Glimpses of Supreme Court Rulings

1.   
Business Income – Set of
accumulated losses of amalgamating company by the amalgamated under section 72A
to be allowed after adjusting the remission of cessation of interest liability
of amalgamating company which are chargeable to tax under section 41(1)

 McDowell and Company Ltd. vs. CIT (2017)
393 ITR 570 (SC)

There was a
company known as M/s. Hindustan Polymers Limited (HPL) which had become a sick
industrial company. Proceedings in respect of the said company were pending
before the Board for Industrial and Financial Reconstruction (BIFR) under Sick
Industrial Companies Act (SICA). At that stage, petitions under sections 391
and 392 of the Companies Act, 1956, were filed in the High Court of Bombay and
Madras for amalgamation of HPL with the Assessee-Appellant, i.e., M/s. McDowell
and Company Limited. Both the High Courts approved the scheme of amalgamation
as a result of which, w.e.f. 01.04.1977, HPL stood amalgamated with the
Assessee/Appellant-company.

HPL owed a lot
of money to banks and financial institutions. In its books of accounts, the
interest which had accrued on the loans given by such financial companies was
shown as the money payable on account of interest to the said banking companies
and was reflected as expenditure on that count. As the interest payable was
treated as expenditure, benefit thereof was taken in the assessment orders
made. The Assessee had approached the Central Government, before moving the
High Court, with the scheme of amalgamation for getting benefits of section 72A
of the Act. This section makes provisions relating to carry forward and set off
accumulated loss and unabsorbed depreciation allowance in certain cases of
amalgamation or demerger etc. Under certain circumstances and on
fulfillment of conditions laid down therein, the company which takes over the
sick company is allowed to set off losses of the amalgamating company as its
own losses. The Central Government had made a declaration to this effect u/s.
72A of the Act granting the benefit of the said provision to the Assessee.

Under the
scheme of amalgamation that was approved by the High Court, after following the
procedure in terms of sections 391 and 392 of the Companies Act, which included
the consent of the secured creditors as well, the banks which had advanced
loans to HPL agreed to waive off the interest which had accrued prior to
01.04.1977. This interest was claimed as expenditure by HPL in its returns. On
the waiver of this interest, it became income in terms of section 41(1) of the
Act. In the return filed by the Assessee for the Assessment Year 1983-1984, the
Assessee claimed set off of the accumulated losses which it had taken over from
HPL by virtue of the provisions contained in section 72A of the Act. This was
allowed. However, later on, it came to the notice of the Assessing Officer that
while allowing the aforesaid benefit to the Assessee, the income which had
accrued u/s. 41 of the Act had not been set off against the accumulated loses.
It so happened that on certain grounds, the assessment was reopened by the
Assessing Officer and while undertaking the exercise of reassessment, the
Assessing Officer also noticed that the aforesaid fact, viz., the income which
had accrued within section 41(1) of the Act as mentioned above, was not set off
while giving benefit of accumulated losses u/s. 72A of the Act to the Assessee.
The Assessing Officer, therefore, treated the aforesaid income at the hands of
the Assessee and adjusted the same from the accumulated losses. The assessment
order was drawn accordingly. This reassessment was challenged by the Assessee
by filing appeal before the Commissioner of Income Tax (Appeals), which was
dismissed. However, in further appeal before the ITAT, the Assessee succeeded
inasmuch as the ITAT held that the aforesaid income u/s. 41(1) of the Act was
not at the hands of the Assessee herein but it may be treated as income of the
HPL and since HPL was a different Assessee and a different entity, the Assessee
herein was not liable to pay any taxes on the said income. Feeling aggrieved
thereby, the Revenue sought reference u/s. 256 of the Act and ultimately, the
reference was made on the following questions of law:

“Whether on the
facts and in the circumstances of the case, the Tribunal was justified in law
in upholding that the over due interest waived by the financial institutions
amounting to Rs. 25.02 lakhs is not assessable in the hands of the Assessee?”

