Glimpses of Supreme Court Rulings

10 Search and seizure – The Supreme Court declined to interfere
in the order of the High Court after finding that the Assessing Officer had
examined some of the borrowers mentioned in the pronotes and they had
categorically stated that the amount advanced was 50 per cent, or less which
explanation had been accepted by the first appellate authority and confirmed by
the Tribunal and held that when all of them were carrying on same business from
the same premises, it is but natural that if any concealed income have been
found at the time of search and survey, it has to be distributed among all the
family members who were carrying on business.

CIT vs. Rekha Bai (2017) 393 ITR 22 (SC)

The assessee, an individual, was carrying on the business of
financier by giving her husband a power of attorney. On August 9, 1989, a
search was conducted under section 132 of the Income-tax Act in the premises of
the assessee and several incriminating documents were seized. The pronotes to
the value of Rs. 28,16,900, the note books containing entries of amounts
advanced and repayments received back, the details of amounts advanced to
various parties and the details of date wise interest receipts were seized.

While making the assessment, the Assessing Officer made an
addition of Rs.15,21,120, Rs.6,05,163 and Rs.10,22,082 for the three assessment
years i.e. 1988-89 to 1990-91 under the head “Income from other sources”.

The Commissioner of Income-tax (Appeals) allowed the appeals
by a common order holding that the concealed income should not be entirely
assessed in the hands of the assessee and should be divided among the assessee,
her husband, her husband’s Hindu undivided family and her son. He further held
that the face value of the pronotes cannot be taken as the amounts actually lent
and fixed the concealed income at a much lower figure.

The Tribunal held that the order of the Commissioner of
Income-tax (Appeals) was reasonable in all respects and confirmed the same.

The High Court held that there was a clear finding given by
the Tribunal that the amount reflected in the seized pronotes were inflated and
actual amount of advance made by the assessee-respondent were less than the
amounts shown in the respective pronotes. The Tribunal noted that the Revenue
had not produced any further evidence or material to show that what was stated
in the pronote was the actual amount advanced. The High Court also did not find
any error in the order of the Tribunal and their finding was that the income
computed in these cases was to be attributed to the assessee-respondent, her
husband, Hindu undivided family and her son. The High Court further held that
the authorities below rightly pointed out that it was not so probable that the
entire income was earned by the assessee-respondent at a particular assessment
year or assessment years. A reasonable conclusion was made that the income had
been earned over a period of time.

Before the Supreme Court the Learned Counsel appearing for
the Appellant Revenue submitted that the full value of the pronotes seized at
the time of survey should have been taken into account.

From the order of the first appellate authority, the Supreme
Court noted that the Assessing Officer had examined some of the borrowers
mentioned in the pro-notes and they had categorically stated that the amount
advanced was 50 per cent, or less which explanation had been accepted by the
first appellate authority and confirmed by the Tribunal.

The Supreme Court held that the Department had failed to
bring on record any material to the contrary except the seized documents which,
according to the Supreme Court, could not absolve the Department or give any
right to negate the view taken by the first appellate authority and the
Tribunal. So far as the income divided among the family members of the
Respondent-Assessee was concerned the Supreme Court noted that all of them were
carrying on same business from the same premises. Therefore, it was but natural
that if any concealed income had been found at the time of search and survey,
it had to be distributed among all the family members who were carrying on
business.

The Supreme Court accordingly dismissed the appeal of the
Revenue.

11 Search and seizure – Block Assessment – As the issue of
invalidity of the search warrant was not raised at any point of time prior to
the notice u/s. 158BD and having participated in the proceedings of assessment
initiated under Section 158BC, the information discovered in the course of the
search, if capable of generating the satisfaction for issuing a notice u/s.
158BD could not altogether become irrelevant for further action u/s. 158BD

Gunjan Girishbhai Mehta vs. Director of Investigation
(2017) 393 ITR 310 (SC)

Notice u/s. 132 of the
Income-tax Act, 1961 (the Act) was issued in the name of a dead person. The
said notice was duly received by the Petitioner as the legal heir of the dead
person. Notice of assessment u/s. 158BC of the Act was issued and in the
assessment proceedings, where the income was declared to be “nil”,
the Petitioner as the legal heir had participated. Thereafter, notice u/s.
158BD of the Act was issued to the Petitioner on the basis of information
coming to light in the course of search. Aggrieved, the Petitioner moved the
High Court and on dismissal of the writ petition, filed the special leave
petition.

The point urged before the
Supreme Court was that if the original search warrant is invalid, the
consequential action u/s. 158BD would also be invalid. The Supreme Court did
not agree with the Petitioner. The Supreme Court held that the issue of
invalidity of the search warrant was not raised at any point of time prior to
the notice u/s.158BD. In fact, the Petitioner had participated in the
proceedings of assessment initiated u/s.158BC of the Act. The information
discovered in the course of the search, if capable of generating the
satisfaction for issuing a notice u/s.158BD, could not altogether become
irrelevant for further action u/s. 158BD of the Act.

