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Category: Direct Taxes

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

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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

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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

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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.

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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

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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.

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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

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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

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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

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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.

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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 ?

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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 —

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  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.

New Page 1

  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.

New Page 1

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) .

New Page 1

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

New Page 1

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.

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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.”


 

 


 

levitra

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

New Page 1

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.”

levitra

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.”




 

 


 

levitra

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

New Page 1

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

New Page 1

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.”

 


 

levitra

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.

New Page 1

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.”

 


 

levitra

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.”

 


 

levitra

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.


 

levitra

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.

levitra

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.

High Court — Writ petition — Whether appeal lies to the Division Bench or not is not to be decided on the basis of nomenclature given in writ petition.

New Page 1

  1. High Court — Writ petition — Whether appeal lies to the
    Division Bench or not is not to be decided on the basis of nomenclature given
    in writ petition.

 

[M.M.T.C. Ltd. v. CCT & Ors., (2008) 307 ITR 276
(SC)]

The challenge in the appeal to the Supreme Court was to the
judgment of the Division Bench of the Madhya Pradesh High Court dismissing the
writ appeal filed by the appellant on the ground that it was not maintainable.
The appeal was filed u/s.2(1) of the M.P. Uchcha Nyayalay (Khand Nyaypeeth Ko
Appeal) Adhiniyam, 2005 (hereinafter referred to as, ‘the Act’). It was held
that the order was passed in exercise of power of superintendence under
Article 227 of the Constitution of India, 1950 (in short, ‘the Constitution’)
against which the Letters Patent appeal is not maintainable. The order of the
learned Single Judge was passed on 09.11.2005. Against the said order, special
leave petition was filed which was disposed of by the Supreme Court by order
dated February 16, 2006.

The Supreme Court had directed the High Court to consider
the LPA on the merits and time was granted to prefer the LPA within three
weeks. The High Court was directed to dispose of the LPA on the merits if it
was otherwise free from defect.

The High Court construed the order as if the Supreme Court
had only waived the limitation for filing of the Letters Patent appeal and
there was no direction to consider the case on merits.

Before the Supreme Court it was contended that the
conclusion of the High Court that merely limitation was waived was contrary to
the clear terms of the earlier order of this Court. Additionally, it was
submitted that the prayer in the writ petition was to quash the order passed
by the Assistant Commissioner, Commercial Tax. That being so, the mere fact
that the writ petition was styled under Article 227 of Constitution was of no
consequence. It is the nature of the relief sought and the controversy
involved which determines the article which is applicable.

The Supreme Court held that the High Court was not
justified in holding that the Supreme Court’s earlier order only waived the
limitation for filing a Letters Patent appeal. The Supreme Court held that on
that score alone the High Court’s order was unsustainable.

The Supreme Court observed that in addition, the High Court
seemed to have gone by the nomenclature, i.e., the description given in
the writ petition to be one under Article 227 of the Constitution. The High
Court did not consider the nature of the controversy and the prayer involved
in the writ petition. As noted above, the prayer was to quash the order of
assessment passed by the Assistant Commissioner, Commercial Tax levying
purchase tax as well as entry tax.

The Supreme Court referring to the precedents held that the
High Court was not justified in holding that the Letters Patent appeal was not
maintainable. In addition, a bare reading of the Court’s earlier order showed
that the impugned order was clearly erroneous. The impugned order was set
aside directing that the writ appeal shall be heard by the Division Bench on
merits.

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Exemption — Income not forming part of the total income — Whether State-controlled Committee/Boards and companies constituted to implement the educational policy of the State should be treated as educational institution eligible for exemption u/s.10(22) o

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7 Exemption — Income not forming part of the total income —
Whether State-controlled Committee/Boards and companies constituted to implement
the educational policy of the State should be treated as educational institution
eligible for exemption u/s.10(22) of the Act — Matter remanded.


[Assam State Text Book Production And Publication Corporation
Ltd. v. CIT, (2009) 319 ITR 317 (SC)]

In the appeals before the Supreme Court, it was concerned
with the A.Ys. 1981-82 to 1996-97, except the A.Y. 1989-90. The question which
arose before the Assessing Officer was whether the Corporation could be termed
as an ‘educational institution’ in terms of S. 10(22) of the 1961 Act ?
According to the Assessing Officer, since the assessee, during the relevant
years, had income exclusively from publication and selling of textbooks to the
students, exemption u/s.10(22) of the Act, as it stood at the material time, was
not admissible. According to the Assessing Officer, the assessee did not exist
solely for educational purposes, particularly in view of clause 21 of the
memorandum of association which provided for distribution of dividends, hence,
its income was not exempt u/s. 10(22) of the Act. This decision of the Assessing
Officer was upheld by the Commissioner of Income-tax (Appeals). In the Tribunal,
there was a difference of opinion between the Member (Judicial) and the Member
(Accountant). By decision of the majority, it was held that the Corporation was
an educational institution and, consequently, the Corporation was entitled to
the benefit of exemption u/s.10(22) of the Act for the relevant assessment years
in question. However, in appeal filed by the Department, the High Court came to
the conclusion that the income of the Corporation, during the relevant
assessment years, was not exempt, particularly in view of the fact that the
assessee did not exist solely for education purposes; that it did not solely
impart education and that its income during the relevant assessment years was
only from publishing and sale of text-books, which according to the High Court,
constituted a profit-earning activity. Against the said decision, the assessee
has come to the Supreme Court by way of civil appeals.

On going through the records, the Supreme Court found that
the High Court had not taken into account the prior history of the case,
particularly in the context of incorporation of the Corporation under the
Companies Act, 1956, as a Government company. Initially, the assessee was a
State-controlled Committee and Board, which was attached to the Office of the
Director of Public Instruction, State of Assam. It was only in the year 1972,
that the Government company got constituted u/s.617 of the Companies Act, 1956;
that, prior to 1972, the entire funding for the working of the Committee/Board
was done by the State of Assam and that even the ownership of the assets
remained vested in the State of Assam, which stood transferred to the
Corporation in 1972, when it got incorporated under the Companies Act, 1956. The
Supreme Court observed that the assessee was a Government company. It was
controlled by the State of Assam. The aim of the said Corporation was to
implement the State’s policy on education; that, clause 21 of the memorandum and
articles of association provided a return on investment to the State of Assam;
that, in the year 1975, in a similar situation, the Central Board of Direct
Taxes (for short, ‘the CBDT’) had granted exemption u/s.10(22) of the Act, vide
letter dated August 19, 1975, to the Tamil Nadu Text Books Society, which
performed activities similar to those of the assessee. The letter dated August
19, 1975, was referred to in the judgment of the Rajasthan High Court in the
case of CIT v. Rajasthan State Text Book Board reported in (2000) 244 ITR
667. A similar question came up for consideration before the Rajasthan High
Court, namely, whether the Rajasthan State Text Book Board was entitled to
exemption u/s.10(22) of the Income-tax Act, 1961 ?

The Rajasthan High Court in its judgment recited that, under
a similar situation, the CBDT had also extended the benefit of exemption under
10(22) of the Act to the Orissa Secondary Board Education, as reported in
Secondary Board of Education v. ITO, (1972) 86 ITR 408 (Orissa). Following
these circulars/letters issued by the CBDT, the Rajasthan High Court had come to
the conclusion that the assessee in that case, namely, Rajasthan State Text Book
Board, was entitled to claim the benefit of exemption u/s.10(22) of the Act.

The Supreme Court, in view of the above, was of the opinion
that the High Court, in its impugned judgment, had not considered the historical
background in which the Corporation came to be constituted; secondly, the High
Court ought to have considered the source of funding, the sharehold-ing pattern
and aspects, such as return on investment; thirdly, it had not considered the
letters issued by the CBDT which are referred to in the judgment of the
Rajasthan High Court granting benefit of exemption to various Board/Societies in
the country u/s.10(22) of the Act; fourthly, it has failed to consider the
judgments mentioned hereinabove; and lastly, it had failed to consider the
letter of the Central Government dated July, 1973, to the effect that all
State-controlled Educational Committee(s)/Board(s) were constituted to implement
the educational policy of the State(s); consequently, they should be treated as
educational institutions.

For the aforesaid reasons, the Supreme Court was of the view
that, instead of remanding the matter to the High Court, it was appropriate that
the matter was remitted to the Assessing Officer to consider it de novo in the
light of the above.

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Reassessment : Notice to agent of non-resident assessee : Limitation : S. 149(3), S. 163(2) Specific order u/s.163(2) not necessary : Notice issued u/s.148 after expiry of two years is time-barred

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8 Reassessment : Notice to agent of non-resident : Limitation
: Ss. 149(3) and Ss. 163(2) of Income-tax Act, 1961 : A.Y. 1996-97 : MC filed
return as agent of non-resident assessee : No specific order u/s.163(2) as agent
: Order not necessary : Notice u/s.148 issued to assessee on 14-1-2000, after
expiry of two years is time-barred u/s.149(3).


[CIT v. Madhwan Bashyam, 214 CTR 335 (Del.)]

For the A.Y. 1996-97, M/s. Mariben Corporation (MC) filed the
return of income as agent of the non-resident assessee on 24-6-1996. On
14-1-2000, the Assessing Officer issued notice u/s.148 of the Income-tax Act,
1961 and served on the assessee on 31-1-2000. Before the Tribunal, the assessee
contended that in view of the provisions of S. 149(3), the notice should have
been served to the assessee on or before 31-3-1999 and therefore the notice was
time-barred. The Revenue contended that no order was passed to the effect that
MC was the agent of the assessee and therefore the provisions of S. 149(3) are
not applicable. The Tribunal accepted the contention of the assessee and held
that the notice issued to the assessee u/s.148 of the Act, was barred by time.

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

“(i) On a plain reading of S. 163(2), it appears that when
an order adverse to the assessee/agent is passed by the Assessing Officer,
then a written order is required to be made. However, if there is no objection
to the agent continuing the proceedings on behalf of the assessee, no specific
order needs to be passed by the Assessing Officer. If a person filing a return
as an agent of the assessee is not accepted as an agent for further
proceedings, then the Assessing Officer must pass an order, so that the agent
or assessee can file an appeal. But as in the present case, if the proceedings
have gone on as if there is no objection to the person filing a return being
treated as an agent of the assessee, no specific order needs to be passed in
this regard.

(ii) Under the circumstances, there is no error in the view
taken by the Tribunal in coming to the conclusion that the notice was issued
to the assessee beyond the period prescribed by law.”


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Penalty u/s.271C and u/s.271B : Failure to deduct tax u/s.194C : Partner only matriculate, assessee new firm, followed advice given by its CA : Penalty cancelled

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7 Penalty for failure to deduct tax at source : Ss.194C,
Ss.271C and Ss.273B of Income-tax Act, 1961 : A.Ys. 2000-01 and 2001-02 : New
firm : Partner a matriculate : Assessee explained that it was not advised by its
Chartered Accountant that it was liable to deduct tax at source u/s.194C :
Explanation bona fide : Penalty cancelled.


[CIT v. Fourways International, 166 Taxman 461 (Del.)]

In the A.Ys. 2000-01 and 2001-02, the assessee had made
certain payments for fabrication charges, but had not deducted tax at source.
The Assessing Officer held that the assessee has failed to deduct tax at source
u/s.194C of the Income-tax Act, 1961 without reasonable cause and therefore
imposed penalty u/s.271C of the Act. The contention of the assessee was that it
was not advised by its Chartered Accountant that it was liable to deduct tax at
source u/s.194C of the Act and therefore the failure to deduct tax at source was
bona fide. The assessee therefore contended that there is no
justification of imposition of penalty u/s.271C of the Act. The Tribunal
accepted the contention of the assessee and cancelled the penalty.

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

“(i) The Tribunal found the explanation to be bona fide.
The Tribunal concluded that the assessee was not avoiding its liability and
had cooperated with the Revenue in the payment of tax. It also held that the
assessee has not been correctly advised by its Chartered Accountant in regard
to its liability.

