v Some Important Case Laws
FromINCOME FROM SALARIES:-
1. Whether the amount received by
the employee on cessation of employment with his
Employer will be exempted from
tax under section 17(3)(i) of the Income-tax Act?
Relevant Case Law - CIT v.
Shyam Sundar Chhaparia (2008) 305 ITR 181 (MP)
Relevant Section - 17(3)
·
The assessee after his retirement was granted an amount of Rs.27,
50,000 as a special Compensation in lieu of an agreement for refraining from
taking up any employment activities Or consultation which would be prejudicial
to the business/interest of his employer.
·
The assessee claimed that it was a non-taxable receipt being the
compensation for not taking upany competitive employment under a restrictive
covenant. The Assessing Officer did not accept the claim of the assessee on the
grounds that (i) the decision of the Supreme Court relied on by the assessee
was that of an agency whereas the case of the assessee was that of one who was
in service, and (ii) section 17(3)(i) was squarely applicable to the case of
the assessee.
·
The Commissioner (Appeals) held that as there was restriction for
the assessee not to work in business of any type and anywhere, the compensation
was received in lieu of loss of future work and was a capital receipt. The
Tribunal held in favour of the assessee.
·
The High Court held that the assessee retired from service on
attaining the age of superannuation and hence there was severance of the master-servant
relationship and there was no material to suggest that there existed a service
contract providing therein a restrictive covenant preventing thereby the
assessee from taking up any employment or activities on consultation which
would be prejudicial to the business/interest of his employer.
·
Therefore, it could not be termed as profit in lieu of salary
because it was not compensation due to or received by the assessee from his
employer or partner- employer at or in connection with the termination of his
employment. Thus, the Commissioner (Appeals) and the Tribunal rightly held that
the amount could not be added for the purpose of income-tax.
2. Can reimbursement of
expenditure on medical treatment taken by the assessee, who
was a member of the Legislative
Assembly, be taxed as perquisite under section
17(2)(iv)?
Relevant Case Law - CIT v.
Shiv Charan Mathur (2008) 306 ITR 126 (Raj)
Relevant Section - 15 & 17(2)
·
Notice under section 148 was issued to the assessee, at the
relevant time a sitting MLA and
former Chief Minister of
the State, for the reason that he received a sum from the State
Government as reimbursement
of medical expenses which amount was liable to be taxed
under section 17 but had
not been offered for taxation.
·
The contention of the assessee wasthat the amount received by MPs
and MLAs was not taxable under the head “Salary” but under the head “Income
from other sources”.
·
The High Court held that MLAs and MPs are not employed by anybody
rather they are
elected by the public,
their election constituencies and it is consequent upon such election
that they acquire
constitutional position and are in charge of constitutional functions and
obligations.
·
The remuneration received by them, after swearing in, cannot be
said to be
“salary” within the meaning
of section 15 of the Income-tax Act, 1961. The fundamental
requirement for attracting
section 15 is that there should be a relationship of employer and
employee whether in
existence or in the past.
·
This basic ingredient is missing in the cases of MLAs and MPs.
When the provisions of section 15 were not attracted to the remuneration received
by the assessee, section 17 could not be attracted as section 17 only extends
the definition of “Salary” by providing certain items mentioned therein to be
included in salary.
·
Thus, the reimbursement of medical treatment taken by the
assessee, who was a member of
the Legislative Assembly
for open heart surgery conducted abroad was not taxable as
perquisite under section 17(2)(iv).
v Important Case Law FromINCOME FROM HOUSE PROPERTY :-
1. Is the rental income from the
sub-letting of a building taken on lease taxable under the head ‘income from
other sources’ or ‘income from house property’ or ‘income from business?
Relevant Case Law -
Harikrishna Family Trust v. CIT (2008) 306 ITR 303 (Guj.)
Relevant Section - 22
·
A lease deed was executed between the owners of a property partly
constructed and the
assessee-trust. The trust
took on lease the said property at a monthly lease rent of Rs.4,000.
The beneficiaries were
dependent relatives of the co-owners of the property.
·
The trust, after completing construction work of the balance
portion of the building, rented out the whole premises and the rental income
was shown as income from property and originally assessedas such.
·
Subsequently, by virtue of action under section 263 of the
Income-tax Act, 1961, the
CIT set aside the order.
After enquiry the Assessing Officer assessed the income as business
income but the CIT(A) on
appeal held that it was income from other sources. The Tribunal
held that the amount was
assessable as business income.
·
The High Court held that the assessee-trust was merely a lessee of
the property and had
sub-let
the property after completing the partly constructed building which the
assessee-trusthad taken on lease. In the circumstances, in the absence of the
assessee-trust being the
owner of the property,
there could be no question of taxing the rental income from the said
property in the hands of
the assessee-trust under the head “Income from house property”.
