Section 28

Section 28 — the law in short

What the courts have decided on section 28, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Jindal Equipment Leasing Consultancy Services Ltd v CIT Supreme CourtCuts both ways
  My client held shares of the amalgamating company as stock-in-trade and received shares of the amalgamated company under the court-sanctioned scheme. Is there business income at that point, or only when those shares are sold?
  It depends. Section 28 does not require a sale, an exchange or a transfer - business profit can be realised in kind - so the substitution of shares on an amalgamation can be charged as business income where shares held as stock-in-trade are replaced by shares that are freely realisable and capable of definite valuation. It is not automatic: the Court laid down a fact-sensitive test of commercial realisability, put the burden of establishing it on the Revenue, and held that the charge is attracted only on allotment of the new shares and not on the appointed date or the date the scheme is sanctioned. The Delhi High Court's judgment was affirmed and the matter remitted to the Tribunal to decide, on the facts, whether the shares were stock-in-trade at all and whether what was received was freely realisable.
• DIT (IT)-I, Mumbai v American Express Bank Ltd Supreme CourtHelps departmentValidity unconfirmed
  Does the section 44C ceiling bite only on head office expenditure shared with other branches, or also on expenditure the head office incurred exclusively for the Indian branch?
  It bites on both. The Explanation to s.44C defines head office expenditure by two things only: that it is incurred outside India, and that it is executive and general administrative expenditure of the kind listed. Nothing in it says the expenditure must be common or shared. The Bombay High Court's contrary view in Emirates Commercial Bank was held to be wrong.
• Rayala Corporation Pvt Ltd v ACIT Supreme CourtHelps taxpayer
  My company's only activity is letting out its properties. Is the rent taxable as house property income or as business income?
  As business income, on these facts. The Supreme Court held that where a company's business is to lease its property and earn rent, the income so earned is business income, and set aside the Madras High Court's contrary view. It applied Chennai Properties and Investments Ltd, in which it had held that if an assessee has house property and by way of business gives it on rent, the receipt, though in the nature of rent, is business income. It rejected the Revenue's argument that the memorandum of association must make letting the main object, noting that on the admitted facts the company had stopped its other activities and had only this one business.
• Guffic Chem P Ltd v CIT Supreme CourtHelps taxpayer
  I was paid to stay out of the business. Is the non-compete money capital or income?
  Capital, for years before assessment year 2003-04. Compensation attributable to a negative or restrictive covenant is a capital receipt, unlike compensation for loss of agency, which is revenue. Section 28(va), which taxes non-compete receipts, is amendatory and cannot be pushed back to earlier years.
• CIT v Saurashtra Cement Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  My supplier paid me liquidated damages for delivering the plant late. Is that taxable as a trading receipt?
  No. The Supreme Court held that liquidated damages received from the supplier of a cement plant for delay in delivery are a capital receipt. The damages were fixed by the contract at 0.5 per cent of the price of the machinery delivered late for each month of delay, payable without proof of actual loss and capped at 5 per cent of the total price. That measure was tied to the price of the asset, not to any calculation of lost profit. The payment was directly and intimately linked with the procurement of a capital asset and compensated the assessee for sterilisation of the profit earning source, not for anything arising in the course of earning profits.
• CIT v Woodward Governor India P Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  I restated my foreign currency creditors at the closing rate and debited an unrealised loss. Can the AO throw it out as a contingent liability?
  No. Under the mercantile system, the loss on restating foreign currency monetary items at the balance sheet date is an item of expenditure under s.37(1), and the word 'expenditure' is wide enough to cover a loss that has not gone out of the assessee's pocket. Section 43A is a separate regime that applies only to an asset acquired from a country outside India, and after its substitution by the Finance Act 2002 it operates only at the time of actual payment.
• CIT v Ponni Sugars & Chemicals Ltd Supreme CourtCuts both ways
  I got a government incentive that came to me as a higher free sale quota and an excise rebate, and I had to use it to repay my term loans. Is that taxable income?
  No, on those terms it is a capital receipt. The Supreme Court applied the purpose test: what decides the character of a subsidy is the object for which it is given, not when it is paid, where it comes from, or the mechanism through which it reaches you. Because the incentive was available only to new or substantially expanded units and had to be used to repay term loans taken to set up or expand the plant, it was capital, not a trade receipt. On the separate section 80P(2)(a)(i) claim the matters went back to the Tribunal.
• S.A. Builders Ltd v CIT (Appeals) Supreme CourtCuts both ways
  I passed borrowed money to my sister concern interest-free. Can the AO disallow the interest I paid?
