Glimpses of Supreme Court Rulings

7.  Capital gains –
Exemption u/s. 54E is available to the depreciable assets which is a long term
capital asset and cannot be denied by referring to the fiction created u/s.50.

CIT vs. V.S. Dempo Company Ltd. (2016) 387 ITR 354 (SC)

In the return filed by the assessee for the Assessment Year
1989-90, the assessee had disclosed that it had sold its loading platform M.V.
Priyadarshni for a sum of Rs.1,37,25,000/- on which it had earned some capital
gains. On the said capital gains the assessee had also claimed that it was
entitled for exemption u/s. 54E of the Income Tax Act. The asset was purchased
in the year 1972 and sold sometime in the year 1989. Thus, the asset was almost
17 years old. Going by the definition of long term capital asset contained in
section 2(29B), it was admittedly a long-term capital asset. The Assessing
Officer however rejected the claim for exemption u/s. 54E on the ground that
the assessee had claimed depreciation on this asset and, therefore, provisions
of section 50 were applicable. Though this was upheld by the Commissioner of
Income Tax (Appeals), the Income Tax Appellate Tribunal allowed the appeal of
the assessee herein holding that the assessee was entitled for exemption under
Section 54E of the Act. The High Court dismissed the appeal of the Revenue.
While doing so the High Court relied upon its own judgment in the case of CIT
vs. ACE Builders Pvt. Ltd. [(2006) 281 ITR 210 [Bom]. The High Court
observed that section 50 of the Act which is a special provision for computing
the capital gains in the case of depreciable assets was not only restricted for
the purposes of section 48 or section 49 of the Act as specifically stated
therein, the said fiction created in sub-section (1) & (2) of section 50
had limited application only in the context of mode of computation of capital
gains contained in sections 48 and 49 and would have nothing to do with the
exemption that is provided in a totally different provision i.e. section 54E.
Section 48 deals with the mode of computation and section 49 relate to cost
with reference to certain mode of acquisition. This aspect was analysed by the
judgment of the Bombay High Court in the case of CIT vs. ACE Builders Pvt.
Ltd. (supra) in the following manner:

“In our opinion, the assessee cannot be denied exemption
u/s. 54E, because, firstly, there is nothing in section 50 to suggest that the
fiction created in section 50 is not only restricted to sections 48 and 49 but
also applies to other provisions. On the contrary, section 50 makes it
explicitly clear that the deemed fiction created in sub-section (1) & (2)
of section 50 is restricted only to the mode of computation of capital gains
contained in Section 48 and 49. Secondly, it is well established in law that a
fiction created by the legislature has to be confined to the purpose for which
it is created. In this connection, we may refer to the decision of the Apex
Court in the case of State Bank of India vs. D. Hanumantha Rao reported in 1998
(6) SCC 183. In that case, the Service Rules framed by the bank provided for
granting extension of service to those appointed prior to 19.07.1969.

The respondent therein who had joined the bank on 1.7.1972
claimed extension of service because he was deemed to be appointed in the bank
with effect from 26.10.1965 for the purpose of seniority, pay and pension on
account of his past service in the army as Short Service Commissioned Officer.
In that context, the Apex Court has held that the legal fiction created for the
limited purpose of seniority, pay and pension cannot be extended for other
purposes. Applying the ratio of the said judgment, we are of the opinion, that
the fiction created u/s. 50 is confined to the computation of capital gains
only and cannot be extended beyond that.

Thirdly, Section 54E does not make any distinction between
depreciable asset and non-depreciable asset and, therefore, the exemption
available to the depreciable asset u/s. 54E cannot be denied by referring to
the fiction created u/s. 50. Section 54E specifically provides that where
capital gain arising on transfer of a long term capital asset is invested or
deposited (whole or any part of the net consideration) in the specified assets,
the assessee shall not be charged to capital gains. Therefore, the exemption
u/s. 54E of the I.T. Act cannot be denied to the assessee on account of the
fiction created in Section 50.”

The Supreme Court held that it was in agreement with the
aforesaid view taken by the High Court.

The Supreme Court noted that the Gujarat High Court as well
as Guahati High Court had also taken the same view in the following cases:

1.  CIT 
vs. Polestar Industries [(2014) 221 Taxman 423 (Guj)];

2.  CIT vs. Tax vs. Assam Petroleum Industries
(P.) Ltd. [(2003) 262 ITR 587 (Guj.)].

The Supreme Court also noted that against the aforesaid
judgments no appeal had been filed.