(ii) We may note that S. 273B of the Act does not make a
levy of penalty u/s.271C of the Act mandatory. The assessee would not be
liable to penalty if he is able to prove that there was a reasonable cause for
failing to deduct the tax. The assessee in the present case had given an
explanation which found favour with the Tribunal. We think that the view taken
by the Tribunal is one that could have possibly been taken in the matter. It
is not perverse as to warrant interference or which gives rise to a
substantial question of law.”



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Block assessment : Ss. 158BC and 143(2) of I. T. Act, 1961 : Where the returned income is not accepted in the block assessment, service of notice u/s. 143(2) is necessary. Failure to serve notice u/s. 143(2) would render the block assessment invalid.

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34. Block assessment : Ss. 158BC and 143(2) of I. T. Act,
1961 : Where the returned income is not accepted in the block assessment,
service of notice u/s. 143(2) is necessary. Failure to serve notice u/s. 143(2)
would render the block assessment invalid.

[CIT vs. Pawan Gupta, 223 CTR 487 (Del).]

In this case the Delhi High Court held as under : 

“i) S. 143(2) is a mandatory provision whether one looks
at it from the standpoint of a regular assessment or from the standpoint of
an assessment under Chapter XIV-B.

ii) S. 143(2) has no application in a situation where the
AO, on receipt of return of undisclosed income in Form No. 2B, is satisfied
with the same as reflecting the true state of affairs and no further
information or explanation is called for from the assessee.

iii) However, where the AO is not inclined to accept the
return of undisclosed income filed by the assessee, the procedure prescribed
in Section 143(2) has to be followed. If an assessment order is passed in
such a situation without issuing a notice u/s. 143(2), it would be invalid
and not merely irregular.”

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Advance Tax : Interest u/s. 234B : Failure by payer to deduct tax at source : Interest cannot be imposed on assessee.

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  1. Advance Tax : Interest u/s. 234B : Failure by payer to
    deduct tax at source : Interest cannot be imposed on assessee.

[DI(International Taxation) vs. NGC Network Asia LLC,
313 ITR 187 (Bom.)]

In this case there was short payment of advance tax on
account of the non-deduction of tax by the payer which it was required by law
to deduct u/s. 195 of the Income-tax Act, 1961. The Assessing Officer levied
interest u/s. 234B on account of short payment of advance tax due to such
non-deduction. It is the case of the Revenue that on failure of the payer to
deduct tax at source, it is the liability of the assessee to pay the advance
tax even on the amount which had not been deducted u/s. 195 of the Act. The
Tribunal held that the assessee was not liable to advance tax and cancelled
the levy of interest.

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

“When duty was cast on the payer to deduct tax at source,
on failure of the payer to do so, no interest could be imposed on the assessee”.

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Advance Ruling : S. 245R of I. T. Act, 1961 : Writ : Articles 226 and 227 of the Constitution of India : Authority for Advance Ruling is Tribunal : High Court can issue writ against advance ruling under Articles 226 and 227 of the Constitution of India.

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32. Advance Ruling : S. 245R of I. T. Act, 1961 : 
Writ : Articles 226 and 227 of the Constitution of India : Authority for Advance
Ruling is Tribunal : High Court can issue writ against advance ruling under
Articles 226 and 227 of the Constitution of India.

DTAA between India and UAE : NR company providing
remittance services to NRIs in UAE :  Liaison offices set up in India
performing auxiliary services : No permanent establishment of NR in India.
Amount earned by NR not assessable in India : S. 90 of I. T. Act, 1961 and
Arts. 5(3)(b) and 7 of DTAA.

[U.A.E. Exchange Centre Ltd. vs. UOI; 313 ITR 94
(Del.), 223 CTR 250 (Del).]

The petitioner is a company incorporated in the UAE. It
offered remittance services to NRIs in the UAE under contracts entered into
between the petitioner and the NRIs in the UAE. The funds were collected from
the NRI remitter in the UAE. A one- time fee of 15 dirhams was levied and
collected by the petitioner from the NRI remitters in the UAE. Funds were
transmitted to the beneficiaries of the NRI remitters in India either by
telegraphic transfer through normal banking channels via banks in India or by
involving the liaison offices of the petitioner in India, who in turn,
downloaded the information and particulars necessary for remittance by using
computers in India which were connected to the servers in the UAE, by drawing
cheques in banks on India and couriering/dispatching to the beneficiaries of
the NRI remitters in India. For the A. Ys. 1998 – 99 to 2003 – 04 the
petitioner had filed returns of income under the provisions of the Income-tax
Act, 1961 showing ‘Nil’ income. The returns were accepted by the Assessing
Officer. The petitioner had also made an application u/s. 245Q(1) of the Act
to the Authority for Advance Ruling (AAR) seeking an advance ruling with
respect to the following question :

“Whether any income is accrued/deemed to be accrued in
India from the activities carried out by the company in India.”

The AAR gave its ruling on 26.05.2004. The AAR held that
downloading of information by the liaison offices in India with regard to the
beneficiaries of the NRI remitters in India and thereupon the act of the
cheques or drafts being drawn on banks in India, in the name of the
beneficiaries and their dispatch through couriers to the beneficiaries
constituted an activity which enabled the petitioner to complete the
transaction of remittance, in terms of the contracts entered into with the
NRIs. From this the Authority concluded that there was, therefore, a real and
intimate relationship between the business carried on by the petitioner, for
which it received commission in UAE. The Authority held that the activities of
the liaison offices of downloading of information, printing and preparation of
cheques and drafts, and sending them to the beneficiaries if India contributed
directly or indirectly to the earning of income by the petitioner by way of
commission. The Authority concluded that the income would be deemed to accrue
or arise to the petitioner in the UAE from a ‘business connection’ in India.
Pursuant to the said ruling, the Assessing Officer issued notices u/s. 148 of
the Act.

On a writ petition challenging the said ruling, the Delhi
High Court held as under : 

“i) The Authority for Advance Ruling would qualify as a
tribunal within the meaning of Article 227 of the Constitution. Thus the
Authority would be amenable to the jurisdiction of the High Court under
Article 227, and more so, of the Article 226 of the Constitution which,
without doubt, has a wider reach being conferred with jurisdiction to issue
appropriate order or direction to any “person or authority” for enforcement
of fundamental rights under Part III of the Constitution as also for any
other purpose.

ii) Where India has entered into a treaty for avoidance
of double taxation as also in respect of purposes referred to in Section 90
of the Act, the contracting parties are governed by the provisions of the
treaty. The treaty overrides the provisions of the Act.

iii) Article 5(3) of the DTAA between UAE and India,
which opens with a non-obstante clause, is illustrative of instances where
under the DTAA various activities have been deemed as ones which would not
fall within the ambit of the expression “permanent establishment”. One such
exclusionary clause is found in Article 5(3)(e) which is : maintenance of a
fixed place of business solely for the purpose of carrying on, for the
enterprise, any other activity of a preparatory or auxiliary character. The
only activity of the petitioner’s liaison offices in India was to download
information which was contained on the main servers located in the UAE,
based on which cheques were drawn on banks in India whereupon the cheques
were couriered or dispatched to the beneficiaries in India, keeping in mind
the instructions of the NRI remitters. Such an activity could not be
anything but auxiliary in character. The instant activity was in “aid” or
“support” of the main activity. It fell within the exclusionary clause.

iv) The ruling rendered by the Authority proceeded on a
wrong premise, inasmuchas, it, firstly, examined the case from the point of
view of Section 5(2)(b) and Section 9(1)(i) of the Act while it was required
to look at the provisions of the DTAA for ascertaining the petitioner’s
liability to tax and, secondly, it ignored the plain meaning of the terms of
the exclusionary clause, i.e., Article 5(3)(e), while examining as to
whether setting up a liaison office in India would result in setting up a
permanent establishment within the meaning of the DTAA. The ruling of the
Authority in these circumstances being contrary to well- established
principles as well as the provisions of law, would amount to an error
apparent on the face of the record and hence, amenable to a writ of
certiorari. The ruling was liable to be quashed.”

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Block assessment — Only brought forward losses of the past years under Chapter VI and unabsorbed depreciation u/s.32(2) were to be excluded while aggregating the total income or loss of each previous year in the block period, but set-off of the loss suffe

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  1. Block assessment — Only brought forward losses of the past
    years under Chapter VI and unabsorbed depreciation u/s.32(2) were to be
    excluded while aggregating the total income or loss of each previous year in
    the block period, but set-off of the loss suffered in any of the previous
    years in the block period against the income assessed in other previous years
    in the block period was not prohibited.

[ E. K. Lingamurthy & Anr. v. Settlement Commission (IT
and WT) & Anr., (2009) 314 ITR 305 (SC)]

The Income-tax Department conducted a search u/s.132 of the
Act on 11-10-1996 on the business premises of the petitioner-assessees as well
as on their family members who were partners in various firms. The assessment
proceedings were initiated under Chapter XIV-B of the Act. A consolidated
application was filed before the Settlement Commission for the block period
1-4-1986 to 11-10-1996. The said application was admitted. The petitioners
claimed unabsorbed depreciation and business loss for the A.Y. 1995-96 and
1996-97 comprised in the block period. The claim was rejected by the
Settlement Commission by referring to S. 158BB(4) and Explanation (a) to S.
158BA(2) holding that the unabsorbed loss and current depreciation claimed in
the regular return should be determined and allowed to be carried forward for
future adjustment only in the regular assessment and consequently, the claim
for adjustment of unabsorbed depreciation against the undisclosed income in a
block assessment would not be considered. The High Court rejected the writ
petition filed by the petitioners holding that the provisions of Chapter XIV-B
did not indicate even a remote possibility for considering a claim of set-off
or brought forward losses under Chapter VI or unabsorbed depreciation
u/s.32(2) to be considered in determination of undisclosed income.

Before the Supreme Court the assessee contended that there
was a conceptual difference between current depreciation and carried forward
unabsorbed depreciation. It was the case of the assessee that Explanation (a)
to S. 158BB did not rule out current year’s losses or current year’s
depreciation; it only ruled out the brought forward losses or unabsorbed
depreciation u/s.32(2).

The Supreme Court held that S. 158BB, inter alia,
states that undisclosed income of the block period shall be “the aggregate of
the total income of the previous years falling within the block period”
computed in accordance with the provisions of Chapter IV. ‘Total income’ is
defined in S. 2(45) to mean the total amount of income referred to in S. 5,
computed in the manner laid down in the Act. In other words, Chapter XIV does
not rule out Chapter IV of the Act in the matter of computation of undisclosed
income under Chapter XIV-B. Ordinarily, in the case of regular assessment, the
unit of assessment is one year consisting of twelve months whereas in the case
of block assessment, the unit of assessment consists of ten previous years and
the period up to the date of the search. S. 158BB provides for aggregation of
income/loss of each previous year comprised in the block period. The block
period assessment under Chapter XIV-B is in addition to regular assessment.

According to the Supreme Court, analysing S. 158BB(4) read
with Explanation (a) thereto, it was clear that only brought forward losses of
the past years under Chapter VI and unabsorbed depreciation u/s.32(2) were to
be excluded while aggregating the total income or loss of each previous year
in the block period, but set-off of the loss suffered in any of the previous
years in the block period against the income assessed in other previous years
in the block period was not prohibited. According to the Supreme Court the
Settlement Commission had erred in disallowing the application of the assessee
for set-off of inter se losses and depreciation accruing in any of the
previous years in the block period against the income returned/assessed in any
other previous year in the block period.

Depreciation — Balancing charge — Assets whose cost does not exceed Rs.5,000 — Depreciation claimed at 100% — Sale of scrap — Those purchased after 1-4-1995 taxable u/s.50 — Those purchased prior to 1-4-1995, not liable to tax.

