The Hindu Business Line : Compensation is chargeable to tax

WHERE the asset compulsorily acquired by the Government is an agricultural land, the compensation is not chargeable to tax, as the asset transferred would not fall within the definition of the term "capital asset".

However, the additional enhanced compensation subsequently received towards the compulsory acquisition of agricultural land, whether chargeable to tax was discussed in A. R. Dahiya v. Asst.CIT (2004) 269 ITR 542 (P&H). It was held that such additional compensation is also not chargeable to tax.

Where an assessee enters into an agreement for purchase of immovable property and makes payment of an advance and subsequently the vendor decides not to transfer the property, the compensation received by the assessee (buyer) towards giving up his right for enforcing specific performance of the contract was discussed in K. R. Srinath v. Asst.CIT (2004) 268 ITR 436 (Mad.).

The court held that the amount received as compensation is taxable as "capital gains" as it is obtained for not enforcing the right towards performance of the contract.

Perk/benefit

The value of any benefit or perquisite whether convertible into money or not obtained from a company by a director or by a person who has substantial interest of the company or by a relative of the director or such person is taxable as income.

Where the wife of the director has no official connection with the company, the travel expenditure met by the company for her accompanying the director to a foreign country was held as chargeable to tax under section 2(24)(iv). CIT v. Surekha P. Kothari (2004) 267 ITR 406 (Mad.).

It is important to note that it was held that the wife of the director is chargeable to tax in respect of the expenditure met by the company towards her foreign travel and not the director.

Where an assessee enters into an agreement with the original owner for purchase of land and for selling those lands after plotting them and the sale deed is executed by the original owner to the buyers directly, the subsequent dispute between the owner and the assessee resulting in the sale proceeds reaching the original owner, the assessee eligible for refund of money earlier paid to the original owner by means of compromise decree, it was held that there is no capital gain accruing to the assessee. Anant Chunilal Kate v. ITO (2004) 267 ITR 482 (Bom.).

Salary

Development officers of LIC of India can claim deduction of the actual expenditures incurred from the conveyance allowance and additional conveyance allowance received by them. In CIT v. Gurudeo Singh Jaggi (2004) 267 ITR 763 (MP) the Supreme Court dismissed special leave petition filed against this judgment. (See 266 ITR (St.) 104).

No tax is payable on the conveyance allowance and additional conveyance allowance to the extent the employer is satisfied that the Development Officer has incurred the expenditure towards conveyance in performance of his duties. Development Officers can also approach the Assessing Officer for issue of certificate for non-deduction of tax at source. Franco John v. Union of India (2004) 269 ITR 441 (Ker.).

Change of residential status

When a notice is given in the course of assessment for production of documents to prove the residential status of the assessee, there is no scope of determining the residential status without giving any opportunity to the assessee. The Assessing Officer cannot change the residential status of the assessee without giving an opportunity of being heard. Vijay Mallya v. Asst. CIT (2004) 266 ITR 329 (Cal.). In this case, notice under section 142(1) was accompanied by the letter stating that the assessee is treated as an ordinary resident and the claim of residential status as "resident but not ordinarily resident" — was rejected. The court held that the assessing authority can not reach a conclusion without affording, to the assessee, an opportunity of being heard.

Where a foreign technician visits India and takes a living allowance, the allowance so received is exempt under section 10(14). The allowance however must be granted specifically to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit. CIT v. Sam Orie (2004) 266 ITR 630 (Del.) ; CIT v. Goslino Mario (2000) 241 ITR 312 (Del.).

Charitable trust

Where a charitable trust gives a donation to another charitable trust from out of its income, the donations so given even if it is with a specific direction towards the corpus fund of the recipient trust, it will be taken as application of income by the donor trust. CIT v. Shriram Memorial Foundation (2004) 269 ITR 35 (Del.).

A charitable trust if applies its income outside India, still it is eligible for registration under the Act. Registration of a charitable trust cannot be denied merely because it has applied its income outside India. M. K. Nambyar Saarc Law Charitable Trust v. Union of India (2004) 269 ITR 556 (Del.). The benefit of Section 11(1)(a) is allowable only to the extent that the income is applied to such purposes in India. Where the income is applied outside India then the application of 85 per cent of the income will be reckoned only in respect of the incomes applied within India.

Where a charitable trust accumulates income and its application of income is less than 85 per cent, it has to give a notice in writing to the Assessing Officer in Form No.10 furnishing the purpose for which the income is accumulated or set apart. Also, the period for which the income is accumulated or set apart must be specified in the notice. The notice intimating the accumulation or setting apart must be submitted before the time limit for filing the return given in section 139(1). It was held that it is sufficient if a charitable trust submits the statement of accumulation along with the return of income in CIT v. G. R. Govindarajulu & Sons Charities (2004) 271 ITR 145 (Mad.).

