Month: June

A letter dated 30-04-2012, written by a Chartered Accountant was treated as a public interest litigation and marked to the Court. Subsequently, the All India Federation of Tax Practitioners fied another writ petition on identical or similar lines. The attention of the Court was drawn towards the numerous difficulties faced by income-tax assesses, consequent upon computerisation and central processing of income-tax returns. The difficulties arose due to faulty processing of returns and uploading of details of tax deducted at source by deductors resulting in creation of huge demands because of mismatch between the tax deducted at source claimed in the return and that reflected in the online computer records, i.e., in Form No. 26AS. Moreover, the Central Processing Unit set up in Bangalore, while issuing refunds in the later years adjusted demands for earlier years which may not have been communicated to the assessee. The Petitioners prayed for suitable directions to the Income Tax Department. By an interim order dated 31-08-2012 certain directions were issued by the Delhi High Court which has been summarised in the November 2012 Issue of the BCA Journal (In the High Courts). Further directions have been now given in this order. Briefly, the directions are as under:

1. Uploading of wrong or fictitious demand and delayed disposal of rectification applications

1.1 Each assessee has a right and can demand from the respondents that correct and true data relating to the past demands should be uploaded. CBDT should and must endeavour and direct the Assessing Officers to upload the correct data. Filing of applications u/s. 154 i.e. application for rectification and correction by the assessee would entail substantial expenses on the part of the assessee who would be required to engage a counsel or advocate or make repeated visits to the Income-tax office for the said purpose. This would defeat themain purpose behind computerisation i.e., to reduce involvement of human element.

1.2 As per Citizen Charter of Income tax Department, refund along with interest in case of electronically filed returns should be made within six months. In case of manually filed returns, refund should be made within nine months. The time commences from the end of month in which the return/application is received. Similarly, the Citizen Charter states that a decision on the rectification application u/s. 154 will be made within a period of two months. The Board has, however, issued instructions that rectification application u/s. 154 should be disposed of within 4/6 months. There is a general grievance that the Assessing Officers do not adhere to the said time limits and the assessees are invariably called upon to file duplicate applications or new applications in case they want disposal. It is stated that there are no dak or receipt counters or register for receipt of applications u/s. 154. Thus, there is no record/register with the Assessing Officer with details and particulars of application made u/s. 154, the date on which it was made, date of disposal and its fate. Therefore, the respondents are to examine the necessity for proper dak/receipt counters for receipt of applications u/s. 154 by hand or by post. It would be desirable that each application received should be entered in a diary/register and given a serial number with acknowledgement to the applicant indicating the diary number. It was also suggested that details of applications u/s. 154 should be uploaded on the website as this would entail transparency. The website should indicate the date on which the application was received and date of disposal of the application by the Assessing Officer concerned.

1.3 Uploading of the details of the said registers should be made online preferably within a period of six months. This would be in accordance with the mandate of the Citizen Charter of the Department which states that the respondents believe in equity and transparency.

2. Regarding adjustment of refund contrary to the mandate of section 245

2.1 Section 245 requires that an opportunity ofresponse/reply should be given and after considering the stand and plea of the assessee, justified and valid order or direction for adjustment of refund can be made. The section postulates two stage action; prior intimation and then subsequent action when warranted and necessary for adjustment of the refund towards arrears.

2.2 CPC, Bengaluru stated that after handing over of old demands to the CPC and commencement of processing of returns by CPC, the procedure u/s. 245 was being followed by CPC before making adjustment of the refunds and assessees were being given full details with regard to the demands which were being adjusted. The intimation u/s. 143(1) issued from CPC incorporated the full details of the existing demands that were adjusted against the refunds. Further, when the processing of a return at CPC resulted in demand, the communication u/s. 245 was incorporated into the intimation itself. As far as the demands uploaded by the Assessing Officers to CPC portal were concerned, CPC had already issued a communication to the taxpayers through e-mail (wherever e-mail address is available) and by speed post informing him the existence of the demand in the books of the Assessing Officer and that such demand was liable for adjustment against refund u/s. 245.

2.3 The respondents accept that when a return of income is processed u/s. 143(1) at Central Processing Unit at Bengaluru, the computer itself adjusts the refund due against the existing demand, i.e., there is adjustment but without following the two stage procedure prescribed in section 245.