New Page 2

  1. Depreciation — Balancing charge — Assets whose cost does
    not exceed Rs.5,000 — Depreciation claimed at 100% — Sale of scrap — Those
    purchased after 1-4-1995 taxable u/s.50 — Those purchased prior to 1-4-1995,
    not liable to tax.

[Nectar Beverages P. Ltd. v. Dy. CIT, (2009) 314 ITR
314 (SC)]

The assessee (Nectar Beverages P. Ltd.), a company which
derived income from manufacture and sale of soft drinks, claimed depreciation
in respect of the bottles and crates (trays) purchased by it at 100 percent
under the proviso to S. 32(i)(ii) of the Act, which was allowed from time to
time. During the financial year relevant to the A.Y. 1991-92, the assessee
sold scrap of bottles and trays (crates) for Rs. 50,850. However, in the
computation of income, the assessee reduced the sale consideration from the
income on the ground that the amount received was a capital receipt and since
it did not form part of the block of assets, even the provision of S. 50 of
the said Act relating to short-term capital gain on sale of depreciable asset
was not attracted. The Assessing Officer held that depreciation having been
allowed to the assessee, the proviso to S. 50 of the Act was applicable. The
Commissioner of Income-tax (Appeals) dismissed the appeal, however, holding
that a deduction had been made in the earlier assessment year in respect of
the expenditure incurred and, subsequently, the assessee having obtained the
amount in respect of such expenditure, the same was chargeable to tax
u/s.41(1) of the Act. The Tribunal confirmed the order of the Commissioner of
Income-tax (Appeals). The High Court also dismissed the appeal.

On appeal, the Supreme Court held that prior to April 1,
1988, S. 41(1) and S. 41(2), both existed on the statute book. S. 41(2)
specifically brought to tax the balancing charge as a deemed income under the
1961 Act. It stated that where any plant owned by the assessee and used for
business purposes was sold, discarded or destroyed and the moneys payable in
respect of such plant exceeded the written down value, then so much of the
surplus which did not exceed the difference between the actual and the
written-down value was made chargeable to tax as business income of the
previous year in which moneys payable for the plant became due. In other
words, S. 41(2) made the balancing charge taxable as business income.
According to the Supreme Court if the argument of the Department of reading
the balancing charge u/s.41(2) into S. 41(1) was to be accepted, then it was
not necessary for the Parliament to enact S. 41(2) in the first instance. In
that event, S. 41(1) alone would have sufficed. The Supreme Court held that,
S. 41(1), S. 41(2), S. 41(3) and S. 41(4) operated in different spheres.

In another batch of appeals, the Supreme Court considered
the effect of introduction of the Finance (No. 2) Act, 1995, with effect from
April 1, 1996. The Supreme Court noted that by the above Finance Act, the
first proviso to S. 32(1)(ii) stood deleted with effect from April 1, 1996.
Consequently, bottles, crates and cylinders whose individual cost did not
exceed Rs.5,000 also came to be included in the block of assets. One of the
assessees, M/s. Goa Bottling Company Pvt. Ltd. was a company registered under
the Companies Act, 1956, and was in the business of manufacture and sale of
soft drinks. For the purposes of its business, it bought bottles and crates
whose cost per unit did not exceed Rs. 5,000. During the year ending March 31,
1998, the company received a sum of Rs.6,89,91,901 on sale of scrap bottles
and crates. The sale proceeds were segregated in two parts :

(a) in respect of bottles and crates purchased prior to
March 31, 1995; and

(b) those purchased after April 1, 1995.

In the return of income filed, the sale proceeds relating
to bottles and crates purchased after April 1, 1995, were taken into
consideration for the purpose of computation of short-term capital gains
u/s.50 whereas the sale proceeds relating to bottles and crates purchased
prior to March 31, 1995, was not offered for short-term capital gains on the
ground that the assets stood depreciated at 100% under the proviso to S.
32(1)(ii) and hence did not form part of the block of assets.

For the reasons given hereinabove, the Supreme Court held
that the bottles and crates purchased prior to March 31, 1995, did not form
part of the block of assets, hence, profits on sale of such assets were not
taxable as a balancing charge, neither u/s.41(1) nor u/s.50. In respect of
bottles and crates purchased after April 1, 1995, on account of deletion of
the proviso to S. 32(1)(ii) (vide Finance Act, 1995) such bottles and crates
formed part of block of assets and consequently such assets purchased after
April 1, 1995, in this case, became exigible to capital gains tax u/s.50.

Capital or revenue expenditure — Matter remanded to the High Court to decide whether the assessee had acquired assets of enduring benefit.

New Page 2

  1. Capital or revenue expenditure — Matter remanded to the
    High Court to decide whether the assessee had acquired assets of enduring
    benefit.

[Shreyas Industries Ltd. v. CIT, (2009) 314 ITR 302
(sc)]

The appellant was running a paper mill at Ahmedgarh in
District Sangrur, Punjab. During the previous year relevant to the A.Y.
1996-97, the appellant applied to the Pollution Control Board and the Forest
Department to allow it to discharge its effluent water from its mill to the
Village Tallewal. The Department of Environment and Forests agreed to provide
forest land for an open drain to be constructed by the assessee (user agency)
for carrying its effluent to the Tallewal drain, subject to certain
conditions. One of the conditions was that the appellant will transfer 4.063
hectares of non-forest land in favour of the Forest Department. That was done.
The appellant claimed that an amount of Rs. 70,79,862 incurred by the
appellant on construction of the open drain for disposal of effluents was
revenue expenditure. According to the Department, the expenditure was on
capital account, particularly, when the appellant had debited the building
account to the extent of Rs.70,79,862.

The Commissioner of Income-tax (Appeals) as well as the
Tribunal held that the expenditure incurred was on revenue account. However,
aggrieved by the decision of the Tribunal the matter was carried by the
Department in appeal to the High Court. The High Court reversed the concurrent
finding given by the Commissioner of Income-tax (Appeals) as well as by the
Tribunal.

On appeal the Supreme Court held that the basic question
which the High Court was required to answer was whether the assessee
(appellant) had acquired assets of enduring benefit. For that purpose, the
High Court was required to examine the terms and conditions on which the
Forest Department had permitted the appellant to construct an open drain. The
High Court was required to consider the effect of diversion of forest land. It
was not in dispute that the open drain ran for approximately fourteen
kilometers. It was not in dispute that it cuts through the forest land. It was
not in dispute that in lieu of this diversion, non-forest land came to be
surrendered by the appellant in lieu of the forest land. Further, the
appellant was required to raise plantation on both sides of the open drain.
Under the terms and conditions, it was stipulated that the Forest Department
shall have afforestation on both sides of drain having tree growth with an
amount of Rs.1.62 lakhs to be paid by the user agency (appellant) for raising
and maintenance of plantation. Further, even with regard to the open drain,
the terms and conditions made it very clear that the open drain would be lined
to avoid any seepage/leakage of effluent in due course of time. None of the
terms and conditions imposed by the Forest Department had been examined in the
above circumstances for deciding the question framed hereinabove.

The Supreme Court therefore set aside the order of the High
Court and remitted the matter to the High Court for fresh consideration in
accordance with law.

 

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Business expenditure — Provision for warranty expenses at certain percentage of turnover of the company based on past experience is allowable as a deduction u/s.37.

New Page 2

 

  1. Business expenditure — Provision for warranty expenses at
    certain percentage of turnover of the company based on past experience is
    allowable as a deduction u/s.37.

[ Rotork Controls India P. Ltd. v. CIT, (2009) 314
ITR 62 (SC)]

The appellant-company sold valve actuators. The bulk of the
sales was to BHEL. At the time of sale, the appellant (assessee) provided a
standard warranty whereby in the event of any beacon rotork actuator or part
thereof becoming defective within 12 months from the date of commencing or 18
months from the date of dispatch, whichever was earlier, the company undertook
to rectify or replace the defective part free of charge. This warranty was
given under certain conditions stipulated in the warranty clause. For the A.Y.
1991-92, the asessee made a provision for warranty at Rs.10,18,800 at the rate
of 1.5% of the turnover. This provision was made by the assessee on account of
warranty claims likely to arise on the sale of effected by the appellant and
to cover up that expenditure. Since the provision made was for Rs.10,18,800
which exceeded the actual expenditure, the appellant revised Rs.5,00,246 as
reversal of excess provision. Consequently, the assessee claimed deduction in
respect of the net provision of Rs.5,18,554 which was disallowed by the
Assessing Officer on the ground that the liability was merely a contingent
liability not allowable as a deduction u/s.37 of the Act. This decision was
upheld by the Commissioner of Income-tax (Appeals). The matter was carried in
appeal to the Tribunal by the appellant. It was held by the Tribunal that
right from the A.Y. 1983-84 the Commissioner of Income-tax (Appeals) as well
as the Tribunal had allowed the warranty claim(s) on the ground that valve
actuators are sophisticated equipment; that in the course of manufacture and
sale of valve actuators a reasonable warranty was given to the purchases; that
every item of sale was covered by the warranty scheme; that no purchaser was
ready and willing to buy valve actuators without warranty and consequently
every item sold had a corresponding obligation under the warranty clause(s)
attached to such sales. All through this period between the A.Y. 1983-84 and
the A.Y. 1991-92, the Tribunal took the view that the provision made by the
appellant was realistic. Applying the rule of consistency, the Tribunal held
that the assessee on the facts and circumstances of the case was entitled to
deduction u/s.37 of the 1961 Act in respect of the provision for warranty
amounting to Rs. 5,18,554. Aggrieved by the decision of the Tribunal, the
Department carried the matter in appeal to the Madras High Court.

The High Court held that the assessee was not entitled to
deduction in respect of the provision made for warranty claims. It was held
that no obligation was ever cast on the date of the sale and consequently
there was no accrued liability. According to the High Court, the warranty
provision was made against the liability which had not crystallised against
the appellant and consequently it was a provision made for an unascertained
liability and, therefore, the appellant was not entitled to claim deduction
u/s.37 of the 1961 Act.

On appeal, the Supreme Court held that in the case of
manufacture and sale of one single item, the provision for warranty could
constitute a contingent liability not entitled to deduction u/s.37 of the said
Act. However, when there is manufacture and sale of an army of items running
into thousands of units of sophisticated goods, the past events of defects
being detected in some of such items lead to a present obligation which
results in an enterprise having no alternative to settling that obligation in
the present case.

The appellant has been manufacturing valve actuators in
large numbers. The statistical data indicated that every year some of these
manufactured actuators are found to be defective. The statistical data over
the years also indicated that being sophisticated item no customer is prepared
to buy a valve actuator without a warranty. Therefore, the warranty became
integral part of the sale price of the valve actuators. In other words, the
warranty stood attached to the sale price of the product. Therefore, the
warranty provision was needed to be recognised because the appellant was an
enterprise having a present obligation as a result of past events resulting in
an outflow of resources. Also, a reliable estimate could be made of the amount
of the obligation.

The Supreme Court observed that there are following options
for accounting the warranty expense :

(a) account warranty expense in the year in which it is
incurred;

(b) to make a provision for warranty only when the
customer makes a claim; and

(c) to provide for warranty at certain percentage of
turnover of the company based on past experience (historical trend).
According to the Supreme Court, the first opinion is unsustainable since it
would tantamount to accounting for warranty expenses on cash basis, which is
prohibited both under the Companies Act as well as by the Accounting
Standards which require accrual concept to be followed. In the present case,
the Department is insisting on the first option which, as stated above, is
erroneous as it rules out the accrual concept. The second option is also
inappropriate since it does not reflect the expected warranty costs in
respect of revenue already recognised (accrued). In other words, it is not
based on the matching concept. Under the matching concept, if revenue is
recognised the cost incurred to earn that revenue including warranty costs
has to be fully provided for. When valve actuators are sold and the warranty
costs are an integral part of that sale price, then the appellant has to
provide for such warranty costs in its account for the relevant year,
otherwise the matching concept fails. In such a case the second option is
also inappropriate. Under the circumstances, the third option is the most
appropriate because it fulfils accrual concept as well as the matching
concept.

