1. PRACTICAL SESSION GROUP DISCUSSION Case Study 2.4

2. Income/Case Study Under a decree of court, X has to make an annual payment of Rs. 60,000 for maintenance of his wife and three sons. The annual payment is not charged on any of his property. X claims that Rs. 60,000 is deductible while computing his taxable income, since it is diversion of income by overriding charge. Is he legally justified ? Case Study 2.4

3. Suggested Solution In the present problem, a portion of X’s income is applied to discharge his obligation and it is not a case in which by an overriding charge the assessee becomes only a collector of another’s income. The annual payment of Rs. 60,000 is, therefore, not excludible while computing X’s total income. The matter would have been different if such an overriding charge had existed either upon the property or upon its income Case Study 2.4

4. Contd… The true test for application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reaches the assessee as his income. Where by obligation the income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow—CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC). Case Study 2.4

5. Business expenditure [Sec. 37(1)] Case Study An assessee claimed amount spent in connection with the inaugural function of a new project as business expenditure and the same was disallowed by the assessing officer on the ground that the same is capital in nature as it was incurred prior to commencement of business. Discuss? Case Study 2.4

6. Business expenditure [Sec. 37(1)] Suggested Solution it has been decided in the by Kerala High Court in the case of CIT v/s Aluminium Industries Ltd. 1995 214 ITR 541 that such expenses cannot be said to be capital expenditure merely on the ground that it is incurred prior to commencement of business. Hence the action of the assessing officer is not justified. Case Study 2.4

7. Business expenditure [Sec. 37(1)] Case Study An assessee company has claimed deduction on account of loss sustained by it for the purpose of its subsidiary from its profits. Examine the admissibility of the claim. Case Study 2.4

8. Business expenditure [Sec. 37(1)] Suggested Solution The claim is not allowable in view of Madras High Court decision in the case of CIT v/s Amalgamation (P) Ltd. 108 ITR 895 where in it was held that a Parent company cannot be allowed to claim deduction in respect of a loss or expenditure incurred by it for the purpose of its subsidiary. Case Study 2.4

9. Wealth Discuss whether the following are “assets”— 1. A commercial multi-storeyed building given on rent by X (not being held as stock-in-trade). Case Study 2.4

10. Cont… A commercial multi-storeyed building given on rent (not being held as stock-in-trade) is not an “asset”. Case Study 2.4

11. Case Study XY Club Ltd., a social and sports club, conducts horse races with amateur riders and charges fees for admission into the enclosure of the club at the time of races. A resolution is passed at a general meeting of the club for charging a surcharge, apart from regular admission fee, the proceeds of which are to go for local charities. Every entrant is issued two tickets—one, an admission ticket, for admission to the enclosure of the club and the other, a separate ticket in respect of surcharge for local charities. Discuss whether receipts on account of surcharge is to be treated as assessee’s income. Case Study 2.4

12. Suggested Solution In the given problem, surcharge is not a part of the price for admission but is a payment made for the specific purpose of being applied to local charities. Surcharge is collected in pursuant to a resolution and with an obligation to apply it for charities. Surcharge is diverted before it reaches the hands of the assessee and at no stage it becomes the part of assessee’s income. The amount of surcharge is, therefore, not taxable in the hands of the assessee-club—CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 (SC). Case Study 2.4

13. Wealth 2. A commercial house property used by a Hindu undivided family for the purpose of carrying on own business Case Study 2.4

14. Suggested Solution. A commercial house property used by a Hindu undivided family for carrying on a business or profession is not an “asset” [i.e., exception three ] Case Study 2.4

15. Case study A scholarship of Rs.100000 was awarded to ‘x’ for for meeting his cost of education. However he actually spent Rs.60000. The assessing officer decides to tax Rs.40000 in the hands of ‘x’. Discuss. Case Study 2.4

16. Suggested Solution It has been held in the case of CIT v/s V.K.Balachandran (1984) 147 ITR 4 (Madras) that if the scholarship is paid only for meeting the cost of education, the fact that the recipient does not spend the whole amount towards education or that he is able to save something out of it would not detract from the character of the payment being one for scholarship. The assessing officer’s action is therefore not in order Case Study 2.4