This question
of law was decided in favour of Revenue by the impugned judgment.

The Supreme
Court held that the Assessee was given the benefit of accumulated losses of the
amalgamating company. The effect thereof was that though these losses were
suffered by the amalgamating company they were deemed to be treated as losses
of the Assessee company by virtue of section 72A of the Act. In a case like
this, it cannot be said that the Assessee would be entitled to take advantage
of the accumulated losses but while calculating these accumulated losses at the
hands of amalgamated company, i.e., HPL, the income accrued u/s. 41(1) of the
Act at the hands of HPL would not be accounted for. That had to be necessarily
adjusted in order to see what are the actual accumulated losses, the benefit
whereof is to be extended to the Assessee.

According to
the Supreme Court, this appeal was without any merit and was, accordingly,
dismissed.

Note:
Interestingly, the above case arose as a result of amalgamation which was
effective from 1/4/1977, but the issue came-up in relation to Asst. Year.
1983-84. In the above case, the Apex Court distinguished its earlier judgement
in the case of Saraswati Industrial Syndicate Ltd. [186 ITR 278] on the ground
that in the instant case the assessee had the benefit of carry forward losses
of the sick company [amalgamating company] u/s. 72A and the assessee company
[amalgamated company] had, in fact, availed the benefit of the waiver of
interest [which accrued to the assessee after the sick company had ceased to
exist due to amalgamation] and therefore, the same should be adjusted against
such losses and in that case, the Court dealt with the provisions of section
41(1) per se where section 72A was not the subject matter of the
decision. Therefore, the facts of the two cases are different. The judgment in
the case of Saraswati Industrial Syndicate Ltd. has been analysed in the column
“Closements” in the December, 1990 issue of the BCAJ. It may also be
noted that subsequently, section 41(1) has been substituted by the Finance Act,
1992 [w.e.f. Asst. Year. 1993-94] which effectively nullified the effect of the
ratio of the judgment in the case of Saraswati Industrial Syndicate Ltd.

 2. Exemption – Compensation
received on compulsory acquisition of agricultural land – The acquisition
process is initiated by invoking the provisions of Land Acquisition Act, 1894
by the State Government is completed with the award and the only thing that
remains thereafter is to pay the compensation as fixed under the award and take
possession of the land in question from the owner and to avoid litigation if
such owner enters into negotiations and settles the final compensation with the
buyer, the character of acquisition would not change from that of compulsory
acquisition to the voluntary sale

 Balakrishnan
vs. UOI and Ors. (2017) 391 ITR 178 (SC)

The Appellant
was the owner of 27.70 acres of land in Sy. No. 18.60 hectares of paddy field
in Block No. 17 of Attippra village in Thiruvananthapuram District comprised in
Sy. No. 293/8. This was agricultural land. The Appellant was using the same to
grow paddy.

The Government
of Kerala sought to acquire the aforesaid property of the Appellant for the
public purpose namely, ‘3rd phase of development of Techno Park’. For this
purpose, Notification u/s. 4(1) of the Land Acquisition Act, 1894 (hereinafter
referred to as the ‘LA Act’) was issued on 01.10.2005. An opportunity was given
to the Appellant to file his objections, if any, u/s. 5A of the LA Act. Record
does not reveal as to whether such objections were filed or not. However
admittedly, thereafter, declaration u/s. 6 of the LA Act was issued on
02.09.2006 wherein the Government had declared that it was decided to acquire
the land for the aforesaid purpose. After this acquisition, the Land
Acquisition Collector (Special Tahsildar), after following the due procedure,
even passed the award on 15.02.2007. As per this award, compensation was fixed
at Rs. 14,36,616/-. The amount of compensation fixed by the Land Acquisition
Collector was not acceptable to the Appellant. At that stage, some negotiations
started between the parties on the amount of compensation and ultimately it was
agreed by the Techno Park, for whom the property in question was acquired, to
pay a sum of Rs. 38,42,489/-. After this amount was agreed upon between the
parties, the Appellant agreed to execute a sale deed of the property in
question in favour of Techno Park. Such sale deed was executed on 08.05.2008
and duly registered with the Sub-Registrar, Kazhakoottam. While disbursing the
aforesaid amount of sale consideration, the Techno Park deducted 10% of the
amount of TDS and it was later refunded to the Appellant herein by the Income
Tax Department on completion of the assessment for the assessment year 2009-10,
taking a view that no capital gain was payable on the aforesaid amount received
by the Appellant as the same was exempted u/s. 10(37) of the Income-tax Act,
1961 (hereinafter referred to as ‘ the Act’).