Special audit of accounts — Order u/s. 142(2A) cannot be passed without giving reasonable opportunity of being heard.

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 12 Special audit of accounts — Order u/s.
142(2A) cannot be passed without giving reasonable opportunity of being heard.


[Sahara India (Firm) v. CIT, (2008) 300 ITR 403 (SC)]

This matter was placed before a three-Judge Bench in view of
a common order dated December 14, 2006, passed by a two-Judge Bench. The order
read as follows :

“When the matter was taken up, the learned counsel for the
petitioner placed reliance on a decision of this Court in Rajesh Kumar v.
Deputy CIT. According to the learned counsel for the petitioner, before
any direction can be issued u/s.142(2A) of the Income-tax Act, 1961 (in short
‘the Act’) for special audit of the accounts of the assessee, there has to be
a pre-decisional hearing and an opportunity has to be granted to the assessee
for the purpose. A close reading of the decision shows that the observations
in this regard appear to have been made in the context of the assessments in
terms of S. 158BC (block assessment) of the Act. Such assessments are
relatable to a case when a raid has been conducted at the premises of an
assessee. Had that been so, limited to the facts involved in that case, we
would have negatived the contentions of the learned counsel for the
petitioner. But, certain observations of general nature have been made. The
effect of these observations appears to be that in every case where the
Assessing Officer issues a direction in terms of S. 142(2A) of the Act, the
assessee has to be heard before such order is passed. This does not appear to
us to be the correct position of law. Therefore, we refer the matter to a
larger Bench. The records be placed before the Hon’ble Chief Justice of
India for constituting an appropriate Bench.”

 


Although no specific question had been formulated for
determination by the larger Bench but from the afore-extracted order it was
discernible that the Bench had doubted the correctness of the decision of this
Court in Rajesh Kumar v. Deputy CIT, to the extent that it laid down as
an absolute proposition of law that in every case where the Assessing Officer
issues a direction u/s.142(2A) of the Act, the assessee has to be heard before
such an order is passed. In other words, the Bench of two learned Judges has
felt that it may not be necessary to afford an opportunity of hearing to an
assessee before ordering special audit in terms of S. 142(2A) of the Act. The
larger Bench after noting the legal position, was in respectful agreement with
its decision in Rajesh Kumar that an order u/s.142(2A) does entail civil
consequences. The Supreme Court after taking note of the insertion of the
proviso to S. 142(2D) w.e.f. 1-6-2007 observed that even after the obligation to
pay auditor’s fees and incidental expenses has been taken over by the Central
Govt., civil consequences would still ensue on the passing of an order for
special audit and held that since an order u/s.142(2A) does entail civil
consequences, the rule audi alteram partem is required to be observed.
The Supreme Court further held that it is well settled that the principle of
audi alteram partem can be excluded only when a statute contemplates a
post-decisional hearing amounting to a full review of the original order on
merit, which was not the case here. Accordingly, the Supreme Court reiterated
the view expressed in Rajesh Kumar’s case. The Supreme Court also noted that by
the Finance Act, 2007, a proviso to S. 142(2A) has been inserted with effect
from June 1, 2007, which provides that no direction for special audit shall be
issued without affording a reasonable opportunity of hearing to the assessee.

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Substantial question of law — Whether credit for MAT is to be allowed before charging of interest u/s.234B and u/s.234C of the Act is a question of law.

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11 Substantial question of law — Whether
credit for MAT is to be allowed before charging of interest u/s.234B and
u/s.234C of the Act is a question of law.

[ CIT v. Xpro India Ltd., (2008) 300 ITR 337 (SC)]

The following substantial question of law arose for
determination u/s.260A of the Income-tax Act, 1961.

“Whether, on the facts and in the circumstances of the
case, the Hon’ble High Court was right in allowing credit for MAT, u/s.115JAA
of the Income-tax Act, 1961, before charging interest u/s.234B and u/s.234C of
the Income-tax Act ?”

 


The Supreme Court held that the High Court erred in coming to
the conclusion that no substantial question of law arose, and consequently the
Department’s appeal was dismissed. The Supreme Court was of the view that, in
the present case, the question of interpretation of S. 234B in the context of
short payment of interest on advance tax arose for determination before the High
Court, which warranted interpretation of S. 115JAA of the 1961 Act read with S.
234B and S. 234C. The shortage in payment according to the respondent was on
account of applicability of S. 115JAA. The High Court in that connection was
required to decide the nature of the levy u/s.234B, whether the levy is penal or
mandatory. It had also not considered the judgment of the Bombay High Court in
the matter of CIT v. Kotak Mahindra Finance Ltd., (2004) 265 ITR 119. The
civil appeal was therefore allowed by the Supreme Court and the impugned
judgment was set aside with the direction to the High Court to consider the
above question in accordance with law.

 

 

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Companies — Minimum Alternate Tax — In respect of company consistently following the practice of debiting the depreciation at the rates prescribed by the Income-tax Rules, the Assessing Officer cannot for the purposes of S. 115J rework the net profit by s

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 9 Companies — Minimum Alternate Tax — In
respect of company consistently following the practice of debiting the
depreciation at the rates prescribed by the Income-tax Rules, the Assessing
Officer cannot for the purposes of S. 115J rework the net profit by substituting
depreciation at the rates prescribed in Schedule XIV to the Companies Act, 1956.


[Malayala Manorama Co. Ltd. v. CIT, (2008) 300 ITR 251
(SC)]

The main question which had arisen for consideration before
the High Court was whether in respect of a company consistently charging
depreciation in its books of account at the rates prescribed in the Income-tax
Rules, the Income-tax Officer has jurisdiction u/s.115J of the Income-tax Act,
1961, to rework net profit by substituting the rates prescribed in Schedule XIV
to the Companies Act, 1956 ? The Kerala High Court (253 ITR 378) had held that
for the purposes of S. 115J the depreciation must be calculated in terms of the
Companies Act. On an appeal to the Supreme Court, it was submitted on behalf of
the appellant that in the profit and loss account the assessee has debited
depreciation at the rates prescribed by the Income-tax Rules, 1962. This has
been the consistent practice of the assessee throughout. S. 211(2) of the 1956
Act mandates that every profit and loss account of a company shall give a true
and fair view of the profit or loss of the company for the financial year and
shall comply with the requirements of Parts II and III of Schedule VI so far as
they are applicable thereto. The accounts of the assessee for the relevant A.Ys.
1988-89 and 1989-90 are audited u/s.227 of the 1956 Act. The audit report
confirms that the accounts of the assessee represent a true and fair view. The
accounts have further been passed and approved by the general body of
shareholders at the annual general meeting. The said accounts have been filed
with the Registrar of Companies and no objections have been raised in relation
to them. It was further submitted that u/s.115J the assessee has the obligation
to prepare his profit and loss account as per Parts II and III of Schedule VI to
the 1956 Act. No dispute has been raised at any stage of the proceedings by the
Revenue that the profit and loss account of the assessee is not in compliance
with the provisions of the 1956 Act, particularly Schedule VI, Parts II and III.
In Schedule VI, there is no reference to S. 205 and S. 350 or Schedule XIV to
the 1956 Act. The appellant referred to Note 3(iv) of Part II (Requirements as
to profit and loss account) of Schedule VI to the 1956 Act which reads as
under : “(iv) The amount provided for depreciation, renewals or diminution in
value of fixed assets. If such provision is not made by means of a depreciation
charge, the method adopted for making such provision. If no provision is made
for depreciation, the fact that no provision has been made shall be stated and
the quantum of arrears of depreciation computed in accordance with S. 205(2) of
the Act shall be disclosed by way of a note”. It was submitted that this made it
clear that Schedule VI to the 1956 Act does not create any obligation on a
company to provide for any depreciation much less provides for depreciation as
per Schedule XIV to the Act. It was also submitted by the appellant that it is a
long-standing accepted position by the Company Law Department that the rates of
depreciation prescribed in Schedule XIV are the minimum rates (See : Circular
No. 2 of 1989, dated Mach 7, 1989). Paragraph (3) of the said Circular reads as
under :

“(3) Can higher rates of depreciation be charged ?

It is stated that Schedule XIV clearly states that a
company should disclose depreciation rates if they are different from the
principal rates specified in the Schedule. On this basis, it is suggested that
a company can charge depreciation at rates which are lower or higher than
those specified in Schedule XIV. It may be clarified that the rates as
contained in the Schedule XIV should be viewed as the minimum rates and,
therefore, a company shall not be permitted to charge depreciation at rates
lower than those specified in the Schedule in relation to assets purchased
after the date of applicability of the Schedule.”

 


Moreover, Note 5 of Schedule XIV contemplates that rate may
be different from the rates specified in the said Schedule. This note reads as :

“5. The following information should also be disclosed in
the accounts :

(i) depreciation methods used; and

(ii) depreciation rates or the useful lives of the
assets, if they are different from the principal rates specified in the
Schedule.”

 



It was submitted by the learned counsel on behalf of the
appellant that this case was squarely covered by a three-Judge Bench decision of
this Court in Apollo Tyres Ltd. v. CIT, (2002) 9 SCC 1. Referring to
Explanation (ha)(iv) to S. 115J, the Revenue submitted that before the High
Court, it was argued by counsel for the Revenue that S. 205 of the Companies
Act, 1956 has been legislatively incorporated into the Income-tax Act for the
purposes of S. 115J and since this is a legislation by incorporation, the said
provision of the Companies Act, 1956, has to be applied as indicated by that
provision in the Companies Act. It was also pointed out that in S. 205 of the
Companies Act, it has been provided that for the purposes of calculating
depreciation u/s.205(1), the same could be provided to the extent specified
u/s.350 of the Companies Act. A reference to S. 350 of the Companies Act would
show that the amount of depreciation to be deducted shall be the amount,
calculated with reference to the written-down value of the assets, as shown by
the books of the company at the end of the financial year expiring at the
commencement of the Act or immediately thereafter and at the end of each
subsequent financial year and the rates specified in Schedule XIV to the
Companies Act. Therefore, according to the Revenue, the calculation of
depreciation in terms of the Companies Act and Schedule XIV thereof becomes a
must, while assessing an assessee u/s.115J of the Income-tax Act.

The Supreme Court allowing the appeal of the appellant, held
that the controversy involved in this case was no longer res integra. Its
three-judge Bench in Apollo Types (supra) had clearly interpreted S. 115J
of the Act and there was no scope for any further discussion.

 

 

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Transfer of a case — Power u/s.127 can also be exercised in respect of a block assessment.

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 10 Transfer of a case — Power u/s.127 can
also be exercised in respect of a block assessment.