  Only if the advance fails the commercial expediency test. Interest on borrowed funds advanced interest-free to a sister concern is deductible under s.36(1)(iii) where the advance was made on grounds of commercial expediency, an expression of wide import covering what a prudent businessman spends for the purposes of business, with no need for a legal obligation.
• Dr T.A. Quereshi v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  My stock in trade was seized and confiscated. The officer says the Explanation to section 37(1) blocks the deduction because the activity was an offence. Is he right?
  No. The Supreme Court set aside the Madhya Pradesh High Court's judgment and restored the Tribunal's order allowing a deduction of Rs 2 lakh. The Explanation to section 37 speaks only of expenditure incurred for a purpose which is an offence or prohibited by law. This was not expenditure but a business loss, and the Explanation has nothing to do with it. Once it was found as a fact that the seized heroin formed part of the assessee's stock in trade, the seizure and confiscation had to be allowed as a business loss on ordinary commercial principles. The Court held that the High Court had taken an emotional and moral approach rather than a legal one.
• CIT v Indo Nippon Chemicals Co Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  I value my raw material net of the excise credit and value my closing stock the same way. Can the officer add the unutilised credit to my income?
  No. The Supreme Court dismissed the Revenue's appeals and held that an irreversible credit available on purchase of duty paid raw material does not for that reason amount to income liable to tax. The assessees had consistently used the net method, valuing raw material at purchase price less the credit and valuing unconsumed raw material and work in progress the same way. The Assessing Officer had used the gross method at purchase and the net method at the year end, which the Court called wholly erroneous, because it assumed income to the extent of the credit on unconsumed raw material that the accounts did not reflect. Whichever method is used consistently, the result is the same.
• Sakthi Trading Co v CIT Supreme CourtHelps taxpayer
  Our firm dissolved when a partner died, but the remaining partners carried on the same business. Must the closing stock on the date of dissolution be revalued at market price?
  No. The Supreme Court held that where a firm is dissolved but the business is not discontinued, there is no warrant for revaluing the closing stock at market rate. The ordinary rule, cost or market price whichever is lower, continues to apply. Valuing stock at a market value higher than cost would tax notional profits the assessee has never realised. A.L.A. Firm and G.R. Ramachari, which required market valuation, were cases where the business itself came to an end. The Commissioner's order under section 263 was wrong and the question was answered for the assessee.
• Bharat Earth Movers v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
  Yes, so long as the liability has actually arisen in the year. A liability that has definitely arisen is deductible even though it still has to be quantified and will be discharged later; what is not deductible is a liability that is merely contingent. On the facts, the provision for leave encashment was held to be an accrued liability, not a contingent one — but for years governed by s.43B(f) that particular result no longer holds.
• CIT v Mahendra Mills Supreme CourtHelps taxpayer
  I did not claim depreciation in my return because it suits me not to. Can the assessing officer force it on me anyway?
  No, on the law as it then stood. The Supreme Court held that where the assessee neither claims depreciation nor furnishes the prescribed particulars, the Income-tax Officer cannot thrust the allowance on him. Section 32 allows depreciation subject to section 34, and section 34 permits the deduction only if the prescribed particulars are furnished. Section 29 is not a complete code and must be read with section 34. Depreciation is a benefit for the assessee; a privilege cannot be turned into a disadvantage and an option cannot become an obligation. The Revenue's appeal was dismissed.
• CIT v Sterling Foods Supreme CourtHelps department
  I sold the import entitlements my exports earned me under a government scheme. Do those sale proceeds count as profits derived from my industrial undertaking for the incentive deduction?
  No. The Supreme Court held that the source of an import entitlement is the Central Government's export promotion scheme, not the assessee's industrial undertaking. Derived from requires a direct nexus between the profits and the undertaking, and here the nexus is only incidental: the undertaking exports processed sea food, the scheme applies because of that export, the entitlement follows from the scheme, and the sale proceeds follow from the entitlement. The Court also held that the insertion of clauses (iiia) and (iiib) in section 28 made no difference, since taxing such receipts as business income says nothing about their source.
• Oberoi Hotel P Ltd v CIT Supreme CourtHelps taxpayer
  We were paid to give up our right of first refusal to buy and to keep operating a hotel we managed — is that a capital receipt?
  Yes. The Supreme Court held that Rs 29,47,500 received from the Receiver of the hotel owner was a capital receipt. The assessee gave up the right under Article XVIII of its operating agreement to have the hotel offered to it first if the owner wished to transfer or lease it, and gave up the operation of the hotel itself. That was the loss of a source of income and an injury to a capital asset, not the settlement of rights under a trading contract. The Calcutta High Court's order was set aside and the question answered in favour of the assessee.