However,
thereafter on 30.05.2012, a notice was issued to the Appellant u/s. 148 of the
Act whereby the Income Tax Department decided to re-open the assessment on the
ground that income which was assessable to income tax escaped assessment during
the year 2009-10. The stand which was taken by the Revenue in this notice was
that the amount of compensation/consideration received by the Appellant against
the aforesaid land was not the result of compulsory acquisition and on the
contrary it was the voluntary sale made by the Appellant to the Techno Park
and, therefore, the provisions of section 10(37) of Act were not applicable.

The Appellant
objected to the re-opening of the said assessment by filing his reply dated
30.11.2012. However, the Joint Commissioner, Income Tax Range-I, Kawadiar,
Thiruvananthapuram, took the view that the case did not come under compulsory
acquisition and directed the Assessing Officer to compute the income
accordingly. This direction dated 11.03.2013 of the Joint Commissioner was
challenged by the Appellant by filing a Civil Writ Petition in the High Court
of Kerala. The learned Single Judge, however, dismissed the said writ petition
vide judgement dated 11.07.2013 relying upon the earlier judgement of the same
High Court in case of Info Park Kerala vs. Assistant Commissioner of Income
Tax (2008) 4 KLT 782. The writ appeal preferred by the Appellant met
the same fate as it was dismissed affirming the view of the learned
Single Judge.

It is in the
aforesaid backdrop, the following question arose before the Supreme Court for
its consideration.

“Whether, on
the facts and circumstances of the case, the High Court was justified in
denying the claim for exemption u/s. 10(37) of the Income-tax Act, 1961 to the
Appellant?”

The Supreme
Court observed that on the transfer of agricultural land by way of compulsory
acquisition under any law, no capital gain tax is payable. The Supreme Court
noted that the initial view of the Income Tax Department, while refunding the
aforesaid TDS amount to the Appellant, was that the land in question was
compulsorily acquired under the LA Act and, therefore, capital gain tax was not
payable.

According to
the Supreme Court, from the facts mentioned above, it was apparent that the
acquisition process was initiated by invoking the provisions of LA Act by the
State Government. For this purpose, not only Notification u/s. 4 was issued, it
was followed by declaration u/s. 6 and even Award u/s. 9 of the LA Act. With
the award the acquisition under the LA Act was completed. Only thing that
remained thereafter, was to pay the compensation as fixed under the award and
take possession of the land in question from the Appellant. No doubt, in case,
the compensation as fixed by the Land Acquisition Collector was not acceptable
to the Appellant, the LA  Act provides
for making a reference u/s.18 of the Act to the District Judge for determining
the compensation and to decide as to whether the compensation fixed by the Land
Acquisition Collector was proper or not. However, the matter thereafter is only
for quantum of compensation which has nothing to do with the acquisition. The
Supreme Court held that it was clear from the above that insofar as acquisition
was concerned, the Appellant had succumbed to the action taken by the
Government in this behalf. His only objection was to the market value of the
land that was fixed as above. To reiterate his grievance, the Appellant could
have either taken the aforesaid adjudicatory route of seeking reference under
section18 of the LA Act leaving it to the Court to determine the market value.
Instead, the Appellant negotiated with Techno Park and arrived at amicable
settlement by agreeing to receive the compensation in the sum of Rs.
38,42,489/-. For this purpose, after entering into the agreement, the Appellant
agreed to execute the sale deed as well which was a necessary consequence and a
step which the Appellant had to take.