[ K. P. Mohammed Salim v. CIT, (2008) 300 ITR 302
(SC)]

A search was conducted by the officers of the Income-tax
Department in the residence as also in the business premises of the assessee,
his sons and other associates, consequent whereupon, it was proposed to transfer
the cases pertaining to the assessee to the Income-tax (Inv.) Circle, Calicut,
to facilitate effective and co-ordinated investigation. An order was passed to
that effect by the Chief Commissioner of Income-tax, Bangalore, u/s.127(2) of
the Act. A notice was issued by the Assessing Officer u/s.158 BC of the Act to
file a return setting forth the total income including the undisclosed income
for the block period. The assessee filed a writ petition in the High Court of
Karnataka challenging the said order of transfer of cases passed by the Chief
Commissioner of Income-tax. The said writ petition was dismissed. A notice was
thereafter issued by the assessing authority asking the assessee to file a
return setting forth the total income including the undisclosed income for the
block period. Pursuant thereto, the return was filed. The purported undisclosed
income of the assessee was determined. The said order of the Assessing Officer,
Calicut was challenged on the ground that he had no jurisdiction to make the
block assessment, as the authority therefor remained with the Assessing Officer
originally having the jurisdiction over the assessee. A Division Bench of the
High Court by reason of the impugned judgment opined that the provisions of S.
127 of the Act can also be resorted to for a block assessment. On an appeal, the
Supreme Court held that an order of transfer is passed for the purpose of
assessment of income. It serves a larger purpose. Such an order has to be passed
in public interest. Only because in the said provision the words ‘any case’ has
been mentioned, the same, in the opinion of the Supreme Court, would not mean
that an order of transfer cannot be passed in respect of cases involving more
than one assessment year. It would not be correct to contend that only because
Explanation appended to S. 127 refers to the word ‘case’ for the purpose of the
said Section as also S. 120, the source of power for transfer of the case
involving block assessment is relatable only to S. 120 of the Act. It is a
well-settled principle of interpretation of statutes that a provision must be
construed in such a manner as to make it workable. When the Income-tax Act was
originally enacted, Chapter XIV-B was not in the statute book. It was brought in
the statutes book only in the year 1996. The power of transfer in effect
provides for a machinery provision. It must be given its full effect. It must be
construed in a manner so as to make it workable. Even S. 127 of the Act is a
machinery provision. It should be construed to effectuate a charging Section so
as to allow the authorities concerned to do so in a manner wherefor the
statute was enacted. Affirming the decision the Andhra Pradesh High Court in
Mukutla Lalita v. CIT reported in (1997) 226 ITR 23 the Supreme Court held
that the word ‘any’ must be read in the context of the statute and for the said
purpose, it may in a situation of this nature, means all. The Supreme Court held
that the power u/s.127 can also be exercised in respect of a block assessment.

 

 

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Appeal — Appeals of Revenue cannot be entertained if it has accepted and not challenged the ruling of the High Court passed on the issue.

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 8 Appeal — Appeals of Revenue cannot be
entertained if it has accepted and not challenged the ruling of the High Court
passed on the issue.


[ ACIT v. Surat City Gymkhana, (2008) 300 ITR 214
(SC)]

The respondent-assessee claimed exemption u/s. 10(23) of the
Income-tax Act, 1961, for the A.Ys. 1991-92 and 1992-93. The said exemption was
claimed on the basis that the objects of the respondent-assessee were
exclusively charitable. The Assessing Officer rejected the claim. The appeals
filed before the Commissioner of Income-tax (Appeals) were dismissed. Aggrieved
thereby, the assessee filed further appeals before the Tribunal. The Tribunal,
by its order dated January 20, 2000, allowed the
appeals filed by the respondent-assessee. The Revenue filed appeals before the
High Court of Gujarat. The Revenue claimed that the following two substantial
questions of law arise from the order of the Tribunal :

(A) Whether, on the facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in law in holding that the
objects of the trust restricting benefits to the members of the club would
fall within the purview of the act of ‘general public utility’ u/s.2(15) of
the Income-tax Act constituting as a section of public and not a body of
individuals ?

(B) Whether, on the facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in law in holding that
registration u/s.12A was a fait accompli to hold the AO back from
further probe into the objects of the trust ?

 


The High Court dismissed the appeals, in limine,
relying on a decision of the same Court in the case of Hiralal Bhagwati v.
CIT, (2000) 246 ITR 188; (2000) 161 CTR 401. Being dissatisfied by the order
of the High Court, the Revenue has filed these appeals. The Supreme Court, on
July 22, 2002, granted leave in respect of question No. ‘B’ only. The appeals
were not entertained in respect of the question No. ‘A’ and it was noted that
the appeals were rightly dismissed by the High Court insofar as question No. ‘A’
is concerned, as the appellant did not challenge the correctness of the judgment
in the case of Hiralal Bhagwati (supra). At the hearing the Supreme Court
found that on a perusal of the judgment of the Gujarat High Court in the case of
Hiralal Bhagwati (supra), question No. ‘B’ was also concluded by the said
judgment (for 1st para of page 196). Further, since the Revenue had not
challenged the decision in the said case, the same has attained finality. The
Supreme Court held that question No. ‘B’, therefore, should also meet the same
fate as question No. ‘A’, as this Court had declined to grant leave in respect
of question No. ‘A’ on the ground that the Revenue did not challenge correctness
of the decision in the case of Hiralal Bhagwati (supra). It appeared that
the fact that question No. ‘B’ was also covered by the aforementioned judgment,
was not brought to the notice of their Lordships and, therefore, leave granted
was restricted to question No. ‘B’. In this view of the matter, the appeals were
dismissed.

 

 

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Reference — Penalty — High Court cannot go into facts in the absence of the question that the finding of the Tribunal was perverse.

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 7 Reference — Penalty — High Court cannot go
into facts in the absence of the question that the finding of the Tribunal was
perverse.


[Sudarshan Silks and Sarees v. CIT, (2008) 300 ITR 205
(SC)]

A search was conducted on the premises of the assessees on
October 14/15, 1987, and incriminating documents evidencing concealment of
income by the assessee were unearthed apart from cash and jewellary found at the
time of search. It was found that the appellant was maintaining double set of
books and was accounting for only 50% of sales in the regular set of books. This
fact was admitted by Shri J. S. Ramesh, a partner of the firm in the statement
recorded u/s.132(4) of the Act. Shri J. S. Ramesh was the person-in-charge of
the entire group. The total turnover suppressed by the assessee for the A.Y.
1987-88 was found to be to the tune of Rs.44,07,783. The AO estimated that the
sales of the assessee were Rs.50,000 per day, whereas the accounted sales were
not found even 50% of the total sales. Apart from this, it was found that
certain purchases were also not being accounted for. Similarly, certain payments
made were not being accounted for. All these were pointed out to the assessee.
The assessee filed a revised return on March 31, 1989, declaring a total income
for the A.Y. 1987-88 at Rs.3,74,226 as against the earlier amount of Rs.43,650.
This was accepted and after verification the assessment was completed on
December 29, 1989. During the course of recording the statement u/s.132(4) of
the Act, Shri Ramesh agreed to declare such additional income as had been
estimated by the search party in the office of the appellant and its sister
concerns. On the basis of these calculations, revised returns were filed by the
appellant for A.Ys. 1984-85, 1985-86 and 1986-87. The incomes as per revised
returns were also accepted in toto. In the course of assessment proceedings,
penal action u/s.271(1)(c) of the Act was initiated and after considering the
reply filed by the appellant, the AO chose to levy maximum penalty u/s.
271(1)(c). On appeal the CIT(A) noticed that no books of account or other
documentary evidence was discovered that proved any concealment for the earlier
years. The CIT(A) held that no penalty is leviable when unproved income is
offered to purchase peace, particularly considering that the additional income
returned, has only been on the basis of the appellant’s own estimates and the
appellant’s own admission, unsupported by the discovery of any other documentary
evidence relevant to years for which higher incomes were returned. The Tribunal
upheld the findings recorded by the CIT(A). The High Court on consideration of
the matter concluded that the findings recorded by the Tribunal and the CIT(A)
being perverse, which no reasonable person could have taken, were liable to be
set aside and accordingly accepted the reference and held that in the facts and
circumstances of the case, the Tribunal was not right in upholding the order of
the CIT(A) in cancelling the penalty levied u/s.271(1)(c). It was held that in
the facts of the case the penalty u/s. 271(1)(c) is clearly exigible. On appeal
the Supreme Court held that the question of law referred to the High Court for
its opinion was, as to whether the Tribunal was right in upholding the findings
of the Commissioner of Income-tax (Appeals) in cancelling the penalty levied
u/s.271(1)(c). Question as to perversity of the findings recorded by the
Tribunal on facts was neither raised nor referred to the High Court for its
opinion. The Tribunal is the final court of fact. The decision of the Tribunal
on the facts can be gone into by the High Court in the reference jurisdiction
only if a question has been referred to it which says that the finding arrived
at by the Tribunal on the facts is perverse, in the sense that no reasonable
person could have taken such a view. In reference jurisdiction, the High Court
can answer the question of law referred to it and it is only when a finding of
fact recorded by the Tribunal is challenged on the ground of perversity, in the
sense set out above, that a question of law can be said to arise. Since the
frame of the question was not as to whether the findings recorded by the
Tribunal on facts were perverse, the High Court was precluded from entering into
any discussion regarding the perversity of the findings of fact recorded by the
Tribunal. Accordingly, the orders under appeal were set aside by the Supreme
Court and that of the Commissioner of Income-tax (Appeals) and the Tribunal
restored.

 

 

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Double Taxation Avoidance Agreement — India and Malaysia — Dividend income received from Malaysian company is not liable to be taxed in India in the hands of the recipient assessee

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6 Double Taxation Avoidance Agreement — India
and Malaysia — Dividend income received from Malaysian company is not liable to
be taxed in India in the hands of the recipient assessee.


[Dy. CIT v. Torqouise Investments and Finance Ltd., (2008) 300 ITR 1
(SC)]

The assessee-respondent, filed its return of income for the
A.Y. 1992-93, declaring an income of Rs.4,30,06,580 by showing its business as
investment and finance, which was processed u/s.143(1)(a) of the Income-tax Act,
1961, on January 18, 1996, on the same income. Along with the return the
assessee claimed refund amounting to Rs.29,16,660 on the basis of credit of
deemed TDS on dividend received from a Malaysian company i.e., Pan
Century Edible Oils SND.BHD, Malaysia. The Assessing Officer raised a demand of
Rs.1,07,370 after rejecting the credit claimed by the assessee on the basis of
deemed credit on dividend received from the aforesaid Malaysia company. Being
aggrieved, the assessee filed an appeal before the Commissioner of Income-tax
(Appeals), which was accepted. The Revenue thereafter filed an appeal before the
Income-tax Appellate Tribunal. The Tribunal disposed of the appeal with the
observation that the Double Taxation Avoidance Agreement entered into by the
Government of India with Government of Malaysia would override the provision of
the Act if they are at variance with the provisions of the Act. It was held that
from a plain reading of Article XI of the DTAA, it was clear that dividend
income would be taxed only in the Contracting State where such income accrued.
On further appeal, the High Court, following the decision of the Madras High
Court in the case of CIT v. Vr. S.R.M. Firm reported in (1994) 208
ITR 400, which was affirmed by the Supreme Court in the case of CIT v.
P.V.A.L. Kulandagan Chettiar reported in (2004) 267 ITR 654, held that the
Tribunal was justified in holding that the dividend income derived by the
assessee from a company in Malaysia is not liable to be taxed in the hands of
the assessee in India under any of the provisions of the Act. On an appeal to
the Supreme Court, the Supreme Court after going through the judgment of the
Madras High Court in CIT v. Vr. S.R.M. Firm (1994) 208 ITR 400 and its
judgment in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 held
that the point involved in the appeals stood concluded in favour of the assessee
and against the Revenue by the decision of the Madras High Court in CIT v. Vr.
S.R.M. Firm (1994) 208 ITR 400, which was duly affirmed by it in the case of
CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654. The Supreme Court
further observed that the review petition filed against the decision of this
Court in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 was also
dismissed on November 1, 2007.

 

Notes :

(i) There was an inordinate delay of 1027 days in filing
the review petition for which no satisfactory explanation had been offered.
The Supreme Court even otherwise did not find any ground to entertain the said
petition (2008) 300 ITR 5 (SC).

(ii) The effect of the judgment of the Apex Court in the
case of Kulandagan Chettiar (267 ITR 654) should now be considered with the
Notification (No. 91 of 2008, dated 28th August, 2008) issued u/s.90(3)
dealing with the scope of words ‘may be taxed’ used in DTAAs — [218 CTR (St.)
13].

 

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Tax audit : S. 44AB of Income-tax Act, 1961 : In the case of individual carrying on business as a sole proprietor, it is necessary to comply with the provisions of S. 44AB only in respect of his business income and not in respect of his other income.

