Glimpses of Supreme Court Rulings

6. Appeal to the Supreme Court – Dismissed as it was against
the order of remand

Addl. CIT vs. Vidarbh
Irrigation Department Corporation (2017) 
392 ITR 1 (SC)

The issue that arose
before the Supreme Court was as to whether the Respondent, namely, Vidarbh
Irrigation Department Corporation (VIDC) was a local authority within the
meaning of section 10(20A) of the Act.

The Supreme Court noted
that though this provision stood omitted vide section 4(m) w e f
1-4-2003 by the Finance Act 2002 but as the assessment year in question was
prior thereto and therefore was relevant.

The Supreme Court found
that the High Court referring to the judgement of the Supreme Court in Gujarat
Industrial Development Corporation vs. CIT [(1997) 227 ITR 414(SC)] had
observed that if the authority is constituted under the enactment either for
satisfying the need for housing accommodation or for planning, development or
improvement of cities, towns and villages or for both, income of such authority
was exempt from tax u/s. 10(20A). 

The Supreme Court noted
that according to the High Court the Tribunal had not considered the issue in
the light of the provisions of VIDC as well as the Maharashtra Irrigation Act,
1976 and the Bombay Canal Rules, 1934 and hence it had remanded the case back
to the Tribunal for fresh consideration.

The Supreme Court declined
to interfere with the judgment of the High Court and dismissed the appeal of
the Income-tax Department because the High Court had only remanded the issue to
the Tribunal for fresh consideration.

7.
Depreciation – The construction was made by the firm though the assessee
company had reimbursed the amount but the fact remained that the construction
was not carried out by the assessee himself and therefore, Explanation 1 to
section 32  would not come to the aid of
the assessee – Assessee not entitled to depreciation

Mother Hospital Pvt.
Ltd. vs. CIT (2017) 392 ITR 628 (SC)

A partnership firm Mother
Hospital had been constituted by Dr. M. Ali, Dr. Ayesha Beevi and their three
children. 4.3 acres of land belonged to the firm. The purpose of the
partnership firm was to run a super speciality hospital in Thrissur Town in
Central Kerala and, accordingly, the firm started construction of the hospital
building. Since it was felt expedient to form a private limited company to run
and manage the hospital (then under construction), a company, Mother Hospital
Private Ltd., was formed for the said purpose and was incorporated on
30.12.1988. The shares which are held by seven persons are closely related to
each other, viz., (1) Dr. M. Ali; (2) Dr. Ayesha Beevi (wife of Dr. M. Ali);
(3) Nisha, (4) Shabna and (5) Sharmini (all children of Dr. M. Ali and Dr. Ayesha
Beevi); (6) Khadeeja Beevi (mother of Dr. M. Ali); (7) and Akbar Ali (father of
Ayesha Devi). Out of the total capital of Rs.1,33,63,520/- of the company, the
value of the shares held by Khadeeja Beevi and Akbar Ali were Rs.5,000/- each.

Thereafter, an agreement
was entered into between the firm and the company by which it was agreed that
the firm will complete the construction of the building and hand over
possession of the same on completion, on the condition that the entire cost of
construction of the building should be borne by the company. The relevant
clause in the agreement read as under:

“The hospital building
shall belong to the company on the company taking possession thereof; but
however that the firm has and will have a lien on the hospital building and on
any improvements or additions thereto until the money owing by the company to
the firm by virtue of this agreement is fully paid off.”

The company took
possession of the building on its completion on 18.12.1991 and was running the
hospital therein with effect from 19.12.1991. The accounts of the company were
debited with the cost of construction of the building, i.e., Rs.1,37,83,149.83.
The accounts of the firm had also been credited with the payments of
Rs.1,06,78,456/- made by the company to the firm for completion of the
construction. The balance amount payable by the company to the firm had been
carried as the company’s liability in its Balance Sheet, for which the firm had
a lien on the building.

This amount was later paid
to the firm. The one time building tax payable by the owner of a building under
the Kerala Building Tax Act was also paid by the company.