The Supreme
Court reiterated that insofar as acquisition of the land was concerned, the
same was compulsorily acquired as the entire procedure prescribed under the LA
Act was followed. The settlement took place only qua the amount of the
compensation which was to be received by the Appellant for the land which had
been acquired. According to the Supreme Court, had steps not been taken by the
Government under sections 4 and 6 followed by award u/s. 9 of the LA  Act, the Appellant would not have agreed to
divest the land belonging to him to Techno Park. He was compelled to do so
because of the compulsory acquisition and to avoid litigation entered into
negotiations and settled the final compensation. Merely because the
compensation amount is agreed upon would not change the character of acquisition
from that of compulsory acquisition to the voluntary sale. It may be mentioned
that this is now the procedure which is laid down even under the Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013 as per which the Collector can pass rehabilitation and
resettlement award with the consent of the parties/land owners. Nonetheless,
the character of acquisition remains compulsory.

The Supreme
Court doubted the correctness of the judgment in the case of Info Park
Kerala vs. Assistant Commissioner of Income Tax (2008) 4 KLT 782.
The Court in the said case took the view that since the title in the property
was passed by the land owners on the strength of sale deeds executed by them,
it was not a compulsory acquisition. The Supreme Court did not subscribe with
the aforesaid view. According to the Supreme Court, it was clear that but for
Notification u/s. 4 and Award u/s. 9 of the LA Act, the Appellant would not
have entered into any negotiations for the compensation of the consideration
which he was to receive for the said land. As far as the acquisition of the
land in question was concerned, there was no consent. The Appellant was put in
such a condition that he knew that his land had been acquired and he could not
have done much against the same. The Appellant, therefore, only wanted to
salvage the situation by receiving as much compensation as possible
commensurate with the market value thereof and in the process avoid the
litigation so that the Appellant is able to receive the compensation well in
time. If for this purpose the Appellant entered into the negotiations, such
negotiations would be confined to the quantum of compensation only and cannot
change or alter the nature of acquisition which would remain compulsory. The
Supreme Court, therefore, overruled the judgment of the Kerala High Court in Info
Park Kerala vs. Assistant Commissioner of Income Tax (2008) 4 KLT 782.

The Supreme
Court allowed the appeal of the Appellant and quashed the proceedings u/s.148
of the Act.

Note: The above
judgment is very useful in the context of current scenario of emphasis on
infrastructure development by the government and consequent need for land
acquisition with the resultant issue of taxation of capital gain arising on
compulsory acquisition of urban agricultural land, which may arise very often.
In such cases where the assessee receives higher compensation on negotiations
with the concerned party in the process of such acquisition, the benefit of
exemption u/s. 10(37) will be crucial and this judgement will become beneficial
in that context and may also help in reducing the litigation on contesting the
acquisition proceeding under the LA  Act.
Furthermore, in this case, the issue arising out of re-assessment proceedings
initiated in the year 2012 got finally resolved in 2017 [i.e. in a short period
of 5 years] at the level of the Apex Court. This shows clear advantage of
adopting the route of filing Writ Petition challenging such re-assessment
proceedings, especially involving a clear point of law. In normal course, the
matter generally would not have got resolved at that level in a period of less
than two decades.

 3.
Exemption/Deduction – Though
Section 10A, as amended, is a provision for deduction, the stage of deduction
would be while computing the gross total income of the eligible undertaking
under Chapter IV of the Act and not at the stage of computation of the total
income under Chapter VI

 C.I.T. and Ors. vs. Yokogawa India
Ltd. (2017) 391 ITR 274 (SC)

The Supreme
Court formulated the following specific questions arising in the group of cases
before it for consideration.

(i)   Whether
section 10A of the Act is beyond the purview of the computation mechanism of
total income as defined under the Act. Consequently, is the income of a section
10A unit required to be excluded before arriving at the gross total income of
the Assessee?