New Page 1

Reported :

37. Tax audit : S. 44AB of Income-tax Act, 1961 : In the case
of individual carrying on business as a sole proprietor, it is necessary to
comply with the provisions of S. 44AB only in respect of his business income and
not in respect of his other income.

[Ghai Construction v. State of Maharashtra, 184
Taxman 52 (Bom.)]

In this case the question for consideration before the
Bombay High Court was as to whether an individual who has income from
different sources including income from business is bound to have his income
from sources other than the business also audited u/s.44AB of the Income-tax
Act, 1961 ?

The Bombay High Court held as under :

“(i) The recommendation for the presentation of the
audited account was in all ‘cases of business or profession’ and not in
respect of the entire income of a person carrying on a business or a
profession. It is these recommendations which were accepted in the form of
S. 44AB of the Income-tax Act.

(ii) In the case of an individual carrying on business as
a sole proprietor, it is necessary to comply with the provisions of S. 44AB
only in respect of his business income. It would not be necessary to comply
with the provisions of S. 44AB in respect of his other income. In the case
of a professional, it is his professional income and not his income from
other sources which would be covered by the provisions of S. 44AB.”

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Income : Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : A.Y. 1996-97 : Trade advance to shareholder, etc. : Not assessable as deemed dividend.

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Reported :

36. Income : Deemed dividend : S. 2(22)(e) of Income-tax Act,
1961 : A.Y. 1996-97 : Trade advance to shareholder, etc. : Not assessable as
deemed dividend.

[CIT v. Raj Kumar, 318 ITR 462 (Del.)]


The assessee was in the business of manufacturing
customised kitchen equipments. He was also the managing director and held
nearly 65% of the paid-up share capital of a company C. A substantial part of
the business of the assessee, was obtained through C. For this purpose, C
could pass on the advance received from its customers to the assessee to
execute the job work entrusted to the assessee. The Assessing Officer held
that the advance money received by the assessee is in the nature of the loan
given by C to the assessee and accordingly is deemed dividend within the
meaning of the provisions of S. 2(22)(e) of the Income-tax Act, 1961. He
therefore made the addition by treating the advance money as the deemed
dividend income of the assessee. 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 word ‘advance’ has to be read in conjunction
with the word ‘loan’. Usually attributes of a loan are that it involves the
positive act of lending, coupled with acceptance by the other side of the
money as loan : it generally carries interest and there is an obligation of
repayment. On the other hand in its widest meaning the term ‘advance’ may or
may not include lending. The word ‘advance’ if not found in the company of
or in conjunction with the word ‘loan’ may or may not include the obligation
of repayment. If it does, then it would be a loan.

(ii) The word ‘advance’ which appears in the company of
the word ‘loan’ could only mean such advance which carries with it an
obligation of repayment. Trade advances which are in the nature of money
transacted to give effect to a commercial transaction would not fall within
the ambit of the provisions of S. 2(22)(e) of the Act.

(iii) The trade advance given to the assessee by C could
not be treated as deemed dividend u/s. 2(22)(e) of the Act.”

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Educational institution : Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : A.Y. 2007-08 : Assessee, deemed university, modified its MOA as per the UGC guidelines to include in the objects clause extra mural studies, extension programmes and field outr

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Reported :

35. Educational institution : Exemption u/s. 10(23C)(vi) of
Income-tax Act, 1961 : A.Y. 2007-08 : Assessee, deemed university, modified its
MOA as per the UGC guidelines to include in the objects clause extra mural
studies, extension programmes and field outreach activities to contribute to the
development of society : Assessee entitled to approval for exemption
u/s.10(23C)(vi).

[Jaypee Institute of Information Technology Society v.
DGIT (Exemption), 185 Taxman 110 (Del.)]


The assessee was a registered society. It was imparting
formal education by running an institute of information technology. On its
request, the UGC conferred on it the status of deemed university, subject to
the condition that the institute would revise/amend its Memorandum of
Association (MOA)/Rules as per the UGC model/guidelines. Accordingly the
assessee amended the MOA to include in the object clause extra mural studies,
extension programmes and field outreach activities to contribute to the
development of society. The assessee’s application for grant of approval for
exemption u/s.10(23C)(vi) of the Income-tax Act, 1961 was rejected on the
ground that education was not the only objective of the assessee-institute
inasmuch as the objective clause in the MOA mentioned that the institute was
also established for undertaking extra mural studies, extension programmes and
field out reach activities to contribute to the development of society.


On a writ petition filed by the assessee challenging the
said rejection, the Delhi High Court held as under :


“(i) In the instant case, the assessee was running an
educational institute imparting education in a systematic manner. The very
fact that it was granted the status of ‘Deemed university’ by the UGC, would
be a clinching factor insofar as institutionalised education conducted by
the assessee was concerned. It was imparting education in an organised and
systematic manner and was accountable to UGC even for maintaining the
standard of education. Further, in the assessee-institute, teachers were
employed and students enrolled were taught by these teachers; and they
remained under their control and supervision.

(ii) The main reason given by the respondent in rejecting
the application of the assessee was that the assessee-institute was having
multiple objectives and education was only one of them. In coming to that
conclusion, the respondent had been swayed by the so-called other
objectives, namely, ‘greater interface with society through extra mural,
extension and field action-related programmes’ stipulated in MOA. What was
perceived by the respondent was that those objectives were independent of
each other and it could not be said that the main object was education and
others were related to it. The first aspect which was totally ignored was
that said object was included at the instance of UGC, without which the UGC
would not have entertained the application of the assessee-institute for
grant of status of ‘Deemed university’. Obviously, the UGC would not insist
on including an objective, which was unrelated to ‘education’. There was a
clear purpose behind it. The aforesaid activity/objective was stated by the
UGC as a part of education. Normal schooling was provided by the assessee-institute.
What was emphasised by the UGC by necessitating incorporation of the
aforesaid objective was that imparting education was not limited to seeking
knowledge through textbooks alone. The UGC also wanted students to have
greater interface with society. That was necessary because of the modern
concept of education which needs to be imparted at schools’ and
universities’ levels.

(iii) If pure learning, which is one of the purposes of
the universities, is to survive, it will have to be brought into relation
with the life of the community as a whole, not only with the refined
delights of a few gentlemen of leisure. Real education is one which makes a
student socially relevant. For this purpose, his greater interface with
society is required. UGC perceives that this can be achieved through extra
mural, extension and field action-related programmes. These programmes may
include NSS and NCC activities, other social service programmes and
projects. It was with that purpose in mind that the aforesaid objective was
introduced so that students in the assessee-institute were able to get
‘real’ education. The main purpose, therefore, remained ‘education’ which
was imparted in a formal way by the assessee-institute with the status of
‘Deemed university’ through the help of teachers. The aforesaid activities
would only develop the knowledge, skill or character of the students further
by achieving education in true sense.

(iv) Therefore, the assessee-institute fulfilled the
requirement of imparting formal education by a systematic instruction. If an
institute/university introduces the courses with the objective of ‘greater
interface with the society through extra mural, extension and field
action-related programmes’, these are not the objectives independent of
education, but are an aid to the education. Therefore, the assessee-institute
fulfilled all the requirements of S. 10(23C)(vi) and was, thus, entitled to
grant of registration and, consequently, exemption under the aforesaid
provision.”

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Expenditure : Capital or revenue : S. 37 of I. T. Act 1961 : A. Y. 2002-03 : Amount spent on computer software is revenue expenditure.

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  1. Expenditure : Capital or revenue : S. 37 of I. T. Act
    1961 : A. Y. 2002-03 : Amount spent on computer software is revenue
    expenditure.



 


[CIT vs. Varinder Agro Chemicals Ltd.; 309 ITR 272
(P&H)].

For the A. Y. 2002-03, the Assessing Officer disallowed the
claim of the appellant for deduction of the expenditure on acquisition of
computer software holding that it is capital in nature on the ground that
enduring advantage was derived by the assessee by incurring such expenditure.
The Tribunal allowed the assessee’s claim.

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

“There is nothing to show that the software used by the
assessee was of enduring nature and will not become outdated. Since
technology is fast changing and day by day systems are being developed in a
new way, software may be needed like raw material. The view taken by the
Tribunal is certainly a possible view.”

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Shares in subsidiary company (ordered to be wound up) : Written off : Deductible business loss.

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23 Business loss : Shares held in subsidiary
company : Subsidiary company ordered to be wound up : Shares became of
insignificant value and written off : Loss to be treated as business loss
eligible for deduction.


[CIT v. H. P. Mineral and Industrial Development
Corporation Ltd., 305 ITR 111 (HP)]

One of the assessee’s subsidiary companies was ordered to be
wound up. The assessee had held the shares as stock in trade. The assessee
decided to write off the value of the shares held by it in the said subsidiary
company and claimed deduction of the same as business loss. The Tribunal allowed
the deduction, holding that there was no question of selling off the shares as
the subsidiary company had gone into liquidation.

 

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

“Once a company had been ordered to be wound up, there was
no question of any party dealing in the shares of that company. The Tribunal
had come to a finding that the shares were stock-in-trade and had therefore,
allowed the loss. The loss had to be treated as a trading loss. The mere fact
that the shares were not sold was of no significance, since in fact the shares
could not have been sold and had become worthless.”

 

 

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Assessment : Extension of period of limitation : S. 150 of I. T. Act, 1961 : A. Y. 1993-94 : Grant of probate to assessee would not extend the period.

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Assessment : Extension of period of limitation : S. 150
of I. T. Act, 1961 : A. Y. 1993-94 : Grant of probate to assessee would not
extend the period.


Reported :

 

[CIT vs. Smt. Shobha Rani Shah : 309 ITR 263 (P &
H)]

The assessee had received the probate of her mother on
30.11.2000. On the basis of the probate the Assessing Officer issued notice
u/s. 148 of the Income-tax Act, 1961, on 31.03.2005 for the A. Y. 1993-94. The
Assessing Officer held that the period of limitation would not be applicable
in view of the provisions of Section 150 of the Act. The Commissioner
(Appeals) held that the effective date for invoking Section 150(1) was the
date of probate of the mother and consequently held that the notice u/s. 148
was beyond the period of limitation. The Tribunal dismissed the appeal filed
by the Revenue holding as follows :

” . . . . once I have held that no finding or direction
was given by the Hon’ble Judge in his order, the issue of notice u/s. 148 is
to be regulated by Section 149 of the Income-tax Act as in the order passed
by the Hon’ble Judge there is no finding or direction to be basis for a
notice within the extended period u/s. 150(1).”

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

“In the present case, the Tribunal has rightly held that
the grant of probate by the Additional District Judge, Rohtak, had no
consequence to the assessment and that the order dated 30.11.2000, would not
cause the limitation to extend u/s. 150 of the Act.”

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Interest on borrowed funds : Deduction u/s.36(1)(iii) of I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares held partly as investment and partly as stock in trade : Shares purchased for acquiring controlling interest in company :

New Page 1

Interest on borrowed funds : Deduction u/s.36(1)(iii) of
I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares
held partly as investment and partly as stock in trade : Shares purchased for
acquiring controlling interest in company : Interest on borrowed funds
allowable as deduction u/s. 36(1)(iii).


 



[CIT vs. Srishti Securities Pvt. Ltd. (Bom); ITA No.
71 of 2006: Dated 22.01.2009].

The assessee had purchased shares out of borrowed funds.
The shares were held partly as investment and partly as stock in trade. The
assessee’s claim for deduction of interest was rejected by the Assessing
Officer on the ground that the primary object of acquiring shares was not to
earn dividend but to acquire controlling interest in the company. The CIT(A)
bifurcated interest on pro rata basis between investment and stock in
trade and allowed the interest attributable to stock in trade. The Tribunal
allowed the assessee’s claim, holding that the interest is allowable u/s.
36(1)(iii).