• Maddi Venkataraman & Co (P) Ltd v CIT Supreme CourtHelps department
  I broke the foreign exchange law to move stock I could not otherwise sell. Can I still deduct what that cost me as a business expense?
  No. The Supreme Court held that expenditure incurred in evading the provisions of another statute, and any penalty levied for that evasion, cannot be deducted. It is not enough that a payment was made in the course of trade; it must be for the purpose of the trade, and the purpose must be lawful. A business can be carried on without breaking the law, and section 37 assumes it will be. Allowing the deduction would make the penal provisions of the Foreign Exchange Regulation Act meaningless. Facing a loss is no justification for contravening the law. The appeal was dismissed.
• Sahney Steel & Press Works Ltd v CIT Supreme CourtHelps department
  The State refunds my sales tax and subsidises my power for five years after I start production. Is that a capital receipt because the scheme was meant to encourage new industry?
  No. The Supreme Court held that these were operational subsidies and therefore revenue receipts. Nothing was paid towards setting up the industry: the incentives became available only once production had begun, ran for five years, and were tied to production - power subsidy only for power consumed for production, sales tax refunds only on taxes levied after production started. Their object was to give a newly set up unit a helping hand so it could run its business more profitably. The Court applied Viscount Simon's rule in Ostime that a subsidy from public funds paid to a trade is a trading receipt.
• CIT v Bankipur Club Ltd Supreme CourtHelps taxpayer
  My members' club charges for drinks, rooms and subscriptions and ends the year with a surplus. Is that surplus taxable income?
  No, where the receipts come from members. The Supreme Court held that amounts realised from members for drinks, refreshments, letting of buildings, admission fees and periodical subscriptions were charges for the privileges, conveniences and amenities the members were entitled to under the club's rules, offered without profit motive and untainted with commerciality. That is not a trading activity, and the excess of receipts over expenditure arising from a mutual arrangement is not income under the Act. Income from extending facilities to non-members was not in issue in these appeals.
• Godhra Electricity Co Ltd v CIT Supreme CourtHelps taxpayer
  I raised my rates and booked the higher billing in my accounts, but customers sued and I could never collect. Must I still pay tax on it?
  No. The Supreme Court held that although the company kept its books on the mercantile system and had passed entries for the enhanced charges, no real income accrued to it. Whether income has accrued must be judged by taking the probability or improbability of realisation in a realistic manner, not by the entries. Here representative suits by consumers, an injunction, a State Government letter advising the company to hold its rates, and the later takeover of the undertaking meant the enhanced charges could never be collected. The entries represented hypothetical income only, and the additions were rightly deleted.
• CIT v T.V. Sundaram Iyengar & Sons Ltd Supreme CourtHelps department
  Old unclaimed credit balances of my customers have gone time-barred and I have written them back to my profit and loss account. Is that taxable even though they were capital receipts when I got them?
  Yes. The Supreme Court held that money received in the course of trade, though a deposit and of capital character when received, changes character when it becomes the assessee's own money by limitation or by some other statutory or contractual right. The deposits here were taken in the course of trade, adjustments were made against them in the course of trade, the customers' claims had become time-barred, and the assessee itself carried the surplus to its profit and loss account with no explanation for doing so if the money was somebody else's. On a common sense view the trader had become richer by the amount, and it is his income.
• Union of India v A. Sanyasi Rao Supreme CourtCuts both waysValidity unconfirmed
  Tax has been collected from me at source on my purchase price as though a fixed percentage of it were my profit. Am I stuck with that figure, or can I still be assessed on my real income?
  You can still be assessed on your real income. The Supreme Court upheld the validity of section 206C and held section 44AC a valid piece of legislation, but read it down: it is an adjunct to and explanatory of section 206C and does not dispense with a regular assessment. To the extent its non obstante clause shut out sections 28 to 43C for the specified trades, the provision was unreasonable, no basis having been shown for denying those traders the reliefs every other assessee gets. So tax is collected at the section 206C rates and a regular assessment follows, with profits computed under sections 28 to 43C.
• CIT v H. Holck Larsen Supreme CourtHelps taxpayer
  I subscribed to rights issues in my own company and sold shares often to fund the calls. Does the frequency make me a dealer in shares rather than an investor?
  Not on these facts. The Supreme Court upheld the High Court's conclusion that the assessee remained an investor. Whether a man is a dealer or an investor is a mixed question of law and fact: the Tribunal's primary findings bind, but its inference can be reviewed if it misdirected itself in law or failed to consider relevant factors in their proper perspective. Here the Tribunal noted, but did not weigh, that rights shares depreciate the original holding, that the assessee was Chairman and his non-subscription would have hurt the market, and that he needed money for an overdraft and a house in Denmark. His conduct was that of a prudent investor, not a plunge into the waters of trade.
