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III. Direct Taxes Case Laws:
1. CIT Vs. Canon India Pvt. Ltd., I.T.A. No. 137/2014, Date of Order: 03.08.2015, High Court of Delhi
Whether
addition of unutilised subsidy, to the total income of the Assessee
received by the Assessee from its holding company observing that
subsidies received by the Assessee became its property notwithstanding
that the same had not been spent for the purposes for which they were
received.
Held No
It is
not disputed by the Revenue that subsidies were received by the Assessee
from CSPL against specific obligation to incur expenditure on specific
activities and it was not open for the Assessee to divert the amount for
any purpose other than for which it was remitted. It is also not
disputed by the Revenue that Assessee is accountable to CSPL for the
amount received. The Tribunal had examined the relevant facts and also
concluded that the unspent amount is to be held in trust on behalf of
CSPL and this was also confirmed by CSPL. In view of the aforesaid
facts, it would, clearly, be impermissible for the Assessee to
appropriate and reflect the amount of unutilised subsidy as its income.
Therefore, the Assessee has not – in our view rightly so – credited the
subsidies received to its Profit & Loss Account, but reflected the
same as a current liability.
In view
of the Assessee’s obligation to utilise the same for the specific
purposes, the revenue could be recognised only on the application of the
subsidy for the specified purposes. In other words, the Assessee could
credit the Profit & Loss Account with the quantum of subsidy only if
the corresponding expenditure was also debited to the Profit and Loss
Account maintained by the Assessee. We are, therefore, unable to accept
the Revenue’s contention that the unutilised subsidy is required to be
recognised as income of the Assessee in the year of its receipt. This
would be contrary to the matching concept, which is the substratal
principle for computing income during a relevant period. It is necessary
that income be recognised along with the corresponding expenditure
incurred for earning the income. Thus, where an Assessee follows the
Accrual/Mercantile system of Accounting – as in this case – income can
be recognised only when the matching expenditure is also accounted for
irrespective of the cash outflows/inflows during the year.
(Please click here for judgment)
2. CIT Vs. Rathi Graphics Technologies Ltd., I.T.A. No. 785/2014, Date of Order: 06.08.2015, High Court of Delhi
Whether
allotment of equity shares in lieu of interest liability can be
construed as actually paid as required under Section 43B of the Act
Held Yes
When
pursuant to a settlement the creditor agrees to convert a portion of
interest into shares, it must be treated as an extinguishment of
liability to pay interest to that extent. In essence there will be no
further outstanding interest to that extent. Consequently, the situation
where an interest payable on a loan is converted into shares in the
name of the lender/creditor is different from the situation envisaged in
Explanation 3C to Section 43B of the Act viz., conversion of interest
into “a loan or borrowing”. In the latter instance, the liability
continues, although in a different form. However, where the interest or a
part thereof is converted into equity shares, the said interest amount
for which the conversion is taking place is no longer a liability. The
Court is of the view that the plea of the Assessee, which was accepted
by the CIT (A) and the ITAT, that the said conversion of a portion of
interest into shares should be taken to be “actual payment” within the
meaning of Section 43B of the Act, merits acceptance.
(Please click here for judgment)
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