Glimpses of Supreme Court Rulings

3.  Capital or Revenue receipt – The principle
that unless the grant-in-aid received by and assessee is utilied for
acquisition of an asset, the same must be understood to be in the nature of
revenue receipt, is not applicable to all situations – Subvention monies paid
by a parent company to its loss making Indian company are to be understood to
be payments made in order to protect capital investment of the assessee-company
and could not be treated as revenue receipts

Siemens Pub.
Communication Network P. Ltd. vs. CIT[(2017) 390 ITR 1 SC)]

The  assessee 
was engaged in the business of manufacturing digital electronic
switching systems, computer software and also software services. The return of
income for the assessment year 1999-2000 was filed declaring a loss of
Rs.9,08,30,417. In the statement of computation, the assessee had shown a sum
of Rs.21,28,40,000 as monies received from Siemens AG Germany, its principal
shareholder. In the course of the assessment proceedings the assessee explained
the said sum, as “subvention payment” from principal shareholder, made for two
reasons, namely, the company was potentially sick company, and that its
capacity to borrow had reduced substantially leading to shortage of working
capital. Siemens AG in its letter explained that as a parent company it had
agreed to infuse further capital by reimbursing the accumulated loss. The assessee
contended that the subvention monies were capital receipt and could not be
treated as income.

The Assessing Officer
rejected the contention of the assessee. The first appellate authority however
allowed the appeal holding the said monies as capital receipt. The Tribunal, in
the appeal filed by the Revenue, upheld the findings of the first appellate
authority. On a further appeal by the revenue, the High Court restored the
order of the Assessing Officer by relying on the two decisions of the Supreme
Court in Sahney Steel and Press Works Ltd vs. CIT [(1997) 228 ITR 253 (SC)]
and CIT vs. Ponni Sugars and Chemicals Ltd [(2008) 306 ITR 392 (SC)] in
which it was held that unless the grant-in-aid received by the assessee is
utilised for acquisition of an asset, the same must be understood to be in the
nature of revenue receipt.

On an appeal by the
assessee, the Supreme Court held that the understanding of the High Court that
the principle of law laid down in the aforesaid two decisions was applicable to
all situations was not correct. According to the Supreme Court, the aforesaid
view overlooked the fact that in both the above decisions the subsidies
received were in the nature of grant-in-aid from public funds and not by way of
voluntary contribution by the parent company as in the present case. The above
apart, the voluntary payments made by a parent company to its loss making
Indian company could also be understood to be payments made in order to protect
capital investment of the assessee-company. If that was so, the payments made
to the assessee-company by the parent company for the assessment year in
question could not be held to be revenue receipts. The Supreme Court approved
the decision of the Delhi High Court in CIT vs. Handicrafts and Handlooms
Export Corporation of India Ltd [(2014) 360 ITR 130 (Del)] which had taken
a similar view.

The Supreme Court allowed
the appeal setting aside the order of the High Court.

4.  Writ – Existence of alternative remedy – The
High Court was not justified in dismissing the writ petition filed by and
assessee challenging the issuance of notice u/s. 148 as not maintainable

Jeans Knit Private
Limited v. DCIT [(2017) 390 ITR 10 (SC)]

The High Courts in the
batch of cases that were before the Supreme Court had dismissed the writ
petitions preferred by the assessee challenging the issuance of notice u/s. 148
and the reasons which were recorded by the Assessing Officer for reopening the
assessment. These writ petitions were dismissed by the High Courts as not
maintainable. According to the Supreme Court, the aforesaid view taken by the
High Courts was contrary to the law laid down by the Supreme Court in Calcutta
Discount Co. Ltd. vs. ITO [(1961) 41 ITR 191 (SC)]. The Supreme Court,
therefore, set aside the impugned judgments and remitted the cases to the
respective High Courts to decide the writ petitions on merits.

The Supreme Court however clarified that it had not made any
observations on the merits of the cases, i.e. the contentions which were raised
by the assessee challenging the move of the Income-tax authorities to reopen
the assessment and that each case would be examined on its own merits keeping
in view the scope of judicial review while entertaining such matters, as laid
down by the Supreme Court in various judgments.

