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Category: Direct Taxes

Depreciation — Membership card of Bombay Stock Exchange is an ‘intangible asset’ on which depreciation is allowable u/s.32(1)(ii).

Glimpses of supreme court rulings

12. Depreciation — Membership card of Bombay Stock Exchange
is an ‘intangible asset’ on which depreciation is allowable u/s.32(1)(ii).


[Techno Shares and Stocks Ltd. v. CIT, (2010) 327 ITR
323 (SC)]

The assessee-company filed its return of income for the A.Y.
1999-2000, disclosing a loss of Rs.10,77,276. The return was processed
u/s.143(1) on November 8, 2000. The case stood re-opened u/s.147 and the notice
u/s.148 was issued to the assessee on July 16, 2002. The assessee filed its
return of income under protest. The assessee filed its return of income pursuant
to the notice u/s.148 once again declaring loss of Rs.10,77,276, the same as was
in the original return of income. The main reason for reopening of the
assessment u/s.147 was the claim of depreciation by the assessee on the BSE
membership card amounting to Rs.23,65,000. The claim of depreciation of the
assessee was based on S. 32(1)(ii) which stood inserted by the Finance (No. 2)
Act, 1998, with effect from April 1, 1999. However, the said Section deals with
claims for depreciation of items acquired on or after April 1, 1998. The
assessee claimed before the Assessing Officer that the BSE membership card is a
‘licence’ or ‘business or commercial right of similar nature’ u/s.32(1)(ii) and
is, therefore, an intangible asset eligible for depreciation u/s.32(1)(ii), the
submission of which was not accepted by the Assessing Officer. It was held that
membership is only a personal permission which is non-transferable and which
does not devolve automatically on legal heirs and, therefore, it is not a
privately owned asset. That, there is no ownership of an asset and that what
ultimately can be sold is only a right to nomination. Further, according to the
Assessing Officer, in the case of BSE membership, there is no obsolescence, wear
and tear or diminution in value by its use, hence, the assessee was not entitled
to claim depreciation u/s.32(1)(ii). This decision of the AO stood affirmed by
the Commissioner of Income-tax (Appeals) in the appeal filed by the assessee.

Aggrieved by the said decision of the Commissioner of
Income-tax (Appeals), the assessee carried the matter in appeal to the Tribunal
which took the view that since the assessee had acquired a right to trade on the
floor of the BSE through the membership card, it was entitled to depreciation
u/s.32(1)(ii) of the 1961 Act. That, the said card is a capital asset through
which the right to trade on the floor of the BSE is acquired and since it is an
intangible asset the said assessee was entitled to depreciation u/s.32(1)(ii).

Against the said decision, the Department carried the matter
in appeal to the High Court which came to the conclusion, following certain
decisions of the Supreme Court, that the BSE membership card is only a personal
privilege granted to a member to trade in shares on the floor of the stock
exchange; that such a privilege cannot be equated with the expression ‘licence’
or ‘any other business or commercial rights of similar nature’ u/s.32(1)(ii);
that, there is a difference between acquiring a know-how, patent, copyright or
trade mark or franchise; that the expression ‘business or commercial rights of
similar nature’ in S. 32(1)(ii) of the 1961 Act would take its colour from the
preceding words. Namely, know-how, patent, copyright, trade mark and franchise
which belong to a class of intellectual property rights and applying the rule of
ejusdem generis, the High Court held that the expression ‘licence’ as well as
the expression ‘business or commercial right of similar nature’ in S. 32(1)(ii)
of the 1961 Act are referable to IPRs such as know-how, patent, copyright, trade
mark and franchise and since the BSE membership card does not fall in any of the
above categories, the claim for depreciation was not admissible on the BSE
membership card acquired by the assessee u/s.32(1)(ii). Consequently, the
appeals filed by the Department stood allowed.

On civil appeals against the decision of the High Court, the
Supreme Court observed that the question which it was required to examine was —
whether the right of nomination in the non-defaulting continuing member comes
within the expression ‘business or commercial right of similar nature’ in S.
32(1)(ii) of the 1961 Act ?

The Supreme Court held that on the analysis of the Rules of
the BSE, it was clear that the right of membership (including right of
nomination) got vested in the exchange on the demise/default committed by the
member; that, on such forfeiture and vesting in the exchange that the same got
disposed off by inviting offers and the consideration received thereof was used
to liquidate the dues owned by the former/defaulting member to the exchange,
clearing house, etc. (see Rule 16 and bye-law 400). It was this right of
membership which allowed the non-defaulting member to participate in the trading
season on the floor of the exchange. Thus, the said membership right was a
‘business or commercial right’ conferred by the rules of the BSE on the
non-defaulting continuing member.

The next question was — whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of S. 32(1)(ii). The Supreme Court held that its answer was in affirmative for the reason that the rules and bye-laws analysed hereinabove indicated that the right of nomination vested in the exchange only when a member committed default. Otherwise, he continued to participate in the trading session on the floor of the exchange; that he continued to deal with other members of the exchange and even had the right to nominate a subject to compliance with the Rules. Moreover, by virtue of Explanation 3 to S. 32(1)(ii) the commercial or business right which was similar to a ‘licence’ or ‘franchise’ was declared to be an intangible asset. Moreover, under Rule 5, membership was a personal permission from the exchange which was nothing but a ‘licence’ which enabled the member to exercise rights and privileges attached thereto. It was this licence which enabled the member to trade on the floor of the exchange and to participate in the trading session on the floor of the exchange. It was this licence which enabled the member to access the market. Therefore, the right of membership which included right of nomination, was a ‘licence’ which was one of the items which fell in S. 32(1)(ii) of the 1961 Act. The right to participate in the market had an economic and money value. It was an expense incurred by the assessee which satisfied the test of being a ‘licence’ or ‘any other business or commercial right of similar nature’ in terms of S. 32(1)(ii).

The Supreme Court however clarified that the present judgment was strictly confined to the rights of membership conferred upon the member under the BSE membership card during the relevant assessment years. This judgment should not be understood to mean that every business or commercial right would constitute a ‘licence’ or a ‘franchise’ in terms S. 32(1)(ii) of the 1961 Act.

Business expenditure — Foreign exchange borrowings — Loss on account of fluctuation in rate of foreign exchange on the last date of balance sheet — If the borrowings are on revenue account, the loss is allowable as deduction u/s.37(1) and if the same is o

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 25 Business expenditure — Foreign exchange borrowings — Loss
on account of fluctuation in rate of foreign exchange on the last date of
balance sheet — If the borrowings are on revenue account, the loss is allowable
as deduction u/s.37(1) and if the same is on capital account, prior to its
amendment of S. 43A w.e.f. 1-4-2003, even if the repayment is not due, the cost
of the asset acquired is to be increased.

The assessee, a public sector undertaking, substantially
owned by the Government of India, was engaged in capital intensive exploration
and production of petroleum products for which it had to heavily depend on
foreign loan to cover its expenses, both capital and revenue, on import of
machinery on capital account and for payment to non-resident contractors in
foreign currency for various services rendered. The assessee had made three
types of foreign exchange borrowings : (i) in revenue account; (ii) in capital
account, and (iii) for general purposes, partly utilised in revenue account and
partly in capital account. As per terms and conditions of foreign exchange
borrowings, some of the loans became repayable in the year under consideration
but the date of repayment of some loans fell after the end of the relevant
accounting year. The assessee revalued in Indian currency all its foreign
exchange loans in revenue account, capital account as also in its general
purposes account, outstanding as on March 31, 1991 and claimed the difference
between their respective amounts in Indian currency as on 31st March, 1990 and
on March 31, 1991 as revenue loss u/s.37(1) of the Act in respect of loans used
in revenue account, and also took into consideration the similar difference in
foreign exchange on capital account loans as an increased liability u/s. 43A of
the Act for the purposes of depreciation. The foreign exchange loss incurred by
the assessee in the revenue account, on account of repayment of these loans made
in the year under consideration was allowed by the Assessing Officer as a
deduction u/s.37(1) of the Act, and he also took into consideration an increased
liability of foreign exchange loans taken in capital account and repaid in the
accounting year, for the purposes of depreciation, u/s.43A of the Act. He,
however, did not allow to the assessee its claim for foreign exchange loss
claimed on such foreign currency loans both in revenue account and in capital
account which were outstanding on the last day of the accounting year under
consideration and were as per the terms of borrowings repayable after the end of
the relevant accounting year. Similar treatment was given to the foreign
exchange loans for general purposes, used partly in revenue account and partly
in capital account. Thus, the assessee’s claim for foreign exchange
loss/increased liability on revaluation of these foreign exchange loans at the
end of the accounting year under consideration both in the revenue account and
capital account as also on loans used partly in revenue account and partly in
capital account, made on the ground that it had followed mercantile system of
accounting in this regards, was disallowed by the Assessing Officer. According
to the Assessing Officer, such a loss could be allowed to the assessee on
discharge of liability at the time of actual repayment of these loans.

Aggrieved, the assessee preferred appeal before the
Commissioner of Income-tax (Appeals). Inso-far as the assessee’s claim for
foreign exchange loss in revenue account was concerned, the Commissioner of
Income-tax (Appeals) affirmed the view taken by the Assessing Officer on the
ground that it was a notional liability and the same had not crystallised or
accrued in the relevant assessment year. However, as regards the adjustment for
increased liability made by the assessee for the purposes of S. 43A of the Act
in respect of foreign exchange loans in capital account, which were outstanding
as on March 31, 1991, the Commissioner accepted the stand of the assessee and
directed the Assessing Officer to allow the benefit of such increased liability
for computation of depreciation allowance on plant and machinery purchased out
of such foreign exchange loans for the assessment year under consideration.

Being dissatisfied, both the assessee as well as the Revenue
carried the matter in further appeal to the Income Tax Appellate Tribunal (for
short ‘the Tribunal’). The Tribunal observed that the method of accounting
adopted by the assessee right from the A.Y. 1982-83 is mercantile system; it has
been consistently claiming loss suffered by it on account of fluctuation in
foreign exchange rates on accrual basis; in respect of the A.Y. 1982-83 to
1986-87, the assessee’s claim on this account had been allowed by the Assessing
Officer himself; in respect of the A.Y. 1997-98, the assessee had shown a gain
of Rs.293.37 crores on account of fluctuation in foreign exchange because of the
Indian rupee had appreciated as compared to the foreign currency and that the
said amount was taxed as the assessee’s income. Taking all these factors into
consideration, the Tribunal held that the loss claimed by the assessee on
revenue account was allowable u/s.37(1) of the Act. The appeal preferred by the
Revenue on the question whether the assessee was entitled to adjust the actual
cost of imported assets acquired in foreign currency on account of fluctuation
in the rate of exchange, in terms of S. 43A of the Act, was also dismissed.

For the A.Ys. 1992-93, 1993-94, 1994-95 and 1997-98 similar
findings were given by the Tribunal. The Revenue took the matter in further
appeal to the High Court. By a common judgment pertaining to the A.Ys. 1991-92
to 1994-95 and 1997-98, the High Court reversed the decision of the Tribunal on
both the issues. Terming the order of the Tribunal as perverse, having been
passed without any material on record and against the statutory provisions, the
High Court held that the foreign exchange loss by the assessee being only a
contingent and notional liability, it was not allowable as deduction u/s.37(1)
of the Act. Insofar as the applicability of S. 43A of the Act was concerned, the
High Court observed that the said provision is confined only to those
liabilities which have become due as per the terms and conditions of written
agreement between the assessee and the foreign creditors but since in the
present case, no such agreement was made available by the assessee at any stage
of the proceedings, the claim of the assessee was not justified. According to
the High Court, the variation in foreign exchange was neither quantified, nor
had it become due or repaid and, therefore, deductions on that account had been
allowed by the Tribunal without application of mind and were, therefore,
illegal.

On an appeal by the assessee, the Supreme Court was of the
opinion that the ratio of the decision in CIT v. Woodward Governor of India P.
Ltd., (2009) ITR 254 (SC) squarely applied to the facts at hand and, therefore,
the loss claimed by the assessee on account of fluctuation in the rate of
foreign exchange as on the date of balance sheet was allowable as expenditure
u/s.37(1) of the Act.

The Supreme
Court further held that all the assessment years in question being prior to the
amendment in S. 43A of the Act (made with effect from April 1, 2003), the
assessee would be entitled to adjust the actual cost of the imported capital
assets, capital assets acquired in foreign currency, on account of fluctuation in
the rate of exchange at each of the relevant balance sheet dates pending actual
payment of the varied liability.

 

[Oil and Natural Gas Corporation Ltd. v. CIT,
(2010) 322 ITR 180 (SC)]

Loan in foreign currency for acquisition of capital asset — Forward contract for obtaining foreign currency at a pre-determined rate — Roll-over charges paid to carry forward the contract have to be capitalised in view of S. 43A.

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24 Loan in foreign currency for acquisition of capital asset
— Forward contract for obtaining foreign currency at a pre-determined rate —
Roll-over charges paid to carry forward the contract have to be capitalised in
view of S. 43A.

The assessee was engaged in the manufacture of gears and
mechanical handling equipment. It procured a foreign currency loan for expansion
of existing business. Since the repayment of loan was stipulated in instalments,
the assessee wanted to ensure that foreign currency required for repayment of
the loan be obtained at a pre-determined rate and cost. Accordingly, the
assessee booked forward contracts with Citibank for delivery of the required
foreign currency on the stipulated dates. The contract was entered into for the
entire outstanding amount and the delivery of foreign currency was obtained
under the contract for instalment due from time to time. The balance value of
the contract, after deducting the amount withdrawn towards repayment, was rolled
for a further period up to the date of the next instalment. The assessee filed
its return of income for the A.Y. 1986-87 on June 30, 1986. A revised return was
filed by it on March 27, 1989, declaring a total income of Rs.2,10,08,640. The
Assessing Officer disallowed an amount of Rs.8,86,280, being the roll-over
premium charges paid by the assessee in respect of foreign exchange forward
contracts to Citibank N.A. on the ground that the said charges were incurred in
connection with the purchase of a capital asset (plant and machinery), hence, it
was not admissible for deduction u/s.36(1)(iii) or u/s.37 of the Act. On appeal,
the Commissioner of Income-tax (Appeals) held that the roll-over premium charges
incurred by the assessee were allowable as they were incurred by the assessee to
mitigate the risk involved in higher payment because of adverse fluctuation of
rate of exchange. According to the Commissioner of Income-tax (Appeals),
roll-over premium charges constituted an expenditure incurred for raising loans
on revenue account, hence, the said expenditure was allowable under the Act.

The Tribunal held that roll-over premium charges (carry
forward charges) were required to be paid to the authorised dealer as
consideration for permitting the unutilised amount of the contract (balance
value of the contract) to be availed of at a later date and in the circumstances
the roll-over premium charges had to be capitalised under Explanation 3 to S.
43A of the said Act. Consequently, the Tribunal upheld the order of the
assessment.

The High Court came to the conclusion that the roll-over
premium charges paid by the assessee were in the nature of interest or committal
charges, hence, the said charges were allowable u/s.36(l)(iii) of the said Act.

The Supreme Court observed that S. 43A, before its
substitution by a new S. 43A vide the Finance Act, 2002, was inserted by the
Finance Act, 1967, with effect from April 1, 1967, after the devaluation of the
rupee on June 6, 1966. It applied where as a result of change in the rate of
exchange there was an increase or reduction in the liability of the assessee in
terms of the Indian rupee to pay the price of any asset payable in foreign
exchange or to repay moneys borrowed in foreign currency specifically for the
purpose of acquiring an asset. The Section has no application unless an asset
was acquired and the liability existed, before the change in the rate of
exchange. When the assessee buys an asset at a price, its liability to pay the
same arises simultaneously. This liability can increase on account of
fluctuation in the rate of exchange. An assessee who becomes the owner of an
asset (machinery) and starts using the same, becomes entitled to depreciation
allowance. To work out the amount of depreciation, one has to look to the cost
of the asset in respect of which depreciation is claimed. S. 43A was introduced
to mitigate hardships which were likely to be caused as a result of fluctuation
in the rate of exchange. S. 43A lays down, firstly, that the increase or
decrease in liability should be taken into account to modify the figure of
actual cost and, secondly, such adjustment should be made in the year in which
the increase or decrease in liability arises on account of fluctuation in the
rate of exchange. It is for this reason that though S. 43A begins with a non
obstante clause, it makes S. 43(1) its integral part. This is because S. 43A
requires the cost to be recomputed in terms of S. 43A for the purpose of
depreciation [S. 32 and 43(1)]. A perusal of S. 43A makes it clear that insofar
as the depreciation is concerned, it has to be allowed on the actual cost of the
asset, less depreciation that was actually allowed in respect of earlier years.
However, where the cost of the asset subsequently increased on account of
devaluation, the written down value of the asset has to be taken on the basis of
the increased cost minus the depreciation earlier allowed on the basis of the
old cost. U/s.43A, as it stood at the relevant time, it was, inter alia,
provided that where an assessee had acquired an asset from a country outside
India for the purpose of his business, and in consequence of a change in the
rate of exchange at any time after such acquisition, there is an increase or
reduction in the liability of the assessee as expressed in Indian currency for
making payment towards the whole or part of the cost of the asset or for
repayment of the whole or part of the moneys borrowed by him for the purpose of
acquiring the asset, the amount by which the liability stood increased or
reduced during the previous year shall be added to or reduced from the actual
cost of the asset as defined in S. 43(1). This analysis indicated that during
the relevant assessment year adjustment to the actual cost was required to be
done each year on the closing date, i.e., year end. Subsequently, S. 43A
underwent a drastic change by virtue of a new S. 43A inserted vide the Finance
Act, 2002. Under the new S. 43A, such adjustment to the cost had to be done only
in the year in which actual payment is made. The Supreme Court noted that in
this case, it was not concerned with the position emerging after the Finance
Act, 2002. Under Explanation 3 to S. 43A, if the assesse had covered his
liability in foreign exchange by entering into forward contract with an
authorised dealer for the purchase of foreign exchange, the gain or loss arising
from such forward contract was required to be taken into account.

According to the assessee, S. 43A was not applicable in this
case as there was no increase or reduction in liability because such roll-over
charges were paid to avoid increase or reduction in liability consequent upon
change in the rate of exchange.

The Supreme Court held that during the relevant assessment years, S.
43A applied to the entire liability remaining outstanding at the year end, and
it was not restricted merely to the instalments actually paid during the year.
Therefore, at the relevant time, the year-end liability of the asessee had to
be looked into. Further, it could not be said that the roll-over charges had
nothing to do with the fluctuation in the rate of exchange. In the present
case, the notes to the accounts for the year ended December 31, 1986 (Schedule
17) indicated adverse fluctuations in the exchange rate in respect of
liabilities pertaining to the assets acquired. This note clearly established
the existence of adverse fluctuations in the exchange rate which made the
assessee opt for forward cover and which made the assessee pay the roll-over
charges. The word ‘adverse’ in the note itself pre-supposes increase in the
liability incurred by the assessee during the year ending December 31, 1986. In
the circumstances, the Supreme Court found no merit in the contention of the
assessee that roll-over charges had nothing to do with the fluctuation in the
rate of exchange.

 

According to the Supreme Court, roll-over
charges represented the difference arising on account of change in foreign
exchange rates. The Supreme Court therefore held that roll-over charges
paid/received in respect of liabilities relating to the acquisition of fixed
assets should be debited/credited to the asset in respect of which liability
was incurred. However, roll-over charges not relating to fixed assets should be
charged to the profit and loss account.

Charitable Trust — For claiming benefit u/s.11(1)(a), registration u/s.12A is a condition precedent.

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7 Charitable Trust — For claiming benefit
u/s.11(1)(a), registration u/s.12A is a condition precedent.


[U.P. Forest Corporation & Anr. v. Dy. CIT, (2008) 297
ITR 1 (SC)]

The U.P. Forest Corporation, the appellant, was constituted
by a Notification issued u/s.3 of the U.P. Forest Corporation Act, 1974. In the
year 1977, the Income-tax authorities issued a notice to the corporation to file
its return of income for the A.Y. 1976-77. The corporation challenged the said
notice by filing writ petition which was disposed of by the High Court by
holding that the corporation was a local authority u/s.10(20) of the Act and was
entitled to claim exemption. Since the said order was not challenged by the
Revenue, the same became final and remained in force till a contrary view was
taken by the Supreme Court in respect of the A.Ys. 1977-78, 1980-81 and 1984-85
in the case of CIT v. U.P. Forest Corporation, reported in (1998) 230 ITR
945.

 

For the A.Y. 1977-78, the corporation’s income was assessed
by making some additions of income and deleting some deductions claimed in the
return of income. On an appeal being filed, the Commissioner (Appeals) upheld
that the corporation was exempt from paying tax, on the ground that it was a
‘local authority’ within the meaning of S. 10(20) of the Act. Insofar as the
relief sought regarding additions of income and deleting of deductions is
concerned, the Commissioner declined to decide the said issue. The Tribunal set
aside the said order of the Commissioner (Appeals) and held that the corporation
was not a ‘local authority’ and remanded the appeals to the Commissioner
(Appeals) for rehearing on the merits on the issue of grant of relief relating
to additions/deductions. Since the corporation was also assessed for the A.Y.
1984-85 as was assessed for the A.Y. 1977-78, the corporation preferred writ
petition before the High Court of Allahabad which was accepted, and the High
Court declared that the corporation was a ‘local authority’ and was entitled to
exemption u/s.10(20) of the Act. It was held that it was entitled to exemption
u/s.11(1)(a) of the Act being a charitable institution.

 

Aggrieved by the said order, the Department chose to file
special leave petition before the Supreme Court, wherein leave was granted and
ultimately the appeals were accepted and order passed by the High Court was set
aside. It was held that even though S. 3(3) of the U.P. Forest Corporation Act
regards the corporation as being a local authority for the purpose of the Act,
it would not, in law, make the corporation a local authority for the purpose of
S. 10(20) of the Act. On the question whether the corporation was to get itself
registered u/s.12A of the Act for invoking the provisions of S. 11(1)(a) of the
Act to claim exemption being a charitable institution, it was held that since
the question had not been raised before any of the authorities below, the High
Court should have remanded the case back to either the assessing authority or
the Tribunal for a decision. The Supreme Court, under the peculiar facts and
circumstances of the case, directed the assessing authority to consider the
claim of the appellant-corporation as to whether the appellant was not liable to
be taxed in view of the provisions of S. 11(1)(a) of the Act as a charitable
institution.

 

In the meantime, following the decision of the High Court in
W.P., the Commissioner (Appeals) allowed the appeals of the corporation in
respect of the A.Ys. 1977-78 and 1980-81 allowing exemption u/s.10(20) and S.
11(1)(a) of the Act.

 

The appellant-corporation, on July 11, 1988, moved an
application before the competent authority for being registered u/s.12A of the
Act, which was rejected after a gap of nine years on March 18, 1997.

Against the said rejection, the corporation filed writ
petition before the High Court during the pendency of which the corporation
filed another application for the purpose on May 4, 1998. The High Court allowed
the writ petition and set aside the order of the competent authority rejecting
the application of the corporation for registration, on the ground that the
Commissioner had passed an order in violation of the principles of natural
justice inasmuch as the appellant-corporation had not been given an opportunity
of hearing and directed the Commissioner to redecide the corporation’s
application for registration after giving an opportunity of hearing to the
corporation. The Commissioner decided against the corporation against which
order an appeal filed by the corporation before the Tribunal at Lucknow is
pending decision.

 

After the matter was remanded by the Supreme Court in the
case of CIT v. U.P. Forest Corporation, (1998) 3 SCC 530, the assessing
authority held that the appellant was not a charitable institution and assessed
the income in respect of the A.Ys. 1977-78, 1980-81 and 1984-85 to tax. The
Commissioner (Appeals) partly allowed the appeals of the appellant-corporation
granting some relief on issues of additions/deductions. The
appellant-corporation as also the Revenue filed appeals against the said order
before the Tribunal. The Tribunal allowed the appeals filed by the Revenue and
set aside the relief granted to the corporation on the issue of
additions/deductions, on the ground that this Court had remanded the matter only
to decide one issue. Being aggrieved, the corporation filed an appeal u/s.260A
of the Act before the High Court. The High Court remanded the matter to the
Tribunal for considering the matter afresh. Aggrieved by the said order, the
corporation filed appeal before the Supreme Court. The Revenue also filed an
appeal against the said order. The Revenue also challenged a subsequent order
passed by the High Court, wherein the above question had not been decided in
view of the pendency of the aforementioned appeals. The Supreme Court held that
for claiming benefit u/s.11(1)(a), registration u/s.12A is a condition
precedent. Unless and until an institution is registered u/s.12A of the Act, it
cannot claim the benefit of S. 11(1)(a) of the Act. Keeping in view the fact
that the appellant-corporation had not been granted registration u/s.12A of the
Act, it was held that the appellant was not entitled to claim exemption from
payment of tax u/s.11(1)(a) and u/s.12 of the Act. The Supreme Court dismissed
the appeals filed by the corporation without deciding the merits of the dispute.
In view of the dismissal of these appeals, the appeals filed by the Revenue were
also dismissed. However, in order to protect the interest of the assessee as
well as the Revenue, the Tribunal was directed to take up the matter on priority
basis and decide the same as expeditiously as possible without being influenced
by any of the findings recorded by the High Court in its order.

National Tax Tribunal — Petitions to be heard after the amendments in the provisions of the Act were made.

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15 National Tax Tribunal — Petitions to be heard after the
amendments in the provisions of the Act were made.


[Sandeep Goyal v. UOI, (2008) 298 ITR 10 (SC)]

The Supreme Court noted the various provisions which were
under challenge in the petitions filed and the contents of the affidavit filed
by the Union of India stating that it would make appropriate amendments in the
Act in this regard. The Supreme Court was of the view that it would be proper to
examine the matter after such amendments as the Government may think appropriate
are made. Liberty was granted to mention the matter for listing after the
amendments in the provisions were made.

levitra

Diversion overriding title — Whether the payment of citizen tax payable to the employees who were Japanese citizens constituted an overriding charge on the salary and therefore would not be income of such employees and consequently no tax was to be deduct

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23 Diversion overriding title — Whether the payment of
citizen tax payable to the employees who were Japanese citizens constituted an
overriding charge on the salary and therefore would not be income of such
employees and consequently no tax was to be deducted at source — Matter remanded
to the Tribunal.

The assessee, a Japanese organisation set up for transmission
of news and broadcasting, paid salary to its employees. It also paid some
housing allowance.

The Assessing Officer included citizens tax as a part of the
income of the expatriates employed by the assessee-company in India as part of
the employee’s income on the ground that it was an amount paid by the assessee
to its employees. According to the Assessing Officer, the assessee ought to have
deducted tax at source at the time of payment.

On appeal, the Commissioner of Income-tax (Appeals) held that
citizen tax was a statutory levy in Japan on the Japanese citizens and such tax
constituted an overriding charge on the salary income and, therefore, the same
had to be excluded in computation of taxable income. This view of the
Commissioner (Appeals) was upheld by the Tribunal.

The High Court took the view that in view of the concurrent
finding of fact, no interference was called for and the appeal was dismissed
accordingly.

The Supreme Court was however of the view that the
Commissioner of Income-tax (Appeals) ought to have examined the provisions of
the Citizen Individual Inhabitant Tax Act which was a Japanese law and it ought
to have analysed the provisions of that law, particularly when it was required
to decide the question as to the nature of the levy being an overriding charge
on the salary income, as stated hereinabove. The controversy in the present case
was that whether citizens tax was a statutory levy in Japan on the Japanese
citizens constituting an overriding charge. If it was an overriding charge, then
of course the Commissioner of Income-tax (Appeals) was right in saying that it
would not be an income. However, according to the Supreme Court, since the
provisions of the Act had not been examined, the matter needed to be considered
afresh by the Tribunal. Accordingly, the Supreme Court remitted the matter to
the Tribunal for fresh consideration in accordance with law. The Supreme Court
did not express any opinion on the merits of the case.

[CIT v. NHK Japan Broadcasting Corporation, (2010) 322
ITR 628 (SC)]

 

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Heads of income — Business income or income from other sources — Interest on short-term deposits with bank of surplus fund — Income from other sources — No deduction u/s.80P is allowable as it is not a part of operational income.

New Page 1

 22 Heads of income — Business income or income from other
sources — Interest on short-term deposits with bank of surplus fund — Income
from other sources — No deduction u/s.80P is allowable as it is not a part of
operational income.

The assessee, a co-operative credit society, which provides
credit facilities to its members and also markets the agricultural product of
its members, during the relevant assessment years in question, had surplus funds
which it invested in short-term deposits with banks and in Government
securities. Interest accrued to the assessee on such investments.

The Assessing Officer held that the interest income which the
assessee had disclosed under the head ‘Income from business’ was liable to be
taxed under the head ‘Income from other sources’. According to the Assessing
Officer the assessee-society had invested the surplus funds as and by way of
investment by an ordinary investor, hence, interest on such investment has got
to be taxed under the head ‘Income from other sources’. Before the Assessing
Officer, it was argued by the assesssee that it had invested the funds on
short-term basis as the funds were not required immediately for business
purposes and, consequently, such act of investment constituted a business
activity by a prudent businessman; therefore, such interest income was liable to
be taxed u/s.28 and not u/s.56 of the Act, and, consequently, the assessee was
entitled to deduction u/s.80P(2)(a)(i) of the Act. This argument was rejected by
the Assessing Officer as also by the Tribunal and the High Court, hence, the
civil appeal was filed by the assessee before the Supreme Court.

The Supreme Court held that the assessee-society regularly
invested funds not immediately required for business purposes. Interest on such
investments, therefore, could not fall within the meaning of the expression
‘profits and gains of business’. Such interest income cannot be said also to be
attributable to the activities of the society, namely, carrying on the business
of providing credit facilities to its members or marketing of the agricultural
produce of its members. The Supreme Court was of the view that such interest
income would come in the category of ‘Income from other sources’, hence, such
interest income would be taxed u/s.56 of the Act.