2.4 In the order dated 31-08-2012, the respondents were directed to follow the procedure prescribed u/s. 245 before making any adjustment of refund payable by the CPC at Bengaluru. The assessees must be given an opportunity to file response or reply and the reply must be considered and examined by the Assessing Officer before any direction for adjustment is made. The process of issue of prior intimation and service thereof on the assessee would be as per the law. The assessees would be entitled to file their response before the Assessing Officer mentioned in the prior intimation. The Assessing Officer wouldthereafter examine the reply and communicate his findings to the CPC, Bengaluru, who would then process the refund and adjust the demand, if any payable. The final adjustment will also be communicated to the assessee.

2.5 The said interim order is confirmed. It is noticed that the respondents have taken remedial steps to ensure compliance of section 245 as they now give an option to the assessee to approach the Assessing Officer.

3. Regarding past adjustments

3.1 The problem relating to ‘past adjustment’ before passing of the interim order on 31-08-2012, still persists and has to be addressed.

3.2 Inspite of the opportunity given to the Revenue to take steps, prescribe, adopt a just procedure, to correct the records, etc., nothing has been done and they have not taken any decision or steps. In these circumstances, direction is issued, which will be applicable only to cases where returns have been processed by the CPC Bengaluru and refunds have been fully or partly adjusted against the past arrears while passing or communicating the order u/s. 143(1) without following the procedure u/s. 245. In such cases, it is directed that :

A. All such cases will be transferred to the Assessing Officer;

B. The Assessing Officers will issue notice to the assessee which will be served as per the procedure prescribed;

C. The assessees will be entitled to file response/ reply to the notice seeking adjustment of refund;

D.    After considering the reply, if any, the Assessing Officers will pass an order u/s. 245 permitting or allowing the refund;

E.    The Board will fix time limit and schedule for completing the said process.

4.    Regarding interest on refund u/s. 244A

4.1  An assessee can certainly be denied interest if delay is attributable to him in terms of s/s. (2) to section 244. However, when the delay is not attributable to the assessee but is due to the fault of the Revenue, then interest should be paid under the said section.

4.2 False or wrong uploading of past arrears and failure to follow the mandate before adjustment u/s. 245, cannot be attributed and treated as a fault of the assessee. These are lapses on the part of the Assessing Officer i.e. the Revenue.

4.3 Interest cannot be denied to the assessees when the twin conditions are satisfied and in favour of the assessee.

5.    Regarding uncommunicated intimations under section 143(1)

5.1 The grievance of the petitioner is with regard to the uncommunicated intimations u/s. 143(1) which remained on paper/file or the computer of the Assessing Officer. This is a serious challenge and a matter of grave concern. The law requires that intimation u/s. 143(1) should be communicated to the assessee, if there is an adjustment made in the return resulting either in demand or reduction in refund. The uncommunicated orders/ intimations cannot be enforced and are not valid.

5.2 The onus to show that the order was communicated and was served on the assessee is on the Revenue and not upon the assessee. If an order u/s. 143(1) is not communicated or served on the assessee, the return as declared/ filed is treated as deemed intimation and an order u/s. 143(1) . Therefore, if an assessee does not receive or is not communicated an order u/s. 143(1), he will never know that some adjustments on account of rejection of TDS or tax paid has been made. While deciding applications u/s. 154, or passing an order u/s. 245, the Assessing Officers are required to know and follow the said principle. Of course, while deciding application u/s. 154 or 245 or otherwise, if the Assessing Officer comes to the conclusion and records a finding that TDS or tax credit had been fraudulently claimed, he will be entitled to take action as per law and deny the fraudulent claim of TDS etc. The Assessing Officer, therefore, has to make a distinction between fraudulent claims and claims which have been rejected on ground of technicalities, but there is no communication to the assessee of the order/intimation u/s. 143(1). In the latter cases, the Assessing Officer cannot turn around and enforce the demand created by uncommunicated order/intimation u/s. 143(1).

6.    Regarding credit of tax deducted at source (TDS)

6.1 The said problem can be divided into two categories; cases where the deductors fail to upload the correct and true particulars of the TDS, which has been deducted and paid as a result of which the assessee does not get credit of the tax paid, and the second set of cases where there is a mismatch between the details uploaded by the deductor and the details furnished by the assessee in the income tax return. The details of TDS credited /uploaded in the case of each assessee are available in form 26AS.