The Supreme Court while
coming to the aforesaid conclusion was conscious of the fact that the High
Court had referred to the judgment of the Supreme Court in CIT vs. Chhabil
Dass Agarwal [(2013) 357 ITR 357 (SC)]. According to the Supreme Court the
principle laid down in the said case did not apply to these cases.

The Supreme Court further
directed that the stay of reassessment that was granted during the pendency of
these appeals would continue till the disposal of the writ petitions before the
High Courts.

The Supreme Court allowed the appeals in the aforesaid terms.

5.  Exemption – Residential Palace – Though a
part of the residential palace is found to be in occupation of the tenant and
remaining is in occupation of the Ruler for his residence, the Ruler is
entitled to claim exemption for the whole of his residential palace u/s.
10(19A)

Maharao Bhim Singh of
Kota vs. CIT (2017) 390 ITR 532 (SC)

Principle of Res
judicata – Though the principle of res judicata does not apply to
income-tax proceedings and each assessment year is an independent year in
itself, yet, in the absence of any valid and convincing reason, Revenue should
not pursue the same issue again to higher Courts. There should be a finality
attached to the issue once it stands decided by the higher Courts on merits.

Rule of interpretation –
If two Statutes dealing with the same subject use different language, then it
is not permissible to apply the language of one Statute to other while
interpreting such Statutes.

Rule of interpretation –
Once the Assessee is able to fulfill the conditions specified in section for
claiming exemption under the Act then provisions dealing with grant of
exemption should be construed liberally because the exemptions are for the
benefit of the Assessee.

The Appellant was the
Ruler of the princely State of Kota, now a part of State of Rajasthan. He owned
extensive properties which, inter alia, included his two residential
palaces known as “Umed Bhawan Palace” and “City Palace”.
The Appellant was using Umed Bhawan Palace for his residence.

In exercise of the powers
conferred by section 60A of the Indian Income-tax Act, 1922 (XI of 1922), the
Central Government issued an order called “The Part B States (Taxation
Concessions) Order, 1950” (hereinafter referred to as “The
Order”). It was issued essentially to grant exemptions, reductions in rate
of tax and the modifications in relation to specified kinds of income earned by
the persons (Ruler and his family members) from various sources as specified
therein. The Order was published in the Gazette of India, extraordinary, on
02.12.1950.

Paragraph 15 of the Order
dealt with various kinds of exemptions. Item (iii) of Paragraph 15, provided
that the bona fide annual value of the residential palace of the Ruler of a
State which is situated within the State and is declared by the Central
Government as his inalienable ancestral property would be exempt from payment
of Income-tax.

In pursuance of the powers
conferred under item (iii) of Paragraph 15 of the Order, the Central
Government, Ministry of Finance (Revenue Division) issued a notification
bearing No. S.R.O. 1619 dated 14.05.1954 declaring the Appellant’s
aforementioned two palaces, viz., Umed Bhawan and City Palace as his official
residences (Serial No. 21 of the Table).

On 20.09.1976, the
Ministry of Defence requisitioned portion of the Umed Bhawan Palace (918.26
Acres of the land including houses and other construction standing on the land)
for their own use and realized Rs. 80,000/- as rent by invoking the provisions
of Requisition and Exhibition of Immovable Property Act, 1952. According to the
Appellant, the period for which the land was requisitioned expired in 1993
though the land still continued to remain in the occupation of the Ministry of
Defence.

A question arose in the
Appellant’s income-tax assessment proceedings regarding taxability of the
income derived by the Appellant (Assessee) from the part of the property
requisitioned by the Defence Ministry, which was a portion of the Appellant’s
official residence (Umed Bhawan Palace). The question was whether the rental
income received by the Appellant from the requisitioned property by way of rent
was taxable in his hands. In other words, the question was as to whether the
Appellant was entitled to get full benefit of the exemption granted to him u/s.
10A(19A) of the Income-tax Act, 1961 (for short, “the I.T. Act”) from
payment of income-tax or it was confined only to that portion of palace which
was in his actual occupation as residence and the rest which was in occupation
of the tenant would be subjected to payment of tax.