The Supreme Court further
held that the reliance placed on the decision of the High Court of Punjab and
Haryana in CIT vs. Rakesh Kumar [2009] 313 ITR 305 (P & H) against
which special leave petition [SLP(C) No. CC 3623/2009] was dismissed by it and
its decision in Asst. CIT vs. A.R. Enterprises [2013] 350 ITR 489 (SC)
was on entirely different facts.

The Supreme Court observed
that in Rakesh Kumar (supra) the challenge was to the proceedings of
assessment u/s. 158BC of the Act on the basis of a search warrant issued in the
name of a dead person. The issue in A.R. Enterprises (supra) had no
similarity to the issue in hand, namely, the validity of the proceedings u/s.
158BD of the Act. For the aforesaid reasons, according to the Supreme Court
there was no merit in the special leave petition and thus the same was
dismissed.

12 Business Expenditure – Amortisation of preliminary expenses –
The “premium amount” collected by the Company on its subscribed
issued share capital was not and could not be said to be the part of
“capital employed in the business of the Company” for the purpose of
section 35D(3)(b) of the Act and hence is not entitled to claim any deduction
in relation to the amount received towards premium from its various shareholders
on the issued shares of the Company.

Berger Paints India Ltd vs. CIT (2017) 393 ITR 113 (SC)

The Appellant, a Limited Company, was engaged in the business
of manufacture and sale of various kinds of paints. For the Assessment Year
1996-97, the Appellant (Assessee) filed their income tax return and declared
the total income at Rs. 3,64,64,527/-, which was revised to Rs. 3,58,92,771/-
and then again revised to Rs. 3,57,26,644/-.

A notice was issued by the A.O.
to the Appellant (Assessee) u/s. 143(2) of the Act which called upon the
Appellant to explain as to, on what basis the Appellant had claimed in the
return a deduction under the head “preliminary expenses” amounting to
Rs. 7,03,306/- being 2.5% of the “capital employed in the business of the
company” u/s. 35D of the Act.

In reply, the Appellant (Assessee) contended therein that it
had issued shares on a premium which, according to them, was a part of the
capital employed in their business. The Appellant, therefore, contended that it
was on this basis, it claimed the said deduction and was, therefore, entitled
to claim the same u/s. 35D of the Act.

The A.O. did not agree with
the explanation given by the Appellant. He was of the view that the expression
“capital employed in the business of the company” did not include the
“premium amount” received by the Appellant on share capital. The A.O.
accordingly calculated the allowable deduction u/s. 35D of the Act at Rs.
1,95,049/- and disallowed the remaining one by adding back to the total income
of the Appellant for taxation purpose.

The Appellant, felt
aggrieved, and filed an appeal before the Commissioner of Income Tax (Appeals).
The Commissioner was of the view that since the “capital employed”
consisted of subscribed capital, debentures and long term borrowings, any
“premium” collected by the Appellant-Company on the shares issued by
it should also be included in the said expression and be treated as the capital
contributed by the shareholders. The Commissioner also was of the view that the
share premium account, which was shown as reserve in the balance sheet of the
Company, was in the nature of the capital base of the Company and hence
deduction u/s. 35D of the Act was admissible with reference to the said amount
also. Accordingly, the Commissioner allowed the appeals, set aside the order of
A.O. and disallowance of Rs. 5,08,257/- made by the A.O. and, therefore,
deleted the said sum.

The Revenue felt aggrieved
and filed an appeal before the Tribunal. The Tribunal allowed the appeal and
reversed the view taken by the Commissioner of Income Tax (Appeals). The
Tribunal held that the premium collected by the Appellant-Company on the share capital
did not tantamount to “capital employed in the business of the
Company” within the meaning of section 35D(3) of the Act.

The Company-Assessee felt aggrieved and filed appeal u/s.
260A of the Act before the High Court. The High Court dismissed the appeal and
affirmed the order of the Tribunal.

Feeling aggrieved, the Assessee-Company filed an appeal
before the Supreme Court.

According to the Supreme Court, the short question that fell
for consideration was whether “premium” collected by the Appellant-Company
on its subscribed share capital is “capital employed in the business of
the Company” within the meaning of section 35D of the Act so as to enable
the Company to claim deduction of the said amounts as prescribed u/s. 35D of
the Act?

The Supreme Court agreed
with the view of the High Court that the capital employed in the business of
the Company is restricted to the issued share capital, debentures and long term
borrowings, and that there was no room for holding that the premium, if any,
collected by the Company on the issue of its share capital would also constitute a part of the capital employed in the business of the Company
for purposes of deduction u/s. 35D.

According to the Supreme Court also, the “premium
amount” collected by the Company on its subscribed share capital was not
and could not be said to be the part of “capital employed in the business
of the Company” for the purpose of section 35D(3)(b) of the Act and hence
the Appellant-Company was rightly held not entitled to claim any deduction in
relation to the amount received towards premium from its various shareholders
on the issued shares of the Company.