Income from property

The word "building " is not confined in its scope only to dwelling houses. The Oxford Dictionary of English, Tenth Edition, defines a `house' as "A building for human habitation especially one that is lived in by a family or by a small group of people consisting of ground floor and one or more number of stories."

The word "house" in association with other words also has many other meanings. But a commercial building is not regarded as a house. But that would not take the income from commercial building out of the ambit of Section 22. A company formed with the object of dealing in properties, deriving income from letting out buildings is liable to tax in respect of such rental incomes as income from property. CIT v. Chennai Properties & Investments Ltd (2004) 266 ITR 685 (Mad.).

Property used for the purpose of one's own business is not chargeable to tax under the head "property income". Where the property is let out to employees of the assessee, still it is regarded as used for business by the assessee. Where the property is let out to employees of a sister concern, then it cannot be treated as property used for business. Hence, the income from such property (including notional annual value, if no rent is received) is chargeable to tax as income from property. CIT v. T. V. Sundaram Iyengar & Sons Ltd (2004) 271 ITR 79 (Mad.).

Where the property is let out to a tenant and it has been sub-let by him subsequently, and if the agreement is found to be genuine, the amount actually received as rent by the owner is chargeable to tax as income from property. In other words, genuine rental agreements are accepted and the owner of the property is liable to tax only based on such rental agreement. CIT v. Indra Co Ltd (2004) 268 ITR 240 (Cal.).

Claim of expenditures

Where the assessee repossesses the goods supplied to a customer and in the course of repossession takes over the goods supplied by a third party, the compensation paid to the third party for the wrongful seizure of goods is eligible for deduction as business loss along with the amounts written off as irrecoverable from the customer. CIT v. Sree Ganesh Stores (2004) 266 ITR 595 (Mad.).

Where the assessee is following mercantile system of accounting, any amount actually paid towards the liability that had arisen in that accounting year is deductible. Where the assessee made payment towards postage, telegram, telephone etc., and in the books of account a portion of the payment is treated as "pre-paid", still it is deductible while computing the taxable income of the assessee. Any expenditure not being in the nature of capital expenditure or personal expenditure laid out or expended wholly and exclusively for the purpose of the business or profession is allowable. Any actual expenditure incurred has to be allowed notwithstanding the method of accounting followed by the assessee. CIT v. Southern Roadways Ltd (2004) 265 ITR 404 (Mad.).

Waiver of loan

Remission of loan by creditors is not chargeable to tax as income by invoking section 41(1) of the Act.

In respect of the loans waived by the creditors, no deductions would have been allowed previously; hence its waiver subsequently is also not chargeable to tax. CIT v. Chetan Chemicals (P) Ltd (2004) 267 ITR 770 (Guj.).

Depreciation

Where the assessee leases commercial vehicles to the persons engaged in the business of running them on hire, the assessee is eligible for higher depreciation. This is due to the reason that the hirers who are engaged in the business of running the vehicles on hire, would put those vehicles to undergo rough use in contrast to vehicles used for personal purposes by the owner.

In view of this, the end use of the vehicle would entitle the owner to claim higher rate of depreciation. CIT v. Kotak Mahindra Finance Ltd (2004) 265 ITR 119 (Bom.). CIT v. South India Viscose Ltd (2005) 272 ITR 115 (Mad.).An asset ready for use but not actually used is not eligible for depreciation. Only where the asset is put to use, such asset becomes eligible for depreciation. Dinesh Kumar Gulabchand Agrawal v. CIT (2004) 267 ITR 768 (Bom.). It is necessary to note that the Apex Court dismissed the Special leave petition filed by the assessee against this judgment. (2004 266 ITR (St.) 106). Where a company allows use of its motorcars by directors and employees, expenditure on maintenance of motorcars and depreciation thereof, are allowable as business expenditure.

No portion of the expenditure (including depreciation) could be disallowed by attributing it to personal and non-business use of such asset. Dinesh Mills Ltd v. CIT (2004) 268 ITR 502 (Guj.); Sayaji Iron & Engg. Co v. CIT (2002) 253 ITR 749 (Guj.). Whether an assessee having aqua farm can claim ponds for storage of water as "plant" was discussed in CIT v. Victory Acqa Farm Ltd (2004) 271 ITR 528 (Ker.). The court held that the assessee is not eligible to claim depreciation at the rate applicable to plant and machinery in respect of ponds maintained by the aqua farm.

However, in CIT v. Victory Acqa Farm Ltd (2004) 271 ITR 530 (Ker.) it was held that the ponds are required to keep the water level for breeding shrimps and prawns and hence is a plant, entitled to statutory depreciation allowable in respect of plant and machinery.

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