• CIT v Piara Singh Supreme CourtHelps taxpayer
  The department is taxing me on income from an unlawful activity. Can I set off what the authorities confiscated from me in the course of that same activity?
  Yes. The Supreme Court held that where the department taxes a person on the income of a smuggling business, the confiscation of the currency notes used in that business is a deductible loss. Detection by the customs authorities and confiscation are incidents as predictable in such a business as any other feature of it, so the loss springs directly from carrying on the business and is incidental to it - the same in principle as if the notes had been stolen or dropped on the way. The Revenue's appeal was dismissed with costs.
• Sutlej Cotton Mills Ltd v CIT Supreme CourtCuts both ways
  The rupee moved and I have a gain on foreign currency. Is that trading income or a capital receipt?
  It depends on what the currency was doing in the business, not on the size or direction of the currency movement. If the foreign currency was held on revenue account, as a trading asset or as part of the circulating capital of the business, the profit or loss is a trading profit or loss. If it was held as a capital asset or as fixed capital, the profit or loss is of a capital nature.
• Chowringhee Sales Bureau (P) Ltd v CIT Supreme CourtHelps department
  I collected sales tax from buyers and kept it in a separate account because I dispute the liability. Is that collection my income?
  Yes. The Supreme Court held that sales tax received by an auctioneer in its character as auctioneer forms part of its trading or business receipts, with a deduction available as and when the money is paid over to the State Government. Crediting the money to a separate sales tax collection account makes no difference: it is the true nature and quality of the receipt, and not the head under which it is entered in the books, that is decisive. If a receipt is a trading receipt, the fact that it is not shown as such in the accounts does not prevent the assessing authority from treating it as one.
• S.G. Mercantile Corporation (P) Ltd v CIT Supreme CourtHelps taxpayer
  My company took a market on a long lease, spent money rebuilding it and sublets the shops and stalls. Is that rent business income or income from other sources?
  Business income. The Supreme Court held that the company's income from subletting stalls in Taltolla Bazar was assessable under section 10 of the 1922 Act, not under the residuary head. The company was not the owner, so the property head could not apply. Its memorandum authorised taking property on lease and dealing with it commercially; within a fortnight of incorporation it took the market on a fifty-year lease, undertook to spend Rs 5 lakhs remodelling it, and for three years did nothing but develop the premises and let out shops, stalls and ground space. Taking the lease and subletting was its trading activity.
• Dalmia Jain & Co Ltd v CIT Supreme CourtHelps taxpayer
  I was sued over the property I work my business on and lost. Are my legal costs deductible, or capital because the case was about title?
  Deductible. The Supreme Court held that the test is whether the expenditure was incurred to create a new asset or to maintain the business: the first is capital, the second revenue. The assessee did not start the litigation; it was dragged in and damages were claimed against it because it was working the quarry at the time. The only reasonable inference was that it defended the suit to protect its business, not to safeguard its prospects of a new lease. Following Shree Meenakshi Mills, deductibility depends on the nature and purpose of the proceeding, not on its outcome.
• CIT v National Storage Pvt Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  My client lets specially built units with security, services and staff. The officer says it is still just letting, so it is house property. Is there authority the other way?
  Yes. Where what is hired out is a complex subject — a purpose-built structure together with services the ordinary landlord does not supply — the return is not income derived from the exercise of property rights but income from an adventure or concern in the nature of trade. The Supreme Court also held that the Act does not allow the receipt to be split, taxing the rental element as property income and the extra as business income, where the assessee is in occupation of the premises for the purposes of its business.
• CIT v Gemini Cashew Sales Corporation Supreme CourtHelps department
  Our firm dissolved and the business passed to the surviving partner. Can the firm deduct the retrenchment compensation that became payable to the workmen on that transfer?
  No. The Supreme Court held that Rs 1,41,506 debited as gratuity payable to workers was not allowable, either as a deduction in computing business profits under section 10(1) or as expenditure under section 10(2)(xv) of the 1922 Act. Liability to pay retrenchment compensation on a transfer of an undertaking arises on the transfer and not before; while the business continues the workmen's right is contingent, since a workman may resign, die or retire. The liability therefore arose not in the course of the business nor for the purpose of carrying it on, but from the transfer, and was not of a revenue nature.
• CIT v Mugneeram Bangur & Co Supreme CourtHelps taxpayerValidity unconfirmed
  We sold our land development business as a going concern for a lump sum, and the schedule to the agreement showed a figure for land. Can the officer tax a profit on the land as stock-in-trade?