On appeal by Revenue, the Bombay High Court followed the
judgment in the case of CIT vs. Lokhandwala Construction Industries Ltd.
260 ITR 579 (Bom), concurred with the judgment of the Calcutta High Court
in CIT vs. Rajeeva Lohana Kanoria 208 ITR 616 (Cal) and upheld the
decision of the Tribunal. The High Court held that the interest which was
disallowed to the extent of investment will have to be allowed as held by the
Tribunal.

Editor’s Note :

This related to an assessment year prior to insertion of
S.14A.


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Cash credit : Undisclosed income : S. 68 of I. T. Act, 1961 : Disclosure of diamonds in declaration under VDIS : Subsequent sale of diamonds and receipt of consideration by cheque : Receipts shown in books of account is not undisclosed income.

New Page 1

Cash credit : Undisclosed income : S. 68 of I. T. Act,
1961 : Disclosure of diamonds in declaration under VDIS : Subsequent sale of
diamonds and receipt of consideration by cheque : Receipts shown in books of
account is not undisclosed income.



 


[CIT vs. Inder V. Nankani (Bom); ITA No. 128 of
2009 : Dated 24.02.2009].

The assessee had disclosed diamonds in a declaration under
VDIS. He subsequently sold the said diamonds and received consideration by
cheque. The amount received was shown in the books of account. The Assessing
Officer treated the sale consideration as undisclosed income and made addition
of the said amount to the total income of the assessee. The Assessing Officer
held that the assessee was unable to prove that he was actually in possession
and ownership of the diamonds. It is the case of the Revenue that these were
hawala transactions which were unearthed on the raid being conducted on the
two chartered accountants. The Tribunal deleted the addition.

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

“i) The entire submission on behalf of the Revenue is
that the first purchaser has in fact sold the diamonds to the second
purchaser whose whereabouts could not be traced and as such, the sale was
fictitious. The question is whether the order of the CIT(A) and ITAT suffers
from any error of law.

ii) In the instant case, admittedly the diamonds were
declared. The declaration was accepted by the Revenue and thereafter, the
assessee had paid the tax. The assessee thereafter had sold the said
diamonds and received consideration which is also disclosed in the books of
account. In these circumstances, the finding recorded by the Tribunal cannot
be faulted, namely, that the assessee had proved the possession of the
jewellery or diamonds at the time of declaration.

iii) In the instant case, the Assessing Officer was given
an opportunity to produce any material in his possession to hold to the
contrary. The Assessing Officer failed to comply with the said direction. In
these circumstances, CIT(A) proceeded to pass the order which order came to
be subsequently affirmed by the ITAT.

iv) The Tribunal in the instant case has held that the
assessee had disclosed the diamonds in his possession at the time of VDIS
declaration which was accepted. Once that be the case and the consideration
received from the purchaser which has not been doubted, the fact that there
is doubt about the second sale, cannot result in making addition in the
hands of the assessee.

v) In our opinion, considering the findings of facts in
the case, this is not a fit case where question of law would arise.”

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Export profit : Deduction u/s. 80HHC of I. T. Act, 1961 : Export turnover and total turnover : Export sale price to be modified as per the approval by the RBI for including in the export turnover.

New Page 1

Export profit : Deduction u/s. 80HHC of I. T. Act, 1961
: Export turnover and total turnover : Export sale price to be modified as per
the approval by the RBI for including in the export turnover.



 


[CIT vs. M/s. Polycot Corporation (Bom); ITA No.
1241 of 2008: Dated 23.01.2009.]

In the appeal filed by the Revenue against the order of the
Tribunal, the Department had raised the following question :

“Whether on the facts and in the circumstances of the
case and law, is the Hon’ble ITAT right in directing the A.O. to compute the
deduction u/s. 80HHC of the Act after the books of account having been
closed/made up with the total export turnover ascertained, holding that the
reduction in the invoice amount having been approved by the RBI, the
original sales price stands modified to this extent and such modified price
only should be included as part of export turnover ?”

The Bombay High Court held as under :

“i) To avail of the benefit of Section 80HHC the proceeds
have to be brought into India within the time prescribed i.e., six
months or such extended period as may be allowed. In the instant case the
RBI granted time up to 30th June, 2001. The proceeds were brought into India
on 30 June, 2001.

ii) Here we may set out the areas of disagreement between
the Revenue and the assessee. It is the contention of the assessee that
while working out total turnover what will have to be considered is the
revenue which has been brought in during the course of that financial year
and if any moneys in respect of export proceeds have come subsequent to the
order of assessment, they will have to be considered in the said financial
year.

iii) The other factual aspect of the matter is that the
buyer proposed deduction in the export price, the respondents agreed to the
same after taking approval of the RBI to the extent of 30%. The respondents
are a totally export oriented unit. Moneys, therefore, in terms of the
approval granted by the RBI were brought in during the period as extended.

iv) The Tribunal in its order observed that once the RBI
has agreed to deduction in the invoice amount, the original sales price
stands modified and such modified price only should be taken as actual
export value. It is further observed that such adjusted export value should
only be included in the export turnover and the total turnover.

v) The contention of the Revenue was that, that should be
excluded from the export turnover.

vi) In our opinion, considering the facts and the
provisions of Section 80HHC, we cannot find fault with the conclusion
arrived at by the learned Tribunal.”

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Business expenditure : Deduction u/s. 37(1) of I. T. Act, 1961 : A. Ys. 1996-97 and 2001-02 : Expenditure on production of films for advertisement of products manufactured by assessee : Is business expenditure allowable u/s. 37(1) ?

New Page 1

Business expenditure : Deduction u/s. 37(1) of I. T.
Act, 1961 : A. Ys. 1996-97 and 2001-02 : Expenditure on production of films
for advertisement of products manufactured by assessee : Is business
expenditure allowable u/s. 37(1) ?



 


[CIT vs. Geoffrey Manners & Co. Ltd. (Bom); ITA No.
789 of 2008: Dated 09.02.2009].

The assessee incurred expenditure on production of films
for the purpose of advertisement for marketing the products manufactured by
it. The Assessing Officer disallowed the claim for deduction of the
expenditure, holding that it is capital in nature. The Tribunal allowed the
claim.

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

“i) A similar issue had come up for consideration before
the Punjab & Haryana High Court in CIT vs. Liberty Group Marketing
Division, 2008 (8) DTR Judgments 28. In that case the assessee had
claimed expenditure incurred on glow signboards, as also T. V. Films. The
expendi-ture was held to be revenue in nature.

ii) In our opinion the correct test to be applied in such
a case would be that if the expenditure is in respect of an ongoing business
of the assessee and there is no enduring benefit, it can be treated as
revenue expenditure. However, if it is in respect of business which is yet
to commence, then the same cannot be treated as revenue expenditure, as
expenditure is on a product yet to be marketed.

iii) The Tribunal on the facts of this case was clearly
within its jurisdiction in holding that the expenditure was by way of
revenue expenditure, as it was in respect of promoting ongoing products of
the assessee herein.”

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Bad debt : Deduction u/s. 36(1)(vii) of I. T. Act, 1961 : After amendment w.e.f. 01.04.1989 it is not obligatory on the part of the assessee to prove that the debt written off is indeed a bad debt for the purpose of deduction u/s. 36(1)(vii).

New Page 1

Unreported :

  1. Bad debt : Deduction u/s.
    36(1)(vii) of I. T. Act, 1961 : After amendment w.e.f. 01.04.1989 it is not
    obligatory on the part of the assessee to prove that the debt written off is
    indeed a bad debt for the purpose of deduction u/s. 36(1)(vii).

 

[DI vs. M/s. Oman International Bank, SAOG (Bom);
ITA No. 114 of 2009; Dated 09.02.2009.]

At the instance of the Revenue the following question was
raised before the Bombay High Court :

“Whether as per the existing provisions even after the
amendment w.e.f. 01.04.1989, is it obligatory on the part of the
assessee to prove that the debt written off by him is indeed a Bad Debt for
the purpose of allowance u/s. 36(1)(vii) ?”

The Bombay High Court answered the question as under :

“The question as framed will have to be answered by
holding that after the amendment it is neither obligatory nor is it a burden
on the assessee to prove that the debt written off by him is indeed a bad
debt as long as it is bona fide and based on commercial wisdom or
expediency.”

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Purchase of immovable property by Central Government — Lease for 9 years renewable at option of lessee for a further period of 9 years would be covered by Explanation to S. 269UA(f)(i) attracting the provisions of Chapter XX-C.

New Page 1

 17 Purchase of immovable property by Central Government —
Lease for 9 years renewable at option of lessee for a further period of 9 years
would be covered by Explanation to S. 269UA(f)(i) attracting the provisions of
Chapter XX-C.



[Govind Impex P. Ltd. & Ors. v. Appropriate Authority,
Income-tax Department, (2011) 330 ITR 10 (SC)]

The appellants, the owners of property bearing No. B-68,
Greater Kailash, Part-I, New Delhi had let out the same at monthly rental of
Rs.2,50,000 with effect from June 1, 1991 for a period of nine years renewable
for a further period of nine years. The Appropriate Authority of the Income-tax
Department, issued show-cause notice to the appellant dated December 4, 1995,
inter alia, alleging that since the lease is for a period of nine years
extendable for a further period of nine years, it was lease for a period of more
than 12 years and hence the provisions of Chapter XX-C of the Income-tax Act
would be attracted and the lessor and the lessee were obliged to submit Form
37-I within 15 days of the draft agreement. The appellants submitted their
show-cause on January 12, 1996, inter alia, contending that the lessee had an
option to renew the lease by giving three months’ notice prior to the expiry of
the lease and further a fresh lease deed was required to be executed and
registered, hence the provisions of Chapter XX-C of the Act would not be
attracted. The show cause filed by the appellants was considered and finding no
merit, the Appropriate Authority rejected the same by order dated April 24, 2001
holding the appellants guilty of not complying with the provisions of S. 269UC
of the Act. Accordingly, a complaint was made on April 30, 2001 u/s.276AB read
with S. 278B of the Act before the Additional Chief Metropolitan Magistrate,
alleging contravention of S. 269UC of the Act. The learned Magistrate by its
order dated April 30, 2001 took cognizance of the offence and issued process
against the appellants.

The appellants filed writ petition before the High Court for
quashing the aforesaid order dated April 24, 2001 of the Appropriate Authority
rejecting their show cause and deciding to file criminal complaint. However,
since the prosecution had already been launched against the appellants, the
Division Bench of the High Court directed for treating the writ petition as an
application u/s.482 of the Code of Criminal Procedure. Ultimately, the learned
Single Judge by order dated October 10, 2002 dismissed the same.

Aggrieved by the same the appellant have preferred an appeal
with the leave of the Supreme Court.

The Supreme Court observed that there was no serious dispute
in regard to the interpretation of the Explanation to S. 269UA(f) of the Act and
in fact, it proceeded on an assumption that it would cover only such cases where
there existed a provision for extension in the lease deed. According to the
Supreme Court, therefore, what it was required to consider was the terms and
conditions of lease. The Supreme Court observed that the terms of lease are not
to be interpreted following strict rules of construction. One term of the lease
cannot be taken into consideration in isolation. The entire document in totality
has to be seen to decipher the terms and conditions of lease. In the present
case, clause 1 in no uncertain term provided for extension of the period of
lease for a further period of nine years and clause 12 thereof provided for
renewal on fulfilment of certain terms and conditions. Therefore, when the
document was construed as a whole, it was apparent that it provided for the
extension of the term. If that was taken into account the lease was for a period
of not less than twelve years. Once it was held so the Explanation to S.
269UA(f)(i) was clearly attracted. The Supreme Court was of the opinion that the
High Court was right in observing that “on a conjoint reading of paragraphs 1
and 12 of the lease deed, the lessor intended the lease to last for 18 years”
and further the lessor could not have refused to renew/extend the lease after
the first term if the lessee complied with the conditions.

As the matter was pending since long, the Supreme Court
directed the Magistrate in seisin of the case to conclude the trial within six
months from the date of appearance of the appellants. It further directed the
appellants to appear before the Court in seisin of the case within six weeks
from date of the order.