·
The assessee-trust at no point of time indulged in any systematic
activity so as to treat the
assessee as having indulged
in business or a venture in the nature of business. On facts the
income was liable to be taxed as “Income from other sources”.
v Some Important Case Laws
FromINCOME FROM CAPITAL GAINS :-
1. Can the loss on account of
forfeiture of share application money be treated as
short-term capital loss?
Relevant Case Law - DCIT v.
BPL Sanyo Finance Ltd. (2009) 312 ITR 63 (Kar.)
Relevant Section: 45
·
The assessee company is engaged in non-banking financial business
and applied for
allotment of one lakh
equity shares of the IDBI in response to the public issue of shares
and remitted the share application
money. The IDBI allotted 89,200 shares to the
assessee as against one
lakh equity shares applied for.
·
Thereafter, the IDBI called the assessee to pay the balance sum
for issuance of shares in its favour. As the assessee company failed to remit
the balance outstanding allotment money, the IDBI cancelled the allotment and
forfeited the share application money. The assessee claimed it as a short term capital
loss in its return of income. The Assessing Officer disallowed the claim.
TheCommissioner(Appeals) confirmed the order passed by the Assessing Officer.
The Tribunal allowed the appeal filed by the assessee.
·
The High Court held that consequent to the assessee's default in
not paying the balance
of money on allotment, its
right in the shares stood extinguished on forfeiture by the IDBI.
The loss suffered by the
assessee, i.e., the non-recovery of share application money was
consequent to the
forfeiture of its right in the shares and was to be understood to be
within the scope and ambit
of transfer. It would amount to short-term capital loss to the
assessee.
2. Can the transfer of capital
asset by a company to its wholly owned subsidiary
company be regarded as transfer
and, therefore, attract levy of capital gains tax?
Relevant Case Law- CIT v.
Coats of India Ltd. (2009) 315 ITR 215 (Cal.)
Relevant Section: 47
·
The entire packaging coating units of the assessee was transferred
to CCIPL for a sum of Rs.
29,89,87,000 by way of
adjustment and issue of equity shares of Rs.10 each in CCIPL
credited as fully paid-up
share capital. In the process of such transfer a surplus amount of Rs.
19,14,55,804 was credited
to the accounts of the assessee over and above the book value of
the assets actually
transferred to CCIPL.
·
The assessee claimed that this excess amount was not taxable on
the ground that the assessee transferred the assets of the company to its wholly
owned subsidiary company. It was further stated that the unit was transferred
with all its assets and, therefore, the value of each of the items could not be
determined separately as the sale was made on slump basis and, accordingly, the
actual profit from each asset could not be determined.
·
The Tribunal held that the entire packaging coating business undertaking
itself constituted a distinct "capital asset" under section 2(14) of
the Income-tax Act, 1961, for which consideration was not determined with reference
to individual assets but with reference to the capitalised value of the said
business, that the proviso to section 47(v)and (iv) was applicable only if, in
the hands of the transferee the capital asset on its transfer constituted
stock-in-trade, that such packaging coating business on its transfer was not accounted
for in the books of CCIPL as stock-in-trade and that, therefore, since the
entire paid-up capital of CCIPL as on December 31, 1997, was held by the
assessee the transfer of the undertaking was covered by the provisions of
section 47(iv) and, therefore, no income under the head "Capital
gains" was assessable in the assessment year 1998-99
·
The High Court held that the Tribunal was right and no capital
gains arose.
3. Can the actual sale
consideration recorded in the agreement to sell of the asset and
received by the assessee be substituted
by the value as adopted by the District
Valuation Officer under section
55A of the Act for the purpose of computing the capital
gains chargeable to tax ?
Relevant Case Law- Dev
Kumar Jain v. Income-tax Officer (2009) 309 ITR 240 (Del.)
Relevant Section - 55A
·
The assessee declared income by way of capital gains arising from
the sale of property. The
Assessing Officer was of
the view that the sale price disclosed in the agreement to sell was
Low
and made a reference to the District Valuation Officer under section 55A for
determiningthe fair market value of the property on the date of sale.
·
The District Valuation Officer determined the value of the plot on
the date of the sale and this was communicated to the assessee. The Tribunal
accepted the stand of the Revenue that the actual sale consideration recorded
in the agreement to sell should be substituted by the value arrived at by the
District Valuation Officer under section 55A.
·
The High Court held that section 55A of the Income-tax Act, 1961,
applies only where the
Assessing Officer is
required to ascertain the fair market value of a capital asset. Section
45(1A) stipulates that
capital gains shall be computed by deducting from the full value of
consideration received or
accruing as a result of the transfer of the capital asset, the amount
of expenditure incurred
wholly and exclusively in connection with such transfer as also the
cost of acquisition of the
asset and the cost of any improvement thereto.