In view of the foregoing, the Supreme Court did not find any
merit in the instant appeal which was accordingly, dismissed.

8. Business Expenditure – Amortisation of expenditure for
issue of share u/s. 35D – Amortisation allowable over a period of 10 years –
Where benefit is allowed for the first two assessment years, it cannot be denied
in the subsequent balance period.

Shasun Chemicals and Drugs Ltd. V. CIT (2016) 388 ITR 1
(SC)  

Business Expenditure – Bonus – Dispute with workmen – Payment
made to Trust to comply with the requirement of section 43B but the dispute was
settled and the payment was made before the expiry of time permissible u/s. 36
– Deduction was allowable and the provisions of section 40A(9) were not
attracted.

The assessee went in for public issue of shares in order to
raise funds to meet the capital expenditure and other expenditure relating to
expansion of its existing units of production both at Pondicherry and Cuddalore
and for expansion of its Research and Development Activity. The assessee issued
to public 15,10,000 equity shares of Rs.10/- each for cash at a premium of
Rs.30/- per share aggregating to Rs.6,04,00,000/-.

The aforesaid issue was opened for public subscription during
the financial year ending 31.03.1995 relevant to the Assessment Year 1995-96.
The assessee had, in the prospectus issued, clearly stated under the column
projects that the production capacity of its existing products, more
particularly Ibuprofen and Ranitidine was proposed to be increased.

The assessee incurred a sum of Rs.45,51,890/- towards the
aforesaid share issue expenses and claimed 1/10th of the aforesaid share issue
expenses each year u/s. 35D of the Act from the Assessment Years 1995-96 to
2004-05. The Assessing Officer on the same set of facts allowed the claim of
the assessee (1/10th of the share issue expenses u/s. 35D of the Act) for the
initial Assessment Year being the Assessment Year 1995-96 after examining the
materials produced. However, the Assessing Officer disallowed the expenses for
the Assessment Year 1996-97 on the ground that the share issue expenses were
not eligible for deduction in view of the decision of the Supreme Court in the
case of Brooke Bond India Ltd. vs. CIT [(1997) 225 ITR 798 (SC)],
stating that the expenditure incurred was capital in nature and hence not
allowable for computing the business profits.

Aggrieved against the aforesaid disallowance made by the
Assessing Officer for the Assessment Year 1996-97, the assessee filed an appeal
before the Commissioner of Income Tax (Appeals), [hereinafter referred to as
CIT(A)] who vide his order directed the Assessing Officer to verify
physically the factory premises of the assessee and find out, whether there
were any additions to the plant and machinery at the factory and whether there
were any additions to the buildings at the factory whereby any expansion has
been made to the existing industrial undertaking to justify the claim made by
the assessee.

In furtherance to the aforesaid direction, the Assessing
Officer after making due physical verification of the factory premises and on
being satisfied with the expansion of the facilities to the industrial
undertaking duly allowed the claim of share issue expenses. While doing so, the
Assessing Officer, for the assessment year 1996-97, passed a detailed and
elaborate order after scrutinising all the materials made available to him and
recorded a positive finding of fact that there was an expansion to the existing
units of the industrial undertaking and after being satisfied of the same duly
allowed the claim of share issue expenses u/s. 35D.

In the return by the assessee for the assessment year
2001-02, it was mentioned by the assessee that it had paid bonus to its
employees to the tune of Rs.96,08,002/- in the said Financial Year and,
therefore, it claimed deduction. However, invoking the provisions of section
40A(9), the said expenditure was disallowed on the ground that it was not paid
in cash to the concerned employees. CIT(A) allowed the expenditure and the same
view was taken by the ITAT but the High Court has reversed the view of ITAT on
this ground also.

In the aforesaid backdrop, two questions were raised before
the Supreme Court by the assessee.