6.2 This being a PIL, no specific direction is being issued but the Board must re-examine the said aspect and if they feel that unnecessary burden or harassment will be caused to the assessees, suitable remedial steps should be taken.

6.3 Also, there can be mismatch because of deductor and the assessee following different methods of accounting. Further, the assessee may treat the income on which tax has been deducted as income for two or more different years. The respondents must take remedial steps and ensure that in such cases TDS is not rejected on the ground that the amounts do not tally. Of course, while issuing corrective steps, the respondents can ensure that fraudulent or double claims for TDS are not made. As it is a technical matter no specific direction is issued, but the respondents should take remedial steps in this regard.

7.    Regarding unverified TDS under different headings

7.1 The respondents will fix a time limit within which they shall verify and correct all unmatched challans. This will necessarily require communication with the deductor and steps to rectify. The time limit fixed should take into account the due date of filing of the return and processing of the return by the Assessing Officer. An assessee as a deductee should not suffer because of the fault made by deductor or inability of the Revenue to ask the deductor to rectify and correct. Once payment has been received by the Revenue, credit should be given to the assessee.

8.    Regarding failure of deductor to file correct TDS statements in time

8.1 It is directed that when an assessee approaches the Assessing Officer with requisite details and particulars, the said Assessing Officer should verify whether or not the deductor has made payment of the TDS and if the payment has been made, credit of the same should be given to the assessee. These details or the TDS certificate should be starting point for the Assessing Officer to ascertain and verify the true and correct position. The Assessing Officer will be at liberty to get in touch with the TDS circle, in case he requires clarification or confirmation. He is also at liberty to get in touch with deductors by issuing a notice and compelling them to upload the correct particulars/details. The said exercise must be and should be undertaken by the Revenue i.e., the Assessing Officer as an assessee who suffers in such cases is not due to his fault and can justifiably feel deceived and defrauded.

8.2 The stand of the Revenue that they can only write a letter to the deductor to persuade him to correct the uploaded entries or to upload the details cannot be accepted. Power and authority of the Assessing Officer cannot match and are not a substitute to the beseeching or imploring of an assessee to the deductor. Section 234E will also require similar verification by the Assessing Officer. In such cases, if required, order u/s. 154 may also be passed.

The assessee carried out scientific research in its facility approved by the prescribed authority. It incurred various expenditure including on clinical trials for developing its pharmaceutical products. These clinical trials were conducted outside the approved laboratory facility. The assesee’s claim for weighted deduction u/s. 35(2AB) of the Income-tax Act, 1961 was rejected by the Assessing Officer on the ground that such expenditure not having been incurred in the approved facility could not form part of the deduction provided u/s. 35(2AB). The Tribunal allowed the assessee’s claim and held that merely because an expenditure was not incurred in the in-house facility, it could not be discarded for the weighted deduction u/s. 35(2AB)

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) Section 35(2AB) provides for deduction to a company engaged in business of bio-technology or in the business of manufacture or production of any article or thing notified by the Board towards expenditure of scientific research development facility approved by the prescribed authority. The Explanation to section 35(2AB) (1) provides that for the purpose of said clause, i.e. clause (1) of section 35(2AB), expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under the Central State or Provincial Act and filing an application for a patent under the Patents Act, 1970.

ii) The whole idea appears to be to give encouragement to scientific research. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in-house facility provided by the assessee and approved by the prescribed authority. Before a pharmaceutical drug could be put in the market, the regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on.

iii) Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. If one gives such restricted meaning to the term expenditure incurred on in house research and development facility, one would on one hand be completely diluting the deduction envisaged u/s.s. (2AB) of section 35 and on the other, making the Explanation quite meaningless.

iv) As noticed earlier that for the purpose of the said clause in relation to drug and pharmaceutical, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the revenue would completely make the Explanation quite meaningless. For the scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, the Legislature appears to have added such an Explanation.

v) Therefore, the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those were incurred outside, by itself would not be sufficient to deny the benefit to the assessee u/s. 35(2AB). It is not as if that the said authority was addressing the issue for deduction u/s. 35(2AB) in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises.” Therefore, no question of law arises.”

The bank accounts of the assessee aggregating to over Rs. 33 lakh were provisionally attached u/s. 281B. The assessee challenged the attachment by filing writ petition. In the mean while the assessment was completed raising a demand of Rs. 9,62,378/-. The assessee contended that the provisional attachment could be operative only up to the assessment and once assessment had been framed, the Revenue was entitled to attach the account to the extent of the demand raised and not all the bank accounts of the assessee.