  No. The Supreme Court held that the sale was of the whole concern and that no part of the slump price was attributable to the cost of the land, so no part of it was taxable. The firm was not carrying on a business of purely buying and selling land; it bought land, developed it and sold it, and the agreement itself recorded liabilities for roads, drains, sanitation, electricity and a school. The figure for land in the schedule was the cost price as it stood in the books, and there was no evidence of any attempt to value the land at the date of sale.
• Janki Ram Bahadur Ram v CIT Supreme CourtHelps taxpayer
  I bought a factory that had nothing to do with my line of business, never ran it, and sold it within months at a large profit. Is that profit business income?
  No, not on these facts. The Supreme Court held the purchase was an isolated transaction unrelated to the assessee's business in iron scrap and hardware, and that a profit motive is not decisive, since an accretion to capital does not become taxable income merely because the asset was bought in the expectation of selling it at a profit. It is for the Revenue to bring the profit within the charge. Even accepting that the assessee got a good bargain and would have sold on a favourable offer, that alone could not support an inference of an adventure in the nature of trade. The High Court's answer was discharged and a negative answer recorded.
• CIT v Nainital Bank Ltd Supreme CourtHelps taxpayer
  Dacoits took cash out of my bank branch. Can I write the loss off against business profits, or is it a loss I suffer as an owner of money rather than as a banker?
  You can write it off. The Supreme Court held that cash is the stock-in-trade of a banking company, and that keeping enough money in the branch, duly guarded, to meet the demands of constituents is an integral part of the operation of banking. Retaining money on the premises carries with it the ordinary risk of embezzlement, theft, dacoity or destruction by fire, so a loss by dacoity is incidental to carrying on the business and is deductible in computing profits. The Allahabad High Court's answer in favour of the bank was upheld and the Rs 1,06,000 lost in the Ramnagar branch was allowed.
• CIT v Kumbakonam Mutual Benefit Fund Ltd Supreme CourtHelps department
  My company lends and takes deposits only from its own shareholders and shares the surplus among them. Is that mutual trading, so that the surplus is not taxable?
  No. The Supreme Court held that mutuality requires complete identity between contributors and participators: every contributor to the common fund must be entitled to share in the surplus, and every participator in the surplus must be a contributor. Here a shareholder could take his dividend without ever making a deposit or taking a loan, so the surplus came back to him as a shareholder on his shares, not as a person who had put money in. That is a company making a profit out of its members as customers, which is taxable. The Madras High Court's test, that the right to contribute and the right to participate need only be open to an identical body, was held unsound.
• Kettlewell Bullen & Co v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  I gave up one of several agencies and was paid compensation. Is that a taxable trading receipt because agency work is my business?
  Not on these facts. The Supreme Court held the payment was compensation for the loss of a capital asset. The test it laid down is this: where compensation is paid for the cancellation of a contract which does not affect the trading structure of the business, does not deprive the recipient of what in substance is his source of income, and where termination is a normal incident of the business leaving him free to carry on his trade, the receipt is revenue. Where the cancellation impairs the trading structure or costs him the source of his income, the compensation is normally capital. It mattered little that other agencies continued.
• Gillanders Arbuthnot & Co Ltd v CIT Supreme CourtHelps department
  My principal cancelled one of my many agencies and paid me compensation worked out on the commission I would have earned. Is that a capital receipt?
  No, on these facts. The Supreme Court held the compensation was income. The company held agencies in a great many lines - paints, petroleum, cement, timber, metals, tea, engineering goods and much else - so acquiring agencies was a normal incident of its business and losing one did not impair its trading structure or cost it an enduring asset. The agency was terminable at will, the company had two years' notice, and the compensation was computed as a proportion of the commission on sales in its former territory. It merely lost a trading avenue and was free to carry on the rest of its business.
• Kettlewell Bullen & Co Ltd v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  I gave up one of my managing agencies and was paid compensation for it - is that a taxable revenue receipt?
  It depends on what was given up, and here the answer was no. The Supreme Court held that the Rs 3,50,000 received for relinquishing the managing agency of Fort William Jute Co was a capital receipt. The test: where compensation is paid for cancelling a contract that does not affect the trading structure, does not deprive the recipient of what is in substance his source of income, and where termination is a normal incident of the business, the receipt is revenue; where the cancellation impairs the trading structure or costs the assessee the source of his income, it is capital. That the assessee held five other agencies made no difference.
• CIT v Dalmia Investment Co Ltd Supreme CourtCuts both waysPartly overruled — read this first
  I received bonus shares and later sold my holding. What is the cost of the bonus shares: face value, nil, or something else?
