Important FAQs with Case Laws under Various heads of Income:

♣ Some Important Case Laws From INCOME FROM SALARIES :-
1. Whether the amount received by the employee on cessation of employment with his Employer will be exempted from tax under section 17(3)(i) of the Income-tax Act?

Relevant Case Law – CIT v. Shyam Sundar Chhaparia (2008) 305 ITR 181 (MP)

Relevant Section – 17(3)

The assessee after his retirement was granted an amount of Rs. 27,50,000 as a special Compensation in lieu of an agreement for refraining from taking up any employment activities Or consultation which would be prejudicial to the business/interest of his employer.
The assessee claimed that it was a non-taxable receipt being the compensation for not taking up any competitive employment under a restrictive covenant. The Assessing Officer did not accept the claim of the assessee on the grounds that (i) the decision of the Supreme Court relied on by the assessee was that of an agency whereas the case of the assessee was that of one who was in service, and (ii) section 17(3)(i) was squarely applicable to the case of the assessee.
The Commissioner (Appeals) held that as there was restriction for the assessee not to work in business of any type and anywhere, the compensation was received in lieu of loss of future work and was a capital receipt. The Tribunal held in favour of the assessee.
The High Court held that the assessee retired from service on attaining the age of superannuation and hence there was severance of the master-servant relationship and there was no material to suggest that there existed a service contract providing therein a restrictive covenant preventing thereby the assessee from taking up any employment or activities on consultation which would be prejudicial to the business/interest of his employer.
Therefore, it could not be termed as profit in lieu of salary because it was not compensation due to or received by the assessee from his employer or partner- employer at or in connection with the termination of his employment. Thus, the Commissioner (Appeals) and the Tribunal rightly held that the amount could not be added for the purpose of income-tax.
2. Can reimbursement of expenditure on medical treatment taken by the assessee, who was a member of the Legislative Assembly, be taxed as perquisite under section 17(2)(iv)?

Relevant Case Law – CIT v. Shiv Charan Mathur (2008) 306 ITR 126 (Raj)

Relevant Section – 15 & 17(2)

Notice under section 148 was issued to the assessee, at the relevant time a sitting MLA and former Chief Minister of the State, for the reason that he received a sum from the State Government as reimbursement of medical expenses which amount was liable to be taxed under section 17 but had not been offered for taxation.
The contention of the assessee was that the amount received by MPs and MLAs was not taxable under the head “Salary” but under the head “Income from other sources”.
The High Court held that MLAs and MPs are not employed by anybody rather they areelected by the public, their election constituencies and it is consequent upon such election that they acquire constitutional position and are in charge of constitutional functions and obligations.
The remuneration received by them, after swearing in, cannot be said to be“salary” within the meaning of section 15 of the Income-tax Act, 1961. The fundamental  requirement for attracting section 15 is that there should be a relationship of employer and employee whether in existence or in the past.
This basic ingredient is missing in the cases of MLAs and MPs. When the provisions of section 15 were not attracted to the remuneration received by the assessee, section 17 could not be attracted as section 17 only extends the definition of “Salary” by providing certain items mentioned therein to be included in salary.
Thus, the reimbursement of medical treatment taken by the assessee, who was a member of the Legislative Assembly for open heart surgery conducted abroad was not taxable as perquisite under section 17(2)(iv).
♣ Important Case Law From INCOME FROM HOUSE PROPERTY :-

1. Is the rental income from the sub-letting of a building taken on lease taxable under the head ‘income from other sources’ or ‘income from house property’ or ‘income from business?

Relevant Case Law – Harikrishna Family Trust v. CIT (2008) 306 ITR 303 (Guj.)

Relevant Section – 22

A lease deed was executed between the owners of a property partly constructed and the assessee-trust. The trust took on lease the said property at a monthly lease rent of Rs.4,000.The beneficiaries were dependent relatives of the co-owners of the property.
The trust, after completing construction work of the balance portion of the building, rented out the whole premises and the rental income was shown as income from property and originally assessed as such.
Subsequently, by virtue of action under section 263 of the Income-tax Act, 1961, the CIT set aside the order. After enquiry the Assessing Officer assessed the income as business income but the CIT(A) on appeal held that it was income from other sources. The Tribunal held that the amount was assessable as business income.
The High Court held that the assessee-trust was merely a lessee of the property and had sub-let the property after completing the partly constructed building which the assessee-trust had taken on lease. In the circumstances, in the absence of the assessee-trust being the owner of the property, there could be no question of taxing the rental income from the said property in the hands of the assessee-trust under the head “Income from house property”.
The assessee-trust at no point of time indulged in any systematic activity so as to treat the assessee as having indulged in business or a venture in the nature of business. On facts the income was liable to be taxed as “Income from other sources”.
♣ Some Important Case Laws From INCOME FROM CAPITAL GAINS :-

1. Can the loss on account of forfeiture of share application money be treated as short-term capital loss?

Relevant Case Law – DCIT v. BPL Sanyo Finance Ltd. (2009) 312 ITR 63 (Kar.)