Since the ownership of the
land had to remain with the firm, it was also agreed that the land would be
given on lease by the firm to the company and agreement dated 01.02.1989
provided for the said contingency as well in clause 4(g) which read as under:

“(g) In consideration of
the FIRM agreeing with the COMPANY to permit situation of the hospital building
or any additions thereto belonging to the FIRM as aforesaid, the COMPANY shall
pay to the FIRM a ground rent of Rs.100/- per month, but however that the
liability to pay such ground rent shall be on and from the 1^st day
of April 93 only.”

The first assessment year
of the company was 1992-1993. The company filed its return for the said year in
which it claimed depreciation on the building part of the said property u/s. 32
of the Income-tax Act. The assessment officer, after construing the provisions
of the aforesaid agreement came to the conclusion that the assessee had not
become the owner of the property in question in the relevant assessment year
and, therefore, rejected the claim of depreciation. Appeal preferred by the
assessee-company before the Commissioner of Income Tax (Appeals) met with the
same fate. However, in further appeal before the Income Tax Appellate Tribunal
(ITAT), the appellant succeeded. This success, however, was proved to be only
of temporary nature inasmuch as the appeal of the Revenue against the order of
the ITAT filed u/s. 260A of the Income-tax Act before the High Court was
allowed setting aside the aforesaid order of ITAT.

The High Court held that
the assessee had not become the owner of the property in question in the
relevant assessment year and clause 4(g) could not confer any ownership rights
on the assessee.

On an appeal by the
assessee-company against the order of the High Court, the Supreme Court agreed
with the view taken by the High Court. The Supreme Court held that the building
which was constructed by the firm belonged to the firm. Admittedly it was an
immovable property. The title in the said immovable property cannot pass when
its value is more than Rs.100/- unless it is executed on a proper stamp paper
and is also duly registered with the sub-Registrar. Nothing of the sort took
place. In the absence thereof, it could not be said that the assessee had
become the owner of the property.

Before the Supreme Court,
another argument was raised by the learned counsel appearing for the appellant.
It was submitted that having regard to clause 4(g), the appellant had become
the lessee of the property in question and since the construction was made by
the appellant from its funds, by virtue of Explanation (1) to section 32 of the
Income-tax Act, the assessee was, in any case, entitled to claim depreciation.
This explanation read as under:

“32(1)
……………………

Explanation 1. Where the
business or profession of the assessee is carried on in a building not owned by
him but in respect of which the assessee holds a lease or other right of
occupancy and any capital expenditure is incurred by the assessee for the
purposes of the business or profession on the construction of any structure or
doing of any work in or in relation to and by way of renovation or extension of
or improvement to the building, the provisions of this clause shall apply as if
the said structure or work is a building owned by the assessee.”

According to the Supreme
Court, from the plain language of the aforesaid explanation it was clear that,
it is only when the assessee holds a lease right or other right of occupancy
and any capital expenditure is incurred by the assesee on the construction of
any structure or doing of any work in or in relation to and by way of
renovation or extension of or improvement to the building and the expenditure
on construction is incurred by the assessee, that assessee would be entitled to
depreciation to the extent of any such expenditure incurred.

The Supreme Court held
that in the instant case, the record showed that the construction was made by
the firm. It was a different thing that the assessee had reimbursed the amount.
The construction was not carried out by the assessee himself. Therefore, the
explanation also would not come to the aid of the assessee. The Supreme Court,
thus, dismissed the appeal being without any merit.

8. Non-resident – Shipping Business – Fees for technical
services – Maersk Net System was a facility which enabled the agents to access
several information like tracking of cargo of a customer, transportation
schedule, customer information, documentation system and several other
informations – Expenditure which was incurred for running this business was
shared by all the agents – By no stretch of imagination, payments made by the
agents could be treated as fee for technical service, it was in the nature of
reimbursement of cost whereby the agents paid their proportionate share of the
expenses incurred on these said systems and for maintaining those systems –
Also, Maersk Net System was an integral part of the shipping business and the
business could not be conducted without the same and ‘profit’ from operation of
ships under Article 19 of DTAA would necessarily include expenses for earning
that income and cannot be separated

DIT (International
taxation) vs. A. P. Moller Maersk A/S

(2017) 392 ITR 186 (SC)