  Something else. By a majority the Supreme Court rejected both extremes. Face value is wrong, because a bonus share is not a voucher for the amount on its face and nothing was paid for it. Nil is also wrong, because on the issue of bonus shares there is an instant loss in the value of the original holding: the earning capacity of the capital is unchanged, dividends per share fall, and the market price moves accordingly. The correct course, where the bonus shares rank pari passu with the old, is to spread the cost of the original shares over the old and the new taken together. On that basis the cost of Rs 5,84,283 was spread over 31,909 old and 31,909 bonus shares.
• CIT v Shoorji Vallabhdas & Co Supreme CourtHelps taxpayer
  I credited commission in my books at the contracted rate but agreed during the year to take a lower rate. Am I taxed on the higher figure?
  No, on these facts. The Supreme Court held that where the agreement itself is altered during the previous year so that the income which accrued and was received is the smaller amount, the larger figure never resulted as income at all, and a book entry cannot make it taxable. Income-tax is a levy on income; the Act fixes two points of time, accrual and receipt, but the substance is the income. The Court distinguished income actually received and later given up, which may still be taxed, from income that never resulted.
• CIT v Bai Shirinbai K Kooka Supreme CourtHelps taxpayer
  I held shares as an investment for years and then started dealing in them. When I sell, is my profit measured from what I originally paid or from the market value on the day I began trading?
  From the market value on the day the trading began. A seven-judge bench of the Supreme Court held, by six to one, that where an investor converts shares into stock-in-trade and then sells them in the course of business, the profits must be computed on ordinary commercial principles: the difference between what the article cost the business and what it fetched on sale. What the shares cost this business was their market value on 1 April 1945, the day the trading activity started. There is no notional sale involved; the sale that produced the profit was a real one, and the only question was how to measure it.
• Karanpura Development Co Ltd v CIT Supreme CourtHelps department
  My company acquired mining leases, developed the land and sub-let it for a premium. Is the premium a capital receipt or business profit?
  Business profit, on these facts. The Supreme Court held that the company, formed to acquire coal-mining rights and to turn them to account, was carrying on business when it took head leases at a salami of Rs 40 a bigha, developed the fields and granted sub-leases at Rs 400 a bigha. The excess was profit of that business, not appreciation of capital. The Court said ownership and letting may be done as part of a business or as a landowner, and which it is depends on the object with which the act is done. Assessable under the business head.
• East India Housing and Land Development Trust Ltd v CIT Supreme CourtHelps department
  My client is a company whose memorandum says it exists to develop and let property. Does that alone make its rent business income?
  No. The heads of income are mutually exclusive and are fixed by the source from which the income is derived, so rent from shops and stalls is income from property whatever the company's objects say. The Supreme Court held that the character of the income is not altered because it is received by a company formed with the object of developing and setting up markets, and that if income falls within a specific head the fact that it may indirectly be covered by another head does not make it taxable under the latter.
• Calcutta Co Ltd v CIT Supreme CourtHelps taxpayer
  I sell developed plots and book the whole sale price on the mercantile basis, but I still have to build the roads and drains I promised the buyers. Can I deduct the estimated cost of that work now?
  Yes. The Supreme Court allowed the land developer to debit Rs 24,809, the estimated cost of development work it had covenanted in the sale deeds to carry out, in the year it credited the full sale price of Rs 43,692. The undertaking in the deeds was unconditional, so the liability had accrued even though nothing had been spent. Difficulty in estimating the amount was no reason to call an accrued liability contingent. Even if no clause of section 10(2) of the 1922 Act covered it, the deduction was allowable under section 10(1) — now section 28 read with section 37(1).
• Punjab Distilling Industries Ltd v CIT Supreme CourtHelps department
  I collect a refundable deposit from customers on top of the price, and I keep whatever is not claimed back. Is that deposit taxable as a trading receipt when I collect it?
  Yes, on these facts. The Supreme Court held that sums the distiller collected from wholesalers as an 'empty bottles return security deposit', over and above the government-fixed price of the bottles, were trading receipts assessable under section 10 of the 1922 Act (now section 28). They were an integral part of each sale transaction and in substance an extra price for the bottles. They could not be security deposits because the wholesaler was under no obligation to return the bottles, so there was nothing to secure. The book entry in a separate ledger did not change their character.
• Badridas Daga v CIT Supreme CourtHelps taxpayer
  My employee embezzled money from the business bank account. Can I write that off for tax?
  Yes, as a trading loss, provided the loss springs from the way the business is carried on. The Court refused the claim as a bad debt and refused it as expenditure, and then allowed it under the charging provision itself, because profits of a business cannot be computed without taking account of losses incidental to that business. The route matters: this is a deduction in computing profits, not an item of expenditure under s.37(1).
