium is an argument without bringing on record any material to substantial that valuation of shares was done only because of value being ascribed to brand or goodwill or any intangibles. 

    Action of AO in disregarding the book results and presuming that assessee has incurred expenditure for creating intangible assets is without any basis. 

    ITAT further held that the loss declared by the assessee in the return of income should be accepted by AO.