The Punjab and Haryana High Court allowed the petition and held as under:

“i) The bank accounts of an assessee are provisionally attached to secure the interest of the Revenue pending assessment proceedings to meet the eventuality of demand of tax to be raised against such assessee. Once the assessment had been completed, the Revenue would be justified to attach the account to the extent of the demand raised against the assessee and not the entire amount standing to the credit of the assessee.

ii) The action of the Revenue in extending the period of attachment in respect of all the bank accounts of the assessee and in respect of over Rs. 33 lakh in these circumstances was wholly unjustified and illegal.”

For the A.Y. 1989-90, the assessee made an application for waiver of interest of Rs.1,95,570 u/s.220(2A) of the Income-tax Act, 1961. The Chief Commissioner gave the finding that all the three conditions regarding genuine hardship to the assessee, default in tax being not due to the circumstances attributable to the assessee and the co-operation of the assessee were satisfied. However, the Chief Commissioner limited the waiver to an amount of Rs.24,408 which was the balance amount due from the assessee.

The Kerala High Court allowed the writ petition filed by the assessee and held as under: “

(i) The Commissioner had found that all the three conditions were satisfied. In the order, the Commissioner merely said that “payment of further interest will cause hardship to them” and did not state any reason for limiting or reducing the waiver.

(ii) The discretion has not been properly exercised by the Commissioner. His order was liable to be quashed to the extent it failed to consider waiver of the amounts already paid.

(iii) The Chief Commissioner was to pass fresh order in accordance with the observations.”

For the A.Y. 1996-97, the assessee returned an income of Rs.2.25 crore from service charges, share trading loss of Rs.2.23 crore: and dividend income of Rs.4.7 lakh. The assessee claimed that in computing the gross total income for the purpose of Explanation to section 73 of the Income-tax Act, 1961, the income from service charges have to be adjusted against the loss in share trading. The Assessing Officer did not accept the claim and disallowed the share trading loss as speculation loss. The Tribunal accepted the assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Explanation to section 73 is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that s.s (1) of section 73 can apply.

(ii) In computing the gross total income the normal provisions of the Income-tax Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation. In the present case, both the income from service charges of Rs.2.25 crore and the share trading loss of Rs.2.23 crore, would have to be taken into account in computing the income under the head business, both being sources under the same head.

(iii) The assessee had a dividend income of Rs.4.7 lakh. The Tribunal was therefore justified in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).”

In the previous year relevant to the A.Y. 2005-06, the assessee’s EOU which was eligible for deduction u/s.10B of the Income-tax Act, 1961 incurred loss. The assessee claimed the set-off of the said loss against the profits of the other units. The Assessing Officer disallowed the claim for set-off of the loss holding that the loss sustained by the eligible units cannot be set off against the profits of the other units. The Tribunal allowed the assessee’s claim.

On appeal filed by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Section 10B as it stands after substitution by the Finance Act, 2000 w.e.f. 1-4-2001, is not a provision for exemption, but a provision which enables an assessee to claim a deduction.

(ii) The loss which is sustained by an eligible unit can be set off against the income arising from other units under the same head of profits and gains of business or profession.”

For the A.Y. 1996-97, the assessment order u/s.143(3) of the Income-tax Act, 1961 was passed on 10-3-1999 allowing the deduction claimed u/ss. 36(1)(vii) and (viia) and the foreign exchange rate difference. Subsequently, a reassessment order u/s.147 was passed on 22-2-2000 reworking the deduction u/s.80M. An appeal against the order u/s.143(3) was decided by the Commissioner (Appeals) on 28-3-2001. Thereafter, another reassessment order u/s.147 was passed on 26-3-2002, for reworking of the deduction u/s.36(1) (viii). On 28-3-2003, the Commissioner passed an order u/s.263 for disallowance u/s.36(1)(vii) and (viia) and in respect of foreign exchange rate difference. The Tribunal set aside the order as barred by limitation.

On appeal by the Revenue, it was contended that when the Assessing Officer passed the reassessment order on 26-3-2002, the Explanation to clause (vii) of section 36(1) had been introduced on the statute book and the Assessing Officer was duty bound to apply the law as amended, which he failed to do, and that Explanation 3 to section 147 of the Act having been amended to provide that the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment and coming to his notice subsequently in the course of the proceedings.

The Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Where the jurisdiction u/s.263(1) is sought to be exercised with reference to an issue which is covered by the original assessment order u/s.143(3) and which does not form the subject-matter of reassessment, limitation must necessarily begin to run from the order u/s.143(3).

(ii) Neither in the first reassessment, nor in the second reassessment was any issue raised or decided in respect of the deductions u/s.36(1) (vii), (viia) and the foreign exchange rate difference. The order of the Commissioner u/s.263(2) had not been passed with reference to any issue which had been decided either in the order of the first reassessment or in the order of second reassessment, but sought to revise issues decided in first order of assessment u/s.143(3) dated 10-3-1999.

(iii) The order dated 10-3-1999, did not merge with the orders of reassessment in respect of issues which did not form the subject-matter of the reassessment. Consequently, Explanation 3 to section 147 would not alter that position. Explanation 3 only enables the Assessing Officer, once an assessment is reopened, to assess or reassess the income in respect of any issue, even an issue in respect of which no reasons were indicated in the notice u/s.148(2). This, however, will not obviate the bar of limitation u/s.263(2). The invocation of the jurisdiction u/s.263(2) was barred by limitation.”

The assessee was engaged in purchase and sale of non-ferrous metals, etc. The purchases were made from one country and exported to another country at a margin of profit by arranging direct shipment from the selling country to the purchasing country. The bills were settled through Bank of Baroda in India. The proceeds were through convertible foreign currency and payments were made on convertible foreign currency. For the A.Y. 2001-02, the assessee claimed deduction u/s.80HHC of the Income-tax Act, 1961 in respect of such exports. The Assessing Officer and the Tribunal held that the assessee was not entitled to the deduction. The Tribunal held that to be eligible for the benefit of section 80HHC, foreign exchange is to be earned by exporting goods from India.

On appeal by the assessee, the Karnataka High Court reversed the decision of the Tribunal and held as under: “

(i) Section 80HHC is an incentive to an assessee to carry on export business so that in turn, the country earns foreign exchange. While interpreting this provision, if two views are possible, it is settled law that the view which is favourable to the assessee is to be preferred by the courts.

(ii) Now section 80HHC provides that to an assessee who is engaged in the business of export out of India of any goods or merchandise, to which the section applies deduction to the extent of profits referred to in s.s (1)(b) is allowed. In the entire provision, there are no express words which provide that the export of such goods is to be from India.

(iii) The Explanation read with the main section does not in any way indicate that, to be eligible for the benefit of deduction u/s.80HHC, the goods or merchandise has to emanate from India. In section 80HHE the words used are ‘export out of India’. But to be eligible for deduction under the aforesaid provision mere export out of India is not sufficient. What is to be exported out of India should be from India to a place outside India by any means. Such a wording is conspicuously missing in section 80HHC.

(iv) The stress in section 80HHC is only on earning of foreign exchange, not the goods and merchandise to be exported out of India. They do not necessarily have to be from India. Therefore, the law does not require the goods to be physically exported out of India. There need not be a two-way traffic of bringing the goods from a foreign country into the Indian shores and thereafter exporting those goods from Indian shores.”

The assessee company carried on the business of manufacture of hardware and software and exported its products. For the A.Ys. 1995-96 to 1998-99, the assessee claimed exemption u/s.10A in respect of two units. The Assessing Officer took the view that the exemption claimed in respect of the two units involved in creation of software was not merely unusually high in comparison to the assessee’s other business, but having regard to the close relationship between the assessee company and its foreign buyer the provisions of section 80-I(9) were to be applied in terms of 10A(6) of the Act. He, therefore, allowed exemption at the percentage of profit in respect of the entire turnover of the assessee inclusive of the export turnover. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under: “

(i) While there did exist a close connection between the assessee and the foreign buyer the other requirement as to the nature of the arrangement and the manner of rejection of the profits margin due to export sales as inflated profits attributable to export activities, had not been disclosed by the Assessing Officer.

(ii) The finding of the Appellate Authority was that the profit margin as revealed by the assessee was a reasonable profit margin in comparison to other similar units.

(iii) There being no material to indicate that the course of business had been so arranged as to inflate profits, i.e., to show a higher profit margin to the two export units of the assessee, the Tribunal was justified in holding that the Assessing Officer could not presume the existence of close connection or arrangement for the purpose of invoking section 80-I(9) of the Act.”