The Supreme Court further held that to say that the source of
income is not relevant for deciding the applicability of S. 80P of the Act would
not be correct because weightage need to be given to the words ‘the whole of the
amount of profits and gains of business’ attributable to one of the activities
specified in S. 80P(2)(a) of the Act. The words ‘the whole of the amount of
profits and gains of business’ emphasise that the income in respect of which
deduction is sought must constitute the operational income and not the other
income which accrues to the society. In this particular case, the evidence
showed that the assessee-society earned interest on funds which were not
required for business purposes at the given point of time. Therefore, on the
facts and circumstances of this case, the Supreme Court was of the view, such
interest income fell in the category of ‘Other Income’ which had been rightly
taxed by the Department u/s.56 of the Act.


[Totgar’s Co-operative Sale Society Ltd. v. ITO, (2010)
322 ITR 283 (SC)]

 

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Head of income — Business income or income from other sources — Interest on short-term deposits with bank — In the absence of factual matrix, matter remanded to the Tribunal for fresh adjudication.

New Page 1

21 Head of income — Business income or income from other
sources — Interest on short-term deposits with bank — In the absence of factual
matrix, matter remanded to the Tribunal for fresh adjudication.


The assessee was an exporter. The Tribunal held that the
interest income was generated by way of keeping the ‘advances’ received by the
assessee in the course of its regular business activity. According to the
Department, it was the case of surplus being invested in FDR, whereas according
to the assessee it was the case of advance having been received from the
exporter which was in FDR for short duration.

The Supreme Court observed that in the present case there was
no factual data to decide the aforesaid issue. The nature of the receipt was not
discussed. The High Court while disposing of the matter had also not examined
the factual basis. In view of the absence of factual matrix the Supreme Court
was of the view that to decide the question as to whether the receipt fell
u/s.28 or u/s.56, the matter was required to be remitted to the Tribunal for
fresh consideration in accordance with law.

[CIT v. Producin Pvt. Ltd., (2010) 322 ITR 270 (SC)]

 

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Business expenditure — Interest on borrowings — Assessee has to establish, in the first instance, its right to claim deduction under one of the Sections between S. 30 to S. 38, and in the case of a firm if it claims special deduction, it has also to prove

New Page 1

18 Business expenditure — Interest on
borrowings — Assessee has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38, and in the
case of a firm if it claims special deduction, it has also to prove that it is
not disentitled to claim deduction by reason of applicability of S. 40(b)(iv).


[Munjal Sales Corporation v. CIT, (2008) 298 ITR 298
(SC)]

In August/September, 1991, the appellant-assessee granted
interest-free advances to its sister concerns, which were disallowed by the
Department on the ground that the said advances were not given from the firm’s
own funds but from interest-bearing loans taken by the assessee-firm from third
parties. Accordingly, the assessee’s claim for deduction u/s. 36(1)(iii) was
disallowed by the Department for the A.Y. 1992-93. However, the Tribunal deleted
the disallowance saying that the assessee had given such advance from its own
funds. In the next A.Y. 1993-94 , the same situation look place. During the A.Y.
1994-95, no further advances were made by the assessee-firm in favour of its
concerns. However, during the A.Y. 1995-96, a small interest-free loan of Rs.5
lakhs was advanced by the assessee-firm to its sister concern and during the
year in question, the assessee had profits of Rs.1.91 crores. The said
advance/loan got finally repaid in the A.Y. 1997-98. For the A.Y. 1994-95, the
Department disallowed the claim for deduction u/s.40(b)(iv) saying that in this
case there was diversion of funds by raising of interest-free loans. The
Assessing Officer did not accept the submission of the assessee that advance(s)
made by the assessee were out of the income of the firm. According to the
Assessing Officer, the said interest-free advances to sister concerns were out
of monies borrowed by the firm from third parties on payment of interest, hence
the assessee was not entitled to deduction u/s.40(b) of the 1961 Act. This view
was confirmed by the Tribunal. For the A.Ys. 1995-96 and 1996-97, the Tribunal
held that during the said years, no interest-free advances to sister concerns
were made and, therefore, there was no nexus between ‘interest-bearing loans’
taken and ‘interest-free advances’. However, the Tribunal found that there was
no material to show that advances were made to sister concerns out of the firm’s
own income and, therefore, the assessee was not entitled to deduction
u/s.40(b)(iv) of the 1961 Act. The Supreme Court after analysing the scheme of
the Act and in particular the provision of S. 36(1)(iii) and S. 40(b), held that
every assessee, including a firm, has to establish, in the first instance, its
right to claim deduction under one of the Sections between S. 30 to S. 38 and in
the case of the firm, if it claims special deduction, it has also to prove that
it is not disentitled to claim deduction by reason of applicability of S.
40(b)(iv). The Supreme Court on the facts held that for the A.Y. 1992-93 and the
A.Y. 1993-94, the Tribunal held that the loans given to the sister concerns were
out of the firm’s funds and that were advanced for business purposes. Once it is
found that the loans granted in August/September, 1991 continued up to A.Y.
1997-98 and that the said loans were advanced for business purposes and that
interest paid thereon did not exceed 18/12 per cent per annum, the assessee was
entitled to deductions u/s.36(1)(iii) read with S. 40(b)(iv) of the 1961 Act.
Further, the Supreme Court observed that during A.Y. 1995-96, apart from the
loan given in August/September, 1991, the assessee advanced interest-free loan
to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there
was nothing on record to show that the loans were given to the sister concern by
the assessee-firm out of its own funds and, therefore, it was not entitled to
claim deduction u/s.36(1)(iii). The Supreme Court held that finding of the
Tribunal was thus erroneous. The opening balance as on April 1, 1994, was
Rs.1.91 crores, whereas the loan given to the sister concern was a small amount
of Rs.5 lakhs. According to the Supreme Court, the profits earned by the
assessee during the relevant year were sufficient to cover the impugned loan of
Rs.5 lakhs. The Supreme Court accordingly allowed the appeal.

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Assessment — Prima facie adjustments — When there are conflicting judgments or interpretations of a Section, prima facie adjustment contemplated u/s.143(1)(a) was not applicable and in such cases there was no liability to pay additional tax u/s.143(1A).

New Page 17 Assessment — Prima facie adjustments — When
there are conflicting judgments or interpretations of a Section, prima facie
adjustment contemplated u/s.143(1)(a) was not applicable and in such cases
there was no liability to pay additional tax u/s.143(1A).

[Kvaverner John Brown Engg. (India) P. Ltd. v.
ACIT, (2008) 305 ITR 103 (SC)]

During the relevant assessment years, the
appellant claimed deduction u/s.80-0 in respect of qualifying income brought
into India in convertible foreign exchange. In its return, the appellant
indicated the qualifying income as the gross figure. By way of adjustment
u/s.143(1)(a), the Income-tax Officer restricted the qualifying income to the
net figure. In other words, the assessee claimed the gross income earned in
foreign exchange as the qualifying income, whereas the Income-tax Officer
granted deduction by restricting the claim of the assessee to the net income.

On December 17, 1997, whether the eligible income
should be taken at the gross figure or net figure, was the question for
interpretation. There were several conflicting decisions on this point.
Therefore, according to the appellant, S. 143(1)(a) was not applicable and
consequently the appellant was not liable to pay the additional tax
u/s.143(1A).

The Supreme Court observed that the only point
raised by the appellant was that it was not liable to pay additional tax, as
S. 143(1)(a), as it stood during the relevant year, was not applicable to the
facts of this case, because a moot point had arisen which could not have been
a matter for adjustment under that Section and which point needed
consideration and determination only under regular assessment vide S. 143(3)
of the 1961 Act. The Supreme Court held that for the A.Ys. 1996-97 and 1997-98
with which it was concerned, one of the main conditions stipulated by way of
the first proviso to S. 143(1)(a), as it stood during the relevant time,
referred to prima facie adjustments. The first proviso permitted the
Department to make adjustments in the income or loss declared in the return in
cases of mathematical errors or in case where any loss carried forward or
deduction or allowance which on the basis of information available in return
was prima facie admissible, but which was not claimed in the return or
in cases where any loss carried forward or deduction or allowance claimed in
the return which on the basis of information available in the return, was
prima facie inadmissible. In the present case, therefore, when there were
conflicting judgments on interpretation of S. 80-0, the Supreme Court was of
the view that prima facie adjustments contemplated u/s.143(1)(a) were
not applicable and therefore the appellant was not liable to pay additional
tax u/s.143(1A) of the Act.

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Method of Accounting — Chit fund — Chit discount accounting on completed contract method cannot be rejected, especially when it is revenue neutral.

New Page 1

16 Method of Accounting — Chit fund — Chit
discount accounting on completed contract method cannot be rejected, especially
when it is revenue neutral.


[CIT v. Bilahari Investment P. Ltd., (2008) 299 ITR I
(SC)]

The assessees are private limited companies subscribing to
chits as their business activities. They were maintaining their accounts on the
mercantile basis and they were computing profit/loss, as the case may be, at the
end of the chit period following the completed contract method, which was
earlier accepted by the Department over several years.

 

However, for the A.Ys. 1991-92 to 1997-98, the Assessing
Officer came to the conclusion that the completed contract method was not
accurate in recognising/identifying ‘income’ under the 1961 Act, and according
to him, therefore, in the context of the ‘chit discount’, the correct method was
deferred revenue expenditure calculated on proportionate basis. In other words,
the Assessing Officer has preferred the percentage of completion method as the
basis for recognising/identifying ‘income’ under the 1961 Act in substitution of
the completed contract method.

 

According to the Department, chit dividend had to be
subjected to tax on accrual basis as the assessees were following the mercantile
system of accounting. As far as the chit dividend is concerned, the Department
rejected the completed contract method as suggested by the assessees, which has
been accepted by the Tribunal and the High Court. However, in the matter of chit
discount, the High Court, overruling the Tribunal, has held that the completed
contract method of accounting adopted by the assessees was valid and that the
Department had erred in spreading the discount over the remaining period of the
chit on proportionate basis. In the matter of chit dividend, the assessees
accepted the view of the Tribunal and the High Court that the completed contract
method was not correct.

 

Before the Supreme Court the limited controversy was whether
the completed contract method of accounting adopted by the assessees as method
of accounting for chit discount was required to be substituted by the percentage
of completion method.

 

The Supreme Court noted that chit funds are basically saving
schemes in which a certain number of subscribers join together and each
contributes a certain fixed sum each month, the total number of months being
equal to the total number of subscribers. The subscriptions are paid to the
manager of the fund by a certain prescribed date each month and the total
subscriptions to the fund are auctioned each month amongst the subscribers. At
each auction, the lowest bidder is paid the amount of his bid and the balance
received from out of the total subscriptions received is distributed equally
amongst other subscribers, as premium. The manager is paid a certain percentage
of the collections each month on account of expenses and charges for conducting
the auction. In the auction, a maximum amount, which the highest bidder agrees
to forgo, is the amount which is distributed to the other members, subject to
deduction of the manager’s commission.

 

Before the Supreme Court, it was the case of the assessees
that profits (loss) accrued to the assessees only when the dividends exceeded
the discount paid and that the difference could be known only on the termination
of the chit when the total figure of dividend received and discount paid would
be available. That, it would be possible for the assessees to make profits only
when the sum total of the dividend received exceeded the sum total of discounts
suffered which is debited to the profit and loss account. According to the
assessees, the Department has all along been accepting the completed contract
method and, therefore, there was no justification in law or in facts for
deviating from the accepted practice. According to the assessees, a chit
transaction has been treated by the various Courts as one single scheme running
for the full period and, therefore, according to the assessees, the completed
contract method adopted by it over the years was not required to be substituted
by any other method of accounting.

 

The Supreme Court observed that recognition/identification of
income under the 1961 Act is attainable by several methods of accounting. It may
be noted that the same result could be attained by any one of the accounting
methods. The completed contract method is one such method. Similarly, the
percentage of completion method is another such method. Under the completed
contract method, the revenue is not recognised until the contract is complete.
Under the said method, costs are accumulated during the course of the contract.
The profit and loss is established in the last accounting period and transferred
to the profit and loss account. The said method determines results only when the
contract is completed.

 

On the other hand, the percentage of completion method tries
to attain periodic recognition of income in order to reflect current
performance. The amount of revenue recognised under this method is determined by
reference to the stage of completion of the contract. The stage of completion
can be looked at under this method by taking into consideration the proportion
that costs incurred to date bears to the estimated total costs of contract.

 

The Supreme Court held that it was concerned with the A.Ys.
1991-92 to 1997-98. In the past, the Department had accepted the completed
contract method and because of such acceptance, the assessees, in these cases,
had followed the same method of accounting, particularly in the context of chit
discount. Every assessee is entitled to arrange its affairs and follow the
method of accounting, which the Department has earlier accepted. It is only in
those cases where the Department records a finding that the method adopted by
the assessee results in distortion of profits, the Department can insist on
substitution of the existing method.

 

Further, in the present cases, the Supreme Court noted from
the various statements produced before them that the entire exercise, arising
out of change of method from the completed contract method to deferred revenue
expenditure, is revenue-neutral. Therefore, the Supreme Court did not wish to
interfere with the impugned judgment of the High Court.

 

Appeal to the High Court — Finding of facts recorded by the Tribunal that machinery was not idle for the entire block period — hence it was not necessary to go into the connotation of the word ‘used’ appearing in S. 32 of the Act.

New Page 1

6 Appeal to the High Court — Finding of facts
recorded by the Tribunal that machinery was not idle for the entire block period
— hence it was not necessary to go into the connotation of the word ‘used’
appearing in S. 32 of the Act.

[Dy. CIT v. N. K. Industries Ltd., (2008)
305 ITR 274 (SC)]

The Supreme Court was concerned with the block
period April 1, 1988, to February 24, 1999. The main contention advanced on
behalf of the Department was that for allowance of deduction for depreciation,
the asset must not only be owned by the assessee but it must also be used for
the purposes of business or profession of the assessee. It was the case of the
Department that the word ‘used’ in S. 32 of the Income-tax Act, 1961, refers to
actual use of the asset; that having regard to the scheme of the Income-tax Act,
1961, and particularly, after the introduction of the concept of ‘block of
assets’, actual use is the only requirement apart from ownership for allowance
of depreciation u/s.32. It was also the case of the Department that an important
question of law arose for determination before the High Court; that the High
Court has failed to examine the said question; and that it had erred in
dismissing the tax appeals only on the ground that no substantial question of
law had arisen.

The Supreme Court observed that in the present
case, the Tribunal had examined the statements of certain witnesses and after
analysing the material on record, it had come to the conclusion on facts that
there was nothing to show that the machinery, namely, expellers remained idle
for the entire block period April 1, 1988 to February 24, 1999. The Supreme
Court after having examined the record itself, agreed with the view expressed by
the Tribunal on the facts of the present case. The Supreme Court was of the view
that hence, it is not necessary for it to go into the larger question of law
regarding the connotation of the word ‘used’ appearing in S. 32 of the
Income-tax Act, 1961. The Supreme Court dismissed the appeal for the aforesaid
reasons. The question of law was however kept open.

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Depreciation — Higher depreciation could not be allowed on the motor trucks used in business of running them on hire, unless there is an evidence that the assessee was in the business of hiring out motor vehicles.

New Page 15 Depreciation — Higher depreciation could not
be allowed on the motor trucks used in business of running them on hire,
unless there is an evidence that the assessee was in the business of hiring
out motor vehicles.

[CIT v. Gupta Global Exim P. Ltd., (2008)
305 ITR 132 (SC)]

The Assessing Officer (AO) took the view that the
assesseé was, during the relevant assessment year, in the business of timber
trading and it was only occasionally that the trucks owned by the assessee
were given out on hire to outside parties and, hence, the assessee was not in
the business running the trucks on hire and, therefore, the assessee was not
entitled to claim higher rate of depreciation at 40%. This finding of the
Assessing Officer was reversed by the Commissioner of Income-tax (Appeals). It
was held by the Commissioner of Income-tax (Appeals) that the transportation
income of 12,50,639 by way of running the subject vehicles on hire was an
integral part of the assessee’s business and that its inclusion under the head
‘Business income’ was not disputed even by the Assessing Officer. This finding
of the Commissioner of Income-tax (Appeals) was affirmed by the Tribunal. The
High Court had refused to interfere on the ground that the matter involved
essentially questions of fact. On an appeal to the Supreme Court, it held that
generally, the Supreme Court does not interfere with the concurrent finding of
facts recorded by the authorities below. However, in this case, the Supreme
Court was of the opinion that a neat substantial question of law arose for
determination which needed interpretation of the depreciation table given in
Appendix I to the Income-tax Rules, 1962.

The Supreme Court held that under item (2)(ii) of
heading III, higher rate of depreciation is admissible on motor trucks used in
a business of running them on hire. Therefore, the user of the same in the
business of the assessee of transportation is the test.

According to the Supreme Court, in the present
case, none of the authorities below (except the Assessing Officer) had
examined the matter by applying the above test. The Assessing Officer had
given his finding that the assessee was not in the business of transportation
as he was only in the business of trading in timber logs. That, the burden was
on the assessee to establish that it is the owner of motor lorries and that it
used the said motor lorries/trucks in the business of running them on hire.

In the view of the Supreme Court, the entire
approach of the Commissioner of Income-tax (Appeals) was erroneous when he had
stated that the transportation income of Rs.12,50,639 by way of running the
subject vehicles on hire was an integral part of the appellant’s business and
its inclusion in the head ‘Business income’ is not disputed even by the AO.
According to the Supreme Court, mere inclusion of Rs.12,50,639 in the total
business income is not the determinative factor for deciding whether trucks
were used by the assessee during the relevant year in a business of running
them on hire. The Supreme Court therefore set aside the judgment of the High
Court and remitted the matter to the Commissioner of Income-tax (Appeals) for
de novo examination of the case in accordance with law.

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Business Expenditure — S. 42(1) — Special provisions for prospecting for mineral oil — Production sharing contract accounts is an independent accounting regime — Foreign exchange losses on account of foreign currency transaction is allowable as a deductio

New Page 14 Business Expenditure — S. 42(1) — Special
provisions for prospecting for mineral oil — Production sharing contract
accounts is an independent accounting regime — Foreign exchange losses on
account of foreign currency transaction is allowable as a deduction.

[CIT v. Enron Oil and Gas India Ltd.,
(2008) 305 ITR 75 (SC)]

The respondent-Enron Oil and Gas India Ltd. (‘the
EOGIL’), a company incorporated in Cayman Islands was engaged in the business
of oil exploration. In 1993, the Government of India through the Petroleum
Ministry invited bids for development of concessional blocks. EOGIL offered
its bid for the development of concessional blocks. A consortium of EOGIL with
RIL was given the contract. Later on, ONGC joined. EOGIL with RIL and ONGC
executed a production sharing contract (PSC) with the Government of India.
EOGIL was entitled to a participating interest of 30% in the rights and
obligations arising under the PSC. RIL was also entitled to participating
interest of 30%. ONGC was entitled to a participating interest of 40%. EOGIL
was designated as the operator under the said PSC.

Vide Notification No. 1997, dated March 8, 1996,
u/s.293A of the Income-tax Act, 1961 (‘the 1961 Act’), each co-venturer was
liable to be assessed for his own share of income. They were not to be treated
as an association of persons.

EOGIL filed its return of income for the
assessment year 1999-2000 declaring its taxable income of Rs. 71,19,50,013
u/s.115JA.

During the year, EOGIL debited its profit and
loss account by exchange loss of Rs.38,63,38,980. The Assessing Officer
disallowed this loss on the ground that it was a mere book entry and actually
no loss stood incurred by the assessee.

The decision of the Assessing Officer was
challenged in appeal by EOGIL before the Commissioner of Income-tax (Appeals),
who after analysing PSC held that each co-venturer in this case had made
contribution at a certain rate, whereas the expenditure incurred out of the
said contribution stood converted on the basis of the previous month’s average
daily means for the buying and selling rates of exchange which exercise
resulted in loss/profit on conversion. Under the circumstances, according to
the Commissioner of Income-tax (Appeals), it could not be said that the
assessee had incurred notional loss. In fact, during the course of
proceedings, the Commissioner of Income-tax (Appeals) found that during the
A.Ys. 1995-96 and 1996-97 the assessee had earned profits which stood taxed by
the Department. He further found that one co-venturer (ONGC) had gained
Rs.293.73 crores during the A.Y. 1997-98 because the Indian rupee had
appreciated as compared to foreign currency and the Department had taxed the
same, but when during the assessment year in question there is a loss on
account of such conversion, the Department has refused to allow the deduction
for such conversion losses. According to the Commissioner of Income-tax
(Appeals), the Department cannot blow hot and cold. Consequently, it was held
that just as the foreign exchange gain was taxable, loss was allowable
u/s.42(1) of the Income-tax Act in terms of the PSC. Therefore, the
Commissioner of Income-tax (Appeals) allowed as deduction, the loss of Rs.
38,63,38,980.

Aggrieved by the order passed by the Commissioner
of Income-tax (Appeals), the Department carried the matter in appeal to the
Income-tax Appellate Tribunal objecting to the deletion made by the
Commissioner of Income-tax (Appeals) on the ground that the loss was only a
book entry. Before the Tribunal the matter pertained to the A.Ys. 1999-2000,
199899, 2000-01 and 1996-97. However, for the sake of convenience, the
Tribunal focussed its attention on the facts and figures given for the A.Y.
1999-2000. Before the Tribunal, the Department contended that the assessee
borrows in USD and repays in the same currency for the preparation of the
balance sheet. The loans, according to the Department, were stated at
prevalent exchange rates and the loss arrived at was charged to the profit and
loss account. Therefore, according to the Department, the said loss was a book
entry and it was not an actual loss in foreign exchange caused to the assessee.
This argument of the Department was rejected by the Tribunal. It was held that
the assessee was a foreign company. It carried out business activity in India.
It had to maintain its accounts in rupees for the purpose of income-tax, that
the PSC had to be read with S. 42(1) of the Income-tax Act, which entitled the
assessee to claim conversion loss as deduction, particularly when the said PSC
provided for realised and unrealised gains/losses from the exchange currency.
According to the Tribunal, the assessee was maintaining its accounts in rupees
and such accounts had to reflect the loan liability under consideration as the
loan had been taken for the Indian activity. Therefore, according to the
Tribunal, the liability arising as a consequence of depreciation of the rupee
had to be considered both for accounting and tax purposes. Accordingly, the
Tribunal refused to interfere with the findings returned by the Commissioner
of Income-tax (Appeals).

The above concurrent finding stood confirmed by
the judgment delivered by the Uttarakhand High Court.

On further appeal, the Supreme Court observed
that the only question which needed consideration was whether the assessee was
entitled to claim deduction for foreign exchange losses on account of foreign
currency translation. In other words, whether loss arising on account of
foreign currency translation is allowable deduction or not and conversely
whether the gains on account of foreign currency translation is to be treated
as a receipt liable to tax. Analysing the provisions of S. 42(1), the Supreme
Court held that it was clear that the said Section was a special provision for
deductions in the case of business of prospecting, extraction/production of
mineral oils. S. 42(1) provides for admissibility in respect of three types of
allowances provided they are specified in the PSC. They relate to expenditure
incurred on account of abortive exploration, expenditure incurred before or
after the commencement of commercial production in respect of drilling or
exploration activities and expenses incurred in relation to depletion of
mineral oil in the mining area. If one reads S. 42(1) carefully, it becomes
clear that the above three allowances are admissible only if they are so
specified in the PSC.

Accordingly, the Supreme Court noted that the PSC
in question provided for both capital and revenue expenditures. It also
provided for a method in which the said expenses had to be accounted for. The
Supreme Court held that the said PSC was an independent accounting regime
which included tax treatment of costs, expenses, incomes, profits, etc. It
prescribed a separate rule of accounting. In normal accounting, in the case of fixed assets, generally when currency fluctuation results in an exchange loss, addition is made to the value of the asset for depreciation. However, under the PSC, instead of increasing the value of expenditure incurred on account of currency variation in the expenses itself, EOGIL was required to book losses separately. The said PSC prescribed a special manner of accounting which was at variance with the normal accountingstandards. The said ‘PSC accounting’ obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to the profit and loss account without reference to their capital or revenue nature. But for the PSC accounting there would have been disputes as to whetherthe expenses were of revenue or capital nature. In view of the special accounting procedure prescribed by the PSC, Accounting Standard 11 had to be ruled out.

The Supreme Court observed that Appendix C pre-scribed the manner in which a contractor is required to maintain his accounts. It stipulated that each of the co-venturers had to follow the computation of Income-tax under the 1961 Act. Clause 1.6.1. of appendix C referred to currency exchange rates. It stated that for translation purposes between USD and INR, the previous month’s average of the daily means of buying and selling rates of exchange as quoted by SBI shall be used for the month in which revenue, costs, expenditure, receipts or incomes are recorded. The Supreme Court therefore, held that clause 1.6.1 of appendix C provided for translation. The Supreme Court noted that subsequent to the award of the concession, EOGIL along with RIL and ONGC executed the PSC with the Government of India. Under the said PSC, each co-venturer remitted money, known as cash call to the bank account of the operator in the USA. The expenditure for the joint venture was made out of the said account. The trial balance was required to be prepared at the end of the month in USD, which was then required to be translated on the basis of accounting procedure mentioned in Appendix C to the PSC. The Supreme Court held that the cash call in other words was not a loan. Cash cali was a contribution. It was made by each co-venturer at a certain rate, whereas the expenditure against it had to be converted on the basis of the exchange rates as provided for in the PSC, which stated that the same had to be converted on the basis of the previous month’s average of the daily means of buying and selling rates of exchange. The above analysis showed that the capital contribution had to be converted under the PSC at one rate, whereas the expenditure had to be converted at a different rate. This exercise resulted in loss/ profit on conversion. Under the PSC, the respondent had to convert revenue, costs, receipts and incomes. If EOGIL had a choice to prepare its accounts only in USD, there would have been no loss/profit on account of currency translation. It is because of the specific provision in the PSC for currency translation that loss/profit accrued to EOGIL. The Supreme Court further held that in the PSC, the foreign company provides the capital investment and cost and the first proportion of oil extracted is generally allocated to the company which uses oil sales to recoup its costs and capital investment. The oil used for that purpose is termed ‘cost oil’. Often a company obtains profit not just from the ‘profit oil’, but also from the ‘cost oil’. Such profits cannot be ascertained without taking into account translation losses. Moreover, taxes are embedded in the profit oil. If these concepts are kept in mind, then it cannot be said that ‘translation losses’ under the PSC are illusory losses.

Appeal by the Revenue — Merely because in some cases the Revenue has not preferred appeal that does not operate as a bar for the Revenue to prefer an appeal in another case where there is a just cause.

New Page 12 Appeal by the Revenue — Merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is a just
cause.

[C. K. Gangadharan & Anr. v. CIT, (2008)
304 ITR 61 (SC)]

By order dated March 13, 2008, a reference was
made to a larger Bench of the Supreme Court and the order, of reference,
inter alia, read as follows :

”In view of the aforesaid position, we are of the
opinion that the matter requires consideration by a larger Bench to the extent
whether the Revenue can be precluded from defending itself by relying upon the
contrary decision.”

The Supreme Court made it clear that it was not
doubting the correctness of the view taken by it in the cases of Union of
India v. Kaumudini Narayan Dalal, (2001) 249 ITR 219, CIT v. Narendra
Doshi, (2002) 254 ITR 606 and CIT v. Shivsagar Estate, (2002) 257
ITR 59 to the effect that if the Revenue has not challenged the correctness of
the law laid down by the High Court and accepted it in the case of one
assessee, then it is not open to the Revenue to challenge its correctness in
the case of other assessees, without just cause. The Supreme Court after
noting its decisions in Bharat Sanchar Nigam Ltd. v. Union of India,
(2006) 282 ITR 273 (SC), State of Maharashtra v. Digambar, (1995) 4 SCC
683, Government of West Bengal v. Tarun K. Roy, (2004) 1 SCC 347,
State of Bihar Ramdeo Yadav, (1996) 3 SCC 493 and State of West Bengal
v. Devdas Kumar, (1991) Supp (1) SCC 138, observed that if the assessee
takes the stand that the Revenue acted mala fide in not preferring
appeal in one case and filing the appeal in other case, it has to establish
mala fides. The Supreme Court accepted the contention of the learned
counsel for the Revenue that there may be certain cases where because of the
small amount of revenue involved, no appeal is filed or where policy decisions
have been taken not to prefer appeal where the revenue involved is below a
certain amount. Similarly, where the effect of the decision is revenue
neutral, there may not be any need for preferring the appeal. All these
provide the foundation for making a departure.

The Supreme Court held that merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is just cause
for doing so or it is in public interest to do so or for a pronouncement by
the higher court when divergent views are expressed by the Tribunals or the
High Courts.

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Exemption — Local Authority — Marketing Committee to provide facilities for marketing of agricultural produce in a locality is not a ‘local authority’ and there fore its income is not exempt u/s.10(20) (after amendment by Finance Act, 2002). Its income is

New Page 13 Exemption — Local Authority — Marketing
Committee to provide facilities for marketing of agricultural produce in a
locality is not a ‘local authority’ and there fore its income is not exempt
u/s.10(20) (after amendment by Finance Act, 2002). Its income is exempt
u/s.10(26AAB) from 1-4-2009.

[Agricultural Produce Market Committee,
Narela v. CIT & Anr., (2008) 305 ITR 1 (SC)]

The appellant-Committee was established under
the Delhi Agricultural Produce Marketing (Regulation) Act, 1998 (the 1998
Act). The provisions of the said 1998 Act enjoined upon the appellant to
provide facilities for marketing of agricultural produce in Narela, Delhi.
This is apart from performing other functions and duties such as
superintendence, direction and control of markets for regulating the
marketing of agricultural produce.

For the A.Y. 2003-04, the appellant-Committee
claimed exemption from payment of tax on the income earned by it, on the
ground that it was a ‘local authority’ within the meaning of S. 10(20) of
the Income-tax Act, 1961 (the 1961 Act). It relied upon the definition of
‘local authority’ in S. 2(1)(l) of the said 1998 Act. The Assessing Officer
rejected the appellant’s claim for exemption relying upon Circular No.
8/2002, dated August 27, 2002 issued by the Central Board of Direct Taxes.
The view taken was that the amended provisions of S. 10(20) of the 1961 Act
were not attracted to ‘Agricultural Produce Marketing Societies’ or
‘Agricultural Market Boards’ even when they may be local authorities under
the Central or State legislation.

Aggrieved by the said order, the appellant
filed an appeal before the Commissioner of Income-tax (Appeals) who upheld
the view taken by the Assessing Officer and declined the exemption claimed
by the appellant.