The Commissioner of Income
Tax (Appeals) answered the question in Appellant’s favour and held that since
the Appellant was in occupation of part of his official residence during the
assessment year in question, he was entitled to claim full benefit of the
exemption for his official residence as provided u/s. 10(19A) of the I.T. Act
notwithstanding the fact that portion of the residence was let out to the
Defence Ministry. The Revenue, felt aggrieved, carried the matter in appeal
before the Income Tax Appellate Tribunal. The Tribunal affirmed the order of
the Commissioner of Income Tax and dismissed the Revenue’s appeal. The
Tribunal, however, on an application made by the Revenue u/s. 256(1) of the
I.T. Act referred the following question of law to the High Court of Rajasthan
for answer.

“Whether on the facts and
in the circumstances of the case, the Tribunal was justified in holding that
the rental income from Umed Bhawan Palace was exempt u/s. 10(19A) of the IT
Act, 1961?”

The Division Bench of the
High Court while hearing the reference noticed cleavage of opinion on the
question referred in this case in two earlier decisions of the High Court of
Rajasthan. One was in the case of Maharawal Laxman Singh vs. C.I.T. (1986)
160 ITR 103 (Raj.) and Anr. was in Appellant’s own case, C.I.T.
vs. H.H. Maharao Bhim Singhji (1988) 173 ITR 79 (Raj.). So far as the case
of Maharwal Laxman Singh (supra) was concerned, the High Court had
answered the question in favour of the Revenue and against the Assessee,
wherein it was held that in such factual situation arising in the case, annual
value of the portion which was in the occupation of the tenant was not exempt
from payment of Income-tax and, therefore, income derived therefrom was
required to be added to the total income of the Assessee, whereas in case of
H.H. Maharao Bhim Singhji (supra), the High Court answered the question
against the Revenue and in favour of the Assessee holding therein that in such
a situation, the Assessee was entitled to claim full exemption in relation to
his palace u/s. 10(19A) of the I.T. Act notwithstanding the fact that portion
of the palace was let out to a tenant. It was held that any rental income derived
from the part of his rental property was, therefore, not liable to tax. The
Division Bench, therefore, referred the matter to the Full Bench to resolve the
conflict arising between the two decisions and answer the referred question on
merits.

The Full Bench of the High
Court answered the question against the Appellant (Assessee) and in favour of
the Revenue.

It was held that so long as the Assessee continued to remain
in occupation of his official residential palace for his own use, he would be
entitled to claim exemption available u/s. 10(19A) of the I.T. Act but when he
was found to have let out any part of his official residence and at the same
time was found to have retained its remaining portion for his own use, he
becomes disentitled to claim benefit of exemption available u/s. 10(19A) for
the entire palace. It was held that in such circumstances, he was required to
pay income-tax on the income derived by him from the portion let out in
accordance with the provisions of the I.T. Act and the benefit of exemption
remained available only to the extent of portion which was in his occupation as
residence.

The Supreme Court observed
that in order to claim exemption from payment of income-tax on the residential
palace of the Ruler u/s. 10(19A), it is necessary for the Ruler to satisfy that
first, he owns the palace as his ancestral property; second, such palace is in
his occupation as his residence; and third, the palace is declared exempt from
payment of income-tax under Paragraph 15 (iii) of the Order, 1950 by the
Central Government.

According to the Supreme
Court, where part of the residential palace is found to be in occupation of the
tenant and remaining is in occupation of the Ruler for his residence, a
question would arise as to whether in such circumstances, the Ruler is entitled
to claim exemption for the whole of his residential palace u/s. 10(19A) or such
exemption would confine only to that portion of the palace which is in his
actual occupation. In other words, whether the exemption would cease to apply
to let out portion thereby subjecting the income derived from let out portion
to payment of income-tax in the hands of the Ruler.