The assessee company was engaged in the business of manufacture and supply of automobile components. The assessee sponsored two of its directors for higher education in connection with the specialised intensive training in the field of general management, marketing, finance and information technology, including project strategy, with a condition that after securing higher education, they should serve the assessee as directors. The claim for deduction of the expenditure was disallowed by the Assessing Officer and the Tribunal on the ground that they were the children of the managing director.

On appeal by the assessee, the Karnataka High Court reversed the decision of the Tribunal and held as under: “

(i) Just because the two directors were the children of the managing director of the company, that could not be the ground for the Assessing Officer to reject the claim of the assessee, until and unless it was established that these two children of the managing director, sponsored to acquire higher education were not connected with the business of the assessee, even though they were directors.

(ii) Since the issue had not been considered by the Assessing Officer and such a mistake was committed by the Commissioner (Appeals) as well as the Tribunal, the matter was remanded to the Assessing Officer for fresh consideration.”

The assessee was a share-broker. For the A.Y. 1998-99, the assessee claimed deduction of Rs. 28.24 lakh representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf, u/s.36(1)(vii) claiming that the amount has become irrecoverable. The Assessing Officer disallowed the claim. The CIT(A) allowed the assessee’s claim. The Revenue filed appeal before the Tribunal and contended that since the assessee had credited only the amount of the brokerage to the P&L a/c, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or any earlier previous year and accordingly, the condition stipulated in section 36(2) was not satisfied. The Tribunal upheld the decision of the CIT(A).

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Brokerage from the transaction of the purchase of shares has been taxed in the hands of the assessee as its business income. Brokerage as well as the value of the shares constitute a part of the debt due to the assessee, since both arise out of the same transaction.

(ii) Value of the shares transacted by the assessee as a stock-broker on behalf of his clients is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. Brokerage having been credited to the P&L a/c of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. Since both form a component part of the debt, the requirements of section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee.

(iii) The assessee was therefore entitled to deduction u/s.36(1)(vii) if the Act.”

For the A.Y. 1972-73, assessment was made in the status of AOP consisting of 3 persons.

 In appeal, the CIT(A) modified the status from AOP to BOI comprising 2 persons. The Tribunal upheld the decision of the CIT(A). On appeal by the assessee, the Andhra Pradesh High Court reversed the decision of the Tribunal and held as under:

“If the status of the assessee is required to be modified, the only option available to the ITO is to assess the income in the appropriate status, if permitted by law, by issuing a notice to the assessee in that particular status. The CIT(A) was not justified in modifying the status from AOP to BOI.”

For the A.Y. 2001-02, the assessee had not made the claim for the benefit of proviso to section 112(1) , while computing the capital gains tax. The claim was first time made before the CIT(A). The CIT(A) allowed the assessee’s claim. By relying on the ratio laid down by the Supreme Court in the case of Goetze India Ltd. v. CIT, (2006) 204 CTR 182 (SC); (2006) 284 ITR 323 (SC) the Tribunal allowed the appeal filed by the Department and set aside the order of the CIT(A).

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under: “

(i) Needless to mention that the proviso to section 112(1) was introduced w.e.f. 1-4-2000 by the Finance Act, 1999. In other words, it was introduced during the assessment year under consideration and the assessee was not aware about latest amendment introduced by the Finance Act, 1999 w.e.f. 1-4-2000.

(ii) Though ignorance of law has no excuse, but it can be excused in tax matters. It is not expected that the Department shall take the advantage of the assessee’s ignorance as per CBDT Circular No. 14(XL-35) of 1955, dated 11- 4-1955. Even under the bona fide belief, the assessee has shown the long-term capital gain @ 20%, but it was expected from the Assessing Officer to know the latest amendment.

(iii) The mistake might have been corrected by passing an order u/s.154. The question of law which arose from the fact as found by the IT authority and legal issue can be raised at any stage. The assessee was entitled to raise the legal issue before the first Appellate Authority, which possessed co-terminus powers similar to the Assessing Officer.

(iv) The CIT(A) has rightly adjudicated the statutory right of the assessee and directed to allow the longterm capital gain at 10%.”