·
A combined reading of section 45(1A) and section 48 shows that
when a sale of property takes place, the capital gains arising out of such a
transfer has to be computed by looking at the full value of the
consideration received or
accruing as a result of such transfer.
·
The expression “full value of sale consideration” is not the same
as “fair market value” as appearing in section 55A. Thus, for the purpose of
computing capital gains there is no necessity for computing the fair market value.
Further, there was nothing on record to show that the assessee received
consideration for the sale of the property in excess of that which was shown in
the agreement to sell.
·
Thus, the actual sale consideration recorded in the agreement to
sell and received by the assessee could not be substituted by the value as
adopted by the District Valuation Officer under
section 55A for the purpose
of computing the capital gains chargeable to tax.
4. Can exemption under section
54(1) be claimed for the purchase of more than one
residential premises?
Relevant Case Law- CIT v.
D. Ananda Basappa (2009) 309 ITR 329 (Kar.)
Relevant Section - 54
·
The assessee a Hindu undivided family sold a residential house.
The assessee purchased
two
residential flats adjacent to each other from taking two separate registered
sale deeds inrespect of the two flats situate side by side purchased on the
same day. The vendor had
certified
that it had effected necessary modifications to the two flats to make it one
residential apartment.
·
The assessee sought exemption under section 54. The assessing
authority gave
exemption for capital gains
to the extent of purchase of one residential flat. It was found by
the Inspector that the
residential flats were in the occupation of two different tenants.
·
The Assessing Officer held that section 54(1) of the Act does not
permit exemption for the
purchasers for more than
one residential premises. The Commissioner (Appeals) confirmed
the order of the assessing
authority. The Tribunal set aside the order of the Commissioner
(Appeals) and held that the
flats purchased by the assessee had to be treated as one single
residential unit and that
the assessee was entitled to full exemption.
·
The High Court held that it was shown by the assessee that the
apartments were situated
side
by side. The builder had also stated that he had effected modification of the
flats to makethem one unit by opening the door in between the two apartments.
The fact that at the timewhen the Inspector inspected the premises, the flats
were occupied by two different tenants was not a ground to hold that the
apartment was not one residential unit.
·
The fact that the assessee could have purchased both the flats in
one single sale deed or could have narrated the purchase of two premises as one
unit in the sale deed was not a ground to hold that the assessee had no
intention to purchase two flats as one unit. The assessee was entitled to the
exemption under section 54.
5. Whether the assessee, in the
computation of long-term capital gains, is entitled to
deduction under section 54F of the
Income tax Act in respect of investment in
modification/expansion of an
existing residential house?
Relevant Case Law- Mrs.
Meera Jacob v. Income-tax Officer (2009) 313 ITR 411 (Ker.)
Relevant section - 54F
·
The Tribunal took the stand that exemption is available only when
the investment is in the
construction of a house and not for
investment in modification or renovation. Admitted facts are that the assessee had a
fairly big house to which the assessee made addition of 140 sq.meters of plinth
area.
·
However, it is the conceded position that the assessee has not constructed
any separate apartment or house. Section 54F does not provide for exemption on investment
in renovation or modification of an existing house.
·
On the other hand, construction of a house only qualifies for
exemption on the investment. Even addition of a floor of a selfcontained type
to the existing house would have qualified for exemption.
·
However, since the assessee has only made addition to the plinth
area, which is in the form of modification of an existing house, she is not
entitled to deduction claimed under section 54F of the Act.
v Important Case Law FromINCOME FROM OTHER SOURCES :-
1. Whether the Tribunal was right
in law in holding that the income from lease of hospital,
after giving a finding that the
hospital basically remains a business asset, should be
assessed as ‘Income from other
sources’ and not as ‘Business Income’?
Relevant Case Law - Orient
Hospital Ltd. v. DCIT (2009) 315 ITR 422 (Mad.)
Relevant Section - 56(2)(iii)
·
The assessee-company constructed a hospital building and ran the
hospital. As the assessee-company suffered loss in running the business, it leased
the hospital building along with equipment and machinery to A on a monthly
lease of Rs.3,00,000 per month and claimed this sum as business income against
which earlier business losses were set off.
·
The Assessing Officer treated the income from lease of the
hospital as "Income from other sources" and disallowed set off of the
earlier years' business losses. The Commissioner (Appeals) allowed the
assessee's appeal, but the Appellate Tribunal, while holding that the lease
income was to be treated as income from other sources, allowed the lease income
to be set off against the previous years' losses.
·
The High Court held that income derived out of the lease of
property and furniture as in this
case could not be treated
as income from profits and gains of business or profession. The
finding given by the Tribunal that the income was income from
other sources was correct.
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