A further appeal by the appellant, before the
Tribunal, also failed.

Aggrieved by the decision of the Tribunal, the
appellant moved the High Court by way of an appeal u/s.260A of the 1961 Act.
The Delhi High Court following its earlier judgment in the case of
Agricultural Produce Market Committee, Azadpur v. CIT, (ITA No.
749/2006), dismissed the appellant’s appeal.

On further appeal, the Supreme Court noted that
prior to the Finance Act, 2002, the said 1961 Act did not contain the
definition of the words ‘local authority’. Those words came to be defined
for the first time by the Finance Act, 2002, vide the Explanation/
definition clause.

After hearing the parties, the Supreme Court
observed that u/s.3(31) of the General Clauses Act, 1897, ‘local authority’
was defined to mean “a municipal committee, district board, body of port
commissioners or other authority legally entitled to the control or
management of a municipal or local fund. The words ‘other authority’ in S.
3(31) of the 1897 Act have been omitted by Parliament in the
Explanation/definition clause inserted in S. 10(20) of the 1961 Act, vide
the Finance Act, 2002. Therefore, it was not correct to say that the entire
definition of the words ‘local authority’ was bodily lifted from S. 3(31) of
the 1897 Act and incorporated by Parliament, in the Explanation to S. 10(20)
of the 1961 Act. This deliberate omission was important. The Supreme Court
noted that various High Courts had taken the view prior to the Finance Act,
2002, that AMC(s) is a ‘local authority’. That was because there was no
definition of the words ‘local authority’ in the 1961 Act. Those judgments
proceeded primarily on the functional tests as laid down in the judgment of
the Supreme Court in the case of R. C. Jain [(1981) 2 SCC 308].

In the case of R. C. Jain, the test of ‘like
nature’ was adopted as the words ‘other authority’ came after the words
‘Municipal Committee, District Board, Body of Port Commissioners’.
Therefore, the words ‘other authority’ in S. 3(31) took colour from the
earlier words, namely, ‘Municipal Committee, District Board or Body of Port
Commissioners’. This is how the functional test was evolved in the case of

R. C. Jain. The Supreme Court held that
Parliament in its legislative wisdom had omitted the words ‘other authority’
from the said Explanation to S. 10(20) of the 1961 Act. The said Explanation
to S. 10(20) provides a definition to the words ‘local authority’. It is an
exhaustive definition. It is not an inclusive definition. The words ‘other
authority’ do not find place in the said Explanation. Even according to the
appellant(s), AMC(s) was neither a Municipal Committee nor a District Board
nor a Municipal Committee nor a Panchayat. Therefore, according to the
Supreme Court, the functional test and the test of incorporation as laid
down in the case of R. C. Jain, was no more applicable to the Explanation to
S. 10(20) of the 1961 Act.

However, the Supreme Court felt that the
question still remained as to why Parliament had used the words ‘Municipal
Committee’ and ‘District Board’ in item (iii) of the said Explanation.
According to the Supreme Court, Parliament defined ‘local authority’ to mean
— a panchayat as referred to in clause (d) of Article 243 of the
Constitution of India, Municipality as referred to in clause (e) of Article
243P of the Constitution of India. However, there was no reference to
Article 243 after the words ‘Municipal Committee’ and ‘District Board’. It
appeared that the Municipal Committee and District Board in the said
Explanation were used out of abundant caution. In 1897 when the General
Clauses Act was enacted there existed in India, Municipal Committees and
District Boards and it was quite possible that in some remote place a
District Board still existed. The Supreme Court in conclusion observed that
having taken the view that AMC(s) is neither a Municipal Committee nor a
District Board under the Explanation to S. 10(20) of the Act, it refrained
from going into the question : whether the AMC(s) is legally entitled to the
control of the local fund, namely, Market Fund, under said 1998 Act, because
vide the Finance Act, 2008, income of AMC(s) is exempted under sub-section
(26AAB) of S. 10 with effect from April 1, 2009.

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Capital or revenue expenditure — Development and prospecting expenditure — The question is to be considered in the light of the provisions of S. 35E(2) and not in the context of S. 37(1).

New Page 1



  1. Capital or revenue
    expenditure — Development and prospecting expenditure — The question is to
    be considered in the light of the provisions of S. 35E(2) and not in the
    context of S. 37(1).

[Rajasthan State Mines
and Minerals Ltd. v. CIT, (2009) 313 ITR 366 (SC)

In the assessment orders
passed for the A.Ys. 1998-99 and 1999-2000 in the case of the assessee, a
public sector undertaking of the Government of Rajasthan, the Assessing
Officer disallowed the expenditure towards developments and prospecting
charges treating it as capital in nature. The Commissioner of Income-tax
(Appeals) referred to the provisions of S. 35E(2) which provide that any
expenditure incurred wholly and exclusively on any operation relating to
prospecting for any mineral or on development of a mine in the year of
commercial production and any one or more of the four years immediately
preceding that year shall be allowed as deduction equal to one tenth of the
amount of expenditure starting from the year the assessee is specifically
covered u/s.35E(2). The Commissioner of Income-tax (Appeals) observed that
the assessee had claimed write off over a period of time and therefore the
claim should be more. It appears that Commissioner of Income-tax (Appeals)
had upheld the disallowance for the reason that prospecting expenses were
incurred on expenditure of corporate plan which did not pertain to
prospecting expenses. Before the Tribunal it was contended by the assessee
that this expenditure was incurred for orientation of the administrative set
up and this was revenue in nature, whereas, the Departmental Representative
had contended that this expenditure was of capital nature because corporate
plan expenditure was of enduring benefit to the assessee company. It appears
that Tribunal rejected the assessee’s appeal. On a further appeal, the High
Court, also appears to have rejected the appeal of the assessee with
reference to the provisions of S. 37(1) of the Act. The Supreme Court, on
assessee’s appeal, observed that it could not be disputed that, had the High
Court considered the claim of the appellant in the light of S. 35E(2), it
might have arrived at a different conclusion. The Supreme Court, therefore,
set aside the judgment of the High Court and remitted the matter back to the
High Court for considering the assessee’s appeal afresh on merits.



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Penalty S. 271(1)(c) Explanation 5 : Assessee admitted acquisition of asset in statement u/s.132(4) : Immunity to be granted

New Page 1

6 Penalty : S. 271(1)(c) Explanation 5 of Income-tax Act,
1961 : A. Ys. 1984-85 and 1988-89 : In statement u/s.132(4), assessee admitted
acquisition of asset in A.Y. 1987-88 and offered income of Rs.3,50,000 spread
over 5 years from A.Y. 1984-85 to 1988-89 : Immunity under Explanation 5 should
be granted.


[CIT v. Kanhaiyalal, 214 CTR 611 (Raj.)]

In the course of a search action, in a statement u/s.132(4)
of the Income-tax Act, 1961, the assessee accepted the acquisition of the asset
of value Rs.3,50,000 in the A.Y. 1987-88 and offered the amount to tax spread
over in the A.Ys. 1984-85 to 1988-89. The Assessing Officer imposed penalty
u/s.271(1)(c) of the Act and refused to grant immunity under Explanation 5, on
the ground that the whole of the amount should have been offered in the A.Y.
1987-88. The Tribunal deleted the addition and held that the assessee is
entitled to immunity under Explanation 5.

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

“Immunity under Explanation 5 of S. 271(1)(c) is not taken
away for the simple reason that income disclosed by assessee in his statement
u/s.132(4) for a particular year was spread over in the returns of several
years, more so, when the Assessing Officer had also made assessment in
assessment years as returned by the assessee, though after making some quantum
reshuffling.”



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Interest on excess refund : S. 234D of Income-tax Act, 1961 : Section came on statute books w.e.f. 1-6-2003 : Provision not retrospective : Interest u/s.234D cannot be charged in respect of refunds granted prior to 1-6-2003.

New Page 1

Unreported :


12. Interest on excess
refund : S. 234D of Income-tax Act, 1961 : Section came on statute books w.e.f.
1-6-2003 : Provision not retrospective : Interest u/s.234D cannot be charged in
respect of refunds granted prior to 1-6-2003.

[CIT v. M/s. Bajaj
Hindustan Ltd. (Bom.), ITA No. 198 of 2009 dated 15-4-2009]

In an appeal by the Revenue
the following question was raised before the Bombay High Court :

“Whether in the facts and
circumstances of the case and in law the ITAT was right in holding that the
interest u/s.234D cannot be charged in respect of refunds granted prior to
1-6-2003 ?”

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

“It is seen that the
subject provision came on statute book w.e.f. 1-6-2003. If that be so, the
said provision does not have retrospective effect. In this view of the matter
we do not see the appeal giving rise to any substantial question of law.”

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Reassessment : Power and scope : S. 147 of Income-tax Act, 1961 : A.Ys. 1994-95 and 1995-96 : If the AO does not assess the income, which he had reason to believe had escaped assessment, then the reassessment order will be invalid.

New Page 6

13. Reassessment : Power and
scope : S. 147 of Income-tax Act, 1961 : A.Ys. 1994-95 and 1995-96 : If the AO
does not assess the income, which he had reason to believe had escaped
assessment, then the reassessment order will be invalid.


[CIT v. M/s. Jet Airways
(I) Ltd. (Bom.), ITA No. 1714 of 2009 dated 12-4-2010]

In an appeal by the Revenue
the following question was raised before the Bombay High Court :

“Where upon the issuance of
a notice u/s.148 of the Income-tax Act, 1961 r/w. S. 147, the Assessing Officer
does not assess or, as the case may be, reassess the income which he has reason
to believe had escaped assessment and which formed the basis of the notice
u/s.148, is it open to the Assessing Officer to assess or reassess independently
any other income, which does not form the subject matter of the notice ?”

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

“(i) S. 147 has the effect
that the Assessing Officer has to assess or reassess the income (such income)
which escaped assessment and which was the basis of the formation of belief
and if he does so, he can also assess or reassess any other income which has
escaped assessment and which comes to his notice during the course of the
proceedings. However, if after issuing a notice u/s.148, he accepts the
contention of the assessee and holds that the income in respect of which he
has initially formed has reason to believe had escaped assessment, has as a
matter of fact not escaped assessment, it is not open to him independently to
assess some other income. If he intends to do so, a fresh notice u/s.148 would
be necessary, the legality of which would be tested in the event of a
challenge by the assessee.

(ii) We have approached
the issue of interpretation that has arisen for decision in these appeals,
both as a matter of first principle, based on the language used in S. 147(1)
and on the basis of the precedent on the subject. We agree with the submission
which has been urged on behalf of the assessee that S. 147(1) as it stands
postulates that upon the formation of a reason to believe that income
chargeable to tax has escaped assessment for any assessment year, the AO may
assess or reassess such income ‘and also’ any other income chargeable to tax
which comes to his notice subsequently during the proceedings as having
escaped assessment. The words ‘and also’ are used in a cumulative and
conjunctive sense. To read these words as being in the alternative would be to
rewrite the language used by the Parliament.

(iii) In that view of the
matter and for the reasons that we have indicated, we do not regard the
decision of the Tribunal in the present case as being in error. The question
of law shall accordingly stand answered against the Revenue and in favour of
the assessee.”

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Interest for non/short payment of advance tax and on excess refund : S. 234B and S. 234D of Income-tax Act, 1961 : A.Y. 2001-02 : Interest not chargeable u/s.234B where short payment of advance tax is attributable to non/short deduction of tax at source :

New Page 1

Unreported :

11. Interest for non/short
payment of advance tax and on excess refund : S. 234B and S. 234D of Income-tax
Act, 1961 : A.Y. 2001-02 : Interest not chargeable u/s.234B where short payment
of advance tax is attributable to non/short deduction of tax at source : S. 234D
applies only for the A.Y. 2004-05 and onwards and is not retrospective.

[DIT v. M/s. Jacabs Civil
Incorporated (Del.), ITA No. 491 of 2008 dated 30-8-2010]

The assessee is a foreign
company. For the A.Y. 2001-02, the assessee had filed return of income declaring
income of Rs.96 lakhs. The assessee had claimed that it is not liable for
interest u/s.234B of the Income-tax Act, 1961 in view of the fact that it was
not liable to pay advance tax since whole of the tax liability was deductible
u/s.195 by the payee. The assessee had also claimed that S. 234D is not
applicable since it is operative only from the A.Y. 2004-05. The Assessing
Officer rejected the assessee’s claim and levied interest u/s.234B and u/s.234D
of the Act. The Tribunal accepted the assessee’s claim.

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

“(i) U/s.209(1)(d), the
tax ‘deductible or collectible at source’ has to be reduced from the advance
tax payable. S. 195 puts an obligation on the payer to deduct tax at source.
Therefore, the entire tax is to be deducted at source which is payable on such
payments made by the payee to the non-resident. The non-resident recipient is
not liable to pay advance tax. Though in Anjum Ghaswala 252 ITR 1(SC), it was
held that S. 234B is mandatory, the present is a case where S. 234B does not
apply at all. Accordingly, it is not permissible for the Revenue to charge
interest u/s.234B.

(ii) S. 234D inserted by
the Finance Act, 2003 w.e.f. 1-6-2003 is in the nature of a substantive
provision and applies only for the A.Y. 2004-05 and onwards. It is not
retrospective.”

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Salary : S. 14, S. 15, S. 16 and S. 17 of Income-tax Act, 1961 and Article 164(5) of Constitution of India : A.Y. 1996-97 : Chief Minister of a State : Pay and allowances received is assessable under the head ‘salary’.

New Page 1

  1. Salary : S. 14, S. 15, S. 16 and S. 17 of Income-tax Act,
    1961 and Article 164(5) of Constitution of India : A.Y. 1996-97 : Chief
    Minister of a State : Pay and allowances received is assessable under the head
    ‘salary’.

[Lalu Prasad v. CIT, 316 ITR 186 (Patna)]

For the A.Y. 1996-97, the assessee was the Chief Mininster
of Bihar and he filed his return of income wherein the pay and allowances
received by him as the Chief Minister was shown under the head ‘Income from
other sources’. The Assessing Officer assessed the amount under the head
‘Salary’. The Assessing Officer allowed the standard deduction of Rs.15,000
and disallowed the claim for deduction of the incidental expenditure. The
Tribunal confirmed the assessment order.

On appeal by the assessee the Patna High Court upheld the
decision of the Tribunal and held as under :

“Article 164(5) of the Constitution of India expressly
provided for payment of salary to the Chief Minister. The assessee in his
return had himself stated that he was the Chief Minister of the State and
received salary from the Government of Bihar. The Assessing Officer had not
erred in changing the head of income to ‘Salary’.”

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Depreciation : Additional depreciation : S. 32(1)(iia) of Income-tax Act, 1961 : Increase in installed capacity of final product is not a requirement for claiming additional depreciation.

New Page 5

  1. Depreciation : Additional depreciation : S. 32(1)(iia) of
    Income-tax Act, 1961 : Increase in installed capacity of final product is not
    a requirement for claiming additional depreciation.


[CIT v. Hindustan Newsprint Ltd., 183 Taxman 257 (Ker.)]

The assessee was engaged in manufacture and sale of
newsprint. It claimed additional depreciation in respect of de-inking plant in
which pulp was made from waste paper. The Assessing Officer disallowed the
claim on the ground that the installed capacity of final product of the
company, viz., newsprint remained unaltered even after installation of
de-inking machinery. The Tribunal held that there was increase in installed
capacity of pulp and pulp though, an intermediary product is also marketable
and, hence, the assessee was entitled to additional depreciation u/s.32(1)(iia).

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

“(i) The provision of S. 32(1)(iia) was modified
dispensing with the requirement of increase in installed capacity as a
condition for eligibility for additional depreciation.

(ii) The fact that pulp is an intermediary product and is
generally consumed captively in the manufacture of newsprint does not mean
that pulp is not a product that can not be marketed by the assessee as and
when it desired. There is no dispute that pulp is a marketable commodity. If
there was reduction in the manufacture of the final product on account of
any reason, necessarily the assessee would have to market the excess pulp
produced.

(iii) The view of the Tribunal that pulp being marketable
commodity produced by the assessee, the increase of the installed capacity
of the pulp plant on account of the installation of de-inking machinery
would entitle the assessee to the benefit of additional depreciation was to
be accepted. The finding of the Tribunal that there has been increase in the
installed capacity of the production of pulp in terms of the requirement of
the provision in the statute was not disputed by the revenue.

(iv) On the other hand its contention was that the
installed capacity of an industry should always be understood with reference
to final product manufactured and sold by it, which was newsprint in the
instant case; that contention of the revenue could not be accepted.

(v) The intermediary product, viz., pulp produced
by the company being a marketable commodity, the increase in the installed
capacity for claiming benefit of additional depreciation under the above
provision could be in the production of intermediary, viz., pulp.
Therefore, the finding of the Tribunal was to be accepted.”

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Depreciation : User of asset : Assessee in leasing business : Lease of machinery in accounting year : Lessee installing machinery in subsequent year : Not relevant : Assessee entitled to depreciation.

New Page 5

  1. Depreciation : User of asset : Assessee in leasing
    business : Lease of machinery in accounting year : Lessee installing machinery
    in subsequent year : Not relevant : Assessee entitled to depreciation.

[CIT v. Kotak Mahindra Finance Ltd., 317 ITR 236 (Bom.)]

The assessee was in the business of leasing. In the
relevant accounting year the assessee had leased out breakers to TECL. The
lessee installed the breakers in the subsequent year. The Assessing Officer
disallowed the claim for depreciation on the ground that asset was not put to
use in the relevant year. The Tribunal allowed the assessee’e claim.

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

“(i) The assessee, admittedly had supplied the machinery
before the end of the financial year and the assessee had received the lease
rental for the same. Whether the lessee had put to use the lease equipment
would be irrelevant as long as the machinery in fact had been given on lease
before the end of the financial year, as then it could be said that the
assessee for the purposes of business had ‘used’ the leased equipment.

(ii) The assessee was entitled to depreciation.”

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Business expenditure : S. 37 of Income-tax Act, 1961 : A.Y. 2004-05 : Assessee civil contractor : Constructed Hockey Stadium in the Collectorate Complex for securing DRDA contract : Expenditure on stadium is business expenditure allowable u/s.37.

New Page 1

  1. Business expenditure : S. 37 of Income-tax Act, 1961 : A.Y.
    2004-05 : Assessee civil contractor : Constructed Hockey Stadium in the
    Collectorate Complex for securing DRDA contract : Expenditure on stadium is
    business expenditure allowable u/s.37.

[CIT v. Velumanickam Lodge, 317 ITR 338 (Mad.)]

The assessee, a civil contractor, wrote a letter to the
District Collector to secure the DRDA contract from the office of the District
Collectorate, expressing its willingness to construct a hockey stadium in the
Collectorate Complex and after receipt of the letter the DRDA contract was
awarded by the Collector to the assessee. In the previous year relevant to A.Y.
2004-05 the assessee constructed the hockey stadium and the expenditure on the
construction of the hockey stadium of Rs.24 lakhs was claimed as revenue
expenditure. The Assessing Officer disallowed the claim treating the
expenditure as capital expenditure. The Tribunal allowed the assessee’s claim
holding that the assessee volunteered to construct the hockey stadium for
generating goodwill and for promoting its business activities, especially
where such construction of the hockey stadium was for the welfare of the
public, which was not prohibited by law. The Tribunal observed that the mere
willingness expressed by the assessee to construct the hockey stadium in the
District Collectorate Complex for a value of Rs.24 lakhs could not be
construed as bribe to a person or as contribution for a private fund or for
the benefit of any individual which could be regarded as a form of illegal
gratification.

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

“The construction of the hockey stadium by the assessee
was in the regular course of business apart from the fact that such
construction came to be made on property belonging to the District
Collectorate meant solely for the use of public at large. Thus, the
investment made by the assessee for construction of the hockey stadium was
in the regular course of business and such investment could be construed as
one made with a view to enlarge its scope of business and could be termed as
business expenditure.”

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Assessment : Cross-examination of witnesses : A.Y. 1996-97 : Assessment based on statement of witnesses : No opportunity afforded to assessee to cross-examine the witnesses : Matter remanded.

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  1. Assessment : Cross-examination of witnesses : A.Y. 1996-97 : Assessment based on statement of witnesses : No opportunity afforded to assessee to cross-examine the witnesses : Matter remanded.

[CIT v. Land Development Corporation, 316 ITR 328 (Karn.)]

The assessee was carrying on the business of real estate and building apartments. For the A.Y. 1996-97, the assessee had claimed depreciation on certain machineries used for the purposes of the business. In the course of survey conducted at the premises of the assessee and the seller of the machinery, statements of different persons were recorded. On the basis of such statements the claim for depreciation was disallowed. The assessee contended that the witnesses whose statements have been relied on were not allowed to be cross-examined by the assessee and therefore the disallowance can not be sustained in law. The Tribunal accepted the contention.

On appeal by the Revenue the Karnataka High Court held as under :

“The matter was to be remanded to the Assessing Officer for affording an adequate and proper opportunity to the assessee for cross-examination of all the witnesses whose statements were recorded earlier and whose statements had been already supplied to the assessee.”

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Assessment : A.Ys. 1993-94 to 1995-96 : Business expenditure : Disallowance : Not to be based only on admissions of assessee : Admission not conclusive evidence.

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  1. Assessment : A.Ys. 1993-94 to 1995-96 : Business
    expenditure : Disallowance : Not to be based only on admissions of assessee :
    Admission not conclusive evidence.

[Ester Industries Ltd. v. CIT, 316 ITR 260 (Del.)]

For the A.Ys. 1993-94 to 1995-96, the disallowances made by
the Assessing Officer were reversed by the CIT(A) and the additions were
deleted on the ground that the assessment order did not justify the additions.
The Tribunal reversed the order of the CIT(A) and restored the order of the
Assessing Officer on the ground that the assessee both in its original as well
as in its revised return had made admissions which formed the basis of the
additions made by the Assessing Officer.

On appeal, the assessee contended that had the assessee
been given an opportunity by the AO, it could have demonstrated that no
additions or disallowances were called for. The Delhi High Court allowed the
appeal and held as under :

“(i) The Tribunal ought to have examined the issue as to
whether the fact that the assessee had made an admission with respect to an
addition in its original return or in the revised return would ipso facto
bar the assessee from claiming an expense or disputing an addition, if it is
otherwise permissible under law.

(ii) The Assessing Officer did not call upon the assessee
to furnish any explanation at the time of making additions. The Tribunal
should have examined the matter based on the point that an admission is an
extremely important piece of evidence but it could not be said to be
conclusive. It was open to the person who made the admission to show that it
was incorrect.

(iii) The Tribunal’s order was to be set aside and it was
directed to rehear the parties.”

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Appeal : Right of payer to appeal : S. 246(1)(i) and S. 248 of Income-tax Act, 1961 : A.Y. 1997-98 : Even if tax is not effected by the payer, the payer has every right to question the tax liability of the payee to avoid vicarious consequences : Payer is

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  1. Appeal : Right of payer to appeal : S. 246(1)(i) and S. 248
    of Income-tax Act, 1961 : A.Y. 1997-98 : Even if tax is not effected by the
    payer, the payer has every right to question the tax liability of the payee to
    avoid vicarious consequences : Payer is entitled to prefer appeal.

[Jindal Thermal Power Company Ltd. v. Dy. CIT, 225
CTR 220 (Karn.)]

In this case the appellant had made payment for which it
had not deducted tax at source. It preferred appeal disputing the tax
liability of the payee in respect of such payment. Dealing with the question
of the locus standi of the appellant to file appeals the Karnataka High Court
held as under :

“The decision (relied on by the Revenue) does not lay
down that the person who is obliged to effect TDS u/s.195 has no right to
question the assessment of tax liability. Since in law, if TDS is not
effected by the payer (Jindal), the payer would be ultimately responsible to
pay the tax liability of the payee. The conjoint reading of S. 195, S. 201
r.w. S. 246(1)(i) and S. 248 makes it clear that Jindal as a payer has every
right to question the tax liability of its payee to avoid the vicarious
consequences. Therefore, the contention that Jundal has no right of appeal
is to be rejected.”

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Arm’s length price : Determination : S. 92CA of Income-tax Act, 1961 : Amendment w.e.f. 1-6-2007 : Transfer Pricing Officer must give an opportunity of hearing : Assessee must be given opportunity to inspect material available with Transfer Pricing Office

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  1. Arm’s length price : Determination : S. 92CA of Income-tax
    Act, 1961 : Amendment w.e.f. 1-6-2007 : Transfer Pricing Officer must give an
    opportunity of hearing : Assessee must be given opportunity to inspect
    material available with Transfer Pricing Officer and file further material.

[Moser Baer India Ltd. v. Addl. CIT, 316 ITR 1
(Del.)]

In this case the petitioners challenged the orders of the
Transfer Pricing Officer(TPO) on the following grounds :

(a) The TPO has not granted an oral hearing before
determining the arm’s length price in respect of international transactions
entered into by the petitioners with their associated enterprises; and

(b) There has been failure on the part of the TPO to
consider documents and information filed by the petitioners, as also,
non-disclosure of information and documents obtained by the TPO which were
used by him in the determination of the arm’s length price.

The Delhi High Court allowed the petitions and held as
under :

“(i) S. 92CA was inserted w.e.f. 1-6-2002 and was amended
w.e.f. 1-6-2007. Prior to the amendment, the Assessing Officer on receipt of
an order passed by the TPO under Ss.(3) of S. 92CA, would proceed to compute
the total income of the assessee u/s.92C(4) having regard to the arm’s
length price determined by the TPO. After the amendment, the Assessing
Officer is required to compute the total income of the assessee u/s.92C(4)
in conformity with the arm’s length price determined by the TPO. Thus, prior
to the amendment, the Assessing Officer while computing the total income of
the assessee, having regard to the arm’s length price so determined by the
TPO, was required to give the final opportunity to the assessee before
computing the assessee’s total income. This is clear from the language used
in Ss.(4) of S. 92CA prior to its amendment, as the determination by the TPO
was not binding on the Assessing Officer. The Assessing Officer was thus
empowered even at the stage of computation of total income to look into the
issues pertaining to the determination of the arm’s length price by the TPO.

(ii) Authorities which have power to decide and whose
decisions would prejudice a party, entailing civil consequences, would be
required to accord oral hearing even where a statute is silent. The
provisions of Ss.(3) of S. 92CA cast an obligation on the TPO to afford a
personal hearing to the assessee before he proceeds to pass an order of
determining of the arm’s length price in terms of S. 92CA(3).

(iii) Since such a requirement flows from a plain reading
of the provisions of S. 92CA(3), the determination of the arm’s length price
by the TPO could not be sustained by recourse of the fact that the assessee
did not demand an oral hearing.

(iv) To obviate any difficulty in future the show-cause
notice issued by the TPO just prior to the determination of the arm’s length
price u/s. 92CA(3) should refer to the documents available with the
Assessing Officer in relation to the international transaction in issue. The
show-cause notice should also give an option to the assessee: (a) both, to
inspect the material available with the Assessing Officer as also the leeway
to file further material or evidence if he so desires, and (b) to seek a
personal hearing in the matter.”

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Company : Book profits : S. 80HHC and S. 115JA of Income-tax Act, 1961 : In case of MAT assessment amount deductible u/s. 80HHC has to be computed on the basis of adjusted book profits and not on basis of profit computed under the normal provisions.

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12 Company : Book profits : S. 80HHC and S. 115JA of
Income-tax Act, 1961 : In case of MAT assessment amount deductible u/s. 80HHC
has to be computed on the basis of adjusted book profits and not on basis of
profit computed under the normal provisions.




[CIT v. SPEL Semiconductor Ltd., 188 Taxman 130 (Mad.)]

The assessee-company was engaged in manufacture and sale of
integrated circuits. For the relevant year, the assessment was completed u/s.
115JA. The assessee claimed that the amount deductible u/s.80HHC has to be
computed on the basis of the adjusted book profits and not on the basis of the
profit computed under the normal provisions. The Assessing Officer rejected
the assessee’s claim. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal following its judgment in the case of CIT v.
Rajanikant Schnelder & Associates (P) Ltd., 302 ITR 22 (Mad.).

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Capital gains : Cost of acquisition : A.Y. 2003-04 : Interest on loan taken for purchase of property : Interest to be included in the cost of acquisition for computing capital gain on sale of property.

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11 Capital gains : Cost of acquisition : A.Y. 2003-04 :
Interest on loan taken for purchase of property : Interest to be included in the
cost of acquisition for computing capital gain on sale of property.




[CIT v. Sri Hariram Hotels (P) Ltd.; 229 CTR 455
(Kar.), 188 Taxman 178 (Kar.)]

The assessee company had purchased an immovable property
out of borrowed funds. On sale of the property, for computation of capital
gain the assessee company included the interest on the borrowed funds in the
cost of acquisition of the property. The Assessing Officer held that the
interest on the borrowed funds does not form part of the cost of acquisition.
The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court followed
its decision in the case of CIT v. Maithreyi Pai, 152 ITR 247 (Kar.) and
upheld the decision of the Tribunal.

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Capital receipt or income from other sources : Interest on share capital during pre-operative period : A.Ys. 2001-02 and 2002-03 : Due to legal entanglement with respect to title of land to be acquired for the assessee, share capital contribution put in f

New Page 1

10 Capital receipt or income from other sources : Interest on
share capital during pre-operative period : A.Ys. 2001-02 and 2002-03 : Due to
legal entanglement with respect to title of land to be acquired for the
assessee, share capital contribution put in fixed deposit with bank : Interest
earned on fixed deposit is capital receipt liable to be set off against
pre-operative expenses : Not income from other sources.




[Indian Oil Panipat Power Consortium Ltd. v. ITO, 230
CTR 199 (Del.)]

Due to legal entanglement with respect to title of land
which was sought to be acquired by the Government for the assessee, share
capital contribution was temporarily put by the assessee in fixed deposit with
bank. Interest earned on fixed deposit in the A.Ys. 2001-02 and 2002-03 was
assessed by the Assessing Officer as income from other sources. The CIT(A)
accepted the stand of the assessee that the interest was in the nature of
capital receipt which was liable to be set off against pre-operative expenses.
The Tribunal reversed the decision of the CIT(A).