The Supreme Court noted that this very question was examined
by the M.P. High Court in the case of Bharatchandra Banjdeo [(1985) 154 ITR 236
(MP)] in detail. It was held that no reliance could be placed on section 5(iii)
of the Wealth Tax Act while construing section 10(19A) for the reason that the
language employed in section 5(iii) was not identical with the language of
section 10(19A) of the I.T. Act. Their Lordships distinguished the decision of
Delhi High Court rendered in the case of Mohd. Ali Khan vs. CIT (1983) 140
ITR 948 (Delhi), which arose under the Wealth Tax Act. It was held that
even if the Ruler had let out the portion of his residential palace, yet he
would continue to enjoy the exemption in respect of entire palace because it is
not possible to split the exemption in two parts, i.e., the one in his
occupation and the other in possession of the tenant.

The Supreme Court held
that in section 10(19A) of the I.T. Act, the Legislature has used the
expression “palace” for considering the grant of exemption to the
Ruler whereas on the same subject, the Legislature has used different
expression namely “any one building” in section 5(iii) of the Wealth
Tax Act. It could not ignore this distinction while interpreting section
10(19A) which, according to the Supreme Court, was significant.

The Supreme Court was of
the view that if the Legislature intended to spilt the Palace in part(s), alike
houses for taxing the subject, it would have said so by employing appropriate
language in section 10(19A) of the I.T. Act. However, no such language was
employed in section 10(19A).

The Supreme Court noted
that section 23(2) and (3), uses the expression “house or part of a
house”. Such expression does not find place in section 10(19A) of the I.T.
Act. Likewise, there is no such expression in section 23, specifically dealing
with the cases relating to “palace”. According to the Supreme Court,
this significant departure of the words in section 10(19A) of the I.T. Act and
section 23 also suggest that the Legislature did not intend to tax portion of
the “palace” by splitting it in parts.

According to the Supreme
Court, it is a settled Rule of interpretation that if two Statutes dealing with
the same subject use different language then it is not permissible to apply the
language of one Statute to other while interpreting such Statutes. Similarly,
once the Assessee is able to fulfill the conditions specified in section for
claiming exemption under the Act then provisions dealing with grant of
exemption should be construed liberally because the exemptions are for the
benefit of the Assessee.

The Supreme Court held
that the view taken by the M.P. High Court in Bharatchandra Banjdeo’s case (supra)
and the Rajasthan High Court in H.H. Maharao Bhim Singhji’s case (supra)
was a correct view.

The Supreme Court further noted that the question involved in
this case had also arisen in previous Assessment Years’ (1973-74 till 1977-78)
and was decided in Appellant’s favour when Special Leave Petition (C) No. 3764
of 2007 filed by the Revenue was dismissed by it on 25.08.2010 by affirming the
order of the Rajasthan High Court referred supra.

In such a factual
situation where the Revenue consistently lost the matter on the issue then,
according to the Supreme Court, there was no reason much less justifiable
reason for the Revenue to have pursued the same issue any more in higher
courts.

The Supreme Court held
that though the principle of res judicata does not apply to income-tax
proceedings and each assessment year is an independent year in itself, yet, in
the absence of any valid and convincing reason, there was no justification on
the part of the Revenue to have pursued the same issue again to higher Courts.
There should be a finality attached to the issue once it stands decided by the
higher Courts on merits. This principle, according to the Supreme Court,
applied to this case on all force against the Revenue. [see Radhasoami Satsang,
Saomi Bagh, Agra’s case (1992) 193 ITR 321 (SC)].

In the light of foregoing
discussion, the Supreme Court held that the reasoning and the conclusion
arrived at by the High Court in the impugned order including the view taken by
the Rajasthan High Court in Maharaval Lakshmansingh’s case (supra) did
not lay down correct principle of law whereas the view taken by the M.P. High
Court in cases of Bharatchandra Bhanjdeo (supra), Commissioner of
Income-Tax vs. Bharatchandra Bhanjdev (1989) 176 ITR 380 (MP) and H.H.
Maharao Bhim Singhji (supra) laid down correct principle of law.