During the relevant year, i.e. A. Y. 2008-09, the admission to the college run by the assessee-trust were not on the basis of the system approved by the medical council of India and Rajasthan University. The Single Judge and the Division Bench of the High Court held that the admission was illegal. A Special Leave Petition filed by the assessee was pending before the Supreme Court. The Chief Commissioner rejected the application of the assesee for approval for exemption u/s. 10(23C)(vi) of the Income-tax Act, 1961 holding as under:

“In the institution’s case, the Hon’ble High Court has held that the admissions made for the academic year 2008-09 were illegal. The purpose of education would not be served, if the education is for students who have been illegally admitted. The purpose of education as contemplated in the section would be served only if the students have been legally admitted and not otherwise. The spending of funds on education of students who have been admitted illegally will not amount to application of income for the purpose of education. In the trust’s case, neither the condition regarding existence for the purpose of education nor the application of funds for the objects, are being fulfilled.”

However, an order granting approval was passed for the A. Y. 2010-11 and onwards.

On a writ petition challenging the order of rejection, the Single Judge of the Rajasthan High Court (352 ITR 427) set aside the order of rejection for fresh disposal and observed as under:

“The sanction was to be granted within the parameters laid down u/s. 10(23C) which are relevant and not the admission procedure undertaken by the assessee.”

On appeal by the Revenue, the Division Bench of the High Court upheld the decision of the Single Judge and held as under:

“i) U/s. 10(23C)(vi) and (via), what is required for the purpose of seeking approval is that the university or other educational institution should exist “solely for educational purposes and not for purposes of profit”. It was nowhere the case or the finding of the Chief Commissioner that on account of the defect in the admission procedure, the assessee ceases to exist solely for educational purposes or it existed for the purpose of profit. Further, it was not the case of the Revenue that the students who were admitted were not imparted education in the college in which they were admitted or the admissions granted were fake or non-existent or that the income generated by admitting the students was not used for the purpose of the assessee.

ii) The emphasis on the part of the Chief Commissioner that the purpose of education would not be served if the education is for students who have been illegally admitted and the purpose of education as contemplated in the section would be served only if the studentshave been legally admitted and not otherwise, went beyond the requirements of the section.

iii) Of course, the requirement of an educational institution to provide admission strictly in accordance with the prescribed rules, regulations and statute need to be adhered to in letter and spirit, but violation could not lead to its losing the character as an entity existing solely for the purpose of education.

iv) Therefore, there is no interference with the order of the Single Judge.”

In the course of the assessment for the A. Y. 2007-08, the Assessing Officer found that the assessee (Group A) had received compensation from group B at the time of partition of properties of the group of HSL and that the amount had been kept in fixed deposit receipts in accordance with the orders passed by the High Court and by the Supreme Court. The Assessing Officer considered the family settlement and found that 8.56% of Rs. 24 crore of compensation was the share of the assessee and levied long term capital gains on the amount. The Commissioner (Appeals) held that the distribution of assets including the sum of Rs. 24 crore was not complete during the relevant year as the matter was subjudice and the assessee was not allowed to use the money by the order of this court, and therefore, the sum of  Rs. 24 crore transferred to the assessee and the other members of the Group A did not accrue to the income of this group including the assessee. The Tribunal upheld this decision.

The Punjab and Haryana High Court dismissed the appeal filed by the Revenue and held as under:

“i) The payment of Rs. 24 crore to the assessee was to equalize the inequalities in partition of the assets of HSL. The amount so paid was immovable property. If such amount was to be treated as income liable to tax, the inequalities would set in as the share of the recipient would diminish to the extent of tax.

ii) Since the amount paid during the course of partition was to settle the inequalities in partition, it would be deemed to be immovable property. Such amount was not an income liable to tax.

iii) Thus, the amount of owelty, i.e. compensation deposited by group B was to equalise the partition and represented immovable property and would not attract capital gains.”

In the A. Y. 2005-06, the assessee had transferred a property to a third party under an agreement for sale. Physical possession was given to the buyer but the agreement was not registered. The assessee computed the capital gain without applying the provisions of section 50C. The Assessing Officer applied section 50C and adopted the guideline value given by the stamp valuation authority as the sale consideration instead of the consideration admitted by the assessee. The Commissioner (Appeals) held that section 50C can be invoked only when the property was transferred by way of registered sale deed and assessed for stamp valuation purposes. The Tribunal held that section 50C could not be invoked as the property was not transferred by way of registered sale deed.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under: 

“i) The insertion of the words “or assessable” in section 50C of the Income-tax Act, 1961, w.e.f. 1st October, 2009, is neither a clarification nor an explanation to the existing provision and it is only an inclusion of new class of transactions, namely, the transfer of properties without or before registration.