According to the Supreme Court, there was more than one
reason to hold so. First, if the intention of the Legislature were to treat the
amount of “premium” collected by the Company from its shareholders
while issuing the shares to be the part of “capital employed in the
business of the company”, then it would have been specifically said so in
the Explanation (b) of sub-section (3) of section 35D of the Act. It was,
however, not said. Second, on the other hand, non-mentioning of the words does
indicate the legislative intent that the Legislature did not intend to extend
the benefit of section 35D to such sum. Third, these two reasons were in
conformity with the view taken by it in the case of Commissioner of Income
Tax, West Bengal vs. Allahabad Bank Ltd. (1969) 2 SCC 143, wherein the
question arose as to whether an amount of Rs. 45,50,000/- received by the
Assessee (Bank) in cash as “premium” from its various shareholders on
issuing share on premium was liable to be included in their paid up capital for
the purpose of allowing the Assessee to claim rebate under Paragraph D of Part
II of the first Schedule to the Indian Finance Act 1956. The Supreme Court
after examining the issue in the context of Para D read with its Explanation
held that “share premium account” was liable to be included in the
paid up capital for the purposes of computing rebate. One of the reasons to
allow such inclusion with the paid up capital was that such inclusion was
permitted by the specific words in the Explanation. Such was, however, not the
case here.

Its conclusion was further supported by the fact that the
Companies Act provides in its Schedule V-Part II (Section 159) a Form of Annual
Return, which is required to be furnished by the Company having share capital
every year. Column III of this Form, which deals with capital structure of the
company, provides the breakup of “issued shares capital breakup”.
This column does not include in it the “premium amount collected by the
company from its shareholders on its issued share capital”. This was
indicative of the fact that such amount was not considered a part of the
capital unless it was specifically provided in the relevant section.

Further, section 78 of the Companies Act which deals with the
“issue of shares at premium and discount” requires a Company to
transfer the amount so collected as premium from the shareholders and keep the
same in a separate account called “securities premium account”. It
does not anywhere say that such amount be treated as part of capital of the
company employed in the business for one or other purpose, as the case may be,
even under the Companies Act.

The appeal was accordingly dismissed.

13 Capital Gains – Amount paid by the subsidiary to its parent
company, in a scheme of settlement between two groups of shareholders whereby
ownership of the holding company remained with the majority shareholders and
the subsidiary was transferred to the minority shareholders, could not be
charged to capital gains tax in the hands of the holding company.

CIT vs. Annamalaiar Mills (2017) 393 ITR 293 (SC)

M/s. Annamalaiar Mills (P.) Ltd., Respondent herein was a
holding company of M/s. Annamalaiar Textiles (P.) Ltd. Hundred percent shares
of M/s. Annamalaiar Textiles (P.) Ltd. were held by the Respondent-company. In
the Respondent-company, there were two groups of shareholders; the majority
shareholder called Group A was having 61.26 % shares whereas the minority
shareholders called Group B were holding 38.74 %, shares.

An agreement was entered
into between the two groups on June 24, 1985 by which Group A came to hold all
the shares in the holding company, i.e., the Respondent herein and Group B was
given 100 % shares in the subsidiary company, i.e., M/s. Annamalaiar Textiles
(P.) Ltd. However, M/s. Annamalaiar Textiles (P.) Ltd. also paid a sum of Rs.
42.45 lakh to the Respondent-company.

Proceedings under the Gift-tax Act were initiated in respect
of payment of Rs. 42.45 lakh received by the Respondent-company.

The Assessing Officer treated the amount of Rs. 42.45
lakhspaid by the M/s. Annamalaiar Textiles (P.) Ltd. to the Respondent-company
as capital gains on the footing that since both the companies were now 100
%  owned by Group A or Group B, as the
case may be, payment of Rs. 42.45 lakh was to offset valuation of the shares of
M/s. Annamalaiar Textiles (P.) Ltd.

The order of the Assessing Officer was upheld in the appeal
before the Commissioner of Income-tax (Appeals). However, the Income-tax
Appellate Tribunal, Madras, in appeal preferred by the Respondent herein
accepted the pleas put forth by the Respondent herein, set aside the assessment
and restored the matter to the Income-tax Officer so that the assessee may
approach the Central Board of Direct Taxes. The Income-tax Officer was further
directed to finalise the assessment in accordance with the directions that may
be given by the Central Board of Direct Taxes.

The matter was taken up before the High Court of Madras and
the order of the Tribunal was upheld by the Madras High Court.

The sole question which arose for
our consideration before the Supreme Court was therefore as to whether the sum
of Rs. 42.45 lakh paid by M/s. Annamalaiar Textiles (P.) Ltd. to the
Respondent-company was liable to any capital gains or not.

The Supreme Court noted that it was not in dispute that M/s.
Annamalaiar Textiles (P.) Ltd. did not pay any amount to the shareholders who
ultimately got the shares transferred in their names. The Respondent was
holding 100 percent shares of M/s. Annamalaiar Textiles (P.) Ltd., before it
was transferred to Group B. No payment was made to the shareholders belonging to
Group B and, therefore, the question of there being any capital gains at the
hands of the Respondent herein does not arise.

The
Supreme Court also noted that the transaction of payment of Rs. 42.45 lakh had
been subjected under the Gift-tax Act and the Department could not claim both
under the Gift-tax Act and also levy tax under the Income-tax Act.