As regards to the issue amortisation u/s. 35D of the
expenditure incurred on issue of shares, the Supreme Court noted that in the
Income Tax Return which was filed for the Assessment Year 1995-96, the assessee
had claimed that it had incurred a sum of Rs.45,51,890/- towards the share
issue expenses and had claimed 1/10th of the aforesaid share issue expenses
u/s. 35D of the Act from the Assessment Year 1995-96. This claim of the
assessee was found to be justified and allowable under the aforesaid provisions
and on that basis 1/10th share issue expenses was allowed u/s. 35D of the Act.
When it was again claimed for the Assessment Year 1996-97, though it was
disallowed and on directions of the Appellate Authority, the Assessing Officer
made physical verification of the factory premises. He was satisfied that there
was expansion of the facilities to the industrial undertaking of the assessee.
It was on this satisfaction that for the Assessment Year 1996-97 also the
expenses were allowed. The Supreme Court held that once this position is
accepted and the clock had started running in favour of the assessee, it had to
complete the entire period of 10 years and benefit granted in first two years
could not have been denied in the subsequent years as the block period was 10
years starting from the Assessment Year 1995-96 to Assessment Year 2004-05. The
Supreme Court observed that the High Court, however, disallowed the same
following the judgment of the Supreme Court in the case of Brooke Bond India
Ltd (supra). In the said case it was held that the expenditure incurred on
public issue for the purpose of expansion of the company is a capital
expenditure. However, in spite of the argument raised to the effect that the
aforesaid judgment was rendered when section 35D was not on the statute book
and this provision had altered the legal position, the High Court still chose
to follow the said judgment. According to the Supreme Court it was here where
the High Court went wrong as the instant case was to be decided keeping in view
the provisions of section 35D. The Supreme Court held that in any case, it
warrants repetition that in the instant case under the very same provisions
benefit was allowed for the first two Assessment Years and, therefore, it could
not have been denied in the subsequent block period. The Supreme Court thus,
answered the question in favour of the assessee holding that the assessee was
entitled to the benefit of section 35D for the Assessments Years in question.

So far as the other question regarding deduction on account
of payment of bonus to the employees of the assessee was concerned, the Supreme
Court noted that in the Assessment Years in question the workers of the
assessee had raised a dispute of quantum of bonus which had led to the labour
unrest as well. Because of this the workers had finally refused to accept the
bonus offered to them. Faced with this situation, the assessee had made the
payment to the Trust to comply with the requirement of section 43B, as the said
provision makes it clear that deduction in respect of bonus would be allowed
only if actual payment was made. Pertinently, the dispute could be settled with
the workers well in time and for that reason payment of bonus was made to the
workers on the very next day of deposit of the said amount in the Trust by the
assessee. This happened before the expiry of due date by which such payment was
supposed to be made in order to claim deduction u/s. 36 of the Act. However,
since the payment was made from the Trust, the Assessing Officer took the view
that as the payment was not made by the assessee to the employees directly in
cash, it was not allowable in view of the provisions of section 40A(9). Though
this view was not accepted by the CIT(A) as well as ITAT, the High Court had
found justification in the stand taken by the Assessing Officer. According to
the Supreme Court, here also the High Court had gone wrong in relying upon the
provisions of section 40A(9) of the Act.

The provisions of section 36 which enumerate various kinds of
expenses which are allowable as deduction while computing the business income
u/s. 28. The amount paid by way of bonus is one such expenditure which is
allowable under clause (ii) of sub-section (1) of section 36. According to the
Supreme Court there was no dispute that this amount was paid by the assessee to
its employees within the stipulated time. Embargo specified u/s. 43B or
40A(9)  did not come in the way of the
assessee. Therefore, the High Court was wrong in disallowing this expenditure
as deduction while computing the business income of the assessee and the
decision of the ITAT was correct.

On both counts, the order of the High Court was set aside by
the Supreme Court and the appeals were allowed.

Note: In the above case, in the context of the second
issue relating to deductibility of bonus payment, some of the observations of
the apex court relating to sections 40A(9) and 43B lack clarity and do not seem
to be in line with the provisions and hence, they are ignored.

9  Appeal to the High
Court – High Court must frame the substantial question(s) of law arising in the
appeal before answering the same.

Jai Hind Cycle Company Ltd. vs. CIT (2016) 388 ITR 482
(SC)

The only point canvassed at the hearing before the Supreme
Court was that the income tax appeal u/s. 260A 
had been decided by the High Court without framing any substantial
question of law. This, according to the Appellant was impermissible on the
basis of several decisions of the Supreme Court including the one in M.
Janardhana Rao vs. Joint CIT reported in [(2005) 273 ITR 50 (SC)].

The Supreme Court after perusing the said order of the Court,
was of the view that the High Court ought to have framed the substantial
question(s) of law arising in the appeal before answering the same. The High
Court having not done that, the Supreme Court set aside the order passed by the
High Court and remanded the matter to the High Court for a de novo
consideration after formulating the substantial question(s) of law arising, if
any.