Relevant Section: 45

The assessee company is engaged in non-banking financial business and applied for allotment of one lakh equity shares of the IDBI in response to the public issue of shares and remitted the share application money. The IDBI allotted 89,200 shares to the assessee as against one lakh equity shares applied for.
Thereafter, the IDBI called the assessee to pay the balance sum for issuance of shares in its favour. As the assessee company failed to remit the balance outstanding allotment money, the IDBI cancelled the allotment and forfeited the share application money. The assessee claimed it as a short term capital loss in its return of income. The Assessing Officer disallowed the claim. The Commissioner(Appeals) confirmed the order passed by the Assessing Officer. The Tribunal allowed the appeal filed by the assessee.
The High Court held that consequent to the assessee’s default in not paying the balance of money on allotment, its right in the shares stood extinguished on forfeiture by the IDBI. The loss suffered by the assessee, i.e., the non-recovery of share application money was consequent to the forfeiture of its right in the shares and was to be understood to be within the scope and ambit of transfer. It would amount to short-term capital loss to the assessee.
2. Can the transfer of capital asset by a company to its wholly owned subsidiary company be regarded as transfer and, therefore, attract levy of capital gains tax?

Relevant Case Law – CIT v. Coats of India Ltd. (2009) 315 ITR 215 (Cal.)

Relevant Section: 47

The entire packaging coating units of the assessee was transferred to CCIPL for a sum of Rs. 29,89,87,000 by way of adjustment and issue of equity shares of Rs.10 each in CCIPL credited as fully paid-up share capital. In the process of such transfer a surplus amount of Rs. 19,14,55,804 was credited to the accounts of the assessee over and above the book value of the assets actually transferred to CCIPL.
The assessee claimed that this excess amount was not taxable on the ground that the assessee transferred the assets of the company to its wholly owned subsidiary company. It was further stated that the unit was transferred with all its assets and, therefore, the value of each of the items could not be determined separately as the sale was made on slump basis and, accordingly, the actual profit from each asset could not be determined.
The Tribunal held that the entire packaging coating business undertaking itself constituted a distinct “capital asset” under section 2(14) of the Income-tax Act, 1961, for which consideration was not determined with reference to individual assets but with reference to the capitalised value of the said business, that the proviso to section 47(v) and (iv) was applicable only if, in the hands of the transferee the capital asset on its transfer constituted stock-in-trade, that such packaging coating business on its transfer was not accounted for in the books of CCIPL as stock-in-trade and that, therefore, since the entire paid-up capital of CCIPL as on December 31, 1997, was held by the assessee the transfer of the undertaking was covered by the provisions of section 47(iv) and, therefore, no income under the head “Capital gains” was assessable in the assessment year 1998-99
The High Court held that the Tribunal was right and no capital gains arose.
3. Can the actual sale consideration recorded in the agreement to sell of the asset and received by the assessee be substituted by the value as adopted by the District Valuation Officer under section 55A of the Act for the purpose of computing the capital gains chargeable to tax ?

Relevant Case Law – Dev Kumar Jain v. Income-tax Officer (2009) 309 ITR 240 (Del.)