The Respondent Assessee, a
foreign company engaged in the shipping business and was a tax resident of
Denmark, with whom India has entered into a Double Taxation Avoidance Agreement
(hereinafter referred to as the ‘DTAA’). The Assessing Officer (AO) assessed
the income in the hands of the Assessee and allowed the benefit of the said
DTAA. However, while making the assessment, the AO observed that the Assessee
had agents working for it, namely, Maersk Logistics India Limited (MLIL),
Maersk India Private Limited (MIPL), Safmarine India Private Limited (SIPL) and
Maersk Infotech Services (India) Private Limited (MISPL). These agents booked
cargo and acted as clearing agents for the Assessee. In order to help all its
agents, across the globe, in this business, the Assessee had set up and was
maintaining a global telecommunication facility called Maersk Net System which
was a vertically integrated communication system. The agents were paying for
said system on pro-rata basis. According to the Assessee, it was merely a
system of cost sharing and the payments received by the Assessee from MIPL,
MLIL, SIPL and MISPL were in the nature of reimbursement of expenses. The AO
did not accept this contention and held that the amounts paid by these three
agents to the Assessee was consideration/fees for technical services rendered
by the assesses and, accordingly, held them to be taxable in India under
Article 13(4) of the DTAA and assessed tax @ 20% u/s. 115A of the Income-tax
Act, 1961.

The Assessee preferred an
appeal against the Assessment Order before the Commissioner of Income Tax
(Appeals) (for short, ‘CIT (A)’). The CIT(A) dismissed the appeal. Aggrieved by
the order passed by the CIT(A), the Assessee preferred further appeal before
the Income Tax Appellate Tribunal (ITAT). Here, the Assessee succeeded as the
ITAT, allowed the appeal of the Assessee.

Aggrieved by the order
passed by the ITAT, the department filed an appeal before the High Court of
Bombay. The High Court, dismissed the Revenue’s appeal holding that the ITAT
had correctly observed that utilisation of the Maersk Net Communication System
was an automated software based communication system which did not require the
Assessee to render any technical services. It was merely a cost sharing
arrangement between the Assessee and its agents to efficiently conduct its
shipping business. The High Court further held that the principles involved in
the decision of The Director of Income Tax (International Taxation)-1 vs.
M/s. Safmarine Container Lines NV  (2014)
367 ITR 209 would also govern the present case and that the Maersk Net used
by the agents of the Assessee entailed certain costs reimbursement. It was part
of the shipping business and could not be captured under any other provisions
of the Income Tax Act except under DTAA. While arriving at the aforesaid
decision, the High Court specifically observed that there was no finding by the
AO or the Commissioner that there was any profit element involved in the
payments received by the Assessee from its agents.

The Supreme Court noted
that the facts which emerged on record were that the Assessee was having its IT
System, which was called the Maersk Net. As the Assessee was in the business of
shipping, chartering and related business, it had appointed agents in various
countries for booking of cargo and servicing customers in those countries, preparing
documentation etc. through these agents. Aforementioned three agents were
appointed in India for the said purpose. All these agents of the Assessee,
including the three agents in India, used the Maersk Net System. This system
was a facility which enabled the agents to access several information like
tracking of cargo of a customer, transportation schedule, customer information,
documentation system and several other informations. For the sake of
convenience of all these agents, a centralised system was maintained so that
agents were not required to have the same system at their places to avoid
unnecessary cost. The system comprised of booking and communication software,
hardware and a data communications network. The system was, thus, integral part
of the international shipping business of the Assessee and ran on a combination
of mainframe and non-mainframe servers located in Denmark. Expenditure which
was incurred for running this business was shared by all the agents. In this
manner, the systems enabled the agents to co-ordinate cargos and ports of call
for its fleet.

The Supreme Court held
that aforesaid were the findings of facts. It was clearly held that no
technical services were provided by the Assessee to the agents. Once these were
accepted, by no stretch of imagination, payments made by the agents could be
treated as fee for technical service. It was in the nature of reimbursement of
cost whereby the three agents paid their proportionate share of the expenses
incurred on these said systems and for maintaining those systems. It was
re-emphasised that neither the AO nor the CIT (A) had stated that there was any
profit element embedded in the payments received by the Assessee from its
agents in India. Record showed that the Assessee had given the calculations of
the total costs and pro-rata division thereof among the agents for
reimbursement. Not only that, the Assessee had even submitted before the
Transfer Pricing Officer that these payments were reimbursement in the hands of
the Assessee and the reimbursement was accepted as such at arm’s length. Once
the character of the payment is found to be in the nature of reimbursement of
the expenses, it could not be income chargeable to tax.