• E.D. Sassoon and Company Ltd v CIT Supreme CourtCuts both ways
  I sold my managing agency part-way through the year. Is the year's commission split between me and the buyer, so that I am taxed on the months I actually worked?
  No. By a majority the Supreme Court answered the referred question — whether the managing agency commission was liable to be apportioned between the assignor and the assignee — in the negative. Under clause 2(d) of the agreements the commission was due yearly on 31 March and payable only after the shareholders passed the annual accounts, so the contract of service was entire and indivisible and nothing was payable for a broken period. Since no income had accrued to the Sassoons when they transferred the agencies, there was nothing to apportion. Jagannadhadas J dissented.
• Chainrup Sampatram v CIT Supreme CourtCuts both ways
  My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
  No to the first and no to the second. The Supreme Court held that valuing closing stock is only a step in working out the year's trading result, not a source of profit, so no 'notional profit' arises from the valuation and appreciation in unsold stock is not brought to charge — the rule is cost or market price, whichever is lower. But the Court also held that the source of business profits is the business and they accrue where the business is carried on. The silver lying at Bikaner was still the Calcutta firm's unsold stock, so the whole profit accrued at Calcutta and the exemption failed. The appeal was dismissed.
• Sir Kikabhai Premchand v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  I took silver and shares out of my own business and settled them on trusts. Must I credit the business with their market value on the day I took them out?
  No, on these facts. By a majority of four to one the Supreme Court held that the withdrawal was not a business transaction: the business made no profit, sustained no loss and the assessee derived no income from it. He was entitled to enter the assets at cost, so that the opening and closing entries cancelled out. The Court refused to separate a business from its sole owner and to introduce, by a fictional sale, a profit that did not exist. It also rejected the argument that the State was deprived of a potential profit, because each year is a self-contained accounting period and only income of that year can be taxed. Bhagwati J dissented.
• Souvenir Developers (I) Pvt Ltd v Union of India High CourtHelps taxpayerHigh Courts differ
  My company is not a share dealer at all, but it lost money on exchange-traded F&O. The AO says the Explanation to s.73 makes it speculation loss. Can I set it off against my ordinary business income?
  In the Bombay High Court, yes. Once a derivative transaction falls inside clause (d) of the proviso to s.43(5) it is not a speculative transaction at all, and the Court held that neither s.73(1) nor the Explanation to s.73 applies to the loss, so it is an ordinary business loss set off under s.70 against any other business income. The Court expressly recorded that the Delhi High Court in DLF Commercial Developers has taken the contrary view.
• CIT v Green Infra Ltd High CourtCuts both waysValidity unconfirmed
  The officer says nobody would pay this premium for shares in my company. Is that a ground for taxing it under s.68?
  No. Even if the premium at which the shares are issued defies commercial prudence, the receipt cannot be assessed as an unexplained credit where the identity of the payer, the genuineness of the transaction and the capacity of the subscriber are not disputed. Whether to subscribe at a heavy premium is the shareholder's decision, not the officer's.
• Commissioner of Income Tax v M/s. Sane & Doshi Enterprises High CourtHelps taxpayer
  I am a builder and I let out the flats I could not sell, which sit in my books as closing stock. Is that rent business income, and can I claim the section 24 deductions including interest on the money that built them?
  It is house property income, and yes. The Bombay High Court dismissed the Revenue's appeals and upheld the finding that rent from unsold units of a commercial complex was assessable under the head income from house property with the section 24(a) deduction. It held that the character and nature of the income is decisive, not the treatment the assessee gives it in its books, so a consolidated profit and loss account did not convert the receipt into business income. It also upheld the provision of Rs 45 lakhs for incomplete work under the project completion method, and the deduction under section 24(b) of interest paid on partners' capital, where that capital had gone into constructing the premises that were let.
• CIT v Darshan Securities Pvt Ltd High CourtHelps taxpayerValidity unconfirmed
  The AO says my company's gross total income does not 'consist mainly' of the four excluded heads because he has left the share loss out of the business head. Is that the right computation?
  No. To decide whether the exception in the Explanation to s.73 applies you compute gross total income under the normal provisions of the Act, taking into account both the income and the loss under the head profits and gains of business or profession, and only then ask whether what results consists mainly of interest on securities, house property, capital gains and other sources. Section 73(1) is applied after the Explanation, not before it, because to apply the bar first in order to decide whether there is a speculation business at all would reverse the order of the statute.
• CIT v Shri Bharat R. Ruia (HUF) High CourtHelps department
  My derivative loss is for a year before assessment year 2006-07. Can I argue that clause (d) of the proviso to s.43(5) is clarificatory and covers it?