Relevant Section – 55A

The assessee declared income by way of capital gains arising from the sale of property. The Assessing Officer was of the view that the sale price disclosed in the agreement to sell was Low and made a reference to the District Valuation Officer under section 55A for determining the fair market value of the property on the date of sale.
The District Valuation Officer determined the value of the plot on the date of the sale and this was communicated to the assessee. The Tribunal accepted the stand of the Revenue that the actual sale consideration recorded in the agreement to sell should be substituted by the value arrived at by the District Valuation Officer under section 55A.
The High Court held that section 55A of the Income-tax Act, 1961, applies only where the Assessing Officer is required to ascertain the fair market value of a capital asset. Section 45(1A) stipulates that capital gains shall be computed by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset, the amount of expenditure incurred wholly and exclusively in connection with such transfer as also the cost of acquisition of the asset and the cost of any improvement thereto.
A combined reading of section 45(1A) and section 48 shows that when a sale of property takes place, the capital gains arising out of such a transfer has to be computed by looking at the full value of the consideration received or accruing as a result of such transfer.
The expression “full value of sale consideration” is not the same as “fair market value” as appearing in section 55A. Thus, for the purpose of computing capital gains there is no necessity for computing the fair market value. Further, there was nothing on record to show that the assessee received consideration for the sale of the property in excess of that which was shown in the agreement to sell.
Thus, the actual sale consideration recorded in the agreement to sell and received by the assessee could not be substituted by the value as adopted by the District Valuation Officer under section 55A for the purpose of computing the capital gains chargeable to tax.
4. Can exemption under section 54(1) be claimed for the purchase of more than one residential premises?

Relevant Case Law – CIT v. D. Ananda Basappa (2009) 309 ITR 329 (Kar.)

Relevant Section – 54

The assessee a Hindu undivided family sold a residential house. The assessee purchased two residential flats adjacent to each other from taking two separate registered sale deeds in respect of the two flats situate side by side purchased on the same day. The vendor had certified that it had effected necessary modifications to the two flats to make it one residential apartment.
The assessee sought exemption under section 54. The assessing authority gave exemption for capital gains to the extent of purchase of one residential flat. It was found by the Inspector that the residential flats were in the occupation of two different tenants.
The Assessing Officer held that section 54(1) of the Act does not permit exemption for the purchasers for more than one residential premises. The Commissioner (Appeals) confirmed the order of the assessing authority. The Tribunal set aside the order of the Commissioner (Appeals) and held that the flats purchased by the assessee had to be treated as one single residential unit and that the assessee was entitled to full exemption.
The High Court held that it was shown by the assessee that the apartments were situated side by side. The builder had also stated that he had effected modification of the flats to make them one unit by opening the door in between the two apartments. The fact that at the time when the Inspector inspected the premises, the flats were occupied by two different tenants was not a ground to hold that the apartment was not one residential unit.
The fact that the assessee could have purchased both the flats in one single sale deed or could have narrated the purchase of two premises as one unit in the sale deed was not a ground to hold that the assessee had no intention to purchase two flats as one unit. The assessee was entitled to the exemption under section 54.
5. Whether the assessee, in the computation of long-term capital gains, is entitled to deduction under section 54F of the Income tax Act in respect of investment in modification/expansion of an existing residential house?

Relevant Case Law – Mrs. Meera Jacob v. Income-tax Officer (2009) 313 ITR 411 (Ker.)

Relevant section – 54F

The Tribunal took the stand that exemption is available only when the investment is in the construction of a house and not for investment in modification or renovation. Admitted       facts are that the assessee had a fairly big house to which the assessee made addition of 140 sq. meters of plinth area.
However, it is the conceded position that the assessee has not constructed any separate apartment or house. Section 54F does not provide for exemption on investment in renovation or modification of an existing house.
On the other hand, construction of a house only qualifies for exemption on the investment. Even addition of a floor of a self contained type to the existing house would have qualified for exemption.
However, since the assessee has only made addition to the plinth area, which is in the form of modification of an existing house, she is not entitled to deduction claimed under section 54F of the Act.
♣ Important Case Law From INCOME FROM OTHER SOURCES :-

1. Whether the Tribunal was right in law in holding that the income from lease of hospital,after giving a finding that the hospital basically remains a business asset, should be assessed as ‘Income from other sources’ and not as ‘Business Income’?

Relevant Case Law – Orient Hospital Ltd. v. DCIT (2009) 315 ITR 422 (Mad.)

Relevant Section – 56(2)(iii)

The assessee-company constructed a hospital building and ran the hospital. As the assessee-company suffered loss in running the business, it leased the hospital building along with equipment and machinery to A on a monthly lease of Rs.3,00,000 per month and claimed this sum as business income against which earlier business losses were set off.
The Assessing Officer treated the income from lease of the hospital as “Income from other sources” and disallowed set off of the earlier years’ business losses. The Commissioner (Appeals) allowed the assessee’s appeal, but the Appellate Tribunal, while holding that the lease income was to be treated as income from other sources, allowed the lease income to be set off against the previous years’ losses.
The High Court held that income derived out of the lease of property and furniture as in this case could not be treated as income from profits and gains of business or profession. The finding given by the Tribunal that the income was income from other sources was correct.
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Yash Shah

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Source: tax guru.in