The Supreme Court further
noted that, the Revenue itself had given the benefit of Indo-Danish DTAA to the
Assessee by accepting that under Article 9 thereof, freight income generated by
the Assessee in these Assessment Years was not chargeable to tax as it arose
from the operation of ships in international waters. The Supreme Court held
that once that was accepted and it was also found that the Maersk Net System
was an integral part of the shipping business and the business could not be
conducted without the same, which was allowed to be used by the agents of the
Assessee as well in order to enable them to discharge their role more
effectively as agents, it was only a facility that was allowed to be shared by
the agents. By no stretch of imagination it could be treated as any technical
services provided to the agents. In such a situation, ‘profit’ from operation
of ships under Article 19 of DTAA would necessarily include expenses for
earning that income and cannot be separated, more so, when it was found that
the business could not be run without these expenses.

9. Prevention of Corruption Act – Returns and the orders in
the I. T. proceedings would not by themselves establish that such income had
been from lawful source

State of Karnataka vs.
Selvi J. Jayalalitha & Ors. (2017) 392 ITR 97 (SC)

Cash credits – The process
undertaken by the Income Tax authorities u/s. 68 of the Act is only to
determine as to whether the receipt is an income from undisclosed sources or
not and is unrelated to the lawfulness of the sources or of the receipt.

In a case of a person
having disproportionate assets to his known sources of income under the
Prevention of Corruption Act, 1988, the Supreme Court has made the following
observations:

1. Though
the I.T. returns and the orders passed in the I.T. proceedings in the instant
case recorded the income of the Accused concerned as disclosed in their
returns, in view of the charge levelled against them, such returns and the
orders in the I.T. proceedings would not by themselves establish that such
income had been from lawful source as contemplated in the Explanation to
section 13(1)(e) and that independent evidence would be required to account for
the same.

2. Even if
such returns and orders are admissible in evidence, the probative value would
depend on the nature of the information furnished, the findings recorded in the
orders and having a bearing on the charge levelled. In any view of the matter,
however, such returns and orders would not ipso facto either
conclusively prove or disprove the charge and can at best be pieces of evidence
which have to be evaluated along with the other materials on record.

3.  Neither
the income tax returns nor the orders passed in the proceedings relatable
thereto, either definitively attest the lawfulness of the sources of income of
the Accused persons or are of any avail to them to satisfactorily account the
disproportionateness of their pecuniary resources and properties as mandated by
section 13(1)(e) of the Act.

4.  The
property in the name of the income tax Assessee itself cannot be a ground to
hold that it actually belongs to such an Assessee and that if this proposition
was accepted, it would lead to disastrous consequences. In such an eventuality
it will give opportunities to the corrupt public servant to amass property in
the name of known person, pay income tax on their behalf and then be out from
the mischief of law.

5.  In the
tax regime, the legality or illegality of the transactions generating profit or
loss is inconsequential qua the issue whether the income is from a
lawful source or not. The scrutiny in an assessment proceeding is directed only
to quantify the taxable income and the orders passed therein do not certify or
authenticate that the source(s) thereof to be lawful and are thus of no
significance vis-à-vis a charge u/s. 13(1)(e) of the Act.

6.  The
submission of income tax returns and the assessments orders passed thereon,
does not constitute a full proof defence against a charge of acquisition of
assets disproportionate to the known lawful sources of income as contemplated
under the PC Act and that further scrutiny/analysis thereof is imperative to
determine as to whether the offence as contemplated by the PC Act is made out
or not.

 7. If the Assessing Officer on the consideration
of the materials sought for is not satisfied with the explanation provided by
the Assessee qua an income determined by undisclosed sources, in terms
of section 68, such income can be made subject to income tax.

8. Even if
such transaction is evidenced by banking operations as well as contemporaneous
records pertaining thereto, the same ipso facto would not be
determinative to hold that the transaction was a genuine transaction.