 (ii)  Whether
the phrase “total income” in section 10A of the Act is akin and pari
materia with the said expression as appearing in section 2(45) of the Act?

 (iii)  Whether
even after the amendment made with effect from 1.04.2001, section 10A of the
Act continues to remain an exemption section and not a deduction section?

 (iv) Whether
losses of other 10A Units or non 10A Units can be set off against the profits
of 10A Units before deductions u/s.10A are effected?

 (v)  Whether
brought forward business losses and unabsorbed depreciation of 10A Units or non
10A Units can be set off against the profits of another 10A Units of the
Assessee.

The Supreme
Court clarified that the decision of this Court with regard to the provisions
of section 10A of the Act would equally be applicable to cases governed by the
provisions of section 10B in view of the said later provision being pari
materia with section 10A of the Act though governing a different situation.

The Supreme
Court considered the submissions advanced and the provisions of section 10A as
it stood prior to the amendment made by the Finance Act, 2000 with effect from
1.4.2001; the amended section 10A thereafter and also the amendment made by the
Finance Act, 2003 with retrospective effect from 1.4.2001.

The Supreme
Court observed that retention of section 10A in Chapter III of the Act after
the amendment made by the Finance Act, 2000 would be merely suggestive and not
determinative of what is provided by the section as amended, in contrast to
what was provided by the un-amended Section. The true and correct purport and
effect of the amended section would have to be construed from the language used
and not merely from the fact that it had been retained in Chapter III.
According to the Supreme Court, the introduction of the word ‘deduction’ in
section 10A by the amendment, in the absence of any contrary material, and in
view of the scope of the deductions contemplated by section 10A, it had to be
understood that the section embodied a clear enunciation of the legislative
decision to alter its nature from one providing for exemption to one providing
for deductions.

The Supreme
Court held that the difference between the two expressions ‘exemption’ and
‘deduction’, though broadly may appear to be the same i.e. immunity from
taxation, the practical effect of it in the light of the specific provisions
contained in different parts of the Act would be wholly different. The above
implications could not be more obvious than from the cases which had been filed
by assessee having loss making eligible units and/or non-eligible units seeking
the benefit of this section.

The Supreme
Court noted that sub-section 4 of section 10A which provides for pro-rata
exemption, necessarily involving deduction of the profits arising out of
domestic sales, was one instance of deduction provided by the amendment.
Profits of an eligible unit pertaining to domestic sales would have to enter
into the computation under the head “profits and gains from business”
in Chapter IV and denied the benefit of deduction. The provisions of
sub-section 6 of section 10A, as amended by the Finance Act of 2003, granting
the benefit of adjustment of losses and unabsorbed depreciation etc.
commencing from the year 2001-02 on completion of the period of tax holiday
also virtually worked as a deduction which had to be worked out at a future
point of time, namely, after the expiry of period of tax holiday. The absence
of any reference to deduction u/s.10A in Chapter VI of the Act could be
understood by acknowledging that any such reference or mention would have been
a repetition of what has already been provided in section 10A. The provisions
of sections 80HHC and 80HHE of the Act providing for somewhat similar
deductions would be wholly irrelevant and redundant if deductions u/s. 10A were
to be made at the stage of operation of Chapter VI of the Act. The retention of
the said provisions of the Act i.e. section 80HHC and 80HHE, despite the
amendment of section 10A, indicated that some additional benefits to eligible
section 10A units, not contemplated by sections 80HHC and 80HHE, was intended
by the legislature. Such a benefit could only be understood by a legislative
mandate to understand that the stages for working out the deductions u/s. 10A
and 80HHC and 80HHE are substantially different.

“The export
turnover and the total turnover for the purposes of sections 10A and 10B shall
be of the undertaking located in specified zones or 100% Export Oriented
Undertakings, as the case may be, and this shall not have any material
relationship with the other business of the Assessee outside these zones or
units for the purposes of this provision.”

