ITAT: S. 40(a)(ia), 2(28A)

DCIT vs M/s Cargill Global Trading (I) (P) Ltd (ITAT)

Dated: 9th April 2011

S. 40(a)(ia), 2(28A) – Disallowance - Payments to non-resident subject to tds -Interest - Difference between definition of interest in “Interest-tax Act” and that in “Income-tax Act” - Discounting charges in respect of bill discounting transactions with Cargill Financial Services Asia Pte. Ltd., Singapore (CFSA); and Cargill TSF Asia Pte. Ltd., Singapore (CTSFA), were not in the nature of interest, as defined u/s 2(28A) or Double Taxation Avoidance Agreement (DTAA). The income is in the nature of business profits, which is not taxable in India in the absence of the permanent establishment (PE) of buyer of bills of exchange.

2. Pragati Construction Co. vs DCIT (HC)

Dated: 31st May 2011

"Whether, on the facts and in the circumstances of the case the ITAT has erred in law in disallowing the loss of Rs 31.05 lakhs claimed by the assessee as a trading loss in its business of purchase and sale of flats." Held, Yes

Extracts

The assessee, in the first instance, before the Assessing Officer had claimed that the sum of Rs.31.05 lacs should be allowed as bad debts. The Assessing Officer after dwelling into the facts came to the conclusion that the amount in issue could not be written off as a bad debt as it had not been shown as a trading receipt either in the previous year in issue or prior to that, for the purposes of either swelling its profits, or to reduce its losses in any of the years, including the previous year in issue. The Assessing Officer, therefore, concluded by his order dated 31.05.1991, that the amount in issue, was paid by the assessee to PCL as an advance. This being so, he came to the conclusion that, the assessee's case was not covered under the provisions of Section 36(1)(vii) of the I.T. Act since the amount paid to PCL could not be treated as a debt in the first place and hence, the amount in issue, could not be allowed to be deducted even if the assessee had written it off in its accounts. Therefore, the sum of Rs.31.05 lacs was added in the assessee's income.

Being aggrieved, the assessee preferred an appeal with the Commissioner of Income Tax (Appeals) [hereinafter referred to as 'CIT(A)']. Before the CIT(A) even though the assessee had raised a ground, in the alternative, that the amount in issue should be treated as a trading loss, it went on to seek a deduction on the ground that it was a bad debt, in respect of which it ought to be allowed a deduction under the provisions of Section 36(1)(vii) of the I.T. Act.

As a matter of fact, by a letter dated 17.12.1991, the assessee had sought a modification in the grounds of appeal as filed initially with the CIT(A). The ground in the modification application/letter, as extracted in the order of the CIT(A), suggests that the assessee gave up its alternative ground that the amount in issue be treated as a trading loss. Therefore, the CIT(A) after perusing the record came to the conclusion that since the assessee had not reflected the amount in issue, as income either in the previous year in issue or in the earlier year in which it was sought to be written off, the assessee's claim for deduction was not maintainable. The CIT(A) analysis was based on the amendment brought about in Section 36(2)(i) by the Direct Taxes law (Amendment) Act, 1987 w.e.f. 01.04.1989. By virtue of the said amendment clause (i) of Section 36(2) of the I.T. Act was substituted for the following:

"No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee."

The point in time when cheque in the sum of Rs.44.50 lacs was remitted by the assessee to the PCL, it was not in a position to allot any space in the proposed multi-storey complex. The amount was remitted on 12.03.1982 which is the very date on which the plot was auctioned. It has emerged from the record that PCL had joined issue with the DDA with regard to defects in the control drawings. This dispute obtained in May 1982 and even thereafter. It was precisely for this reason that a suit bearing no. 766/1982 was filed in 1982. During the pendency of the said suit, a second suit being CS(OS) No. 993/1983 was filed. This suit is pending even today. Commercial space, if any, could have been booked by PCL only after it had acquired the control drawings. The record also shows that any sale of commercial space had to have the permission of the DDA for which a fee of Rs.100 had to be paid. Curiously, the assessee has trotted out an agreement evidently executed between itself and PCL dated 02.06.1982. There was admittedly no written agreement in existence on 12.03.1982, when initially a sum of Rs.44.50 lacs was paid by the assessee to the PCL. This amount, as noticed above, got adjusted and consequently, what was shown in favour of the assessee was of sum Rs.36.55 lacs. This sum after refund of Rs.5.50 lacs got scaled down to Rs.31.05 lacs; which is presently the amount in issue. The aforesaid facts do show therefore that the amount in issue was not expended to purchase a commercial space in a proposed building. The purpose of payment was subsequently morphed to suit the situation. Thus the condition, required to be fulfilled to sustain a deduction under Section 37 of the I.T. Act that the expense should be incurred for the purpose or should be incidental to the business of the assessee is not fulfilled in the instant case.