ii) Before the amendment, only transfer of properties where the value was adopted or assessed by the stamp valuation authority were subjected to section 50C application. However, after introduction of the words ”or assessable” such transfers where the value is assessable by the valuation authority are also brought into the ambit of section 50C. Thus such introduction of a new set of class of transfer would certainly have prospective application only. The amendments have been made applicable w.e.f. 1st October, 2009 and will apply only in relation to transactions undertaken on or after such date.

iii) Since the transfer in the assessee’s case was admittedly made prior to the amendment, section 50C, as amended w.e.f. 1st October, 2009, was not applicable.”

In the relevant year, the assessee claimed deduction on account of software development and upgradation expenditure. The Assessing Officer held that software development and upgradation would give the assessee an enduring benefit and such expenditure should be treated as capital expenditure. Accordingly, he disallowed the claim. The Tribunal allowed the assesee’s claim. On appeal by the Revenue , the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The assessee had entered into contract with a company, which had agreed to provide certain services. These services, thus, essentially were in the nature of maintenance and support  services providing essentially backup to the assessee, who had procured software for its purpose. These services, thus, essentially did not give any fresh or new benefit in the nature of a software to be used by the assessee in the course of the business but were more in nature of technical support and maintenance of the existing software and hardware. For example, the service provider had to provide technical support to the employees of the company and to maintain the computers and the laptop, had to supply security service for controlling the data theft and providing checks on access by unauthorised persons to the data etc.

ii) In essence, these services, therefore, were in nature of maintenance, back up and support service to existing hardware and software already installed by company for the purpose of its business. The Tribunal, therefore, rightly held that the expenditure was revenue in nature.”

The assessee had contracted with a landlord to take premises on lease for opening its branch, but no formal agreement was entered into. The landlord started the construction of the premises as per assessee’s requirements. However, before completion of construction, assessee came to know of the proposed construction of an overbridge over the said property which would cause hindrance to conduct its business and services. The assessee, therefore, terminated the understanding with the landlord and paid compensation to the landlord for the work done, in lieu of withdrawing all claims against the assessee. In the A. Y. 2003-04, the assessee claimed such amount paid as revenue expenditure. The Assessing Officer disallowed the claim. The Tribunal deleted the disallowance as the compensation was paid in the course of business and for the purpose of business, to protect the assessee’s interest and in lieu of the claims that could have been raised by the landlord.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal referred to the case of J.K. Woollen vs. CIT [1969] 72 ITR 612 (SC) in which it was held, that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT department.

ii) No question of law arises. Tax appeal is, therefore, dismissed.”

For the A. Y. 2001-02, the assessee filed return of income claiming loss of Rs. 16.82 crore which included a loss from share transactions of Rs. 13.63 crore. An assessment order was passed u/s. 143(3) determining a total loss of Rs. 3.13 crore after disallowing the loss from the share transactions. The Tribunal restored the assessment proceeding back to Assessing Officer for fresh examination of the nature of the share transactions in view of SEBI guidelines and to decide the matter. The Assessing Officer passed an order giving effect to the order of the Tribunal and recomputed the total loss at Rs. 16.83 crore. Subsequently, the successor in office of the Assessing Officer passed another order computing the loss at Rs. 3.19 crore.

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

“i) Once the Assessing Officer had given effect to the order of the Tribunal, his successor-in- office had no jurisdiction to pass a fresh order. The impugned order of the successor-in-office in fact reflects his awareness of the earlier order which was passed by the predecessor in order to give effect to the order of the Tribunal became the successor Assessing Officer has, in his computation, commenced with a total income as computed in the order of the predecessor Assessing Officer (viz., a loss of Rs. 16.83 crore). The successor Assessing Officer has not purported to exercise the jurisdiction u/s. 154.

ii) Once effect was given to the order of the Tribunal by the passing of an order u/s. 254 that order could have been modified or set aside only by following a procedure which is known to the Act. What the Assessing Officer has done by the impugned order is to conduct a substantive review of the earlier order of the predecessor which was clearly impermissible. Since the order of the successor Assessing Officer is clearly without jurisdiction, there was no reason or justification to relegate the Petitioner to the remedy of an appeal.

iii) Therefore, the instant petition was allowed and the assessment order passed by the successor Assessing Officer was quashed and set aside.”