Query No. 1: (Depreciation on income assessed under other sources)
The main object of the company is to carry on the business of the construction. However, construction business was not carried on. The querist has purchased the wind mill and received the charges for use of electricity. Whether income can be assessed a business income or income from other sources. If income is assessed as income from other sources, the depreciation is allowable?
From the fact, it is clear that the company has not started construction business but received electricity charges by letting out wind mill; which is presumed to be not business of the company.
So whatever electricity charges received would be assessed as “Income from other sources” under section 56(2)(ii) of the Income tax Act, 1961.
Section 57 of the Act, provides that the income chargeable under the head “Income from other sources” shall be computed after making deductions mentioned in that section.
Clause (ii) of section 57 provides for deduction, which reads as under:
“in the case of income of the nature referred to in clauses (ii) and (iii) of sub section (2) of section 56, deductions, so far as may be, in accordance with provisions of sub clause (ii) of clause (a) and clause (c) of section 30, section 31and sub sections (1) and (2) of section 32 and subject to provisions of section 38”.
Thus, the company is entitled for depreciation allowance on the said income.
Query No. 2: (Single Transaction in the course of business)
The main object of the company is leasing of the premises. However, the company is having only one property as investment which is shown in the books of account. The said property is leased to a third party, whether the income of leasing of premises can be assessed as income from house property or business income. If the consolidated agreement is entered into for leasing of property and furniture can the AO bifurcate the expenses as a income from other sources and property income.
The main object of the company is leasing of the premises. The company is having only one property shown as investment in the books of account and the said property is given on lease to third party as per the object of the company. Therefore, income from leasing is to be shown under the head “Profits and gains of business or profession”.
Lord Clyde L P. observed in Balgownie Land Trust Ltd. v. I.T. [14 TC 684} “A single plunge may be enough, provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade, —–“ quoted with approval in G. Venkataswamy Naidu & Co. v. CIT [35 ITR 594 (SC)]
If it is proved with other surrounding circumstances that leasing of premises is a business, then, the Assessing Officer has no right to bifurcate income, if it is through consolidated agreement with furniture.
Query No. 3: (Developers position on renting & selling of flats)
Assessee is a developer of housing complex. He intends to sell the all the flats in a building constructed. However latter on instead of selling flats assessee gave them on the rent. Under which head of income such rental income would be taxable? Further if sells such flats after 7/8 years to same tenants. Whether sale proceeds would be taxed as business income or capital gains?
Though, the assessee being a developer and developed housing complex with intention to sell the flats. Due to circumstances, he could not sell the flats and therefore he has rented out the same,. The income from renting outould be assessed under the head “Income from house property”.
Later on, if he disposes of the flats after 7/8 years to the same tenants, the gain from such flats would be assessed as business income or capital gains, would depend on the facts. If the flats are shown in the books of account as stock-in-trade, it would be assessed as business income. But, if those flats are shown as investment, then, it would be assessed as capital gains.
Query No. 4: (Applicability of section 179 of the I.T. Act)
AO passes an order u/s. 179(1) of the Act whereby directors of the concerned Pvt. Co. are jointly and severally held liable for payment of outstanding demand of such Pvt. Co. in which they are directors. Can such directors prefer a writ petition before the Hon’ble High Court challenging the said order? Whether, before initiating recovery proceedings u/s. 179 against directors in respect of dues of a company, it is essential for the revenue to establish that such recovery cannot be made against the company? Whether directors can be made liable for such tax dues of a company even if such non recovery can not be attributable to any gross neglect, misfeasance or breach of duty on the part of directors?
Section 179(1) reads as under:
“Notwithstanding anything contained in the Companies Act, 1956 where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company can not be recovered, then, every person who was director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company”
This sub section was tested by the Bombay High Court in Dinesh T. Tailor v. TRO [326 ITR 85], wherein the Court has observed as under:
“By sub section (1) of section 179, every person who is director of a private company at any time during the relevant previous year is jointly and severally liable for the payment of tax due from the company, if such tax cannot be recovered. Though the liability of the directors is made joint and several the provision is attracted only when tax can not be recovered from the company. It is only if the tax cannot be recovered from the company that every person who was director of the company at any time during the relevant previous year becomes jointly and severally liable”.
