Section 37

Section 37 — the law in short

What the courts have decided on section 37, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Sharp Business System v CIT-III Supreme CourtHelps taxpayerValidity unconfirmed
  Is a lump sum non-compete fee paid to keep a former partner out of the market capital expenditure, or is it deductible as revenue expenditure under s.37(1)?
  On these facts it was revenue expenditure and deductible under s.37(1). Because the payment was held to be on revenue account, the alternative claim for depreciation on a non-compete right as an intangible asset did not arise and was left undecided.
• 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.
• Pride Foramer S.A. v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  A non-resident had no contract in India for several years but kept trying for one. Had its business ceased, so that expenditure and unabsorbed depreciation fall away?
  No. A business going through a lean period which could be revived if circumstances permitted is a lull in business, not a cessation. The test is the assessee's conduct judged as a prudent businessman would judge it, not whether a contract was actually obtained. Expenditure of the lull years remained deductible and could be set off, and unabsorbed depreciation carried forward.
• CIT v Ramesh Electric and Trading Co. High CourtHelps department
  The Tribunal did not deal with some of my grounds. Can I get its order rectified under section 254(2) so it looks at them again?
  No, not on that ground alone. The Bombay High Court held that section 254(2) gives the Tribunal a power to amend, not to review. The mistake must be obvious and patent, not one that has to be established by a long process of reasoning on a point on which two views are possible. Failure to consider an argument advanced by a party is not an error apparent from the record, though it may be an error of judgment. The Tribunal, having decided on the merits that the commission was not genuine, had no jurisdiction to reopen the whole dispute and allow the deduction.
• Society for Human Transformation and Research v ITO (Exemptions) ITATHelps taxpayerValidity unconfirmed
  My trust gave interest-free or low-interest advances to entities connected with its trustees. The Assessing Officer has treated the interest not charged as a benefit to specified persons, disallowed it under s.40A(2)(a) and denied exemption on the whole income. Can he do that?
  Not on this record. Where the counterparties are themselves institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not establish diversion of charitable funds for private benefit, and s.13(1)(c) is not attracted. Section 40A(2)(a) cannot be used at all: it disallows excessive or unreasonable expenditure paid to a related party in the course of business or profession, and does not authorise an addition for interest the trust failed to charge.
• ACIT v Lurgi India International Services Pvt Ltd ITATHelps taxpayerValidity unconfirmed
  Our Indian company's shares moved from one group company to another and the ultimate parent abroad did not change. The officer says 97 per cent of the shareholding changed and denies the brought forward losses. Which way does the Tribunal go?
  On these facts the Tribunal decided with the taxpayer, but it supplied almost no reasoning of its own. The Delhi Bench dismissed the Revenue's appeal in a single paragraph, finding merit in the assessee's submissions and no material from the Revenue contradicting the Commissioner (Appeals). What it left standing is the Commissioner (Appeals)'s reasoning that s.79 stresses beneficial ownership, that the ultimate holding company remained the same throughout the restructuring, and that CIT v AMCO Power Systems Ltd applied. The Revenue's ground founded on Yum Restaurants failed with the appeal, but the Tribunal did not address that decision.
• M/s. The Plantation Corporation of Kerala Ltd and M/s. The Velimalai Rubber Co. Ltd v ACIT, Kottayam ITATHelps departmentValidity unconfirmed
  I am a rubber planter. I cleared an old unproductive block and replanted it, and claimed the cost under rule 7A(2). The Assessing Officer has disallowed it. Is there anything I can do?
  Not in Kerala. The Cochin Tribunal dismissed both appeals, holding itself bound by the Kerala High Court in Rehabilitation Plantations Ltd v CIT, which construed rule 7A(2) as covering only infilling — the replacement of dead or useless trees within an existing yielding area — and not the replanting of an area after cutting and removing an old plantation, and held that expenditure on planting and developing a plantation up to maturity must be capitalised. Rule 7A itself makes 35 per cent of the income from the specified rubber products taxable as business income and leaves 65 per cent as agricultural income for the State.

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.