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

“(i) The test is whether the activity which is taken up for
setting up of the business and the funds which are generated are inextricably
connected to the setting up of the plant. The clue is perhaps available in S.
3 which states that for newly set up business the previous year shall be the
period beginning with the date of setting up of the business. Therefore, as
per the provisions of S. 4 which is the charging Section, income which arises
to an assessee from the date of setting of the business but prior to
commencement is chargeable to tax depending on whether it is of a revenue
nature or capital receipt. It is clear upon a perusal of the facts as found by
the authorities below that the funds in the form of share capital were infused
for a specific purpose of acquiring land and the development of
infrastructure. Therefore, the interest earned on funds primarily brought for
infusion in the business could not have been classified as income from other
sources.

(ii) Since the income was earned in a period prior to
commencement of business, it was in the nature of capital receipt and hence
was required to be set off against pre-operative expenses.

(iii) On account of the finding of fact returned by the
CIT(A) that the funds infused in the assessee by the joint venture partner
were inextricably linked with the setting up of the plant, the interest earned
by the assessee could not be treated as income from other sources.

(iv) The Tribunal misdirected itself in law in holding that
interest which accrued on funds deployed with the bank could be taxed as
income from other sources and not as capital receipt liable to be set off
against pre-operative expenses.”

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Business expenditure : A.Y. 2004-05 : Premium paid by assessee-firm on keyman insurance policy of partner is business expenditure allowable as deduction.

New Page 1

8 Business expenditure : A.Y. 2004-05 : Premium paid by
assessee-firm on keyman insurance policy of partner is business expenditure
allowable as deduction.




[CIT v. M/s. B. N. Exports (Bom.); ITA No. 2714 of
2009, dated 31-3-2010]

The assessee is a partnership firm. For the A.Y. 2004-05,
the assessee’s claim for deduction of the premium paid by the assessee-firm on
the keyman insurance policy of the partners was disallowed by the Assessing
Officer. The Tribunal allowed the assessee’s claim.

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

“(i) The Circular No. 762, dated 18-2-1998 issued by the
CBDT clarifies the position by stipulating that the premium paid for a keyman
insurance policy is allowable as business expenditure.

(ii) In the present case, on the question whether the
premium which was paid by the firm could have been allowed as business
expenditure, there is a finding of fact by the Tribunal that the firm had not
taken insurance for the personal benefit of the partner, but for the benefit
of the firm, in order to protect itself against the setback that may be caused
on account of the death of the partner.

(iii) The object and purpose of a keyman insurance policy
is to protect the business against the financial setback which may occur, as a
result of a premature death, to the business or professional organisation.
There is no rational basis to confine the allowability of the expenditure
incurred on the premium paid towards such a policy only to a situation where
the policy is in respect of the life of an employee.

(iv) A keyman insurance policy is obtained on the life of a
partner to safeguard the firm against a disruption of the business that may
result due to the premature death of the partner. Therefore, the expenditure
which is laid out for the payment of premium on such a policy is incurred
wholly and exclusively for the purpose of business.”

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Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : A.Y. 2003-04 : Loans and advances from one company to another with common shareholder with substantial interest : Deemed dividend to be assessed in the hands of the shareholder and not in the hands o

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9 Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 :
A.Y. 2003-04 : Loans and advances from one company to another with common
shareholder with substantial interest : Deemed dividend to be assessed in the
hands of the shareholder and not in the hands of the recipient company.




[CIT v. Universal Medicare Pvt. Ltd. (Bom.); ITA No.
2264 of 2009, dated 22-3-2010]

An amount of Rs.32,00,000 was transferred from the bank
account of a company CSPL to the bank account of the assessee in the Chembur
branch of the State Bank of India. There was a common shareholder holding the
number of shares in the two companies as specified in S. 2(22)(e) of the
Income-tax Act, 1961. The amount was misappropriated by an employee of the
assessee and the transaction was not entered in the accounts of the assessee.
The Assessing Officer treated the said amount as deemed dividend u/s.2(22)(e)
of the Act and made the addition of the said amount. The Tribunal held that
the amount was part of a fraud committed on the assessee and the transaction
was not reflected in its books of account. The Tribunal therefore held that S.
2(22)(e) was not applicable. The Tribunal further held that even otherwise,
the amount would have to be taxed in the hands of the shareholder who obtained
the benefit and not in the hands of the assessee-company.

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

“(i) The Tribunal has found that as a matter of fact no
loan or advance was granted to the assessee, since the amount in question had
actually been defalcated and was not reflected in the books of account of the
assessee. Consequently, according to the Tribunal the first requirement of
there being an advance or loan was not fulfilled. In our view, the finding is
a pure finding of fact which does not give rise to any substantial question of
law.

(ii) Even on the second aspect which has weighed with the
Tribunal, we are of the view that the construction which has been placed on
the provisions of S. 2(22)(e) is correct.

(iii) The effect of clause (e) of S. 22 is to broaden the
ambit of the expression ‘dividend’ by including certain payments which the
company has made by way of a loan or advance or payments made on behalf of or
for the individual benefit of a shareholder. The definition does not alter the
legal position that dividend has to be taxed in the hands of the shareholder.
Consequently, in the present case the payment, even assuming that it was a
dividend, would have to taxed not in the hands of the assessee, but in the
hands of the shareholder.”

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TDS : S. 199 : TDS on interest on Deep Discount Bonds — Payment on behalf of ‘owner of security’

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20 TDS : Credit of : S. 199 of Income-tax
Act, 1961 : A.Y. 2002-03 : TDS in relation to interest on Deep Discount Bonds is
required to be treated as payment on behalf of ‘owner of security’ or ‘unit
holder’.


[CIT v. Smt. Sonal Bansal, 167 Taxman 311 (P&H); 215
CTR 65 (P&H)]

On 1-1-2001, the assessee had purchased Deep Discount Bonds
1997 of IDBI at the rate of Rs.9,700 each from one ‘V’ who had originally
purchased the same at the rate of Rs.5,500. On maturity, the IDBI deducted tax
at source of Rs.91,800 on the interest income of Rs.9 lakhs. In the A.Y.
2002-03, the assessee had declared the income of Rs.1,07,140 which included
Rs.60,000 being interest on the said Bonds as the secondary purchaser. The
assessee had also claimed credit of the said tax deducted at source of Rs.91,800
on the said interest of Rs.9 lakhs. The Assessing Officer allowed credit for TDS
of Rs.6,120 only, proportionate to the interest income of Rs.60,000 offered by
the assessee and disallowed the balance. The CIT(A) and the Tribunal allowed the
full claim.

 

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

“(i) A perusal of the provisions of S. 199 shows that any
deduction made of tax at source and paid to the Central Government is required
to be treated as payment of tax on behalf of the person from whose income the
deduction was made. However, with effect from 1-4-1997, amendments were
introduced by Finance Act, 1996, which resulted in addition of words
‘depositor’ or ‘owner of property’ or ‘owner of security’ or ‘unit holder’, as
the case may be. Therefore, it is clear that any deduction made of tax at
source and paid to the Central Government is required to be treated as payment
of tax on behalf of ‘owner of security’ or ‘unit holder’.

(ii) In the instant case, it is obviously the assessee-secondary
purchaser who was owner of security and, therefore, tax deducted at source had
to be regarded as payment made on her behalf. Moreover, certificate u/s.203
had also been issued to the assessee.”

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Refund : S. 119, S. 237 : Belated return for refund : Delay condoned due to genuine hardship to assessee

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19 Refund : Condonation of delay : S. 119 and S. 237 of
Income-tax Act, 1961 : A.Y. 1997-98 : Belated return for refund : Delay should
be necessarily condoned in case of genuine hardship to assessee.






[Pala Marketing Co-operative Society Ltd. v. UOI, 167
Taxman 238 (Ker.)]

The assessee co-operative society was entitled to exemption
u/s.80P of the Income-tax Act, 1961. For the A.Y. 1997-98, the assessee had
filed return of income claiming refund of advance tax and TDS. There was delay
in filing the return as there was delay in audit of the accounts. The Assessing
Officer rejected the return as time-barred and, consequently declined the
refund. The assessee’s application u/s.119(2)(b) for condonation of delay in
filing return was also rejected by the Board.



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

“(i) If delay is not condoned by the Board u/s. 119(2)(b),
such application cannot be processed u/s.139(1) or u/s.139(4). Therefore, in
order to consider belated return for refund on merits, delay has to be
necessarily condoned by the Board u/s.119(2)(b).

(ii) In S. 119(2)(b), it is stated that if the Board
considers it desirable or expedient for avoiding genuine hardship to the
assessee, it should condone the delay. In other words, what the Board should
consider is hardship to the party if delay is not condoned. The Board should
condone the delay if failure to condone the delay causes genuine hardship to
the assessee, no matter whether the delay in filing return is meticulously
explained or not.

(iii) Strangely, the Board had stated in its order that it
was not possible to investigate (scrutinise) the return of income because the
statutory time limit had already elapsed. It is not clear on what basis that
statement was made, because even in a case where a claim of refund is made,
the Assessing Officer has to examine the liability for Income-tax of the
assessee and refund is made only if tax is not payable or the amount paid is
in excess of the tax, interest, etc., payable.

(iv) The delay in audit by the auditor was not attributable
to the assessee. Besides showing sufficient cause for delay in filing the
return for refund, the assessee had also established its case of genuine
hardship inasmuch as it had suffered losses in the five succeeding years. The
genuine hardship contemplated u/s. 119(2)(b) obviously is financial hardship
caused to the assessee if delay is not condoned. If delay in the instant case
was not condoned, the assessee would be deprived of Rs.10 lakhs and odd, which
it was otherwise not liable to pay by virtue of the exemption u/s.80P.

(v) In the circumstances, impugned order was quashed
declaring the assessee’s entitlement for condonation of delay u/s.119(2)(b)
and, the Assessing Officer was directed to process assessee’s claim for refund
u/s.237 and grant refund to the extent eligible.”









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Charitable trust: Assessee, a marketing committee entitled to registration u/s.12A/12AA and exemption u/s.11

New Page 1

II. Reported :



 


17 Charitable trust : Registration u/s.12A
and u/s.12AA of Income-tax Act, 1961 : Assessee, a marketing committee eligible
for exemption u/s.10(29) : Exemption withdrawn w.e.f. 1-4-2003 : Assessee not
disentitled to registration 12A and 12AA and exemption u/s.11.

[CIT v. Krishi Upaj Mandi Samiti, 215 CTR 54 (MP)]

The assessee, a marketing committee, was entitled to
exemption u/s.10(29) of the Income-tax Act, 1961. The exemption was withdrawn
w.e.f. 1-4-2003. The assessee made application for registration u/s.12A and
u/s.12AA of the Act. The Commissioner rejected the application, on the ground
that the exemption u/s.10(29) has been withdrawn. In appeal the Tribunal
directed the Commissioner to permit the registration.

 

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

“(i) The first contention raised by the counsel for the
appellant is that the intention of the legislature in deleting S. 10(29) and
introduction of S. 10(20) itself shows that the legislature did not want to
extend the benefit of exemption to Krishi Upaj Mandi Samiti. This argument is
without any force because S. 10(20) and S. 10(29) provide for exemption to all
the local authorities and exemption under this section was a blanket exemption
without fulfilling any condition. S. 11 provides for exemption on certain
conditions. Thus, the intention behind the amendment was to remove the blanket
exemption to the local authorities and provide exemption only if they fulfil
the conditions u/s.11.

(ii) As per S. 11, the exemption can be granted to the
marketing committees provided that they spend amount for charitable purposes
as required by S. 11(2). Marketing committees are bound to spend their income
as per S. 39 of the 1972 Adhiniyam and as per said Section, the amount could
be spent only for public amenities like construction of roads, market, etc. S.
2(15) provides that if the amount is spent towards public amenities, it will
be deemed that the amount is spent for charitable purposes. Hence, by virtue
of S. 2(15), it will have to be deemed that the amount spent by the marketing
committees is spent towards public purposes.

(iii) Respondent marketing committees fulfil all the
requirements of S. 11 to get exemption and therefore, are entitled to
registration u/s.12A and u/s.12AA and hence, the Tribunal has rightly allowed
the appeals and set aside the orders passed by the CIT.


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Income from other sources : S. 56, 57 : Interest on borrowed money prior to commencement of business — Deductible u/s 57

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18 Income from other sources : S. 56 and S. 57 of Income-tax
Act, 1961 : A.Ys. 1997-98 and 1998-99 : Interest income prior to commencement of
business : Interest on borrowed money could be allowed as deduction.






[CIT v. VGR Foundations, 298 ITR 132 (Mad.)]

The assessee was engaged in the real estate business. It
incurred expenses prior to commencement of business and also earned interest
income from out of the fixed deposits with the bank and the said income had been
set off against the expenses. The Assessing Officer assessed the interest income
as income from other sources, but did not allow any deduction of expenses. The
Tribunal held that the interest on moneys borrowed for the period prior to the
commencement of business could be allowed as deduction from the interest u/s.57
of the Income-tax Act, 1961.



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

“(i) The Tribunal allowed the claim of the assessee by
following its own earlier order and had rightly come to the conclusion that
interest on moneys borrowed for the period prior to the commencement of
business could be allowed as deduction u/s.57 while computing income from
other sources in respect of the interest received.

(ii) The Revenue was unable to give any further materials
or evidence and to furnish information as to whether they had filed any appeal
against the earlier order or not. Therefore there was no error or legal
infirmity in the order of the Tribunal so as to warrant interference. “





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Capital gains : Sale of property received under will : Expenditure on obtaining probate & travel expenses of executors deductible

New Page 1

II. Reported :



 


16 Capital gains : Computation : Deduction :
A.Y. 1996-97 : Sale of property received under will : Expenditure incurred on
obtaining probate and travel expenses of executors are deductible.

[Mrs. June Perrett v. ITO, 298 ITR 268 (Kar); 215 CTR
267 (Kar.)]

In the A.Y. 1996-97, the assessee had sold a property
inherited by her under a will. While computing capital gain, she claimed
deduction of the expenditure incurred on obtaining probate and travel expenses
of executors. The claim was disallowed by the Assessing Officer. Disallowance
was upheld by the Tribunal.

 

On appeal by the assessee, the Karnataka High Court allowed
the claim and held as under :

“(i) While computing the capital gains u/s.48(i) of the
Income-tax Act, 1961, any expenditure incurred wholly and exclusively in
connection with the transfer of the property has to be deducted, and similarly
the cost incurred by the assessee for any improvement thereto is deductible.

(ii) The executors who were residing in London were
required to obtain probate and letters of administration and any expenses
incurred by the executors in order to obtain probate and letters of
administration were to be treated as expenses incurred by them in connection
with the transfer of property in question, since the executors could not sell
the property to any party without letters of administration.

(iii) Similarly, without paying the court fee, no letter of
administration would be issued by the court. Therefore, Rs.1,23,000 paid by
the executors as court fee at the time of obtaining the letters of
administration had to be treated as expenditure incurred in connection with
the transfer of property.”

 


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Capital gains : S.55(2)(b) : Sale of shares acquired before 1-4-1981 held as stock in trade up to 1987 — Market value as on 1-4-1981 is cost of acquisition

New Page 9

II. Reported :

14 Capital gains : Cost of acquisition : S. 55(2)(b) of
Income-tax Act, 1961 : Shares acquired prior to 1-4-1981 and held as stock in
trade up to 2-11-1987 : Sale of shares : Assessee entitled to adopt market value
as on 1-4-1981 as cost of acquisition.

[CIT v. Jannhavi Investments (P) Ltd.; 215 CTR 72 (Bom.)]

The assessee had acquired shares prior to 1-4-1981. Up to
2-11-1987, the shares were held as stock in trade when those were converted into
capital assets. On sale of the shares the assessee claimed the market value of
the shares as on 1-4-1981 as the cost of acquisition relying on the provisions
of S. 55(2)(b) of the Income-tax Act, 1961. The Assessing Officer rejected the
claim, on the ground that the shares were held as stock in trade till 2-11-1987.
Relying on the judgment of the Bombay High Court in the case of Keshavji
Karsondas v. CIT; 207 ITR 737 (Bom.) the Tribunal allowed the assessee’s
claim.

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

“(i) On behalf of the Revenue, it was sought to be
contended that the decision in the case of Keshavji Karsondas is
distinguishable in the facts of the present case. He pointed out that by
Finance Act, 1992, w.e.f. 1993, the mode of computation of income chargeable
under head ‘Capital gain’ had changed and the concept of ‘indexed cost of
acquisition’ had been introduced and defined under Explanation III to the 5th
proviso of S. 48. According to him the concept ‘indexed cost of acquisition’
was calculable on the basis of the cost of acquisition for the first year in
which the asset was held or on the first day of April, 1981, whichever was
later. He drew our further attention to S. 55(2)(b) which related to
calculation of ‘any other capital asset’.

(ii) In our view, there is no substance in the contention
of the Revenue. The amendment of 1993 referred to hereinabove does not in any
way nullify or dilute the ratio as laid down in the case of Keshavji Karsondas.
The cost of acquisition can only be the cost on the date of the actual
acquisition. In the present case, there was no acquisition of shares on
2-11-1987 when the same were converted from stock in trade to a capital
asset.”


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Capital gain : Interest on borrowing for investment in shares to be added to cost of acquisition of shares

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15 Capital gains : cost of acquisition : A.Y. 2000-01 :
Interest on capital borrowed for investment in shares is liable to be added to
the cost of acquisition of shares.


[CIT v. Trishul Investments Ltd., 215 CTR 96 (Mad.)]

The assessee company was carrying on business of investment
in shares and securities. In the books of the assessee company, the interest
liability on the borrowed funds was debited. The assessee claimed that the
interest should be included in the cost of acquisition of the shares. The
Assessing Officer rejected the claim. The Tribunal allowed the claim.

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

“(i) The Tribunal correctly held that the interest paid for
acquisition of shares would partake character of cost of share and therefore
the same was rightly capitalised along with the cost of acquisition of shares.
There is no denial regarding the borrowed money for the acquisition of shares
by the assessee. The Tribunal correctly held that the interest payable thereon
should be added to the cost of acquisition of shares. The reasons given by the
Tribunal are based on valid materials and evidence.

(ii) Under these circumstances, we do not find any error or
legal infirmity in the order of the Tribunal so as to warrant interference.”

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Principle of mutuality : Entrance fees, commutation value of subscription for life members received by sports club — Capital Receipt

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A. Unreported :

13 Income/capital receipt : Principle of
mutuality : A.Y. 1992-93 : Assessee is a sports club : Entrance fees : Commuted
value of subscription for life members : Is capital receipt not chargeable to
tax as principle of mutuality applies ?

[CIT v. Willingdon Sports Club (Bom.); ITA No. 121 of
2005; dated 18-3-2008 (Not reported)]

The assessee is a sports club. Its members are described as
gymkhana member, corporate member, short-term member all of whom are entitled to
the advantages or privileges of membership of the club except that of being
present or of voting at the general body meetings of the club or of serving on
the general committee and of proposing or seconding for elections as members of
the club. Apart from these members, there are life/founder/ordinary/super number
members. For the A.Y. 1992-93, the Assessing Officer assessed the total income
at Rs.15,75,900. In appeal, the Commissioner (Appeals) noted the two distinct
kind of members and held that the first category of members who were not allowed
to vote during the general body meeting were also not eligible to participate or
share in the surplus of the club on its winding up, and relying on the judgment
of the Bombay High Court in CIT v. WIAA Club; 136 ITR 569 (Bom.), held
that entrance fees and commutation of fees both have to be taken as revenue
receipts and dismissed the appeal. The Tribunal held that the entrance fees is
capital receipt not chargeable to tax in view of the decision in the case of
CIT v. WIAA Club; 136 ITR 569 (Bom.), which has been followed in CIT v.
Diners Business Services Pvt. Ltd.; 263 ITR 139 (Bom.). Accordingly, the
Tribunal allowed the appeal.

 

In appeal by the Revenue, the following questions were
raised :

“(a) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was right in holding that the entrance fees
received by the assessee is capital receipt not chargeable to tax as the
principle of mutuality applies ?

(b) Whether commuted value of subscription for life members
has to be taxed or treated as capital receipts in the light of the decision of
the Bombay High Court in CIT v. WIAA Club, 136 ITR 569 (Bom.) ?”

 


Following the judgment of the Supreme Court in CIT v.
Bankipur Club; 226 ITR 97 (SC), the Bombay High Court held as under :

“(i) The Revenue it appears have based their submission on
the judgment of this Court in CIT v. WIAA Club; 136 ITR 569. The
membership of the club consisted of ordinary members and life members. The
ordinary members were paying entrance fees and annual subscription. The life
members were paying larger entrance fees without any liability to pay annual
subscription. The club was extending similar facilities both to ordinary and
life members. The issue of mutuality was neither argued nor raised or was on
issue before the learned Bench of this Court. It is on the facts there and
without considering the principle of mutuality that the learned Bench
proceeded to hold that the amount paid by the members had two elements in it.
The part of the amount paid was entrance fees which were paid to the club with
a view to acquiring the right to avail of the services and facilities extended
by the club. The other part was a consolidated commuted payment in lieu of
annual subscription. The Court held that that part of the entrance fees which
was a compounded payment for annual subscription would be income and the
balance would be capital receipt. In our opinion, considering the judgment of
the Supreme Court in Bankipur (supra) and the issue of mutuality which
has been raised in the present appeal, the judgment in WIAA Club (supra)
is clearly distinguishable. Even otherwise, in our opinion, it is doubtful
whether it would be correct law considering the judgment in Bankipur (supra).

(ii) From the principles which have been set out above and
more so in the judgment in Bankipur (supra), even if there be temporary
or honorary members who are not entitled to vote, the assessee would not cease
to be governed by the principle of mutuality. Once the assessee is governed by
the principle of mutuality, its income earned would not be income which would
be assessable to tax.

(iii) For the aforesaid reasons, we are of the view that
there is no infirmity in the judgment and consequently the questions as raised
are devoid of merit and consequently appeal dismissed.”


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Business expenditure — Whether aid given to the residents living in the vicinity of the factory of the assessee is a business expenditure allowable u/s.37 of the Act is a question on which finding of fact should be given by the Tribunal.

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  1. Business expenditure — Whether
    aid given to the residents living in the vicinity of the factory of the
    assessee is a business expenditure allowable u/s.37 of the Act is a question
    on which finding of fact should be given by the Tribunal.

[CIT v. Madras Refineries
Ltd., (2009) 313 ITR 334 (SC)]

During the previous year
relevant to the A.Y. 1993-94, the assessee’s claim with respect to social and
welfare community expenses was disallowed by the Assessing Officer. Aggrieved
by the said order, the assessee filed an appeal before the Commissioner of
Income-tax (Appeals), who allowed the appeal deleting the disallowance.
Against the said order, the Revenue preferred an appeal before the Income-tax
Appellate Tribunal, which dismissed the appeal.

Further on an appeal,
following the decisions in CIT v. Madras Refineries Ltd., (2004) 266
ITR 170 and Cheran Engineering Corporation Ltd. v. CIT, (1999) 238 ITR
892, the Madras High Court held that the social and welfare community expenses
were deductible as business expenditure.

On an appeal before the
Supreme Court by the Revenue, it was argued on behalf of the assessee that the
aid given to the residents living in the vicinity of the factory of the
assessees was a business expenditure allowable u/s.37 of the Income-tax Act.
The Supreme Court, however, did not find any finding on this aspect in the
judgment of the Tribunal as well as in the judgment of the High Court and
therefore, set aside the impugned judgment of the High Court and remitted the
matter to the Tribunal for de novo examination of this point in
accordance with law.

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S. 80IB : Customs duty drawback derived from business of industrial undertaking is entitled to deduction

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34 Industrial undertaking : Deduction u/s.
80-IB of Income-tax Act, 1961 : A.Y. 2001-02 : Customs duty drawback derived
from business of industrial undertaking is entitled to deduction u/s.80-IB.


[CIT v. ELTEK SGS P. Ltd., 300 ITR 6 (Del.)]

The assessee was engaged in the business of processing prawns
and other seafood which it had exported. For the A.Y. 2001-02, the Assessing
Officer disallowed the claim for deduction of Customs Duty drawback of
Rs.42,92,725 u/s.80-IB of the Income-tax Act, 1961 by relying on the judgment of
the Supreme Court in CIT v. Sterling Foods, 237 ITR 579 (SC) which was
concerned with S. 80HH of the Act. The Tribunal allowed the claim for deduction.

 

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

“(i) There is a material difference between the language
used in S. 80HH and S. 80-IB of the Income-tax Act, 1961. While S. 80HH
requires that the profits and gains should be derived from the industrial
undertaking, S. 80-IB of the Act requires that the profits and gains should be
derived from any business of the industrial undertaking. In other words, there
need not necessarily be a direct nexus between the activity of an industrial
undertaking and the profits and gains. The source of the duty drawback is the
business of the industrial undertaking which is to manufacture and export
goods out of raw material that is imported and on which Customs Duty is paid.
The entitlement for duty drawback arises from S. 75(1) of the Customs Act,
1962, read with the relevant notification issued by the Central Government in
that regard.

(ii) An assessee would be entitled to special deduction
u/s.80-IB in respect of Customs Duty drawback.”

S. 147 : A completed assessment cannot be reopened merely on the basis of suspicion

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35 Reassessment : S. 147 of Income-tax Act,
1961 : A.Y. 1989-90 : A completed assessment cannot be reopened merely on the
basis of suspicion : Reason to believe v/s reason to suspect.


[CIT v. Smt. Paramjit Kaur, 168 Taxman 39 (P&H)]

For the A.Y. 1989-90, the assessment was completed u/s.143(3)
of the Income-tax Act, 1961. On receiving the information from the Department’s
survey wing that the assessee had prepared a demand draft, which was not
accounted for in the books of account, the Assessing Officer issued a notice to
the assessee u/s.148 and completed the reassessment u/s.147 by adding the amount
of the draft to the income of the assessee. The Tribunal held that since the
Assessing Officer had failed to incorporate material and its satisfaction for
reopening the assessment, the same was invalid.

 

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

“(i) In the instant case, it was undisputed that the
Assessing Officer had initiated reassessment proceedings on the basis of
information received from the survey circle that the assessee had got prepared
a demand draft which was not accounted for in the books of account of the
assessee. But the Assessing Officer had not examined and corroborated the
information received from the survey circle before recording his own
satisfaction of escaped income and initiating reassessment proceedings. The
Assessing Officer had, thus, acted only on the basis of suspicion and it could
not be said that the same was based on belief that the income chargeable to
tax had escaped assessment. The Assessing Officer has to act on the basis of
‘reason to believe’ and not on ‘reason to suspect’.

(ii) The Tribunal had, thus, rightly concluded that the
Assessing Officer had failed to incorporate the material and his satisfaction
for reopening the assessment and, therefore, the issuance of notice u/s.148
for reassessment proceedings was not valid.”

 


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S. 28(iv) : Notional interest on interest free deposit can not be treated as benefit or perquisite

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33 Income : Business income : S. 28(iv) read
with S. 23 of Income-tax Act, 1961 : A.Ys. 1995-96 and 2000-01 : Assessee
received interest-free deposit in respect of shops given on rent : Notional
interest on interest-free deposit can-not be treated as benefit or perquisite
u/s. 28(iv) : Notional interest not income.


[CIT v. Asian Hotels Ltd., 168 Taxman 59 (Del.)]

 

The assessee company had received interest-free deposit in
respect of shops given on rent. For the A.Ys. 1995-96 and 2000-01, the Assessing
Officer added notional interest on the said deposit to the assessee’s income on
the ground that by accepting the interest-free deposit, benefit had accrued to
the assessee, which was chargeable to tax u/s.28(iv) of the Income-tax Act,
1961. The Tribunal deleted the addition and held that notional interest on the
interest-free deposit received by the assessee in respect of a shop let on rent
was neither taxable as business profit u/s.28(iv), nor as income from house
property u/s.23(1)(a).

 

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

“(i) A plain reading of the provisions of S. 28(iv)
indicates that the question of any notional interest on an interest-free
deposit being added to the income of an assessee on the basis that it may have
been earned by the assessee if placed as fixed deposit, does not arise. S.
28(iv) is concerned with business income and is distinct and different from
income from house property. It talks of the value of any benefit on perquisite
whether convertible into money or not from the business or the exercise of a
profession.

(ii) S. 23(1)(a) is relevant for determining the income
from house property and concerns determination of the annual letting value of
such property. That provision talks of the sum for which the property might
reasonably be expected to let from year to year. This contemplates the
possible rent that the property might fetch and not certainly the interest on
fixed deposit that may be placed by the tenant with the landlord in connection
with the letting out of such property. It must be remembered that in a taxing
statute, it would be unsafe for the Court to go beyond the letter of the law
and try to read into the provision more than what is already provided for. The
attempt by the Revenue to draw an analogy from the Wealth-tax Act, 1957 was
also to no avail. It is an admitted position that there is a specific
provision in the Wealth-tax Act, which provides for considering of a notional
interest, whereas S. 23(1)(a) contains no such specific provision.”

 


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S. 80P(2)(a)(i) : Co-operative Society carrying on banking business : Interest on loans to nominal members is entitled to deduction.

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32  Co-operative Society : Deduction u/s. 80P(2)(a)(i)
of Income-tax Act, 1961 : A.Y. 1999-00 : Co-operative Society carrying on
banking business : Interest on loans to nominal members is entitled to
deduction.



[CIT v. Punjab State Co-operative Bank Ltd., 300 ITR
24 (P&H)]

The assessee was a co-operative society carrying on the
business of banking and extending credit facilities to its members and nominal
members. For the A.Y. 1999-00, the Assessing Officer disallowed the claim for
deduction u/s.80(2)(a)(i) of the Income-tax Act, 1961 in respect of interest
derived from the loans advanced to the nominal members. The Tribunal allowed
the claim.

 

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

“(i) The provisions of S. 80P of the Income-tax Act,
1961, were introduced with a view to encouraging and promoting the growth of
the co-operative sector in the economic life of the country and in pursuance
of the declared policy of the Government. The different heads of exemption
enumerated in the Section are separate and distinct heads and are to be
treated as such. Clause (a)(i) of Ss.(2) of S. 80P talks of a co-operative
society engaged in carrying on the business of banking or providing credit
facilities to its members. The carrying on of the business of banking by a
co-operative society or providing credit facilities to its members are two
different types of activities which are covered under this sub-clause. The
word ‘or’ used in this sub-clause cannot be read as ‘and’. If the literal
reading of the whole of a Section or sub-section or a clause is quite clear
and there is no ambiguity, then the plain meaning to the Section should be
given effect and the word ‘or’ should not be read as ‘and’. Any interest
income received by the co-operative society engaged in carrying on the
business of banking activities from its members or non-members is liable for
exemption under this sub-clause.