  No, in the Bombay High Court. Exchange-traded derivative transactions settled otherwise than by actual delivery are speculative transactions within the main part of s.43(5), and clause (d) of the proviso, inserted by the Finance Act 2005, operates prospectively from 1 April 2006 only. For years up to assessment year 2005-06 the loss is speculation loss.
• CIT v Lokmat Newspapers Pvt Ltd High CourtHelps taxpayer
  My company has brought forward speculation loss from the Explanation to s.73. This year it made a profit on delivery-based share sales. The AO says the deeming fiction works only on losses. Can I set the brought forward loss against that profit?
  Yes. Once the Explanation to s.73 deems a company to be carrying on speculation business, the fiction attaches to the business, not to the result, so profits from that same business - including delivery-based share sales - are profits of a speculation business against which brought forward speculation loss can be set off under s.73(2). The Revenue's argument that the fiction applies to a loss but not to a profit would read a restriction into the Explanation that Parliament did not enact.
• CIT v Neha Builders (P) Ltd High CourtHelps departmentValidity unconfirmed
  I am a builder and I let out an unsold floor of a building that sits in my closing stock. Is the rent house property income or business income?
  Business income. The Gujarat High Court answered the reference in favour of the Revenue and held that the Tribunal was wrong to allow the assessee's claim. Income derived from property is ordinarily income from property, but where the property is used as stock-in-trade it partakes the character of stock, and income derived from stock is income from business. The company was incorporated to purchase, lease, acquire, sell or let out the buildings it constructed; it had shown the building in closing stock and debited maintenance expenses to the profit and loss account; and every part of the building except the let-out ground floor had been sold. It was stock-in-trade from the beginning.
• ACIT v Rcube Projects Pvt Ltd ITATHelps taxpayerValidity unconfirmed
  My client holds commercial space at a metro station under a build-operate-transfer concession and sub-lets it. The officer says it is a deemed owner under section 27 and must offer the receipts as house property. Is that right?
  Not on this decision. The Tribunal held that section 53A of the Transfer of Property Act, on which the deeming provision draws, operates in relation to a transfer of immovable property by way of a registered document where possession has been taken in part performance of the contract, and that a build-operate-transfer concession has none of those characteristics — the building always belongs to the grantor and the concessionaire holds only a licence. There being no basis to treat the concessionaire as a deemed owner, the receipts were business income and not income from house property.
• Kavita Marketing Pvt Ltd v Income Tax Officer ITATHelps taxpayer
  My leave and licence agreement splits the receipt into rent and separate facility charges for housekeeping and security. Can the officer tax the facility charges as house property income too?
  No, not where the services are actually rendered. The Mumbai Tribunal held that facility service charges of Rs 9,60,000 received for housekeeping, caretaker and security were business income, not income from house property. Applying CIT v Sarabhai (P) Ltd, where an owner carries on activities on the property that yield profits not from ownership but from the use of the property, those profits are business income. The Revenue's argument that the services were routine and of the kind a landlord would provide was held to be of no consequence, since it was not disputed that the services were in fact rendered and that the assessee had incurred Rs 10,11,900 on them. The rent itself remained assessable as house property income.
• In re Morgan Stanley and Co. International Limited Advance RulingHelps taxpayerSuperseded by amendment
  We are a UK company registered as an FII, trading index and stock futures and options on Indian exchanges through brokers and custodians. Is that income taxable in India?
  No. The Authority ruled that the income derived by Morgan Stanley and Co. International Limited, a UK resident, from trading in exchange-traded derivative instruments in India would not be taxable in India under the India-UK agreement. It held first that income from derivative trading is business income and not capital gains, derivative contracts being excluded from the definition of capital asset. Business profits are taxable in India only through a permanent establishment, and the brokers, custodians and bankers the applicant used were independent agents acting for many clients in the ordinary course of their business, so no permanent establishment arose under article 5. The ruling binds only that applicant.
• In re Fidelity Advisor Series VIII Advance RulingHelps taxpayerSuperseded by amendment
  Our US fund buys and sells Indian shares through local brokers and a custodian bank. Are our gains business profits or capital gains, and does the custodian give us a permanent establishment?
  Business profits, and no permanent establishment - so the fund won. The Authority ruled that the gains arising to Fidelity Advisor Series VIII from sales of its portfolio investments in India were its business profits covered by article 7 of the India-US convention, the shares and securities being held as business assets. It further ruled that the fund had no permanent establishment in India under article 5: it had no branch, office, employee or dependent agent here, and Standard Chartered Bank, its domestic custodian, was an independent agent within paragraph 5 of article 5. Without a permanent establishment the fund was not taxable in India under the convention. The ruling binds only that applicant.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.