If the specific
provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and
10A (4)] that the unit that is contemplated for grant of benefit of deduction
is the eligible undertaking and that is also how the contemporaneous Circular
of the department (No. 794 dated 09.08.2000) understood the situation, it was
only logical and natural that the stage of deduction of the profits and gains
of the business of an eligible undertaking has to be made independently and,
therefore, immediately after the stage of determination of its profits and
gains. At that stage the aggregate of the incomes under other heads and the
provisions for set off and carry forward contained in sections 70, 72 and 74 of
the Act would be premature for application. The deductions u/s. 10A therefore
would be prior to the commencement of the exercise to be undertaken under
Chapter VI of the Act for arriving at the total income of the Assessee from the
gross total income. The somewhat discordant use of the expression “total
income of the Assessee” in Section 10A could be reconciled by
understanding the expression “total income of the Assessee” in section
10A as ‘total income of the undertaking’.

The Supreme
Court answered the appeals and the questions arising therein, as formulated
above, by holding that though section 10A, as amended, is a provision for
deduction, the stage of deduction would be while computing the gross total
income of the eligible undertaking under Chapter IV of the Act and not at the
stage of computation of the total income under Chapter VI. All the appeals were
disposed of accordingly.

 4.  Assessment – Prima facie
adjustment – Capital or revenue – Even though it is may be a debatable issue
but where the jurisdictional High Court has taken a particular view,
authorities under its jurisdiction are bound by it and it could not be said that the issue was a debatable one in that State

 DCIT vs.
Raghuvir Synthetics Ltd. (2017) 394 ITR 1 (SC)

The
Respondent-Assessee, a public limited company, filed its return for the
assessment year 1994-95, wherein it had claimed revenue expenditure of Rs.
65,47,448 on advertisement and public issue. However, in the return of income,
the company made a claim that if the aforesaid claim could not be considered as
a revenue expenditure then alternatively the said expenditure may be allowed
u/s. 35D of the Income-tax Act, 1961 (hereinafter referred to as “the
Act”) by way of capitalising in the plant and machinery obtained.

The Assessing
Officer issued an intimation u/s. 143(1)(a) of the Act disallowing a sum of Rs.
58,92,700 out of the preliminary expenditure incurred on public issue. He,
however, allowed one-tenth of the total expenses and raised demand on the
balance amount.

The intimation
was challenged before the first appellate authority which allowed the appeal by
holding that the concept of “prima facie adjustment” u/s.
143(1)(a) of the Act could not be invoked as there could be more than one
opinion on whether public issue expenses were covered by section 35D or section
37 of the Act.

Feeling
aggrieved by the order passed by the first appellate authority, the Revenue
preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal
upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the
appeal filed by the Revenue.

The Appellant
preferred an appeal u/s. 260A of the Act before the High Court of Gujarat at
Ahmedabad. The Division Bench of the High Court by the impugned order dismissed
the appeal on the ground that a debatable issue cannot be disallowed while
processing return of income u/s. 143(1)(a) of the Act.

The Supreme
Court held that even though it was a debatable issue but as the Gujarat High
Court in the case of Ahmedabad Mfg. and Calico (P.) Ltd. (1986) 162 ITR 800
(Guj) had taken a view that it is capital expenditure which was subsequently
followed by Alembic Glass Industries Ltd. vs. CIT (1993) 202 ITR 214 (Guj)
and the registered office of the Respondent-Assessee being in the State of
Gujarat, the law laid down by the Gujarat High Court was binding. Therefore, so
far as the present case was concerned, it could not be said that the issue was
a debatable one.

According to the Supreme
Court, the order passed by the Commissioner of Income-tax (Appeals), the
Income-tax Appellate Tribunal and also the order of the Gujarat High Court were
not sustainable and were therefore set aside as they had wrongly held that the
issue was debatable and could not be considered in the proceedings u/s. 143(1)
of the Act. The Supreme Court allowed the appeal of the Revenue.