(ii) A nominal member who had become a member of the
society after its registration on payment of the prescribed fees as per
bye-laws of the society, would also be considered as a member of the society
as per the definition given under the Co-operative Societies Act. In any
case, it made no difference whether the income was derived from the loan
advanced to the nominal members or members or otherwise to a third party,
because every income of interest derived by a co-operative banking society
from the banking activity was entitled to special deduction u/s.80P.”

Wealth-tax : Penalty : Legal representative : S. 15B, S. 18 and S. 19 of Wealth-tax Act, 1957 : A.Ys. 1968-69, 1970-71, 1971-72, 1983-84 and 1984-85 : Assessee filing returns and receiving notices for penalty : Penalty order passed after death of assessee

New Page 1

II. Reported :

  1. Wealth-tax : Penalty : Legal representative : S. 15B, S. 18 and S. 19 of Wealth-tax Act, 1957 : A.Ys. 1968-69, 1970-71, 1971-72, 1983-84 and 1984-85 : Assessee filing returns and receiving notices for penalty : Penalty order passed after death of assessee on legal representative : Not justified.

[ACIT v. Late Shrimant F. P. Gaekwad, 313 ITR 192 (Guj.)]

For the A.Ys. 1968-69, 1970-71, 1971-72, 1983-84 and 1984-85 the assessee had filed the returns of wealth. At the time of assessment, penalty proceedings were initiated u/s.18(1)(a), u/s.18(1)(c) and u/s.15B of the Wealth-tax Act, 1957. The assessee expired in 1988 before the penalty proceedings could be completed. The estate of the assessee devolved upon his mother who also passed away and thereafter it devolved upon the sister of the assessee. On 29-8-2003 the Assessing Officer passed penalty orders u/s.18(1)(a), u/s.18(1)(c) and u/s.15B of the Act. The Tribunal cancelled the penalty orders.

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

“(i) No penalty order was passed during the life-time of the deceased. To make the legal representative liable for penalty u/s.19(1) it was not enough that the penalty proceedings should be initiated during the lifetime of the deceased. It was also necessary that such penalty proceedings must result in penalty orders during his lifetime. Therefore, neither S. 19(1) nor S. 19(3) casts any obligation on the executor, administrator or other legal representative to pay the amount of penalty as they were not liable to face any such penalty proceedings for which they have not committed any default.

(ii) The default, if any, was committed by the assessee and the assessee was not alive when the penalty proceedings culminated in penalty orders.”

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Reassessment : S. 147 and S. 148 of Income-tax Act, 1961 : A.Ys. 1996-97 to 1998-99 and 2001-02 : Reason to believe : Satisfaction not of AO of the assessee but borrowed from another AO : Not sufficient : Reopening not valid.

New Page 2

II. Reported :

  1. Reassessment : S. 147 and S. 148 of Income-tax Act, 1961 :
    A.Ys. 1996-97 to 1998-99 and 2001-02 : Reason to believe : Satisfaction not of
    AO of the assessee but borrowed from another AO : Not sufficient : Reopening
    not valid.

[CIT v. Shree Rajasthan Syntex Ltd., 313 ITR 231 (Raj.)]

The assessee company had leased out certain plant and
machinery to another company. The depreciation claimed by the assessee on the
capital asset so leased out was allowed by the Assessing Officer. The lessee
had claimed revenue expenditure for the lease rent paid to the assessee but
the Assessing Officer had allowed depreciation on the capital value of the
plant and machinery. On noticing this fact, the Assessing Officer of the
assessee, reopened the completed assessments and disallowed the claim for
depreciation. The Tribunal held that the reopening was not valid as the
satisfaction was not of the Assessing Officer of the assessee, but that of the
Assessing Officer of the lessee.

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

“The reassessment proceedings had been initiated only on
account of the opinion of the Assessing Officer of the lessee and the
Tribunal was right in finding that it was ‘borrowed satisfaction’ which was
not sufficient to confer power on the Assessing Officer to initiate
reassessment proceedings against the assessee.”

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Penalty : Concealment : S. 271(1)(c) of Income-tax Act, 1961 : A.Y. 1993-94 : Bona fide claim for exemption in terms of conflicting determination of law : Assessee disclosed entire facts : Imposition of penalty not justified : Judgment of Supreme Court in

New Page 2

II. Reported :

  1. Penalty : Concealment : S. 271(1)(c) of Income-tax Act,
    1961 : A.Y. 1993-94 : Bona fide claim for exemption in terms of
    conflicting determination of law : Assessee disclosed entire facts :
    Imposition of penalty not justified : Judgment of Supreme Court in the case of
    UOI v. Dharmendra Textile Processors, 306 ITR 277 (SC) considered.

[CIT v. Haryana Warehousing Corporation, 314 ITR 215
(P&H)]

The assessee, a warehousing corporation had made a claim
for exemption u/s.10(29) of the Income-tax Act, 1961 in respect of which there
were conflicting decisions. The claim for exemption was disallowed by the
Assessing Officer and a penalty of Rs. 1,04,61,330 was imposed u/s.271(1)(c)
of the Act. The Tribunal cancelled the penalty.

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

“(i) The deduction claimed by the assessee was legitimate
and bona fide in terms of the conflicting determination of law on the
proposition in question. The categorical finding at the hands of the
Tribunal in its order was that the assessee had disclosed the entire facts
without having concealed any income. There was no allegation against the
assessee that it had furnished inaccurate particulars of income. The
determination of the Tribunal had not been controverted even in the grounds
raised in the appeal. The assessee was guilty of neither of the two
conditions. Therefore, in the absence of the two pre-requisites postulated
u/s.271(1)(c) it was not open to the Revenue to inflict any penalty on the
assessee.

(ii) The second contention advanced by the appallent-Revenue
was that the impugned order passed by the Income-tax Appellate Tribunal
deleting the penalty imposed on the respondent-assessee u/s.271(1)(c) of the
Act was not sustainable in law because of the clear judgment in UOI v.
Dharmendra Textile Processors, (2008) 306 ITR 277. According to the
learned counsel for the appellant-Revenue, the entire income which remained
undisclosed, ‘with or without’ any conscious act of the assessee was liable
to penal action. It is submitted by the learned counsel for the
appellant-Revenue that the concept of law with regard to levy of penalty has
drastically changed in view of the said judgment, inasmuch as now penalty
can be levied even when an assessee claims deduction or exemption by
disclosing the correct particulars of its income. According to the learned
counsel, if an addition is made in quantum proceedings by the Revenue
authorities, which addition attains finality, an assessee per se
becomes liable for penal action u/s.271(1)(c) of the Act. It is the vehement
contention of the learned counsel for the appellant-Revenue that a penalty
automatically becomes leviable against the respondent-assessee u/s.271(1)(c)
of the Act, after the finalisation of quantum proceedings. In this behalf,
it is also pointed out that in view of the judgment of the Supreme Court,
referred to above, the dichotomy between penalty proceedings and assessment
proceedings stands completely obliterated.

(iii) It is also essential for us to notice, while
dealing with the second submission advanced by the learned counsel for the
appellant-Revenue, that the issue which arose for determination before the
Supreme Court in UOI v. Dharmendra Textile Processors (supra)
was whether u/s.11AC inserted in the Central Excise Act, 1944, by the
Finance Act, 1996, penalty for evasion of payment of tax had to be
mandatorily levied, in case of short of levy or non-levy of duty under the
Central Excise Act, 1944, irrespective of the fact whether it was an
intentional or innocent omission. In other words, the Apex Court was
examining a proposition whether mens rea was an essential ingredient
before penalty u/s.11AC of the Central Excise Act, 1944, could be levied. In
view of the factual position noticed herein above, the issue of mens rea
does not arise in the present controversy because the ingredients, before
any penalty can be imposed on an assessee u/s.271(1)(c) of the Act, were not
made out in the instant case as has been concluded in the foregoing
paragraph. Thus viewed, the judgment relied upon by the learned counsel for
the appellant-Revenue is, besides being a judgment under a different
legislative enactment, is totally inapplicable to the facts and
circumstances of this case. Accordingly, we find no merit even in the second
contention advanced by the learned counsel for the appellant-Revenue.”

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Appellate Tribunal : Powers : Search : Block assessment : S. 132 and S. 158B of Income-tax Act, 1961 : Tribunal cannot go into validity or otherwise of administrative decision for conducting search and seizure.

New Page 2



II. Reported :


58. 


Appellate Tribunal : Powers : Search : Block assessment : S. 132 and S. 158B of
Income-tax Act, 1961 : Tribunal cannot go into validity or otherwise of
administrative decision for conducting search and seizure.


[CIT v. Paras Rice Mills, 313 ITR 182 (P&H)]


In an appeal before the Tribunal against a block assessment order the assessee
raised the ground that the search and the consequent block assessment order were
not valid. The Tribunal held that the search and seizure was illegal as no
material was produced to show that the requirements of S. 132 (1) of the Act
were complied with.


On appeal by the Revenue, the Punjab & Haryana High Court held as under :


“While hearing an appeal against the order of assessment, the Tribunal could not
go into the question of validity or otherwise of any administrative decision for
conducting search and seizure. It could be challenged in an independent
proceeding where the question of validity of the order could be gone into. The
appellate authority was concerned with the correctness or otherwise of the
assessment.”

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Appellate Tribunal : Powers : Search : Block assessment : S. 132 and S. 158B of Income-tax Act, 1961 : Tribunal can look into validity of search : Authorisation for search not valid : Consequent search and block assessment also not valid : Tribunal justif

New Page 2



II. Reported :

  1. Appellate Tribunal : Powers : Search : Block assessment :
    S. 132 and S. 158B of Income-tax Act, 1961 : Tribunal can look into validity
    of search : Authorisation for search not valid : Consequent search and block
    assessment also not valid : Tribunal justified in setting aside block
    assessment order.

[CIT v. Smt. Chitra Devi Soni, 313 ITR 174 (Raj.)]

In the appeal before the Tribunal against the block
assessment order the assessee contended that there was no material with the
Director to form the belief as was required u/s.132(1) of the Income-tax Act,
1961 and therefore the search and the block assessment order were not valid.
The Tribunal held that the search was not valid in the absence of
authorisation based on reasons as required u/s.132(1) and consequently the
block assessment was illegal.

On appeal by the Revenue challenging the jurisdiction of
the Tribunal to look into the validity of search the Rajasthan High Court
upheld the decision of the Tribunal and held as under :

“(i) Since the assessment in the present case is made
under Chapter XIV-B and when it was specifically challenged by the assessee,
that the circumstances contemplated by S. 132(1) did not exist, this is a
matter which goes to the root of the matter about jurisdiction of the
assessing authority to proceed under Chapter XIV-B, the Tribunal was very
much justified, and had jurisdiction to go into the question as to whether
the search was conducted consequent upon the authorisation having been
issued in the background of the existence of eventualities and material
mentioned in 132(1).

(ii) The basic ingredient of the term ‘block period’
u/s.158B of the Income-tax Act, 1961, is that it relates to a certain number
of years relating to and relevant to the search conducted u/s.132. The
conclusion is that there should be a search conducted u/s.132. S. 132
contemplates existence of certain eventualities, in the event of existence
whereof, the competent authority should have reason to believe the existence
of the circumstances mentioned in clauses (a) to (c) of S. 132(1). The
consequence is that if the requirement of Ss.(1) about the existence of the
reason to believe consequent upon the information in the possession of the
concerned authority is not satisfied there could possibly be no
authorisation, irrespective of the fact that it may have been made and in
turn if a search is conducted in pursuance of the authorisation issued in
the absence of the requisite sine qua non the search cannot be a
‘search’ u/s.132 of the Act, as contemplated by the provisions of S. 158B of
the Act.

(iii) The Revenue failed to produce records containing
relevant material including information in the possession of the competent
authority, on the basis of which it had entertained the reason to believe
the existence of one or more of the eventualities covered by clauses (a) to
(c) of S. 132(1). In the absence of a legal search, in accordance with
provisions of S. 132 the ‘block period’ or the previous year in which the
search was conducted could not be said to have come into existence and
therefore any assessment order based on such search could not stand.

(iv) The Tribunal was justified in holding that when the
authorisation to conduct the search based on reasons germane to S. 132(1)
did not exist the search became invalid and that the assessment order based
on such search could not stand and had rightly set it aside.”

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Appellate Tribunal : Powers : Litigation between public sector undertaking of State Government and Income-tax Department : No power to decide whether appeal to be admitted : Refusal to admit appeal relegating parties to Committee of Disputes : Not permiss

New Page 2

II. Reported :

  1. Appellate Tribunal : Powers : Litigation between public
    sector undertaking of State Government and Income-tax Department : No power to
    decide whether appeal to be admitted : Refusal to admit appeal relegating
    parties to Committee of Disputes : Not permissible.

[Gujarat Mineral Development Corporation Ltd. v. ITAT,
314 ITR 14 (Guj.)]

The assessee, a public sector undertaking of the Government
of Gujarat, filed appeals before the Income-tax Appellate Tribunal. The
Department also filed cross appeals. Without going into the merits of the
matter, the Tribunal non-suited the parties by refusing to admit the appeals
without approval of the Committee of Disputes.

The Gujarat High Court allowed the writ petitions and
appeals against the said orders of the Tribunal and held as under :

“(i) The Supreme Court in the three ONGC cases and in
Chief Conservator of Forests, Government of AP v. Collector, (2003) 3
SCC 472 and MTNL v. Chairman CBDT, (2004) 267 ITR 647 was dealing
with disputes between a public sector undertaking of the Central Government
and a Department of the Central Government or between two Departments of the
State Government of Andhra Pradesh. The directions given and the
observations made by the Supreme Court therein have to be read in the
context and against the backdrop of the controversy before the Court,
including the litigants who were before it. There is no order made by the
Supreme Court which relates to a dispute between the Union of India and a
State, or a public sector undertaking of the Union of India and a State, or
between two States inter se, the term ‘State’ here meaning and
including the State Government, a Department of the State Government or an
undertaking of the State Government. None of these cases suggest that the
Committee set up by the Central Government would have jurisdiction to
consider resolution of such disputes between a State and the Union, the
respective Departments and undertakings included.

(ii) Hence, it is not possible to expand the scope of the
directions of the Supreme Court so as to include a dispute between a
Department of the Central Government and a State Government undertaking.

(iii) The Income-tax Appellate Tribunal is a creature of
statute. Such a constituted Tribunal is required to exercise powers and
discharge the functions conferred on the Tribunal by the Act. The Tribunal,
therefore, cannot exercise powers or discharge functions which are not
conferred on the Tribunal by the Act.

(iv) The powers available to the Tribunal are governed by
the provisions of S. 253 and S. 254 of the Act. These provisions cannot be
read to mean that the Tribunal has power to hold that an appeal is not
admitted.

(v) Both the assessee and the Department are statutorily
vested with a right under the Act by virtue of S. 253(1), (2) and (4) of the
Act to file an appeal or cross-objections. Such right granted by the statute
cannot be divested by the Tribunal on an erroneous assumption of powers
arrogated to itself under a mistaken belief of law.

(vi) The Tribunal had assumed powers which it did not
have, for determining whether the appeal was to be admitted or not. There
was no such requirement in the facts of the case to approach the Committee
as the assessee and the Income-tax Department could not be asked to go and
obtain clearance from a Committee which had no jurisdiction over them.

(vii) The appeals filed by the assessee and the
Department before the Tribunal were accordingly restored to the file of the
Tribunal for being heard and decided afresh on the merits in accordance with
law.”

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Reassessment : Notice u/s.148 of Income-tax Act, 1961 : A.Ys. 1991-92 and 1993-94 : Assessee Co-operative Housing Society : Notice u/s.148 issued claiming that transfer fee is liable to tax relying on judgment of Bombay High Court in CIT v. The Presidency

New Page 2



I. Unreported :

  1. Reassessment : Notice u/s.148 of Income-tax Act, 1961 :
    A.Ys. 1991-92 and 1993-94 : Assessee Co-operative Housing Society : Notice
    u/s.148 issued claiming that transfer fee is liable to tax relying on judgment
    of Bombay High Court in CIT v. The Presidency Co-operative Housing Society,
    216 ITR 321 (Bom.) : Reopening not valid : Notice quashed.


[Mittal Court Premises Co-operative Society Ltd. v. ITO
(Bom.), W. P. No. 526 of 1996, dated 17-7-2009]

In this case the assessee is a co-operative society of
commercial premises. As provided in the bye-laws the assessee had received
transfer fees from the transferees. On the basis of principles of mutuality
the transfer fees were not offered for tax. The Assessing Officer issued
notice u/s.148 proposing to assess the transfer fees to tax relying on the
judgment of the Bombay High Court in the case of CIT v. The Presidency
Co-operative Housing Society, 216 ITR 321 (Bom.).

On a writ petition challenging the notice u/s.148, the
Bombay High Court quashed the notice and held as under :

“(i) Notices basically have been issued on the ground
that the transfer fees received by the petitioners from incoming members was
assessable to tax considering the judgment of this Court in the case of
CIT v. The Presidency Co-operative Housing Society, 216 ITR 321 (Bom.)

(ii) We have in the judgment delivered today in
Income-tax Appeal No. 931 of 2004 and other connected appeals distinguished
the same on the ground that the issue of mutuality had not at all been in
issue before the learned Bench when it decided the reference. Once we have
held the transfer fee even paid by incoming members is not assessable to tax
applying the doctrine of mutuality, the notice issued would be without
jurisdiction and consequently will have to be set aside.”

 



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Settlement Commission : Abatement of proceedings : S.245D(4A)(1), S.245HA(1) (iv) and S. 245HA(3) not valid : Settlement applications not disposed of by 31-3-2008 for reasons not attributable to the applicant cannot be treated as having abated.

New Page 2



I. Unreported :


 



  1. Settlement Commission : Abatement of
    proceedings : S.245D(4A)(1), S.245HA(1) (iv) and S. 245HA(3) not valid :
    Settlement applications not disposed of by 31-3-2008 for reasons not
    attributable to the applicant cannot be treated as having abated.

[Star Television News Ltd. v. UOI (Bom.), W.P. No.
952 of 2008 dated 7-8-2009]

The Finance Act, 2007, amended S. 245D(4A) and S. 245HA to
provide that if in respect of a settlement application filed before 1-6-2007,
the Settlement Commission did not pass a final order before 31-3-2008, the
proceedings would abate. In a group of writ petitions the constitutional
validity of the said amendment was challenged. The Bombay High Court allowed
the petitions and held as under :

“(i) The fixing of the cut-off date u/s.245D(4A)(i), the
abatement of proceedings u/s.245HA(1)(iv) and the making available of
confidential information u/s.245HA(3) for no fault of the applicant are
ultra vires the Constitution. In order to save these provisions from
being struck down as being unconstitutional, they will have to be read down
as applying only to cases where the Settlement Commission is unable to pass
an order on or before 31-3-2008 for any reasons attributable on the part of
the applicant.

(ii) Accordingly, the Settlement Commission has to
consider whether the proceedings have been delayed on account of any reasons
attributable on the part of the applicant. If it comes to the conclusion
that it is not so, then it has to proceed with the application as if not
abated.

(iii) The Government shall consider appointment of more
benches of the Settlement Commission if it desires early disposal of pending
applications.”


 



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Co-operative housing society : Commercial premises : Transfer fees and non-occupancy charges : Principle of mutuality applies : Notification of State of Maharashtra putting restriction on amount of transfer fees applies only to residential societies and n

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I. Unreported :

  1. Co-operative housing society : Commercial premises :
    Transfer fees and non-occupancy charges : Principle of mutuality applies :
    Notification of State of Maharashtra putting restriction on amount of transfer
    fees applies only to residential societies and not to commercial premises :
    Transfer fees and non-occupancy charges not liable to tax.

[Mittal Court Premises Co-operative Society Ltd. v. ITO
(Bom.), ITA No. 999 of 2004, dated 17-7-2009]

In this case the assessee is a co-operative society of
commercial premises. As provided in the bye-laws, the assessee had received
transfer fees from the transferees and non-occupancy charges from the members.
As regards the transfer fees the Tribunal relied on the decision of the
Special Bench in the case of Walkeshwar Triveni Co-operative Housing
Society Ltd v. ITO, (2004) 88 ITD 159 (Mum.) (SB) and held that the
transfer fees being received from the transferee is not exempt on the basis of
the principles of mutuality. As regards the non-occupancy charges the Tribunal
held that the principles of mutuality would be applicable, but subject to the
10% limit prescribed by the State Government.

On appeal by the assessee, the Bombay High Court referred
to its judgment in the case of Sind Co-op. Housing Society v. ITO, (Bom.),
ITA No. 931 of 2004, dated 17-7-2009 (see August issue) and held as under :

“(i) In Income-tax Appeal No. 931 of 2004 along with
other appeals which we have decided by the separate judgment today, we have
set out the various facts and consequently, the Government Notifications
involved as also the provisions of the Act and the Rules and as such, it is
not necessary to refer to them once again. Suffice it to say that the
Notification issued by the State of Maharashtra putting restrictions on the
amount of transfer fee when the member desires to transfer his shares or
occupancy rights applies only in respect of housing residential societies.
In the instant case, the appellants before us are not housing residential
societies and consequently, those Notifications would not be applicable.

(ii) Insofar as the transfer fee is concerned, the
Tribunal held that it is covered by the decision of the Special Bench in the
case of Walkeshwar Triveny Co-operative Housing Society Ltd. The Tribunal
also noted that the transferees were admittedly not members of the assessee
society on the date on which the payments were made to the assessee society.
The transferees were admitted as members of the society and flats were
entered in their names only after the impugned payments were made to the
assessee society. It was also found that the amounts were paid in excess of
the Government Notifications and consequently, the amount paid as transfer
fees are exigible to tax.

(iii) There is an agreement by which the amount is paid
by the transferee. Insofar as the society is concerned, even if receipt is
issued in the name of transferee it is the nature of admission fee which
could be appropriated only on the transferee being admitted. Merely because
the amount may be appropriated earlier, it will not lose the character of
the amount being paid by a member. As held by us in Income-tax Appeal No.
931 of 2004, the same reasonings will apply to the appellants/petitioners
before us. In the circumstances, question as framed has to be answered in
the negative in favour of the assessee and against the Revenue.

(iv) That brings us to the issue insofar as non-occupancy
charges are concerned. Non-occupancy charges are again payable by a member
on account of the fact that the member is not occupying premises. Bye-laws
themselves provide for non-occupancy charges. Contribution therefore, is by
the member. Object of the contribution is for the purpose of increasing the
society’s funds, which could be used for the object of the society. Object
of the society as noted earlier is to provide service, amenities and
facilities to its members. In these circumstances, in our opinion, the
principles of mutuality as discussed in Income-tax Appeal No. 931 of 2004
must also apply.

(v) The learned counsel for the Revenue contended that
the amount of non-occupancy charges over and above 10% of the maintenance
charges should be held to be assessable to tax. In our opinion, the 10%
limit is not applicable to the commercial society like the appellant
herein.”

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Business expenditure : S. 37 of Income-tax Act, 1961 : Expenditure incurred on issue of convertible debentures : Is revenue expenditure allowable as deduction ?

New Page 2



I. Unreported :


52. 


Business expenditure : S. 37 of Income-tax Act, 1961 : Expenditure incurred on
issue of convertible debentures : Is revenue expenditure allowable as
deduction ?


[CIT v. M/s. Secure Meters Ltd. (Raj.), ITA No. 8 of 2007, dated
20-11-2008 (Not reported)]


The assessee incurred expenditure on issue of convertible debentures : The
assessee’s claim for deduction of the expenditure was rejected on the ground
that it is capital expenditure. The Tribunal held that the expenditure is
revenue expenditure and allowed the deduction.


In appeal, the Revenue contended that convertible debentures were akin to shares
and that in line with the judgment of the Supreme Court in Brooke Bond India
v. CIT, 225 ITR 798 (SC), the expenditure was capital in nature.


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


“A debenture, when issued, is a loan. The fact that it is convertible does not
militate against it being a loan. In accordance with the judgment of the Supreme
Court in the case of India Cement v. CIT, 60 ITR 52 (SC), expenditure on
loan is always revenue in nature even if loan is taken for capital purposes.
Consequently the expenditure on convertible debenture is admissible as revenue
expenditure.”

 

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Capital gains — In a case where computation provision cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s case distinguished on facts.

New Page 1


 


  1. Capital gains — In a case where computation provision
    cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s
    case distinguished on facts    .

[PNB Finance Ltd. v. CIT, (2008) 307 ITR 75 (SC)]

 

The Punjab National Bank Ltd. was set up in 1895 in an area
which now falls in Pakistan. It was nationalised as Punjab National Bank (PNB)
by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970.
On July 19, 1969 PNB Ltd. the appellant herein, on nationalisation received
compensation of Rs.10.20 crores. This compensation was calculated on the basis
of capitalisation of last 5 years’ profits. The said compensation was received
during the accounting year ending December 31, 1969, corresponding to the A.Y.
1970-71. During the A.Y. 1970-71, the appellant had to compute capital gains
u/s.48 by deducting from the sale consideration the cost of acquisition as
increased by the cost of improvement and expenses incurred in connection with
the transfer. Under the law then prevailing, the assessee could index the cost
of acquisition. A return was filed in this case by the assessee showing an
income of Rs.2,03,364.

 

The assessee in the course of assessment proceedings
submitted that he had an option u/s.55(2)(i) of having the value ascertained
as on January 1, 1954, whichever is higher, but could not exercise it as the
cost of acquisition in this case was not computable. In the alternative, the
assessee submitted the fair market value of the undertaking as on January 1,
1954. By letter dated September 30, 1970, the assessee claimed a capital loss.

 

The Assessing Officer, however, proceeded to hold on the
basis of capitalisation of the last 5 years’ profits the capital gains of
Rs.1,65,34,709.

 

Aggrieved by the decision of the Assessing Officer, the
matter was carried in appeal by the assessee to the Appellate Assistant
Commissioner who came to the conclusion that, in this case, it was not
possible to allocate the full value of the consideration received
(compensation) amounting to Rs.10.20 crores between various assets of the
undertaking and, consequently, it was not possible to determine the cost of
acquisition and cost of improvement under the provisions of S. 48 of the 1961
Act and since computation was inextrically linked with the charging provisions
u/s.45 of the said Act it was not possible to tax the tax the surplus, if any,
u/s.45 of the 1961 Act. Aggrieved by the decision of the Commissioner, the
Department went by way of appeal to the Tribunal which took the view that, in
this case, since the assessee had exercised its option for substitution of the
fair market value of the undertaking as on January 1, 1954, it was not open to
the assessee to contend that the cost of acquisition was not computable and,
therefore, the Assessing Officer was right in arriving at the figure of
capital gains fixed by him at Rs.1,65,34,709.

 

For the first time, relying upon S. 41(2), the High Court
dismissed the reference initiated at the behest of the assessee.

 

On an appeal, the Supreme Court held that as regards
applicability of S. 45, three tests are required to be applied. The first test
is that any surplus accruing on transfer of capital assets is chargeable to
tax in the previous year in which transfer took place. In this case, transfer
took place on July 18, 1969. The second test which needs to be applied is the
test of allocation/attribution. This test is spelt out in the judgment of this
Court in Mugneeram Bangur and Co. (Land Department) (1965) 57 ITR 299. This
test applies to a slump transaction. The object behind this test is to find
out whether the slump price was capable of being attributable to individual
assets, which is also known as itemwise earmarking. The third test is that
there is a conceptual difference between an undertaking and its components.
Plant machinery and dead stock are individual items of an undertaking. A
business undertaking can consist of not only tangible items but also
intangible items like, goodwill, manpower, tenancy rights and value of banking
licence. However, the cost of such items (intangibles) is not determinable. In
the case of CIT v. B. C. Sriniwasa Setty reported in [1981] 128 ITR
294, this Court held that S. 45 charges the profits or gains arising from the
transfer of a capital asset to Income-tax. In other words it charges surplus
which arises on the transfer of a capital asset in terms of appreciation of
capital value of that asset. In the said judgment, this Court held that the
‘asset’ must be one which falls within the contemplation of S. 45. It is
further held that, the charging Section and the computation provisions
together constitute an integrated code and when in a case the computation
provisions cannot apply, such a case would not fall within S. 45. In the
present case, the banking undertaking, inter alia, included intangible
assets like goodwill, tenancy rights, manpower and value of banking licence.
On the facts, the Supreme Court found that itemwise earmarking was not
possible. On the facts, it was found that the compensation (sale
consideration) of Rs.10.20 crores was not allocable item-wise as was the case
in Artex Manufacturing Co. (1997) 227 ITR 260. For the aforestated reasons,
the Supreme Court held that on the facts and circumstances of this case, which
concerned A.Y. 1970-71, it was not possible to compute capital gain and,
therefore, the said amount of Rs.10.20 crores was not taxable under Setion 45
of the 1961 Act. Accordingly, the impugned judgment was set aside. The Supreme
Court however, observed that in this case S. 55(2)(i) did not operationalise.
U/s.55(2), the fair market value as on January 1, 1954, could have substituted
the figure of cost of acquisition provided the figures of both ‘cost of
acquisition’ and ‘fair market value as on January 1, 1954’ were ascertainable.

Appeal to High Court : Power to condone delay : S. 260A of Income-tax Act, 1961 : No power to condone delay : Delay in filing appeal cannot be condoned

New Page 2

I. Unreported :

  1. Appeal to High Court : Power to condone delay : S. 260A of
    Income-tax Act, 1961 : No power to condone delay : Delay in filing appeal
    cannot be condoned.

[CIT v. M/s. Grasim Industries Ltd. (Bom.), N. M.
No. 787 of 2009 in I.T. Appeal (L) No. 3592 of 2008, dated 8-7-2009]

In this Notice of Motion the Revenue was seeking
condonation of delay in filing the appeal u/s.260A of the Income-tax Act,
1961.

Following the judgment of the Supreme Court in
Chaudharana Steels (P) Ltd v. CCE, (2009) 238 ELT 705 (SC) the Bombay High
Court held that the High Court had no power to condone delay in filing appeal
u/s.260A of the Act.

