The Hindu Business Line : Beware of cash transactions

In business, quick decisions and actions bring desired results. A quick payment to the supplier of materials indicates that the buyer is financially sound and astute in business.

If payment towards any expenditure exceeds Rs 20,000, it must be by means of account-payee crossed cheque or draft. If not, the entire expenditure is not eligible for deduction.

The monetary limit of Rs 20,000 is prescribed in Section 40A(3) and there are certain exceptions to the disallowance, which are mentioned in Rule 6 DD.

Cash payment by the buyer into the bank account of the supplier of merchandise does not fall within the exception and, hence, liable for disallowance. In the K. Abdu & Co vs ITO (2008 170 Taxman 297 Kerala) case, cash payment into the bank account of the supplier was held as breach of Section 40A(3) and liable for disallowance.

Acceptance, repayment

Acceptance of loan or deposit of Rs 20,000 or more otherwise than by an account-payee crossed cheque or draft is liable for penalty — which is equal to the sum accepted.

Similarly, repayment of such loan or deposit otherwise than by account-payee crossed cheque or draft is liable for penalty equal to the amount repaid.

Acceptance of advance money for supplies to be made when refunded otherwise than by account-payee crossed cheque or draft whether liable for penalty was debated recently in the Chaubey Overseas Corpn. vs CIT (2008) 170 Taxman 9 (All.) case.

The assessee argued that the amount received as advance for supplies is a trade deposit but the court held that the Section covers every kind of deposit, be it trade deposit or business deposit or deposit as such.

Depreciation

Depreciation is one of the incentives given in tax law to compensate for the erosion in value of asset due to its wear and tear. In Dy. CIT vs N.K. Industries Ltd (2008 170 Taxman 22 SC), the apex court declined to interfere with the findings of the tribunal as regards depreciation on machinery.

The tribunal earlier had held that factually nothing was there on record to show that the machineries had remained idle for denying depreciation claim.

While deciding the case the apex court held that whether the actual use is a pre-condition for allowance of depreciation is kept open and not dealt with while reaching the conclusion.

Salary to partners

For partnership firms, any partner taking care of the affairs of the firm could draw salary. The eligibility for allowing the salary payment to the partners as a deduction was brought into the statute book about 16 years ago. The conditions and limit for the allowance of salary are contained in Section 40(b) of the Act.

The foremost condition is the mandate for salary payment being mentioned in the deed. Once the deed authorises payment of salary to a partner, who manages the business of the firm (technically called as working partner) the tax officer cannot deny deduction by adducing reasons such as the deed not being genuine or antedated, etc., without making any enquiry or any other evidence in his possession. It was so held in CIT vs Paras Cotton Co (2008) 170 Taxman 431 (Rajasthan).

Exchange fluctuation

Where the assessee imports machinery and there is increase or decrease in liability due to exchange fluctuation, such increase or decrease would be adjusted in the cost of machinery.

On that adjusted value, the machinery would be eligible for depreciation. However, the increase or decrease in liability due to exchange fluctuation is eligible for adjustment only on the actual payment of such liability.

When the liability is subsisting, the fluctuation in currency will not alter the cost of asset or the depreciation claim. Where the Government compensates the assessee for the loss suffered in exchange fluctuation the amount so received whether taxable as income was debated in the National Small Industries Corporation Ltd vs CIT (2008) 170 Taxman 66 (Delhi) case.

The amount received was held as taxable under Section 41 of the Act. As the aspect of capitalising the exchange fluctuation only on actual payment has come into effect only from the assessment year 2003-04, the decision could be applied for the current year in the following manner:

If the compensation is received after the actual settlement of the machinery due, it is chargeable to tax under Section 41; and

If the loss compensated by the Government is before or just at the time of actual settlement of machinery due, it could be set off against exchange loss and that would be tax neutral.

Book profit

In the case of companies, there are two methods by which the taxable income and liability are determined. They are:

Regular provisions of the Income-tax Act; and

Specific adjustments for computation contained in Section 115-JB. The second alternative is called minimum alternate tax or MAT. Section 115JA was succeeded by Section 115 JB from the assessment year 2001-02 onwards. Any amount set aside towards provision for liabilities other than ascertained liabilities (that is, towards unascertained liabilities) is to be added to the net profit for computing “book profit” under Section 115 JB.

In CIT vs Indraprasatha Medical Corpn Ltd (2008 170 Taxman 140 Delhi) the assessee made a provision for bad and doubtful debts. It was held that the provision for doubtful debts is not a provision for ‘unascertained liability’ and hence not to be adjusted (that is, added) while computing ‘book profit’.

Similar decisions can be found in CIT vs Eicher Ltd (2006 287 ITR 170 Delhi) and CIT vs HCL Comnet Systems & Services Ltd (2007 292 ITR 299 Delhi).

Income from bank deposit

While securing contracts the taxpayers may have to furnish bank deposit to show solvency or as guarantee for the work obtained. Such bank deposit interest whether to be treated as business income or as income from other sources is often debated. In CIT vs Chinna Nachimuthu Constructions (2008 170 Taxman 272 Karnataka) it was held that interest on fixed deposits given as guarantee for procuring contract work forms part and parcel of business income.

However, surplus business funds if kept in bank deposits, the interest income could not be treated as ‘derived’ from the business activity for allowance of deduction under Chapter VI-A (Pandian Chemicals Ltd vs CIT (2003 262 ITR 278 SC).

The appellate tribunal is the final fact-finding authority for rendering justice. Where the argument of the assessee or the department is not considered by the tribunal while making the judgment, then the order of the tribunal would be erroneous and it is eligible for rectification as held in Ras Bihari Bansal vs CIT (2008 170 Taxman 31 Delhi).

(The author is an Erode-based chartered accountant.)