However, the Department has to comply the condition precedent to recovery as held by the Bombay High Court in Madhavi Kerkar v. ACIT [403 ITR 157] The Court, in the said judgment has held as under:
“That the Department acquired or get jurisdiction to proceed against the directors of the private limited company, only after it had failed to recover the dues from the company, it was a condition precedent for the Assessing Officer to exercise jurisdiction under section 179(1) against the director of the company. The jurisdictional requirement was not satisfied by a mere statement in the order that recovery proceedings had been conducted against the defaulting company but it had failed to recover its dues. Such a statement should be supported by mentioning briefly the types of efforts made and the results. The notice under section 179(1) did not indicate or give any particulars in respect of the steps taken by the Department to recover the tax dues of the defaulting company and failure thereof. In the letter sent in response to the notice, questioning the jurisdiction of the Department, the petitioner had sought details of the steps taken by the Department to recover the tax dues of the defaulting company and failure thereof. In the letter sent in response to the notice, questioning the jurisdiction of the Department, the petitioner had sought details of the steps taken by the Department and had pointed out that the defaulting company had assets of over Rs. 100 crores. Admittedly, no particulars of steps taken to recover the dues from the defaulting company were communicated to the petitioner nor indicated in the order. At no time had the petitioner been given a chance to meet the Department’s case that it had taken steps to recover the amount from the defaulting company so as to meet the jurisdictional condition precedent before passing of an order under section 179(1). The order was set aside since the condition precedent was not satisfied….”.
Thus, it is necessary that revenue should prove first that no recovery would be made from the company.
Query No. 5: (AO has no jurisdiction to change book profit)
Assessee changed its method of providing depreciation from ‘Straight Line Method (SLM) to “Written Down Value (WDV) during the year under consideration which resulted into shortfall in depreciation. Such shortfall was charged to P & L Account. AO disallowed claim of such additional depreciation on the count that Sec. 205 of the Companies Act does not entitled an assessee to claim depreciation for earlier years placing reliance on “McDowell and Co. v. CTO – 154 ITR 148”. Whether the change in method of accounting for depreciation was in accordance with Accounting Standards issued under the Companies Act? Whether AO has jurisdiction to go behind the “book profits” shown in P & L Account except to the extent of prescribed adjustments once it is found that books of accounts are certified by authorities under the Companies Act? What is the treatment of income on account of change in the method of depreciation? What is the treatment of additional claim / write back of depreciation in the books of account upon change in the method calculating the same?
Para 15 of Accounting Standard (AS 6) : “Depreciation Accounting” as per Companies (Accounting Standards) Rules, 2006 reads as under:
“The method of depreciation is applied consistently to provide comparability of the results of the operation of enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.. When such a change in the method of depreciation is made, depreciation is recalculated. In accordance with the new method from the date of asset coming into use. The definition or surplus arising from retrospective re-computation of depreciation in accordance with the new method is adjusted in the account in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency is charged in the statement of profit and loss account. In case the change in the method result in surplus, the surplus is credited to the statement of profit and loss. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed”..
So the assessee has changed method depreciation from SLM to WDV and shortfall (deficiency) is charged to profit and loss account as per accounting standard. Thus prepared accounts is per schedule VI of the Companies Act, 1956 (i.e. schedule III of the Companies Act, 2013) and certified by the authorities under the Companies Act. Therefore the Assessing Officer has no jurisdiction to go behind the “book profit” shown in P & L account except to the extent of prescribed adjustment mentioned under section 115JB of the Income tax Act, 1961. As per the Supreme Court in Apollo Tyres Ltd. v. CIT [255 ITR 273],while interpreting similar provision under section 115J of the Act, the Court has held that
“The Assessing Officer, while computing the books profits of a company under section115J of the Income tax Act, 1961, has only the power of examining whether books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Expiation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words” in accordance with the provisions of Part II and III of Schedule VI to the Companies Act”, in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the Company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in the manner provided by the Act and the same is scrutinized and certified by the Statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirement of the Companies Act. Sub-section (1A) if section 115J does not empower the Assessing Officer to embark upon a fresh enquiry to regard to the entries made in the books of account of the company”
This view has been reaffirmed by the Supreme Court in Malyala Manorama Co. v. CIT [300 ITR 251].