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Capital or Revenue — If the object of the subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account — if the object of the assistance under subsidy scheme is to enable the assessee to set up a new unit

New Page 1


 

  1. Capital or Revenue — If the object of the subsidy scheme is
    to enable the assessee to run the business more profitably the receipt is on
    revenue account — if the object of the assistance under subsidy scheme is to
    enable the assessee to set up a new unit or expand its existing unit, then the
    receipt is on capital account.



[CIT v. Ponni Sugars and Chemicals Ltd. (and other
connected appeals), (2008) 306 ITR 392 (SC)]

 

Co-operative Society — Deduction u/s.80P — Assessing
Authority should examine as to whether the society is engaged in its business
of banking or providing credit facilities to its members.

 

The Supreme Court was mainly concerned with the following
two questions in a batch of civil appeals, namely :

(i) Whether the incentive subsidy received by the
assessee is a capital receipt not includible in the total income ?

(ii) Whether the assessee was entitled to exemption
u/s.80P(2)(a)(i) of the Income-tax Act, 1961, in respect of the interest
received from the members of the society ?

 


For convenience the Supreme Court considered the 1980
scheme which was almost identical to 1987, 1988 and 1993 schemes. The dispute
pertained to the A.Y. 1986-87. In matter considered by the Supreme Court both
the above questions arose for determination. The incentives conferred under
that scheme were two-fold. First, in the nature of a higher free-sale sugar
quota and, second, in allowing the manufacturer to collect excise duty on the
sale price of the free-sale sugar in excess of the normal quota, but pay to
the Government only the excise duty payable on the price of levy sugar.

 

The Supreme Court observed that four factors existed in the
said schemes, which were as follows :

(i) Benefit of the incentive subsidy was available only
to new units and to substantially expanded units, not to supplement the
trade receipts.

(ii) The minimum investment specified was Rs.4 crores for
new units and Rs.2 crores for expansion units.

(iii) Increase in the free-sale sugar quota depended upon
increase in the production capacity.

(iv) The benefit of the scheme had to be utilised only
for repayment of term loans.

 


The main controversy arose in these cases because of the
reason that the incentive were given through the mechanism of price
differential and the duty differential. According to the Department, price and
costs are essential items that are basic to the profit making process and any
price related mechanism would normally be presumed to be revenue in nature. On
the other hand, according to the assessee, what was relevant to decide the
character of the incentive was the purpose test and not the mechanism of
payment.

 

According to the Supreme Court, the above controversy could
be resolved if it applied the test laid down in its judgment in the case of
Sahney Steel and Press Works Ltd. According to the Supreme Court the test to
be applied was that the character of the receipt in the hands of the assessee
had to be determined with respect to the purpose for which the subsidy was
given. The point of time at which the subsidy is paid is not relevant. The
source is immaterial. The form of subsidy is immaterial. If the object of the
subsidy scheme was to enable the assessee to run the business more profitably
then the receipt is on revenue account. On the other hand, if the object of
the assistance under subsidy scheme was to enable the assessee to set up a new
unit or to expand the existing unit then the receipt of the subsidy was on
capital account.

 

The Supreme Court referred to the decision of the House of
Lords in the case of Seaham Harbour Dock Co. v. Crook, (1931) 16 TC
333. In that case the Harbour Dock Co. had applied for grants from the
Unemployment Grants Committee from funds appropriated by Parliament. The said
grants were paid as the work progressed. The payments were made several times
for some years. The Dock Co. had undertaken the work of extension of its
docks. The extended dock was for relieving the unemployment. The main purpose
was relief from unemployment. Therefore, the House of Lords held that the
financial assistance given to the company for dock extension cannot be
regarded as a trade receipt.

 

The Supreme Court observed that the aforesaid judgment of
the House of Lords showed that the source of payment or the form in which the
subsidy is paid or the mechanism through which it is paid is immaterial and
what is relevant is the purpose for payment of assistance.

 

Applying the above tests to the facts of the present case
and keeping in mind the object behind the payment of the incentive subsidy,
the Supreme Court was satisfied that payment received by the assessee under
the scheme was not in the course of a trade, but was of capital nature.

Interest — Waiver of interest u/s.220(2) — Case of genuine hardship — Merely because a person has large assets could not per se lead to the conclusion that he would never be in difficulty as he can sell those assets and pay the amount of interest levied —

New Page 1

  1. Interest — Waiver of interest u/s.220(2) — Case of genuine
    hardship — Merely because a person has large assets could not per se
    lead to the conclusion that he would never be in difficulty as he can sell
    those assets and pay the amount of interest levied — When a request has been
    made to dispose of the seized assets and appropriate proceeds towards taxes,
    why the request was not acceded to should be gone into by the Commissioner.



[B. M. Malani v. CIT, (2008) 306 ITR 196 (SC)]

 

The appellant had been carrying on money-lending business
and trading in shares and securities. On or about September 4, 1994, a raid
was conducted in his residential premises by the authorities in exercise of
their powers u/s.132 of the Income-tax Act, 1961 (for short, ‘the Act’).
Amongst others, shares worth market value of Rs.61.38 lakhs and a demand draft
worth Rs.10 lakhs in the name of PAN Clothing Company Limited were seized. By
a letter dated December 15, 1994, a declaration was made by the appellant in
terms of Ss.(4) of S. 132 of the Act, by reason whereof he opted to pay taxes
from out of the seized shares and securities stating that the shares be
expeditiously disposed of and the sale proceeds therefrom be appropriated
towards taxes. The said request of the appellant was not acceded to.

 

The Income-tax Department demanded and recovered a sum of
Rs.40 lakhs in between the period January and March, 1995, for the A.Y.
1991-92 to 1994-95.

 

The appellant filed an application in terms of Ss.(1) of S.
245C before the Settlement Commission on January 2, 1996, whereupon an order
was passed by the Settlement Commission on December 2, 1999. The demand draft
drawn in the name of PAN Clothing Company Limited worth Rs.10 lakhs which was
seized during the course of search was encashed by the Income-tax Department
in July, 2000, after the same was got revalidated.

 

By an order dated March 8, 2002, the Income-tax Officer,
Ward-10(1), Hyderabad, levied interest for a sum of Rs.31,41,106 u/s.220(2) of
the Act for the A.Ys. 1990-91 to 1995-96.

 

The appellant thereafter filed an application for waiver of
interest on diverse dates, i.e., April 3, 2002, May 14, 2002, and
September 16, 2002. The same was rejected by the Commissioner of Income-tax by
reason of an order dated November 26, 2002, opining that the appellant did not
satisfy all the three conditions which were required for allowing a waiver
petition. The High Court dismissed the writ petition filed by the appellant.
On an appeal to the Supreme Court, it was held that for interpretation of the
aforementioned provision, the principle of purposive construction should be
resorted to. Levy of interest although is statutory in nature, inter alia is
for recompensating the Revenue from loss suffered by non-deposit of tax by the
assessee within the time specified therefor. The said principle should also be
applied for the purpose of determining as to whether any hardship had been
caused or not. A genuine hardship would, inter alia, mean a genuine
difficulty. That per se would not lead to a conclusion that a person
having large assets would never be in difficulty as he can sell those assets
and pay the amount of interest levied.

 

The Supreme Court further held that the Commissioner has
the discretion not to accede to the request of the assessee, but that
discretion must be judiciously exercised. He has to arrive at a satisfaction
that the three conditions laid down therein have been fulfilled before passing
an order waiving interest.

 

According to the Supreme Court, compulsion to pay any
unjust dues per se would cause hardship. But a question, however, would
further arise as to whether the default in payment of the amount was due to
circumstances beyond the control of the assessee.

 

The Supreme Court was of the view that, unfortunately, this
aspect of the matter had not been considered by the learned Commissioner and
the High Court in its proper perspective. The Supreme Court observed that the
Department had taken the plea that unless the amount of tax due was
ascertainable, the securities could not have been sold and the demand draft
could not have been encashed. The Supreme Court held that the same logic would
apply to the case of the assessee in regard to levy of interest also. It is
one thing to say that the levy of interest on the ground of non-payment of
correct amount of tax by itself can be a ground for non-acceding to the
request of the assessee as the levy is a statutory one, but it is another
thing to say that the said factor shall not be taken into consideration at all
for the purpose of exercise of the discretionary jurisdiction on the part of
the Commissioner. The appellant volunteered that the securities be sold. Why
the said request of the appellant could not be acceded to has not been
explained.

 

The Supreme Court observed that as the offer was voluntary,
the authorities of the Department subject to any statutory interdict could
have considered the request of the appellant. It was probably in the interest
of the Revenue itself to realise its dues. Whether this could be done in law
or not has not been gone into. The same ground, however, was not available to
the appellant in respect of the demand draft, as in relation thereto no such
request was made.

 

The Supreme Court was of the opinion that interests of
justice would be sub-served if the impugned judgment was set aside and the
matter was remitted to the Commissioner of Income-tax for consideration of the
matter afresh. The appeal was allowed accordingly.

Substantial questions of law — Whether the freight paid by the assessee (AOP) to truck owners who in turn are members of the said AOP is subject to TDS u/s.194C(2) of the Act, is a substantial question of law.

New Page 1

  1. Substantial questions of law —
    Whether the freight paid by the assessee (AOP) to truck owners who in turn are
    members of the said AOP is subject to TDS u/s.194C(2) of the Act, is a
    substantial question of law.

[CIT v. Sirmour Truck
Operators Union (No. 1), (2009) 313 ITR 26 (SC)]

[CIT v. Sirmour Truck
Operators Union (No. 2), (2009) 313 ITR 27 (SC)]

M/s. Gujarat Ambuja Cements
Ltd. entered into a contract with M/s. Sirmour Trucks Operators Union, a
society, consisting of truck operators as its members. The question which
arose before the High Court was whether the freight paid by the assessee (AOP)
to truck owners, who in turn are members of the said AOP, is subject to TDS
u/s.194C(2) of the Act. According to the Supreme Court, the afore-stated
question was a substantial question of law and the High Court ought to have
decided the said question and ought not to have dismissed the appeals
summarily. The Supreme Court therefore remitted the matter to the High Court
for consideration in accordance with the law.

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Writ petition — Under Income-tax Act, the unit of assessment is a ‘year’ and hence it is not open to a court to direct by an omnibus order that all subsequent years are connected years and that income be treated in same manner for all the years.

New Page 1

  1. Writ petition — Under
    Income-tax Act, the unit of assessment is a ‘year’ and hence it is not open to
    a court to direct by an omnibus order that all subsequent years are connected
    years and that income be treated in same manner for all the years.


[Dy. CIT v. Divya
Investment P. Ltd., (2004) 313 ITR 363 (SC)]

 

The assessee, a private
limited company, carried on the business, inter alia, of hire-purchase.
The assessee took on lease a land with existing structure. The lease deed was
entered into on October 30, 1986. The lease was for ten years. The assessee
demolished the structure and constructed a multi-storeyed building which was
let out to Canara Bank and others. The assessee received hiring charges and
maintenance charges from the lessees. Thereafter, the respondent filed its
return for the A.Y. 1997-98. The Assessing Officer held that it was an income
from house property and not from business as claimed by the assessee in its
return. The assessment order was confirmed by the Commissioner of Income-tax
(Appeals) and cases for earlier assessment years from 1992 to 2000 were
ordered to be reopened by issuance of notice u/s.148 of the Income-tax Act.

Aggrieved by the decision of
the Commissioner of Income-tax (Appeals), the matter was carried in appeal to
the Tribunal. The Tribunal held that hire charges received by the assessee
were liable to be assessed as business income and not as income from property.

Against the notices issued
u/s.148 reopening the assessments, the assessee filed a separate writ petition
for each of the assessment years in which reopening was ordered. The High
Court held in all the writ petitions that the income should be treated as
business income and not as income from house property as held by the Tribunal.
The decision of the High Court was based on the fact that for one assessment
year of the assessee (viz. 1997-98), the Tribunal had held that income
should be treated as income from business and not as income from house
property and so long as this view of the Tribunal was not reversed, all the
subordinate authorities were bound by this decision.

On an appeal the Supreme Court
held that it was not open to the High Court to direct by an omnibus order that
all subsequent years were connected years and that income be treated only as
business income. Under the Income-tax Act, the unit of assessment is a ‘year’.
According to the Supreme Court the parties should have been relegated to move
the Tribunal by filing an appeal u/s.253(1) and it was not open to the High
Court to entertain the writ petitions.

The Supreme Court, however,
clarified that in this case there were two separate proceedings involved,
viz., the order of the Commissioner of Income-tax (Appeals) plus
proceedings u/s.148. Unfortunately, all proceedings were clubbed in the writ
petitions. The exact status of those proceedings was not known. If the
assessee objected to the reopening of assessment, then, it was required to
file revised returns. The Supreme Court refrained from expressing any opinion
in that regard. Similarly, if the decision of the Commissioner of Income-tax
(Appeals) was sought to be challenged for a given year, then, the assessee
ought to have filed appeals u/s. 253(1) before the Tribunal. However, since
the writ petitions were pending in the High Court, the Supreme Court directed
that if appeals were required to be filed, then they shall be filed within
four weeks from the date of the order in which they shall not be dismissed on
the ground of delay.


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Substantial question of law — While allowing the deduction of expenditure, nature of such expenditure is required to be examined — Question of nature of expenses is a substantial question of law.

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  1. Substantial question of law —
    While allowing the deduction of expenditure, nature of such expenditure is
    required to be examined — Question of nature of expenses is a substantial
    question of law.

[CIT v. Oswal Agro Mills
Ltd., (2009) 313 ITR 24 (SC)]

The Supreme Court observed
that in this case, the substantial question of law which arose before the High
Court u/s.260A was as follows :

“Whether the assessee is
entitled to deduction of Rs.1,16,89,327 incurred as ‘issue management
expenses’ ?”

On reading the judgments of
the Tribunal and the High Court, the Supreme Court found that the assessee had
succeeded only on the basis of ‘rule of consistency’. According to the Supreme
Court, the High Court should have examined the nature of the
said expenses, namely, ‘issue management expenses’. The Supreme Court was of
the view that substantial question of law did arise for determination.

Consequently, the Supreme
Court set aside the impugned judgment of the High Court and remitted the
matter to the High Court for fresh consideration in accordance with law.

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Penalty — Concealment of income — Penalty can be levied u/s.271(1)(c) even in a case where positive income is reduced to nil after set off of carried forward losses of earlier years.

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  1. Penalty — Concealment of
    income — Penalty can be levied u/s.271(1)(c) even in a case where positive
    income is reduced to nil after set off of carried forward losses of earlier
    years.

[CIT v. R.M.P. Plasto P.
Ltd., (2009) 313 ITR 397 (SC)]

The question that came up for
consideration before the High Court was whether the Appellate Tribunal was
right in law and on facts in cancelling the penalty levied u/s.271(1)(c) of
the Act on the ground that there was loss assessed in the year under
consideration, without appreciating the fact that there was positive income
which was reduced to nil only after allowing set off of carried forward losses
of earlier years. The High Court dismissed the appeal following its decision
in the case of CIT v. Avon Flours P. Ltd., (2009) 313 ITR 400 (Guj.).

On appeal, the Supreme Court
allowed the appeal in view of the judgment of the larger Bench in CIT v.
Gold Coin Health Food P. Ltd., (2008) 304 ITR 308 (SC).

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Export business — Deduction u/s.80HHC — ‘Rights’ of movies for telecasting for a period of five year would fall in the category of articles of trade and commerce, hence merchandise — So far as films are concerned the word ‘lease’ is included in the meanin

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  1. Export business — Deduction
    u/s.80HHC — ‘Rights’ of movies for telecasting for a period of five year would
    fall in the category of articles of trade and commerce, hence merchandise — So
    far as films are concerned the word ‘lease’ is included in the meaning of the
    word ‘sale’.

[CIT v. B. Suresh,
(2009) 313 ITR 149 (SC)]

During the relevant A.Y.
1993-94, the assessee, B. Suresh, transferred feature film rights for
exploitation outside India and earned income in foreign exchange. The assessee
claimed deduction u/s.80HHC in respect of the said receipts. The Assessing
Officer held that the assessee was not entitled to deduction u/s.80HHC,
inter alia, on the ground that the export was not of merchandise or goods
as contemplated u/s.80HHC, but was merely an export of ‘rights’ in the film.
This decision of the AO was overruled by the Commissioner of Income-tax
(Appeals). When the matter came before the Tribunal at the instance of the
Department, there was already a judgment of the Bombay High in the case of
Abdulgafar A. Nadiadwala v. ACIT, (2004) 267 ITR 488. Following the said
decision, the Tribunal and the High Court held that the assessee was entitled
to deduction u/s.80HHC. On an appeal by the Department, the assessee inter
alia invited attention of the Supreme Court to the scheme of S. 80HHC to
point out that the word ‘sale’ would also include ‘lease’ as indicated in Rule
9A(7) which states that for the purposes of Rule 9A, the ‘sale’ of the rights
of exhibition of feature films would include the ‘lease’ of such rights.
Similarly, under Rule 9B(6), it has been, inter alia, provided that
‘Sale’ of rights of exhibition of a feature film would include ‘lease’ of such
rights.

The Supreme Court held that
the basic requirement of S. 80HHC is earning in foreign exchange and retention
of profits for export business. Profits are embedded in the ‘income’ earned.
Earning of income depends on sale of goods and services. Today the difference
between the two is getting blurred with globalisation and cross-border
transaction. Today with technological advancement one has to change the
thinking regarding concepts like goods, merchandise and articles. In the
instant case the assessee had bought rights of various decoders and had
recorded movies on beta-cam tapes which were transferred as telecasting rights
to Star T.V. for five years (it has a limited life). Hence, such ‘rights’
would certainly fall in the category of articles of trade and commerce, hence,
merchandise. On the question as to whether transfer of the said rights by way
of lease would attract S. 80HHC, the Supreme Court found merit in the
contention that under Rule 9A and 9B, the word ‘lease’ is included in the
meaning of the word ‘sale’. In conclusion the Supreme Court observed that
there was no infirmity in the judgment of the Bombay High Court in the case of
Abdulgafar A. Nadiadwala (supra).

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Exemption — S. 10(5) — Leave travel concession/Conveyance allowance — For the purpose of S. 192, employer need not collect and examine the supporting evidence to the deduction submitted by the employees.

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  1. Exemption — S. 10(5) — Leave
    travel concession/Conveyance allowance — For the purpose of S. 192, employer
    need not collect and examine the supporting evidence to the deduction
    submitted by the employees.

[CIT v. Larsen and Toubro
Ltd., (2009) 313 ITR 1 (SC)]

A short question which arose
for determination in the civil appeal(s) before the Supreme Court was, whether
the assessee(s) was/were under statutory obligation under the Income-tax Act,
1961, and/or the Rule to collect evidence to show that its employee(s) had
actually utilised the amount(s) paid towards leave travel concession(s)/conveyance
allowance.

The Supreme Court held that
the beneficiary of exemption u/s.10(5) was an individual employee and there is
no circular of the Central Board of Direct Taxes (CBDT) requiring the employer
u/s.192 to collect and examine the supporting evidence to the declaration to
be submitted by an employee(s).

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Appeal : ITAT : Reference to Third Member : S. 255(4) does not empower the President/Third Member to go beyond the reference and to enlarge, restrict and modify and/or formulate any question of law on his own on the difference of opinion referred to by t

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II. Reported :



35. Appeal : ITAT : Reference to Third Member : S. 255(4) of
Income-tax Act, 1961 : A.Y. 1990-91 : S. 155(4) does not empower the
President/Third Member to go beyond the reference and to enlarge, restrict and
modify and/or formulate any question of law on his own on the difference of
opinion referred to by the Members of Tribunal.


[Dynavision v. ITAT, 217 CTR 153 (Mad.) :

In this case, when the appeal was heard by the Tribunal,
the Accountant Member and the Judicial Members differed in their opinions.
While referring the matter to the President for constituting Third Member
Bench u/s.255(4) of the Income-tax Act, 1961, there was no unanimity between
them in identifying the point of difference. The President, with a view to
identify the point of difference, reframed the questions and decided the
appeal as Third Member.

 

The assessee filed writ petition challenging the order of
the Third Member. The Madras High Court quashed the order of the Third Member
and held as under :

“(i) From a reading of S. 255(4), it is clear that the
order of reference to the Third Member shall contain the difference of
opinion between the Members of the Bench. The President or the Third Member
has no right to go beyond the scope of reference and they have to consider
only the difference of opinion stated by the Members of the Bench. S. 255(4)
does not vest such power with the President or the Third Member. They have
also no right to formulate the question on their own. Framing the question
on their own goes beyond the jurisdiction.

(ii) The Third Member must confine himself to the order
of reference. Therefore, he has no right to enlarge, restrict and modify
and/or formulate any question of law on his own on the difference of opinion
referred to by the Members of the Tribunal. In this case, the JM and the AM
had the difference of opinion and formulated the questions. The President
had no right to go beyond the scope of reference. For the foregoing reasons
and in the interest of justice, the order of the Third Member is set aside
with a direction to rehear only on the difference of opinion referred to by
the Members of the Division Bench and consider and pass orders in accordance
with law.”

 


 


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Appeal to CIT(A) : Scope of ‘tax’ u/s.249(4) : ‘Tax’ does not include interest.

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II. Reported :

34 Appeal to CIT(A) : Condition precedent :
Scope of ‘tax’ u/s.249(4) of Income-tax Act, 1961 : ‘Tax’ does not include
interest.

[CIT v. Manojkumar Beriwal, 217 CTR 407 (Bom.) :

In this case while filing appeal before the CIT(A), the
assessee had paid disputed tax, but the amount paid was not sufficient to cover
the interest u/s.234B and u/s.234C of the Act. The CIT(A) dismissed the appeal
filed by the assessee on the ground that the condition of payment of tax
u/s.249(4) of the Income-tax Act, 1961 is not satisfied. He was of the view that
tax u/s.249(4) includes interest u/s.234B and u/s.234C of the Act. The Tribunal
allowed the assessee’s appeal and held that for the purposes of S. 249(4), the
deposit of tax which is a condition precedent, does not include interest
u/s.234B and u/s.234C of the Act.

 

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

“(i) It is well settled that when the Legislature seeks to
make a law denying a remedy on failure to comply with deposit, the Courts
would save the remedy, if possible by the interpretative process. Further, in
taxing statute, if a view can be taken in favour of an assessee, that view is
ordinarily preferred.

(ii) On the literal reading of S. 249(4), the language used
by the Legislature is ‘has paid tax dues’. The expression tax has been defined
in S. 2(43). Tax as per the definition does not include interest which has
been independently referred to u/s.2(28A). When the Legislature itself has
used two different expressions and defined separately, then whilst considering
the language of a Section, the Courts are bound to look at the definitions in
the legislation for the purpose of interpreting and construing the expressions
and words under the Act. The object being to avoid conflict and have a
harmonious interpretation, unless the context otherwise requires.

(iii) In these circumstances, the expression ‘tax’ does not
include interest for the purpose of s. 249(4).”

 


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Compulsory purchase of property : Chapter XX-A/Chapter XX-C : Agreement dated 15-9-1986 : Chapter XX-A applies and not Chapter XX-C

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I. Unreported :



33 Compulsory purchase of property : Chapter
XX-A/Chapter XX-C of Income-tax Act, 1961 : Agreement dated 15-9-1986 for
purchase of bungalow to be constructed : Competent Authority held that it is not
a fit case for acquiring under Chapter XX-A : Appropriate Authority passed order
of purchase under Chapter XX-C : Not valid : Chapter XX-A applies and not
Chapter XX-C.

[Mr. Jaipal Jain and Ors. v. Appropriate Authority and
Ors. (Bom.) : W. P. 680 of 1993; Dated 1-12-2008 : (Not reported)]

Under an agreement dated 15-9-1986, the petitioners had
agreed to purchase from the builder a residential bungalow to be constructed. On
13-10-1986 the petitioners filed a declaration in Form 37EE seeking NOC from the
Competent Authority under Chapter XXA of the Income-tax Act, 1961. By an order
dated 30-12-1992 passed u/s.269UF(7) of the Act, the Competent Authority held
that the property in question is not a fit case for acquiring under Chapter XX-A
of the Act. On the other hand, on a declaration filed in Form No. 37-I by the
vendors, the Appropriate Authority passed an order of purchase u/s.269UD(1) of
Chapter XX-C of the Act on 26-12-1986. The Bombay High Court set aside the said
order on 16-12-1992 with a direction to pass a fresh order in accordance with
law. The Appropriate Authority once again passed an order u/s. 269UD(1) on
24-2-1993, directing purchase of the property.

 

On a writ petition filed by the petitioner challenging the
validity of the order, the Bombay High Court quashed the said order dated
24-2-1993 and held as under :

“(i) In the case of Hiten R. Mehta v. Union of India,
(2008) 167 Taxman 338 (Bom.), this Court in a similar case held that the
provisions of Chapter XX-A would apply to the transactions entered into prior
to 1-10-1986 relating to transfer of immovable property as also transactions
where a person acquires any right in or with respect to any building or part
of a building by becoming a member or acquiring shares in a cooperative
society.

(ii) In the present case, the agreement in question was
entered into on 15-9-1986 i.e., prior to the introduction of Chapter
XX-C of the Act. Thus the issue raised in this petition is squarely covered by
the judgment of this Court in the case of Hiten R. Mehta (supra)
against the Revenue and, therefore, the impugned order passed under Chapter
XX-C of the Act cannot be sustained.”



 

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MAT credit : MAT credit to be given before charging interest u/s.234B and u/s.234C of the Act.

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Reported :

49 MAT credit : Interest
u/s.234B and u/s.234C r/w S. 115JAA of Income-tax Act, 1961 : A.Y. 1999-00 : MAT
credit has to be given before charging interest u/s.234B and u/s.234C of the
Act.

[CIT v. Salora
International Ltd., 329 ITR 568 (Del.)]

For the A.Y. 1999-00, the
income of the assessee company was assessed u/s.115JA of the Income-tax Act,
1961. Interest u/s.234B and u/s.234C was charged without reducing the MAT credit
u/s. 115JAA. The assessee contended that the interest has to be computed after
allowing the MAT credit. The Tribunal accepted the assessee’s claim.

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

“Before charging interest u/s.234B and
u/s.234C of the Income-tax Act, 1961, credit of minimum alternative tax was to
be first allowed to the assessee.”


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Business deduction : Bad debts : S. 36(1)(vii) : After amendment w.e.f. 1-4-1989 writing off of bad debt in the accounts is sufficient for allowing deduction — Not necessary to prove that debt has become bad

New Page 1

I. Unreported :

32 Business deduction : Bad debts : S.
36(1)(vii) of Income-tax Act, 1961 : After amendment w.e.f. 1-4-1989 writing off
of bad debt in account is sufficient for allowing deduction. It is not necessary
to prove that debt has become bad.

[CIT v. M/s. Star Chemicals (Bombay) P. Ltd. (Bom.);
ITAL No. 1915 of 2007; Dated 27-2-2008]

The following question was raised before the High Court in
the appeal filed by the Revenue u/s.260A of the Income-tax Act, 1961.

“Whether on the facts and in the circumstances of the case
and in law, the Tribunal is right in confirming the order of CIT(A) in
deleting the disallowance of Rs.79,27,211 on account of bad debt despite the
debt has not become bad ?”

 


The Bombay High Court held as under :

“The issue arises from the amendment to S. 36(1)(vii) of
the Income-tax Act. Subsequent to the amendment the Board has issued Circular
551, dated 23-1-1990. The issue pertained to bad debt in para 6.6. The
relevant portion of the direction reads as under :

“In order to eliminate the disputes in the matter of
determining the year in which a bad debt can be allowed and also to
rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of
Ss.(1) and clause (i) of Ss.(2) of the Section to provide that the claim for
bad debt will be allowed in the year in which such a bad debt has been written
off as irrecoverable in the accounts of the assessee.”

 

It is thus clear from the reading of the Section itself and
the Circular that if the assessee has written off the debt as bad debt, that
would satisfy the purpose of the Section. Considering the law as stated in so
far as the view taken by the Tribunal cannot be faulted.”

 


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Income : Income u/s.56(2)(v) Loan received without interest and repaid : Not a receipt within the meaning of S. 56(2)(v) .

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Reported :

48 Income : Receipt without
consideration : Income u/s.56(2)(v) of Income-tax Act, 1961 : A.Y. 2006-07 :
Loan received without interest and repaid : Not a receipt within the meaning of
S. 56(2)(v) of the Act.

[CIT v. Saranapal Singh (HUF),
237 CTR 60 (P&H)]

The assessee had received
short-term loan without interest in the relevant year and the same was repaid.
The Assessing Officer added the said amount of loan to the total income treating
the same to be the receipt within the meaning of S. 56(2)(v) of the Income-tax
Act, 1961. The Tribunal deleted the addition and observed as under:



“(i) There is no dispute
regarding the nature and source of the impugned unsecured loans.

(ii) Merely because the
amount of loan has been raised without involving payment of interest, cannot
be seen to have vested the impugned amount with characteristics of an
income, within the meaning of S. 56(2)(v) of the Act.

(iii) The existence of
the expression ‘without considerstion’ in S. 56(2)(v) cannot distract from
the fact that in the impugned case, the sum of money received in question
carried a liability of its repayment and the same was not received by the
assessee with an absolute unfettered right of possession.”



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



“(i) The amount
contemplated u/s.56(2)(v) of the Act cannot include loan which is shown to
have been repaid.

(ii) In the facts and
circumstances of the present case, a concurrent finding of fact has been
recorded that the amount received was a short-term loan which was duly
repaid. The said amount cannot be treated as income of the assessee
u/s.56(2)(v) of the Act. Thus, no substantial question of law arises.”


 

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Business expenditure : Deduction u/s.37 of Income-tax Act, 1961 : A.Y. 2003-04 : Agreement executed in August 2002 with retrospective effect from January 1, 2002 : Disallowances of expenses of January to March 2002 on ground that it crystallised in preced

New Page 1

Reported :

23. Business expenditure :
Deduction u/s.37 of Income-tax Act, 1961 : A.Y. 2003-04 : Agreement executed in
August 2002 with retrospective effect from January 1, 2002 : Disallowances of
expenses of January to March 2002 on ground that it crystallised in preceding
year : Liability under agreement arises and accrues when agreement executed :
Addition cannot be sustained.

