Volume VIII Part 1 July 10, 2014 23 Business Advisor

Case laws update

V. K. Subramani

1. Reduction in gross profit ratio when explained by

the assessee – estimation of income by rejecting

books is unjustified

In G.V.D. I. & Co v. Dy. CIT (2014) 363 ITR 27 (Mad), the

assessee disclosed lower rate of gross profit than the

immediately preceding year. The assessee also explained

that in its activity of running ginning factory during the

year, the price of input kappas had increased but there

was no such corresponding increase in price of cotton

being its finished product, hence it had reduced gross profit margin.

The Assessing Officer did not reject the books of account either on the

ground of invisible loss or the non-maintenance of day to day stock book.

The Assessing Officer merely held that the reduction in gross profit ratio

was not properly explained.

The court held that when the assessee has given some reason for falling

gross profit ratio, the Revenue should have taken the matter further for

verification. Without such exercise, it held that the assessing was not

justified in making a determination of gross profit on the basis of the figures

of the preceding year. Thus the decision was in favour of the assessee.

2. A liberal interpretation on the date of ownership

In Mrs. Madhukaul v. CIT (2014) 363 ITR 54 (P&H), the assessee was allotted

a flat on 07.06.1986 by means of letter dated 30.06.1986. The assessee paid

the first instalment on 04.07.1986. The flat was identified and delivery of

possession was given on 30.11.1988. The assessee sold the flat on

05.07.1989.

The issue was whether the capital gain was short-term or long-term?

Assessing Officer, CIT (Appeals) and tribunal have held the gain as short-

term capital gain on the reasoning that the flat was identified and allotted

only on 30.11.1988. The claim of the assessee that it was long-term capital

gain was negatived by all the authorities including tribunal.

The court however held that the flat was allotted and first instalment was

paid on 04.07.1986 which conferred a right upon the assessee to hold a flat,

which was later identified and possession was given on a later date. Merely

Volume VIII Part 1 July 10, 2014 24 Business Advisor

that possession was given later did not detract the fact of the assessee being

conferred with a right to hold the property on the issuance of allotment

letter. The facts such as balance payment made and identification of flat

were consequential acts which related back and arise due to allotment letter

which firstly conferred the rights on the assessee. This decision was followed

also in CIT v. Ramakrishnan (2014) 363 ITR 59 (Del).

3. Power tariff concession to facilitate business is revenue

In Brakes India Ltd v. CIT (2014) 363 ITR 13 (Mad), the assessee received Rs

397.16 lakh as industrial power tariff concession which was claimed as

capital receipt.

The first appellate authority placed reliance on CIT v. Rajaram Maize

Products (1998) 251 ITR 427 (SC) and held that the subsidy for 3 years is an

operational subsidy and not a capital subsidy. The court perused the

industrial policy of the State Govt and held that applying the rationale of the

judgment in the case of Sahney Steel & Press Works Ltd v. CIT (1997) 228

ITR 253 (SC), wherein it was held that the true character of subsidy is to be

determined with reference to the purpose for which it was given. If it is to

enable the assessee to run business more profitably then the receipt is on

revenue account. If it is to enable the assessee to set up a new unit or

expand the existing unit, it should be taken to the capital account.

The court held that the point of time it is paid, its source or form, is

irrelevant. Thus the subsidy meant for better operational results is taxable

as revenue receipt as in this case, it was to assist the assessee in carrying

out business operation, taxable as revenue receipt.

4. False ceiling, wooden partition eligible for 100% depreciation

In CIT v. Amrutanjan Finance Ltd (2014) 363 ITR 135 (Mad), one of the issues

before the court was whether the assessee is entitled to 100% depreciation

on false ceiling, wooden partitions inclusive of furniture, electrical wiring

and interior decoration.

The assessee had put these for running computer centres. The court

referred to the binding precedent in the case of Thiru Arooran Sugars Ltd v.

Dy. CIT (2013) 350 ITR 324 (Mad) and held in favour of the assessee.

Reference was also made to decisions such as CIT v. Madras auto Service P

Ltd (1998) 233 ITR 468 (SC) and CIT v. Ayesha Hospitals P Ltd (2007) 292

ITR 266 (Mad).

(V. K. Subramani is Chartered Accountant, Erode)