[CIT v. Exxon Mobil
Lubricants P. Ltd., 328 ITR 17 (Del.)]

In August 2002, the assessee
had executed an agreement with M/s. Exxon Mobil Asia Pacific Pte. Ltd. with
retrospective effect from January 2002. The expenditure under the said agreement
for the period January to March 2002 was also claimed as deduction in the A.Y.
2003-04. The Assessing Officer disallowed the claim, holding that the
expenditure pertained to the preceding year resulting in the addition of the
equal amount. The Tribunal deleted the addition.

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

“(i) The liability of the
assessee under the agreement had arisen and accrued in August 2002, when the
agreement was executed and, therefore, the liability of the assessee to pay
for the period January 2002 to March 2002 arose and crystallised in August
2002.

(ii) The Commissioner
(Appeals) had observed that the assessee had shown prior period expense
against which the prior period income was shown and the net amount had been
shown as expenditure in the profit and loss account. If the assessee had shown
the prior period income and the Assessing Officer had not excluded it while
working out the current years taxable income, then there was no reason on the
part of the Assessing Officer to disallow only one part of the prior period
adjustments, i.e., the prior period expenditure.

(iii) The addition made by
the Assessing Officer could not be sustained.”

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Deduction u/s.80-O of Income-tax Act, 1961 : Amount allowable is restricted to the total income and not to the income computed under the head business.

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Unreported :

21. Deduction u/s.80-O of
Income-tax Act, 1961 : Amount allowable is restricted to the total income and
not to the income computed under the head business.

[CIT v. M/s. J. B. Boda &
Co. P. Ltd. (Bom.), ITA No. 3224 of 2009 dated 18-10-2010.]

The Assessing Officer
determined the amount eligible for deduction u/s.80-O at Rs. 1,29,41,830 being
50% of the income so received or brought into India. However, he restricted the
deduction u/s.80-O to
Rs. 69,70,000, being the total income under the head ‘Business’, on the ground
that allowing further deduction would amount to allowing the deduction from
income under other heads. The Tribunal found that the gross total income
exceeded Rs. 1,29,41,830 and therefore allowed the full claim of the assessee.

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

“(i) The only question
sought to be canvassed is that out of these deductions the admissible
deduction u/s.80-O ought to be limited to the extent of
Rs. 69,70,127 which represents business income. In other words, income from
interest and dividend shall not form part of the gross total income as defined
u/s.80B(5) of the Act.

(ii) Considering the
definition of the gross total income, it is difficult to hold that the
interest income and the dividend income would not form part of the gross total
income computed in accordance with the provisions of the Act.

(iii) The view taken by
the Tribunal, in our considered view, is in consonance with what is stated
herein.”

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Business expenditure : S. 37(1) r/w S. 145 of Income-tax Act, 1961 : Year in which deductible : Assessee following mercantile system of accounting claimed prior period expenses and was allowed every year : Doctrine of consistency would come into play : Tr

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Reported :

22. Business expenditure :
S. 37(1) r/w S. 145 of Income-tax Act, 1961 : Year in which deductible :
Assessee following mercantile system of accounting claimed prior period expenses
and was allowed every year : Doctrine of consistency would come into play :
Tribunal justified in allowing prior period expenses claimed by assessee.

[CIT v. Jagatjit
Industries Ltd., 194 Taxman 158 (Del.)]

The assessee-company was
following mercantile system of accounting. During the relevant assessment year,
it had claimed prior period expenses pertaining to earlier years on ground that
vouchers of such expenses from employees/branch employees were received after
31st March of the financial year. The Assessing Officer disallowed the said
expenses, holding that the nature of the expenses was such that they had
occurred and crystallised during the earlier years. The Tribunal allowed the
assessee’s claim.

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

“(i) On a scrutiny of the
facts, that had been brought on record, it was discernible that the assessee
had been claiming prior period expenses, on the ground that the vouchers of
such expenses from the employees/branch employees were received after 31st
March of the financial year. The said accounting practice had been
consistently followed by the assessee and accepted by the Department.

(ii) If a particular
accounting system has been followed and accepted and there is no acceptable
reason to differ with the same, the doctrine of consistency would come into
play. In the instant case, the said accounting system had been followed for a
number of years and there was no proof that there had been any material change
in the activities of the assessee as compared to the earlier years. Nothing
had been brought on record to show that there had been distortion of profit or
the books of account did not reflect the correct picture.

(iii) In the absence of
any reason whatsoever, there was no warrant or justification to depart from
the previous accounting system which was accepted by the Department in respect
of the previous years.

(iv) Therefore, there was
no merit in the instant appeal and the same was to be dismissed.”

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TDS : Consequences of failure : Limitation : Ss. 153, 201(1), (1A) : Period of limitation not prescribed : Reasonable period is 4 years.

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 31 TDS : Consequences of failure :
Limitation : Ss. 153, 201(1), (1A) of Income-tax Act, 1961 : A.Y. 1990-91 :
Period of limitation not prescribed : Reasonable period is 4 years : Proceedings
initiated in 1999 for A.Y. 1990-91 : Barred by limitation.


[CIT v. NHK Japan Broadcasting Corporation, 305 ITR
137 (Del.)]

The assessee is a Government-company of a foreign country and
is carrying on the business in India. In respect of its employees in India it
pays salary in Indian Rupees and also pays something called ‘global salary’ to
the employees in the home country. In respect of the salary paid to the
employees in India, the assessee deducted tax at source, but with respect to the
global salary, the assessee did not deduct tax at source. On November 19, 1998,
a survey was conducted by the Revenue in the premises of the assessee and these
facts came to light for the first time. The assessee did not dispute its
liability to deduct tax at source in respect of global salary and the tax due
thereon was paid by the assessee and interest was also paid. In December 1999,
the Assessing Officer issued show-cause notice, and thereafter passed an order
treating the assessee as being in default for the purposes of S. 201 of the
Income-tax Act, 1961. The Tribunal cancelled the order holding that the
proceedings have not been initiated within a reasonable period of time.

 

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

“(i) There is no dispute that S. 201 of the Act does not
prescribe any limitation period for the assessee being declared as an assessee
in default.

(ii) S. 153(1)(a) prescribes the period of two years from
the end of the assessment year for completing the assessment. Therefore, the
time limit would be three years from the end of the financial year. Even
though the period of three years would be a reasonable period as prescribed by
S. 153 of the Act for completion of proceedings, we have been told that the
Income-tax Appellate Tribunal has, in a series of decisions taken the view
that four years would be the reasonable period of time for initiating action
in a case where no limitation is prescribed. The rationale for it seems to be
quite clear — if there is a time limit for completing the assessment, then the
time limit for initiating the proceedings must be the same, if not less.
Nevertheless the Tribunal has given a greater period for commencing or
initiation of proceedings. We are not inclined to disturb the time limit of
four years prescribed by the Tribunal and are of the view that in terms of the
decision of the Supreme Court in Bhatinda District Co-op. Milk Producers Union
Ltd. (2007) 9 RC 637; 11 SCC 363, action must be initiated by the competent
authority under the Income-tax Act, where no limitation is prescribed as in S.
201, within a period of four years.

(iii) It appears that the assessee paid the tax voluntarily
as well as interest thereon, but the acceptance of the liability by the
assessee would not by itself extend the period of limitation, nor would it
extend the reasonable time that is postulated by the scheme of the Income-tax
Act. The assessee cannot be put, in a sense, in a worse position merely
because it has admitted its liability. The fact that the assessee agreed to
pay the tax voluntarily cannot put the assessee in a situation worse than if
it had contested its liability.”

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Profits and gains from foreign projects: Deduction u/s.80HHB : Project in Iraq : Payment received as per terms of agreement between Govt. of India and Iraq in RBI bonds and interest on them : Deduction allowable on interest.

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 30 Profits and gains from foreign projects :
Deduction u/s.80HHB of Income-tax Act, 1961 : A.Ys. 1997-98 and 2000-01 :
Project in Iraq : Payment held up due to war in Iraq : Payment received in terms
of agreement between Governments of India and Iraq in terms of RBI bonds and
interest on RBI bonds : Deduction u/s.80HHC allowable on interest component
also.


[CIT v. Arvind Construction Co., 172 Taxman 5 (Del.)]

The assessee carried out certain construction work in two
different projects in Iraq as a subcontractor of the Indian Railway Construction
Corporation (IRCON). On account of the outbreak of war in Iraq, the payments to
IRCON were held up. Subsequently, by an agreement between the Governments of
India and Iraq, a settlement was arrived at by which the payment would be made
to IRCON on the deferred basis. The total sum due to the assessee together with
interest was calculated at Rs.54.93 crores for the A.Y. 1997-98 and the said sum
was settled as under :

(i) RBI Bonds Rs. 42,69,91,452

(ii) ECGC Bonds Rs. 5,61,12,153

(iii) Interest on RBI Bonds Rs. 6,61,83,046

 

The assessee claimed deduction u/s.80HHB of the Income-tax
Act, 1961, inter alia in respect of interest on RBI Bonds. The Assessing
Officer rejected the claim on the ground that the interest on RBI Bonds was not
an income derived from the business activities of the assessee. The Tribunal
allowed the claim.

 

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

“We find that as regards the interest on the RBI Bonds,
this was part of the total settlement package by which the assessee was to
receive Rs.54.93 crores for the works undertaken in Iraq as a sub-contractor
of IRCON. In the facts and circumstances of the case, it is not possible to
view the interest received on the RBI Bonds as payment de hors the
activity of the assessee pursuant to the execution of the contract.”


 

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Hotel in a place of pilgrimage : Deduction u/s.80-IA(4)(iii) : Hotel certified by prescribed authority : IT Authority has no jurisdiction to decide on basis of own criteria that assessee not entitled to deduction

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 28 Hotel in a place of pilgrimage :
Deduction u/s.80-IA(4)(iii) of Income-tax Act, 1961 : Hotel granted
certification by prescribed authority : Income-tax authority has no jurisdiction
to decide on basis of his own criteria that assessee is not entitled to
deduction u/s.80-IA(4)(iii).


[Gujarat JHM Hotels Ltd. v. DGIT (Exemption), 305 ITR
386 (Guj.)]

The petitioner’s hotel was located at S, which is an
important place of pilgrimage as required u/s.80-IA(4)(iii) of the Income-tax
Act, 1961. The petitioner made an application for exemption u/s.80-IA(4)(iii) of
the Act. In support of the necessary conditions the petitioner filed a
certificate issued by the Director, Tourism, Gujarat Govt., dated 18-6-1996 and
a certificate issued by the Department of Tourism, Govt. of India, dated
11-6-1996. The Director General of Income-tax (Exemption) rejected the
application. He observed that it was a well-known fact that S was an important
industrial town, having existent infrastructure/tourism facilities, to promote
industrial and tourism development and that a place like S did not require the
additional benefit of S. 80-IA(4)(iii).

The Gujarat High Court allowed the writ petition filed by the
petitioner and held as under :

“(i) A bare perusal of the documents furnished by the
petitioner vis-à-vis S. 80-IA(4)(iii) of the Act and Rule 18BBC made it
clear that the petitioner had fulfilled all the necessary conditions for grant
of the approval.

(ii) The authority had only considered that the petitioner
did not fulfil the pilgrimage test without dealing with the two certificates
issued by the prescribed authorities. Once the prescribed authorities grant
certificates, if the authority wants to reject it, valid and justifiable
reasons must be given therefor. Rejecting the application on merely
considering the fact whether S is a place which could be considered as
requiring approval for notification for promotion of pilgrimage, was an
extraneous consideration to the provisions of the Act and the Rules and the
benefit could not be refused to the petitioner on this ground.”


 

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Investment allowance : S. 32A : Computation : Agreement providing for escalation of price : Extra amount paid to be taken into account

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29 Investment allowance : S. 32A of
Income-tax Act, 1961 : A.Y. 1986-87 : Computation : Actual cost to be determined
in each year : Agreement providing for escalation of price : Extra amount paid
in relevant year to be taken into account.


[DCIT v. Official Liquidator, 305 ITR 418 (Mad.)]

The assessee had imported machinery from Italy for polynostic
staple fibre plant and installed it in the accounting year relevant to the A.Y.
1981-82. The agreement for purchase provided for an escalation clause. In
pursuance of the escalation clause, the assessee made certain payments towards
cost of escalation of the machinery and escalation in the customs duty and
technical consultancy fees. The total payments amounted to Rs.1,40,60,651. For
the A.Y. 1986-87, the assessee filed a revised return wherein the investment
allowance was enhanced to Rs.47,20,648 from Rs.10,55,608 as originally claimed.
The Assessing Officer allowed the claim, but the Commissioner acting u/s.263
rejected the claim. The Tribunal set aside the order of the Commissioner.

 

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Export Profit : Deduction u/s.80HHC : Computation : Manufacture and export including job works : Investment in raw materials, labour, etc. on own account alone includible in total profit.

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27 Export Profit : Deduction u/s.80HHC :
Computation : S. 80HHC Expl. (baa) of Income-tax Act, 1961 : Manufacture and
export including job works for others : Investment in raw materials, labour,
etc. by assessee on own account alone includible in total profit.


[William Goodacre and Sons India Ltd. v. CIT, 305 ITR
365 (Ker.)]

The assessee was engaged in the business of manufacture and
export of products. The assessee was also engaged in doing job works for others
particularly exporters. The Assessing Officer excluded 90% of the job work
receipts from the business profit in the computation of the export profit by
referring to clause (baa) of the Explanation to S. 80HHC(4B) of the Income-tax
Act, 1961. The Tribunal confirmed the order of the Assessing Officer.

 

On appeal by the assessee, the Kerala High Court remanded the
matter back to the Assessing Officer and held as under :

“(i) The scheme of S. 80HHC of the Income-tax Act, 1961
provides for computation of the export profit of an assessee engaged in local
business and export business based on the formula provided in the Section to
find out the proportionate profit on export with reference to the total
turnover and total profit. Under the formula, eligible export profit is the
total profit divided by the total turnover and multiplied by export turnover.

(ii) The scheme of exclusion of certain items of income
which come within the description of business profits by virtue of the
inclusion clause contained in S. 28 of the Act, is to ensure that in the
course of working out the eligible export profit on a proportionate basis with
reference to the total turnover and export turnover, the net result should not
be a distorted figure. In other words, the formula seeks to achieve
determination of export profit as realistically and as near as possible. The
purpose of clause (baa) of the Explanation to S. 80HHC(4B) of the Act, is to
exclude such items of receipts which are not derived from business turnover.
Brokerage, commission, interest and rent, etc. are items which are essentially
in the nature of net receipts and are not derived out of total turnover of the
assessee. Besides the four items enumerated in clause (baa)(1), the charges or
any other receipt of a similar nature should also be excluded. If charges are
not comparable to any of these items, then such items cannot be excluded from
the business profits in terms of clause (baa) of the Explanation.

(iii) If raw materials are supplied by the awarder or if
the assessee purchased the raw materials separately in its name and claimed
separate re-imbursement, then the turnover of the transaction does not get
included in the total turnover and the receipt is net receipt, 90% of which
has to be excluded as charges under clause (baa).

(iv) The rubber backing charges and rubber edging charges
could not be excluded from the total profit by referring to clause (baa) of
the Explanation to the Section. The authorities below failed to consider the
claim of the assessee that it purchased raw materials on its own account and
used them in manufacture of the final product leading to value addition at the
assessee’s cost on the awarder’s raw material like doormats and coir carpets.
Unless the cost of the raw material is borne by the assessee in its own
account forming its sale value as total turnover, the assessee could not claim
the benefit of inclusion of full charges so collected in the total profit.

(v) If the entire raw material cost is borne by the awarder
and the assessee did only job work with machinery and employed its own labour,
such charges were comparable to commission or brokerage which were income
earned by incurring labour and other charges covered under clause (baa) of the
Explanation.”


 

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Educational Institution: Exemption u/s.10(22): Funds need not be invested in modes specified in S. 11(5).

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 26 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1997-98 : Funds of educational institution
need not be invested in modes specified in s. 11(5) : Effect of CBDT Circular
No. 712, dated 25-7-1995.


[DI (Exemption) v. Dalmia Shiksha Pratishthan, 305 ITR
327 (Del.)]

The assessee trust was imparting education through four
educational institutions. Up to the A.Y. 1996-97 the assessee was allowed
exemption u/s.10(22) of the Income-tax Act, 1961. For the A.Y. 1997-98, the
Assessing Officer denied the exemption for the reasons that (i) the assessee had
let out a property owned by it on rent; (ii) the assessee had earned some amount
on sale of books and thus it existed for purposes of profit, and (iii) the main
ground was that the assessee had invested its funds with a non-Governmental
body. The Tribunal allowed the claim for exemption u/s.10(22).

 

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

“(i) A perusal of the CBDT Circular No. 712, dated
25-7-1995 would show that there is no restriction regarding the mode of
investment of funds by an educational institution. There is no obligation that
an educational institution must invest its funds in the modes specified in S.
11(5) of the Act.

(ii) The rent from the property let out is only Rs. 4,500.
This amount was far too insignificant for taking a decision against the
assessee and denying it exemption u/s.10(22). The assessee had earned only an
amount of Rs.9,603 through sale of books. This could not be construed to mean
that the assessee did not exist solely for educational purposes but had a
profit motive. The assessee invested its funds and the intention was to use
the funds and any interest earned thereon for educational purposes.

(iii) For the subsequent assessment year, that is, A.Y.
1998-99, without there being any change in circumstances, the contention of
the assessee that it continued to be an educational institution and was
entitled to exemption u/s. 10(22) of the Act was accepted. The present A.Y.
1997-98 was the only odd assessment year for which the assessee has been
denied exemption and that too for reasons that were not at all germane to the
issue. The assessee was entitled to exemption.”


 

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Educational Institution : Exemption u/s.10(22) : Object of educating public in safety : All income used for promotion of objects : Entitled to exemption.

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25 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1993-94 : Registered society with object
of educating public in safety : Entire income used for promotion of objects of
society : Society entitled to exemption.


[DI (Exemption) v. National Safety Council, 305 ITR
257 (Bom.)]

The assessee was a society registered with the principle
object of educating the public concerning safety. For the A.Y. 1993-94, the
Assessing Officer denied the assessee exemption u/s.10(22) of the Income-tax
Act, 1961, on the ground that the assessee is not a university or other
educational institute existing solely for educational purposes. The Tribunal
allowed the assessee’s claim holding that the assessee was covered within the
meaning of the term ‘any other educational institution’ u/s.10(22) of the Act.

 

The Bombay High Court dismissed the appeal filed by the
Revenue and affirming the decision of the Tribunal held as under :

“The return filed for the A.Y. 1993-94 revealed that the
entire income has been utilised for the purpose of its objects. Therefore, the
finding of the Tribunal was not perverse and there was no substantial question
of law.”


 

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Educational Institution : Exemption u/s. 10(22) : Institution run for educational purposes : No evidence that capitation fees charged : Institution entitled to exemption u/s.10(22)

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5 Educational Institution : Exemption u/s.
10(22) of Income-tax Act, 1961 : A.Y. 1997-98 : Institution run for educational
purposes : No evidence that capitation fees had been charged : Institution
entitled to exemption u/s. 10(22).


[CIT v. Khalsa Rural Hospital and Nursing Training
Institute, 304 ITR 20 (P&H)]

The assessee-trust was running a rural hospital and training
institute for nurses. During the course of assessment proceedings for the A.Y.
1997-98, the Assessing Officer noticed that the assessee had claimed exemption
u/s.11 of the Income-tax Act, 1961. The Assessing Officer disallowed the
exemption u/s.11 and made an addition of Rs.40 lakhs on account of capitation
fee. The Tribunal allowed exemption u/s.10(22) of the Act.

 

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

“There was nothing on record to show that the assessee-trust
was charging any capitation fee. The Assessing Officer had not found any
irregularity in the accounts of the trust. There was no document to show that
the trust was being run for any purpose of profit except that for any
educational purposes. The assesse was entitled to exemption u/s.10(22).”

 


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Depreciation : WDV : S. 32 and S. 43(1) of Income-tax Act, 1961 : A.Ys. 2001-02 and 2002-03 : Depreciation is a privilege : WDV can only be on basis of depreciation ‘actually allowed’ and not ‘notionally allowed’.

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Reported :

34. Depreciation : WDV : S. 32 and S. 43(1) of Income-tax
Act, 1961 : A.Ys. 2001-02 and 2002-03 : Depreciation is a privilege : WDV can
only be on basis of depreciation ‘actually allowed’ and not ‘notionally
allowed’.

[CIT v. Hybrid Rice International (P) Ltd., 185
Taxman 25 (Del.)]


The assessee company was engaged in the business of
producing superior-quality hybrid seeds of rice for supply to farmers. For
that purpose, it was using germplasm seeds. Prior to the A.Y. 2001-02, the
assessee had not claimed depreciation on the germplasm seeds. In the relevant
years, the assessee claimed depreciation on the germplasm seeds on the basis
of the actual cost taking it as the WDV. The Assessing Officer found that the
germplasm seeds were purchased in the preceding years and therefore held that
even though depreciation was not claimed or allowed in the preceding years,
the WDV for the relevant years has to be determined after reducing the
notional depreciation for the preceding years. The Tribunal allowed the
assessee’s claim.


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


“(i) In the instant case, in the earlier assessment
years, there did not arise any question of calculation of actual cost,
because no depreciation was claimed in the earlier years. Therefore, it
could not be understood as to how the assessee was taking advantage of his
own wrong as contended by the Revenue. Once it was held that depreciation is
a privilege and can only be on the basis of ‘actually allowed’ and not
‘notionally allowed’, there did not remain any issue of any wrong by the
assessee. There was no wrong and as held by the Supreme Court in CIT v.
Mahendra Mills, 243 ITR 56 (SC), it is only a privilege which the
assessee may choose to exercise or not.

(ii) Therefore, the Tribunal was correct, in law, in
allowing depreciation to the assessee on the actual cost of the germplasm
seeds and the actual cost incurred by the assessee much before becoming an
assessee could still be treated as an actual cost to the assessee when
depreciation had to be claimed.”



 


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Company in liquidation : Director’s liability : S. 179 of Income-tax Act, 1961 : Liability of director u/s.179 is limited to tax and it does not extend to penalty and interest.

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Reported :

33. Company in liquidation : Director’s liability : S. 179 of
Income-tax Act, 1961 : Liability of director u/s.179 is limited to tax and it
does not extend to penalty and interest.

[H. Ebrahim v. Dy. CIT, 185 Taxman 11 (Kar.)]


Dealing with the scope of the director of a company u/s.179
of the Income-tax Act, 1961, the Karnataka High Court held in this case as
under :


“The phrase ‘tax’ as contemplated u/s.179 does not
include penalty and interest, insofar as the directors of the company are
concerned. However, this interpretation of phrase ‘tax would not be’ is
u/s.179 and does not encompass the company. Indeed the company was liable to
pay all the three components, i.e., ‘tax’, ‘interest’ and ‘penalty’
and any other sum due or recoverable from it as contemplated u/s.222.”

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Assessment : Notice u/s.143(2) of Income-tax Act, 1961 : Service : A.Y. 2001-02 : Service of notice by affixture on last day after office hours : Not valid service : Assessment not valid.

New Page 1

Reported :

  1. Assessment : Notice u/s.143(2) of Income-tax Act, 1961 :
    Service : A.Y. 2001-02 : Service of notice by affixture on last day after
    office hours : Not valid service : Assessment not valid.

[CIT v. Vishnu and Co. P. Ltd., 319 ITR 151 (Del.)]

For the A.Y. 2001-02, the assessee had filed the return of
income on 28-9-2001. A valid notice u/s. 143(2) of the Income-tax Act, 1961,
was required to be served on or before 30-9-2002. On 30-9-2002, the Assessing
Officer issued a notice u/s.143(2) and got it served by affixture on the
office premises of the assessee after the office hours on that day. The
Tribunal cancelled the assessment made pursuant to the said notice holding
that there was no valid service of notice u/s.143(2) within the prescribed
period.

In appeal, the Revenue contended that the assessee having
appeared in the assessment proceedings it should be treated as a valid notice.
The Delhi High Court upheld the decision of the Tribunal and held as under :

“(i) S. 143(2) of the Income-tax Act, 1961, is a
mandatory provision whether from the standpoint of a regular assessment or
from the standpoint of an assessment under Chapter XIV-B.

(ii) The Revenue could not disclose as to when the
assessee had appeared, namely, whether the assessee had appeared on October
10, 2002, pursuant to the affixation or on a later date after the alleged
service of the subsequent notice. Even such appearance by the assessee, on a
date when the proceedings had become time-barred because of no proper
service of notice, would be of no consequence.”

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TDS : Fees for technical services : Ss.9(1)(vii) & 195 : Payment for use of Internet bandwidth is not fees for technical services : No obligation to deduct tax at source from payment.

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II. Reported :


43. TDS : Fees for technical services : S. 9(1)(vii) and S.
195 of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee using Internet bandwidth
of US party T and providing access to its subscribers : Payment for use of
Internet bandwidth is not fees for technical services : No obligation to deduct
tax at source from payment.



[CIT v. Estel Communications (P) Ltd., 217 CTR 102
(Del.)]

The assessee was using Internet bandwidth of US party,
Teleglobe, for providing access to its subscribers. For the services
rendered by the assessee to the subscribers in India, it levies a charge and
out of this, some amount is paid to the US party. The Assessing Officer
invoked the provisions of S. 9(1)(i) and S. 9(1)(vii) of the Income-tax Act,
1961 and held that the assessee is liable to deduct tax at source from the
payments made to the US party. The Tribunal held that the assessee is not
liable to deduct tax at source.

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

“(i) The Tribunal considered the agreement that had been
entered into by the assessee with Teleglobe and came to the conclusion that
there was no privity of contract between the customers of the assessee and
Teleglobe. In fact, the assessee was merely paying for an Internet bandwidth
to Teleglobe and then selling it to the customers.

(ii) The use of Internet facility may require
sophisticated equipment, but that does not mean that technical services were
rendered by Teleglobe to the assessee. It was a simple case of purchase of
Internet band width by the assessee from Teleglobe. No technical services
were rendered by Teleglobe to the assessee.

(iii) The Tribunal has rightly dismissed the appeal after taking into
consideration the agreement between the assessee and Teleglobe and the
nature of services provided by Teleglobe to the assessee.”


 

 


 

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Refund : Delayed return claiming refund : On facts refusal to condone delay not justified : Order of rejection set aside for fresh disposal as per directions.

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Unreported :

31. Refund : Delayed return claiming refund : On facts
refusal to condone delay not justified : Order of rejection set aside for fresh
disposal as per directions.

[Sitaldas K. Motwani v. DGIT (International Taxation) (Bom.);
W.P. No. 1749 of 2009, dated 15-12-2009]

The assessee petitioner is a non-resident Indian. In the
previous year relevant to the A.Y. 2000-01, the assessee had invested in
shares of Indian companies and earned short-term capital gains of Rs.
2,09,05,250. The concerned bank deducted tax at source at the rate of 30%. The
said short-term capital gain was taxable at the rate of 20% and accordingly
the assessee was entitled to a refund of Rs. 20,78,871. The assessee filed
belated return on 24-9-2003 and claimed refund. Along with the return the
assessee had filed an application u/s.119(2)(b) of the Income-tax Act, 1961
for condonation of delay in filing of return. The DGIT (International
Taxation) rejected the application for condonation of delay relying on the
CBDT Instruction No. 13 of 2006, dated 22-12-2006. Accordingly, he refused to
grant refund.

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

“(i) The Board Circular prescribes that at the time of
considering the case u/s.119(2)(b) of the Act, it is necessary for the
authorities to consider that the income declared and the refund claimed are
correct and genuine and that the case is of genuine hardship on merits and
correctness of the refund claim.

(ii) While considering the genuine hardship, the
respondent No. 1 was not expected to consider a solitary ground as to
whether the petitioner was prevented by any substantial cause from filing
return within due time. Other factors ought to have been taken into account.

(iii) The phrase ‘genuine hardship’ used in S. 119(2)(b)
should have been construed liberally even when the petitioner has complied
with all the conditions mentioned in Circular dated 12th October, 1993. The
Legislature has conferred the power to condone delay to enable the
authorities to do substantial justice to the parties by disposing of the
matters on merit.

(iv) The expression ‘genuine’ has received a liberal
meaning and while considering this aspect, the authorities are expected to
bear in mind that ordinarily the applicant, applying for condonation of
delay does not stand to benefit by lodging its claim late.

(v) Refusing to condone delay can result in a meritorious
matter being thrown out at the very threshold and cause of justice being
defeated. As against this, when delay is condoned the highest that can
happen is that a cause would be decided on merits after hearing the parties.
When substantial justice and technical considerations are pitted against
each other, cause of substantial justice deserves to be preferred for the
other side cannot claim to have vested right in injustice being done because
of a non-deliberate delay.

(vi) There is no presumption that delay is occasioned
deliberately, or on account of culpable negligence, or on account of mala
fides. A litigant does not stand to benefit by resorting to delay. In
fact he runs a serious risk. The approach of the authorities should be
justice-oriented so as to advance cause of justice. If refund is
legitimately due to the applicant, mere delay should not defeat that claim
for refund.

(vii) Whether the refund claim is correct and genuine,
the authority must satisfy itself that the applicant has a prima facie
correct and genuine claim, does not mean that the authority should examine
the merits of the refund claim closely and come to a conclusion that the
applicant’s claim is bound to succeed. This would amount to prejudging the
case on merits. All that the authority has to see is that on the face of it
the person applying for refund after condonation of delay has a case which
needs consideration and which is not bound to fail by virtue of some
apparent defect. At this stage, the authority is not expected to go deep
into the niceties of law. While determining whether the refund claim is
correct and genuine, the relevant consideration is whether on the evidence
led, it was possible to arrive at the conclusion in question and not whether
that was the only conclusion which could be arrived at on that evidence.

(viii) The Respondent No. 1 did not consider the prayer
for condonation for delay in its proper perspective. As such, it needs
consideration afresh. In the result, we set aside the impugned order and
remit the matter back to the respondent No. 1 for consideration afresh, with
the direction to decide the question of hardship as well as that of
correctness and genuineness of the refund claim in the light of the
observations made hereinabove.”

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Speculative loss/business loss : S. 28(i) & S. 43(5) : Transaction of purchase and sale ultimately settled by actual delivery : Not speculative transaction : Loss arising is business loss and not speculative loss.

New Page 1

II. Reported :


42 Speculative loss/business loss : S. 28(i)
and S. 43(5) of Income-tax Act, 1961 : A.Y. 1990-91 : Transaction of purchase
and sale ultimately settled by actual delivery : Not speculative transaction:
loss arising is business loss and not speculative loss.


[Sripal Satyapal v. ITO, 217 CTR 337 (Raj.)]

The assessee is a cotton merchant and carries on business
of purchase and sale of cotton bales. In the previous year relevant to A.Y.
1990-91 the appellant purchased certain cotton bales from one R through the
commission agent J, but however did not take delivery. He subsequently sold
the said goods to Os Co. through commission agent Om. The ultimate purchaser
Os Co. took delivery of the goods from R. The Assessing Officer treated the
loss arising out of the transaction as speculative loss on the ground that the
appellant had not taken delivery of the goods. The Tribunal upheld the
decision of the Assessing Officer.

 

In appeal the following question was raised before the
Rajasthan High Court :

“Whether the Tribunal was justified in disallowing the
claim for set-off of business loss of Rs.2,54,068 in the hands of the
appellant by applying S. 43(5) of the IT Act, 1961 and treating the same as
speculative loss merely for the reason that transportation charges were not
shown to be paid by the appellant ?”

 


The Rajasthan High Court reversed the decision of the
Tribunal and held as under :

“The fact of taking physical delivery of the goods by the
assessee is not the test for determining the speculative transaction in
terms of S. 43(5), but the test is settlement of the transaction entered
into by the assessee or on his behalf otherwise than by actual delivery of
the commodity. Even though the assessee itself or its agent did not obtain
actual delivery of the goods, but the goods having been specifically
identified at the godown and actual delivery to purchaser from the assessee
having been effected by transport of goods directly from the godown,
transaction entered into by the assessee could not be termed as speculative
transaction.”




 

 


 

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Reassessment : Scope : S. 147 : Addition in respect of items other than the one on which notice is given : Permissible only when the AO assesses any income with respect to which he had ‘reason to believe’ to be so : Otherwise reassessment proceedings beco

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II. Reported :


41 Reassessment : Scope : S. 147 of
Income-tax Act, 1961 : Addition in respect of items other than one on which
notice is given : Permissible only when AO assesses any income with respect to
which he had ‘reason to believe’ to be so : Otherwise reassessment proceedings
become invalid.

[CIT v. Shri Ram Singh, 217 CTR 345 (Raj.)]

In the course of search of some business establishment, a
diary was found, which showed some entry regarding purchase of plot of land by
the assessee for a consideration of Rs.1,66,000, while in the agreement it was
shown to have been purchased for Rs.45,000. On this basis the Assessing Officer
issued notice u/s.148. In the course of the reassessment proceedings the
Assessing Officer was satisfied with the source of investment in land and no
addition was made on that count. However, in the course of reassessment
proceedings the Assessing Officer found that during the relevant year the
assessee had made deposits of Rs.1,65,000 cash, for which there was no
explanation. He therefore made an addition of Rs.1,65,000 and completed the
reassessment proceedings. The Tribunal found that the Assessing Officer has
accepted the investment in the plot of land which was the very basis of
reopening. The Tribunal held that when the very base of the reopening goes, the
reason for reopening also goes. The Tribunal, therefore, held that the action
taken by the Assessing Officer is illegal and accordingly quashed the
reassessment order.

 

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


“Once the Assessing Officer came to the conclusion that the
income with respect to which he had entertained ‘reason to believe’ to have
escaped assessment, was found to have been explained, his jurisdiction came to
a stop at that. He did not continue to possess jurisdiction to put to tax any
other income, which subsequently came to his notice in the course of
reassessment proceedings, which was found by him to have escaped assessment.”

New industrial undertaking in backward area : Deduction u/s.80HH : A.Y. 1999-00 : Interest received for belated settlement of bills by sundry debtors : Directly relatable to business of assessee : Is profit and gains derived from business and considered f

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II. Reported :


40 New industrial undertaking in backward
area : Deduction u/s.80HH of Income-tax Act, 1961 : A.Y. 1999-00 : Interest
received for belated settlement of bills by sundry debtors : Directly relatable
to business of assessee : To be included as profit and gains derived from
business and considered for deduction u/s.80HH.

[CIT v. Bhansali Engineering Polymers Ltd., 306 ITR
194 (Bom.)]

The assessee had an industrial undertaking in backward area,
eligible for deduction u/s.80HH of the Income-tax Act, 1961. For the A.Y.
1999-00, the assessee included the interest received for belated settlement of
bills by sundry debtors for computing deduction u/s.80HH. The Assessing Officer
excluded the amount of interest. The Tribunal allowed the claim of the assessee.

 

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

“The Tribunal was right in holding that the interest
received on belated payments from sundry debtors to whom the industrial unit
of the assessee had sold goods could be treated as interest income derived
from the industrial undertaking, even though the assessee had realised income
from other sources and in directing the Assessing Officer to recompute the
deduction u/s.80HH.”

Deemed dividend : S. 2(22)(e) : Partners of assessee firm shareholders of company : Company advanced loan to firm : Loan not to be treated as deemed dividend in the hands of the firm

New Page 1

II. Reported :



 


38 Deemed dividend : S. 2(22)(e) of
Income-tax Act, 1961 : Partners of assessee firm shareholders of company :
Assessee firm not a shareholder of company : Company advanced loan to firm :
Loan not to be treated as deemed dividend in hands of firm.

[CIT v. Hotel Hilltop, 217 CTR 527 (Raj.)]

In the scrutiny assessment u/s.143(3) of the Income-tax Act,
the Assessing Officer made an addition of Rs.10,00,000 as deemed dividend
u/s.2(22)(e), being advance received from M/s. Hilltop Palace Hotels (P) Ltd. in
which the two partners of the assessee firm held 48.33% of the shares. CIT(A)
deleted the addition holding that the assessee firm is not a shareholder of the
company, and therefore, the amount of Rs.10,00,000 cannot be assessed to tax in
the hands of the assessee firm. The Tribunal dismissed the appeal filed by the
Revenue.

 

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

“(i) The important aspect, being the requirement of S.
2(22)(e) is, that “the payment may be made to any concern, in which such
shareholder is a member or the partner, and in which he has substantial
interest, or any payment by any such company, on behalf, or for the individual
benefit of any such shareholder . . .” Thus, the substance of the requirement
is, that the payment should be made on behalf, or for the individual benefit
of any such shareholder. Obviously, the provision is intended to attract the
liability of tax on the person, on whose behalf, or for whose individual
benefit, the amount is paid by the company, whether to the shareholder, or to
the concerned firm, in which event, it would fall within the expression
‘deemed dividend’.

(ii) Obviously, income from dividend is taxable as income
from other sources u/s.56, and in the very nature of things, the income has to
be of the person earning the income. The assessee in the instant case is not
shown to be one of the persons, being shareholder. Of course the two
individuals being ‘R’ and ‘D’ are the common persons, holding more than
requisite amount of shareholding and are having requisite interest in the
firm. But then, thereby the deemed dividend would not be deemed dividend in
the hands of the firm, rather it would obviously be deemed dividend in the
hands of the individuals, on whose behalf, or for whose individual benefit,
being such shareholder, the amount is paid by the company to the concern.

(iii) Thus the significant requirement of S. 2(22)(e) is
not shown to exist. The liability of tax as deemed dividend could be attracted
in the hands of the individuals, being the shareholders, and not in the hands
of the firm.”

 


 

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Income or capital receipt : Non-compete fees : S. 10(3) and S. 45  : Payment for loss of office as director with freedom to carry on other employment without involving in software develop- ment : Is capital receipt not liable to tax.

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II. Reported :


39. Income or capital receipt : Non-compete fees : S. 10(3)
and S. 45 of Income-tax Act, 1961 : A.Y. 2000-01 : Payment for loss of office as
director with freedom to carry on other employment without involving in software
development: Is capital receipt not liable to tax.


[Rohitasava Chand v. CIT, 306 ITR 242 (Del.)]

The assessee, a shareholder and director of a company
entered into non-compete agreements with a foreign company and received
certain sums under the agreements from periods relevant to A.Ys. 1998-99 to
2000-01. During the currency of the non-compete agreements, the assessee was
restrained from soliciting, interfering, engaging in or endeavouring to carry
on any activity, including supply of services or goods concerning software
development. For the A.Y. 1998-99 the Assessing Officer accepted the claim of
the assessee that the receipt is a capital receipt not liable to tax. However,
for the A.Y. 2000-01 the Assessing Officer rejected the claim of the assessee
and included the amount in the income of the assessee. The Tribunal upheld the
addition.

 

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

 


“(i) Where an amount is received by way of compensation
under a restrictive covenant or under a non-compete agreement, it would
amount to a capital receipt in the hands of the recipient, but a lot would
depend on the agreement entered into between the parties.

(ii) The non-compete agreement incorporated a restrictive
covenant on the right of the assessee to carry on his activity of
development of software. While it might not alter the structure of his
activity, in the sense that he could carry on the same activity in an
organisation in which he had a small stake, it certainly impaired the
carrying on of his activity. To that extent it was a loss of a source of
income for him and it was of an enduring nature, as contrasted with a
transitory or ephemeral loss. The covenant was an independent obligation
undertaken by the assessee not to compete with the new agents in the same
field for a specified period, which came into operation only after the
agency was terminated and was wholly unconnected with the assessee’s agency
termination. Therefore, that part of the compensation attributable to the
restrictive covenant was a capital receipt not assessable to tax.

(iii) The non-compete agreement was independent of the
first agreement whereby the assessee agreed to transfer his shares to the
foreign company. The receipt in the hands of the assessee was a capital
receipt inasmuch as it denied his profit making capabilities.”

Capital gains : Exemption u/s.54F : Construction of new house : If the assessee has invested the net consideration before the specified period, exemption cannot be denied on ground that construction not completed within that period.

New Page 1

II. Reported :


37 Capital gains : Exemption u/s.54F of
Income-tax Act, 1961 : A.Y. 2001-02 : Construction of new house : Requirement is
that assessee has to construct a residential house within a period of three
years after date of transfer : If assessee has invested net consideration before
specified period, exemption cannot be denied on ground that construction is not
completed within that period.

[CIT v. Sardarmal Kothari, 217 CTR 414 (Mad.)]

For the A.Y. 2001-02, the Assessing Officer disallowed the
claim of the assessee for exemption of the capital gain u/s.54F of the
Income-tax Act, 1961 on the ground that the construction of the new house was
not completed. The CIT(A) allowed the claim observing that the assessee had
invested the capital gain in the land and the construction was substantially
completed. The Tribunal upheld the decision of the CIT(A).

 

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

“(i) There is no dispute about the fact that the assessee
has invested the entire net consideration of sale of capital asset in the land
itself and subsequently the assessee has invested large sums of money in
construction of the house. The one and only ground on which the Assessing
Officer has non suited the assessee for the claim of exemption was that the
house has not been completed. There remains some more construction to be made.

(ii) The requirement of the provision is that the assessee,
within a period of three years after the date of transfer, has to construct a
residential house in order to become eligible for exemption. In the case on
hand, it is not in dispute that the assessee has purchased the land by
investing the capital gain and he has also constructed residential house.

(iii) On a reading of the Board Circular No. 667, dated
18-10-1993, relied on by the Revenue, we are of the view that the Circular
would not in any way advance the case of the Revenue to come to the conclusion
that in order to have the benefit u/s.54F of the Act, the construction should
have been completed.

(iv) The Tribunal has also taken note of its own earlier
orders, wherein the Tribunal has held that in order to get the benefit
u/s.54F, the assessee need not complete the construction of the house and
occupy the same. It is enough if the assessee establishes that the assessee
had invested the entire net consideration within the stipulated period. The
said view taken consistently by the Tribunal has been applied in this case
also.

(v) There is no material to entertain this appeal. The
appeal fails and the same is dismissed.”

 


 

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Business expenditure : Amortisation of preliminary expenses : S. 35D : Interest received on share application money : Can be set off against public issue expenses : Interest accrued not taxable.

New Page 1

II. Reported :


36 Business expenditure : Amortisation of
preliminary expenses : S. 35D of Income-tax Act, 1961 : Interest received on
share application money : Can be set off against public issue expenses :
Interest accrued not taxable.

[CIT v. Neha Proteins Ltd., 306 ITR 102 (Raj.)]

The assessee had claimed set-off of the interest earned on
the share application money against the public issue expenses which were to be
amortised in future under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961. The assessee had therefore claimed that the interest
income is not taxable. The Assessing Officer disallowed the claim for set-off
and added the interest amount to the income of the assessee. The Tribunal held
that the assessee was entitled to set-off of the interest against the public
issue expenses and deleted the addition.

 

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

“(i) The amount of interest accruing on the share
application money could not be used by the assessee for any purpose whatever,
other than those mentioned in S. 73(3) and S. (3A) of the Companies Act, 1956,
and on the allotment of shares, the assessee was to take stock of things about
the expenditure incurred by it, being the public issue expenses, and the
interest accrued did reduce that expenditure and it was rightly required to be
adjusted against the expenditure, i.e., the assessee was entitled to
claim amortisation of the public issue expenses only on the figure so reduced,
after setting off, or adjusting.

(ii) The interest accrued on the share application money
lying with the bank under the mandate of S. 73 of the Companies Act was not
taxable as ‘Income from other sources’ and was required to be set off or
adjusted against the public issue expenses, so as to reduce the amount of
public issue expenses, for the purpose of enabling the assessee to claim
amortisation, under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961.

(iii) The assessee had not claimed adjustment of
this interest against other liability of the assessee to pay interest on the
borrowed money and it was nobody’s case that this was to be taxed as income
from “Profits and gains of business or profession”. It could not be said to be
a short-term deposit either.”

 


 

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Capital gains : Immovable property : S. 50C : Constitutional validity : Provision not arbitrary or violative of Article 14 : Constitutionally valid.

New Page 1

24 Capital gains : Immovable property : Cost
of acquisition : S. 50C of Income-tax Act, 1961 : A.Y. 2003-04 : Constitutional
validity : Complete safeguard provided for assessee in Stamp Act and Income-tax
Act : Provision not arbitrary or violative of Article 14 : Provision
constitutionally valid.


[K. R. Palanisamy v. UOI, 306 ITR 61 (Mad.)]

The assessee sold his capital assets for a price lower than
the market price. The Assessing Officer applied S. 50C of the Income-tax Act,
1961 for computation of capital gain. The assessee filed a writ petition
challenging the constitutional validity of S. 50C.

 

The Madras High Court upheld the validity of S. 50C and held
as under :

“(i) S. 50C of the Act was incorporated to prevent
large-scale undervaluation of the real value of the property in the sale deed
so as to defraud the Government of revenue it was legitimately entitled to by
pumping in black money.

(ii) Article 246 of the Constitution of India gives
exclusive power to Parliament to make laws in respect of the matters
enumerated in List I of the Seventh Schedule. The legislative competence of
Parliament to insert a provision for arresting leakage of income had been
considered by the Supreme Court in several cases and the uniform opinion in
all those cases was that the entries in the legislative Lists should be
construed more liberally and in their widest amplitude and not in a narrow or
restricted sense. Every safeguard had been provided under the provisions of
the Stamp Act to the assessee to establish before the authorities the real
value for which the capital asset had been transferred.

(iii) Thus, what was stated in S. 50C as real value
could not be regarded as a notional or artificial
value and such real value is determinable only after hearing the assessee in
accordance with the statutory provisions. There was no indication either in
the provisions of S. 50C of the 1961 Act, or S. 47A of the Stamp Act or rules
made thereunder about the adoption of the guideline value. Hence, the
contention that S. 50C was arbitrary and violative of Article 14 of the
Constitution of India could not be accepted.

(iv) The principle of determining the market value of the
assets had been stated in detail in rule 5 of the Tamil Nadu Stamp (Prevention
of Undervaluation of Instruments) Rules, 1968. Hence the question of the
guideline value forming the basis for determination of the full value did not
arise.

(v) Capital assets and trading assets or stock-in-trade
were treated differently under the scheme of the Act. They could not be
compared on par with each other by considering them as a class of assets. The
discrimination on the ground of valid consideration which answers the test of
intelligible differentia did not attract Article 14 of the Constitution of
India.

(vi) A provision could be rendered inoperative only when it
was found to be violative of the constitutional mandate. The provision could
not be rendered inoperative on the ground that the speech of the Finance
Minister or the administrative instructions issued by the Central Board of
Direct Taxes had not explained the reasons for incorporation of the provision
when the object was evident from the provision itself.


 

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Investment allowance — Whenever there is exchange fluctuation in any previous year, S. 43A(1) comes into play — the increase in liability should be taken as ‘actual cost’ within the meaning of section and extra benefit when liability is reduced must be ta

New Page 1

  1. Investment allowance — Whenever there is exchange
    fluctuation in any previous year, S. 43A(1) comes into play — the increase in
    liability should be taken as ‘actual cost’ within the meaning of section and
    extra benefit when liability is reduced must be taxed under S. 41(1)(a).

[CIT v. Gujarat Siddhi Cement Ltd., (2008) 307 ITR
393 (SC)]

The respondent (hereinafter referred to as ‘the assessee’)
claimed increased amount as deduction as investment allowance on account of
increase in the cost of plant and machinery on account of exchange rate
fluctuation. The Assessing Officer disallowed the claim on the ground that the
plant and machinery in respect of which there has been increase were installed
in the earlier years.

Therefore, there is no scope for provision for investment
allowance in the year under assessment. It referred to the letter of the
assessee dated February 16, 1996, making such claim. The assessee preferred an
appeal before the Commissioner of Income-tax (Appeals). The disallowance made
by the Assessing Officer was upheld by the Commissioner of Income-tax
(Appeals) on the ground that no arguments were advanced and no factual details
were furnished regarding the alleged fluctuation on account of foreign
exchange rate.

The matter was carried in further appeal by the assessee
before the Tribunal, which allowed the claim, placing reliance on a decision
of the Gujarat High Court in CIT v. Gujarat State Fertilizers Co. Ltd.,
(2003) 259 ITR 526. The Revenue preferred an appeal u/s. 260A of the Act
before the High Court. By the impugned judgment the High Court upheld the view
of the Tribunal referring to the judgment of Gujarat Fertilizer’s case (2003)
259 ITR 526 (Guj.).

On an appeal, the Supreme Court referred to its judgment in
CIT v. Arvind Mills, (1992) 193 ITR 255 (SC) in which it was held that
where the provisions of Ss.(1) apply, the increased liability should be taken
as ‘actual cost’ within the meaning of S. 43A(1). All allowances including
development rebate or depreciation allowance or other types of deductions
referred to in the sub-section would therefore have to be based on such
adjusted actual cost. But then Ss.(2) intercedes to put in a caveat. It says
that the provisions of Ss.(1) should not be applied for purposes of
development rebate.

The Supreme Court further held that on a bare reading of
the provision, i.e., S. 43A(1), the position is clear that it relates
to the fluctuation in the previous year in question. If any extra benefit is
taken the same has to be taxed in the year when the liability is reduced as
provided in terms of S. 41(1)(a), Explanation 2. Therefore, whenever there is
fluctuation in any previous year, S. 43A(1) comes into play.

The Supreme Court noted that after the substitution by the
Finance Act, 2002, with effect from April, 1 2003, the position however was
quiet different. But in the instant case, the Commissioner of Income-tax
(Appeals) recorded a categorical finding that no argument was advanced and no
details were given. In the aforesaid background the Supreme Court felt that it
would be appropriate to grant opportunity to the assessee to establish the
factual position relating to fluctuation in the foreign exchange rate. For
that limited purpose, the Supreme Court remitted the matter to the Tribunal to
consider whether the assessee is justified in claiming deduction in the
background of S. 43A(1), as it stood then.

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Method of accounting — Before rejecting the method of accounting regularly followed by the assessee, the Assessing Officer should demonstrate that the method of accounting so followed results in underestimation of profits.

New Page 1

  1. Method of accounting — Before rejecting the method of
    accounting regularly followed by the assessee, the Assessing Officer should
    demonstrate that the method of accounting so followed results in
    underestimation of profits.

[CIT v. Realset Builders & Services Ltd., (2008) 307
ITR 202 (SC)]

The short point arising in the case before the Supreme
Court was : Whether income accrued to the assessee on registration of the sale
deed in favour of the third party (plot purchaser) or whether it accrued at
the time of execution of the tripartite agreement ? According to the
Department, income accrued on the date of execution of the tripartite
agreement when the assessee received full consideration of the plot and not in
the year in which the sale deed stood executed.

According to the assessee, since there was no transfer of
right, title and interest up to the date of execution of conveyance, income
did not accrue to the assessee till the date of conveyance and therefore,
there was no accrual of income at the time of execution of the tripartite
agreement(s) which took place during the A.Y. 1994-95.

The basic controversy is in which year the liability arose
— whether it arose during A.Y. 1994-95 or whether it accrued in the year when
conveyance stood executed.

Though the Supreme Court did not agree with the reasons
given by the High Court for dismissing the appeal in its impugned judgment,
(namely, that the Revenue had accepted two primary orders in the earlier
years), but since the Department had not gone into the method of accounting
followed by the assessee, it found no reason to interfere with the impugned
judgment.

The Supreme Court observed that in cases where the
Department wants to tax an assessee on the ground of the liability arising in
a particular year, it should always ascertain the method of accounting
followed by the assessee in the past and whether change in method of
accounting was warranted on the ground that profit is being underestimated
under the impugned method of accounting. If the Assessing Officer comes to the
conclusion that there is under-estimation of profits, he must give facts and
figures in that regard and demonstrate to the Court that the impugned method
of accounting adopted by the assessee results in underestimation of profits
and is therefore rejected. Otherwise, the presumption would be that the entire
exercise is revenue-neutral. In this case, that exercise had never been
undertaken. The Assessing Officer was required to demonstrate both the
methods, one adopted by the assessee and the other by the Department. In the
circumstance, there was no reason to interfere with the conclusion given by
the High Court and the Tribunal.

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Gift Tax — Deemed Gift — Allotment of rights shares do not constitute transfer — Renunciation for inadequate consideration in a given case may attract S. 4(1)(a), but the Department has to proceed against the renouncer — Recipient of bonus shares from the

New Page 1

  1. Gift Tax — Deemed Gift — Allotment of rights shares do not
    constitute transfer — Renunciation for inadequate consideration in a given
    case may attract S. 4(1)(a), but the Department has to proceed against the
    renouncer — Recipient of bonus shares from the company cannot be called donee
    of shares.

[Khoday Distilleries Ltd. v. CIT and Another, (2008)
307 ITR 312 ((SC)]

On January 29, 1986, the appellant-company, on the other
shareholders not exercising the option given to them to take up the rights
shares issued by the appellant, allotted them to the seven investment
companies, who were the shareholders in the appellant-company. In all there
were twenty-seven shareholders. Twenty shareholders did not subscribe to the
rights issue and consequently the appellant-company allotted shares to the
remaining existing shareholders. The Assessing Officer held that the said
allotment by way of rights issue was without adequate consideration within the
meaning of S. 4(1)(a) of the Gift Tax Act, 1958 (1958 Act). He further held
that the modus operandi was an attempt to evade taxes, that it was a
colourable transaction and since the shares allotted were without adequate
consideration, there was a deemed gift u/s.4(1)(a) of the 1958 Act.
Accordingly, the difference between the value of the shares on yield basis and
the face value of Rs.10 at which the shares were allotted was sought to be
brought to tax under the said Section. Aggrieved by the decision of the
Assessing Officer, the appellant carried the matter in appeal to the
Commissioner of Income-tax (Appeals). It was held that the entire exercise
undertaken by the appellant was to evade payment of wealth-tax by the
individual shareholders of the appellant-company. This finding was given by
the Commissioner of Income-tax (Appeals) on the ground that rights shares were
allotted because 20 existing shareholders out of 27 shareholders of the
company did not subscribe for the rights shares. However, according to the
Commissioner of Income-tax (Appeals), gift tax proceedings had to be initiated
by the Department not against the appellant-company but it ought to have
initiated gift-tax proceedings against the exiting shareholders who had
renounced their rights. Having so held, the Commissioner of Income-tax
(Appeals) came to the conclusion that the entire exercise undertaken by the
appellant was to avoid payment of wealth-tax and therefore, it was held that
the company was liable to pay gift-tax for transfer of the said shares to the
seven investment companies. This decision of the Commissioner of Income-tax
(Appeals) stood reversed by Tribunal which decided the appeal filed by the
company against the Department. The Tribunal came to the conclusion that the
allotment of rights shares by the appellant did not constitute ‘transfer’ as
it did not involve any existing property at the time of such allotment.
According to the Tribunal, the seven investment companies made payment towards
the face value of the shares and, consequently, it cannot be said that the
contract was without consideration. It was further held that in this case
there was no element of gift u/s.4(1)(a) as there was no transfer of property
as defined u/s. 2(xxiv) of the 1958 Act. Aggrieved by the decision of the
Tribunal, the Department preferred gift-tax Appeal No. 2/02 which, vide the
impugned judgment stood disposed of in favour of the Department.

On an appeal by the assessee, the Supreme Court held that
there is a vital difference between ‘creation’ and ‘transfer’ of shares. As
stated hereinabove, the words ‘allotment of shares’ have been used to indicate
the creation of shares by appropriation out of the unappropriated share
capital to a particular person. A share is a chose-in-action. A
chose-in-action implies existence of some person entitled to the rights in
action in contradistinction from rights in possession. There is a difference
between issue of a share to a subscriber and the purchase of a share from an
existing shareholder. The first case is that of creation, whereas the second
case is that of transfer of chose-in-action. In this case, when twenty
shareholders did not subscribe to the rights issue, the appellant allotted
them to the seven investment companies, such allotment was not transfer. In
the circumstance, S. 4(1)(a) was not applicable as held by the Tribunal.

The Supreme Court further held that there is a difference
between ‘renunciation’ and ‘allotment’. In this case, the Department has
confused the two concepts. The judgment of the Madras High Court in the case
of S. R. Chockalingam Chettiar, (1968) 70 ITR 397 dealt with the case of
renunciation in which case under certain circumstance the renouncer could be
treated as a donor liable to be taxed u/s.4(1)(a) of the Gift-tax Act, 1958.
That was not the situation here. The Department had sought to tax the
appellant-company as a donor under the 1958 Act for making allotment of rights
shares. The Department had not taxed the renouncer shareholders despite the
decision of the Commissioner of Income-tax (Appeals). Allotment is not a
transfer. Moreover, there is no element of existing right in the case of
allotment as required u/s.2(xii) of the 1958 Act. In the case of renunciation
for inadequate consideration in a given case S. 4(1)(a) could stand attracted.
However, in such a case, the Department has to proceed against recouncer
(shareholder). For the above reasons, the judgment of the Madras High Court in
S. R. Chockalingam Chettiar’s case (1968) 70 ITR 397 had no application.

The second issue to be decided by the Supreme Court was
whether there was an element of ‘gift’ in the appellant issuing bonus shares
in the ratio of 1 : 23 in April/May, 1986. In addition to the levy of gift-tax
on the allotment of rights shares, the Assessing Officer levied gift tax on
the bonus shares issued later by the appellant. The Supreme Court held that
when a company is prosperous and accumulates a large surplus, it converts this
surplus into capital and divides the capital amongst the members in proportion
to their rights. This is done by issuing fully paid shares representing the
increased capital. Shareholders to whom the shares are allotted have to pay
nothing. The purpose is to capitalise profits which may be available for
division. Bonus shares go by the modern name of ‘capitalisation shares’. If
the articles of a company empower the company, it can capitalise profits or
reserves and issue fully paid shares of nominal value, equal to the amount
capitalised, to its shareholders. The idea behind the issue of bonus shares is to bring the nominal share capital into line with the excess of assets over liabilities. A company would like to have more working capital, but it need not go into the market for obtaining fresh capital by issuing fresh shares. The necessary money is available with it and this money is converted into shares, which really means that the undistributed profits have been ploughed back into the business and converted into share capital. Therefore, fully paid bonus shares are merely a distribution of capitalised undivided profit. It would be a misnomer to call the recipients of bonus shares as donees of shares from the company. The profits made by the company may be distributed as dividends or retained by the company as its reserve which may be used for improvement of the company’s works, buildings and machinery. That will enable the company to make larger profits. There cannot be any dispute that the shareholders will benefit from the improvements brought about in profit-making apparatus of the company. Like-wise, if the accumulated profits are capitalised and capital base of the company is enlarged, this may enable the company to do its business more profitably. The shareholders will also benefit if the capital is increased. They may benefit immediately by issue of bonus shares. But neither in the case of improvement in the profit-making apparatus nor in the case of expansion of the share capital of the company, can it be said that the shareholders have received any money from the company. They may have benefited in both the cases. But this benefit cannot be treated as distribution of the amount standing to the credit of any reserve fund of the company to its shareholders.

One of the points raised on behalf of the Department before the Supreme Court was that the entire exercise undertaken by the appellant constituted tax evasion. According to the Department, by a paltry investment of Rs.10 lakhs (approximately) the seven investment companies became owners of 24,00,168 shares of M/s. Khoday Distilleries Ltd. worth Rs. 2,40,01,680. According to the Department, the market value of the said shares and the yield from the said shares were totally disproportionate to the investment made by the seven investment companies. Therefore, according to the Department, the modus operandi adopted by the appellant was an exercise in tax evasion. The Supreme Court observed that it does not know the reason why the Department had not proceeded under the Income-tax Act, 1961, if, according to the Department, the case was of tax evasion. According to the Commissioner of Income-tax (Appeals), the appellant had undertaken an exercise to avoid wealth-tax, whereas according to the Assessing Officer the exercise undertaken by the appellant was to evade gift-tax and in the same breath the Assessing Officer states that the entire exercise was to evade tax by allotting shares to the directors which attracted the deeming prevision of S. 2(22) of the 1961 Act. According to the Supreme Court there was utter confusion on this aspect. The Supreme Court, therefore, was of the view that on the question of evasion of tax, the contention of the Department was conflicting and in fact, the Department had messed up the entire case.

The Supreme Court, therefore, set aside the judgment of the High Court and the civil appeal filed by the assessee was allowed.