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Power of Appellate Tribunal : To allow claim for deduction not made in return : Assessee claimed 1/5th revenue expenditure on deferred basis : Tribunal can allow full revenue expenditure on accrual basis.

New Page 1

22 Appellate Tribunal : Power of : A.Y.
1990-91 : The Tribunal has power to allow claim for deduction which was not made
in the return of income : Assessee claimed 1/5th revenue expenditure on deferred
basis: Tribunal can allow full revenue expenditure on accrual basis.


[CIT v. Jai Parabolic Springs Ltd., 172 Taxman 258
(Del.)]

For the A.Y. 1990-91, the assessee had written off in the
books certain revenue expenditure over a period of 5 years from the relevant
assessment year and, accordingly, the assessee claimed deduction of 1/5th of the
expenses in the relevant year on deferred basis. The claim was allowed by the
AO. In appeal, the CIT(A) allowed the claim for deduction of the entire revenue
expenditure in the relevant year. The Tribunal restored the matter to the AO to
consider the issue afresh. The AO again disallowed the claim holding that the
same was not claimed in the return of income. The CIT(A) allowed the claim. The
Tribunal upheld the order of the CIT(A).

 

In appeal before the High Court, the Revenue contended that
the Tribunal was not right, in law, in allowing the deduction when no such claim
was made in the return of income. The Delhi High Court dismissed the appeal
filed by the Revenue and held as under :

“(i) The revenue expenditure, which is incurred wholly and
exclusively for the purpose of business, must be allowed in its entirety in
the year in which it is incurred. It cannot be spread over a number of years
even if the assessee has written it off in his books over a period of a number
of years.

(ii) There is no prohibition on the powers of the Tribunal
to entertain an additional ground which according to the Tribunal arises in
the matter for the just decision of the case. Therefore, there was no
infirmity in the order of the Tribunal.”


 

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Revision : S. 263 of Income-tax Act, 1961 : A.Y. 2004-05 : Commissioner setting aside assessment order and directing AO to pass fresh order following procedure u/s. 50C(2)(b) : Not proper : Commissioner has no power to direct AO to complete asessment in a

New Page 1

Reported :


45 Revision : S. 263 of Income-tax Act, 1961 : A.Y. 2004-05 :
Commissioner setting aside assessment order and directing AO to pass fresh order
following procedure u/s. 50C(2)(b) : Not proper : Commissioner has no power to
direct AO to complete asessment in a particular manner.

[CIT v. Smt. Tasneem Z. Madraswala; 324 ITR 67 (Mad.)]

For the A.Y. 2004-05, the assessment was completed u/s.143(3)
of the Income-tax Act, 1961 determining the total income at Rs.8,02,440.
Subsequently, the Commissioner set aside the assessment order exercising the
powers u/s.263 of the Act and also directed the Assessing Officer to pass a
fresh assessment order following the procedure contemplated u/s.50C(2)(b) of the
Act. The Tribunal deleted the direction given by the Commissioner for invoking
the procedure contemplated u/s.50C(2)(b) of the Act to value the capital asset
in a particular manner.

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

“While cancelling the order of assessment, there was no power
vested with the Commissioner to direct the Assessing Officer to complete the
assessment in a particular manner. Therefore, the Tribunal had correctly set
aside that portion of the order passed by the Commissioner, directing the
Assessing Officer to complete the assessment by recourse to the provisions
contained u/s.50C(2)(b) of the Act.”

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Revision : S. 263 of Income-tax Act, 1961 : A.Ys. 2004-05 and 2005-06 : Assessment order consistent with binding ruling of AAR : Revision of assessment order by Commissioner u/s.263 not permissible.

New Page 1

Reported :

44 Revision : S. 263 of Income-tax Act, 1961 : A.Ys. 2004-05
and 2005-06 : Assessment order consistent with binding ruling of AAR : Revision
of assessment order by Commissioner u/s.263 not permissible.

[Prudential Assurance Co. Ltd. v. DIT (International
Taxation); 232 CTR 12 (Bom.), 191 Taxman 62 (Bom.)]

For the A.Ys. 2004-05 and 2005-06, the assessments were
completed in accordance with the binding rulings of the AAR in the case of the
assessee. Thereafter the Commissioner sought to reopen the assessments by
exercising the revisional powers u/s.263 of the Income-tax Act, 1961.

The assessee challenged the notice issued by the Commissioner
by filing a writ petition. The Bombay High Court allowed the writ petition and
held as under :

“(i) There is no dispute that the transaction in respect of
which the petitioner sought a ruling and in respect of which the AAR had
issued a ruling to the petitioner is of the same nature as that for A.Ys.
2004-05 and 2005-06. Evidently, the CIT has ignored the clear mandate of the
statutory provision that a ruling would apply and would be binding only on the
applicant and the Revenue in relation to the transaction for which it is
sought. The ruling in Fidelity Northstar Fund cannot possibly, as a matter of
the plain intendment and meaning of S. 245S displace the binding character of
the advance ruling rendered between the petitioner and the Revenue.

(ii) That apart, the CIT could not possibly have found
fault with the AO for having followed a binding ruling. Where the AO has
followed a binding principle of law laid down in a precedent which has binding
force and effect, it is not open to the CIT to exercise his revisional
jurisdiction u/s.263.

(iii) For the aforesaid reasons, on both counts the
invocation of the jurisdiction u/s.263 was improper.”

 

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Penalty : Concealment of income : S. 271(1)(c) of Income-tax Act, 1961 : A.Y. 2004-05 : Incorrect claim for deduction made u/s.10(36) on the basis of advice from counsel : Claim bona fide : No concealment : Penalty not justified.

New Page 1

Reported :


43 Penalty : Concealment of income : S. 271(1)(c) of
Income-tax Act, 1961 : A.Y. 2004-05 : Incorrect claim for deduction made
u/s.10(36) on the basis of advice from counsel : Claim bona fide : No
concealment : Penalty not justified.


[CIT v. Deepak Kumar, 232 CTR 78 (P&H)]

For the A.Y. 2004-05, the assessee had made a claim for
deduction u/s.10(36) of the Income-tax Act, 1961 on the basis of the advice
given by the counsel. The claim was found to be incorrect and accordingly was
disallowed. As regards the disallowed amount, the Assessing Officer held that
there was concealment of income and accordingly imposed penalty 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 question concerning bona fide mistake or belief is
more or less a question of fact, which has been decided by the CIT(A) on the
basis of the affidavit filed by the counsel. There is no finding of
intentional or motivated mistake which might have been resorted to by the
assessee. It is not unknown that IT returns are filed through the tax experts
in the IT laws and, therefore, the advice given by the counsel can be acted
upon with bona fide belief to be correct.

(ii) There is no rule of law that the aforesaid issue
should have been only before the AO or there was any bar on the assessee not
to raise this issue before the Appellate Authority. The affidavit filed by the
counsel of the assessee has been readily accepted by the CIT(A) as well as the
Tribunal.

(iii) It is well settled that if on the evidence adduced
before the AO or the Appellate forum, a possible view has been taken, then
u/s. 260A, no substantive question of law could be framed merely because
another view is possible.

(iv) The appeal is, thus, without merit and accordingly the
same is dismissed”

 

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Deduction u/s.80-O of Income-tax Act, 1961 : A.Y. 2003-04 : Supply of architectural designs for use outside India : Receipt of fees in foreign exchange : Assessee entitled to deduction u/s.80-O.

New Page 1

 Reported :


41 Deduction u/s.80-O of Income-tax Act, 1961 : A.Y. 2003-04
: Supply of architectural designs for use outside India : Receipt of fees in
foreign exchange : Assessee entitled to deduction u/s.80-O.


[CIT v. Charles M. Correa; 232 CTR 61 (Bom.)]

The assessee is an architect. In the A.Y. 2003-04 the
assessee had claimed deduction u/s.80-O of the Income-tax Act, 1961, in respect
of the professional fees received in convertible foreign exchange for providing
design to foreign enterprise. The Assessing Officer disallowed the claim. 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 object underlying S. 80-O is to allow a deduction
in respect of incomes received in convertible foreign exchange in
consideration for the use outside India of certain categories of intellectual
property, namely, patents, inventions, designs or registered trademarks. The
fact that the assessee supplies designs is not in dispute.

(ii) The contention that the assessee was providing
professional services and could not regarded as the owner of the intellectual
property has no merit. The income in respect of which a deduction is claimed
u/s.80-O was not income, generally speaking, received for rendering
professional services outside India. The income which was received was
specifically in consideration for use outside of the designs which were
supplied by the assessee.

(iii) For the purposes of S. 80-O, use that is made outside
India may be single or multiple use, which may vary upon the facts and
circumstances of each case. So long as the use has taken place outside India
and the payment which is received in convertible foreign exchange is in India,
the benefit of the deduction would have to be granted.

(iv) The assessee had prepared designs in India and had
supplied them to its foreign counterpart outside India in pursuance of the
contracts. Explanation (iii) to S. 80-O clarifies that services rendered or
agreed to be rendered outside India, would include services rendered from
India but shall not include services rendered in India. There is no dispute
about the fact that the designs were supplied and used outside India. All the
conditions requisite for an exemption u/s.80-O were fulfilled. For the
aforesaid reasons no substantial question of law would arise.”

 

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Free Trade Zone : Deduction u/s.10A of Income-tax Act, 1961 : A.Y. 2001-02 : Explanation 1 to S. 10A(9) operative from 1-4-2001 is not retrospective : Assessee treated as newly established undertaking in free trade zone since A.Y. 1997-98 : Explanation 1

New Page 1

Reported :


42 Free Trade Zone : Deduction u/s.10A of Income-tax Act,
1961 : A.Y. 2001-02 : Explanation 1 to S. 10A(9) operative from 1-4-2001 is not
retrospective : Assessee treated as newly established undertaking in free trade
zone since A.Y. 1997-98 : Explanation 1 to S. 10A(9) not applicable.


[Zycus Infotech (P) Ltd. v. CIT; 191 Taxman 13 (Bom.)]

The assessee-company had been treated as a newly established
undertaking in the free trade zone in the A.Y. 1997-98 and was enjoying
deduction of its profits and gains u/s.10A since then. On 31-3-1998, the two
promoters of the company, viz., ‘A’ and ‘N’ were having 100% of voting power in
respect of shares held by them. During the accounting year ending on 31-3-2001,
the assessee-company issued new shares to NRIs, as a result of which
shareholding of promoters reduced to 42.63% and voting power in respect of
shares held by them was reduced to 51.42%. The Assessing Officer held that the
percentage of shares of the company held by the promoters was reduced to less
than 51% in the year under consideration and, as such, it was clearly
established that the beneficial interest in the undertaking was transferred. He,
therefore, applied the provisions of the Explanation 1 to S. 10A(9) and denied
deduction u/s.10A to the assessee for the A.Y. 2001-02. The order of the
Assessing Officer was confirmed by the Commissioner (Appeals) as well as by the
Tribunal.

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

“(i) The Explanation 1 to S. 10A(9) provides that the
promoters of the assessee-company should continue to hold shares of the
company, carrying not less than 51% of the voting power.

(ii) In the instant case, the assessee-company had issued
shares without voting rights. As a result, original promoters, i.e., ‘A’ and
‘N’ continued to hold shares of the company carrying not less than 51% of the
voting power. It was, thus, clear that during the previous year relevant to
the A.Y. 2001-02, the ownership of the assessee-company was not transferred by
any means and, therefore, the assessee-company was right in claiming
entitlement to deduction u/s.10A(9).

(iii) So far as retrospectivity of provision is concerned,
one has to keep in mind the settled principle of interpretation that
retrospectivity cannot be lightly inferred unless it is clearly provided for
in the statute. The first proviso to S. 10A implies continuity. If the
intention is to deprive the existing industries or to impose a condition,
which is not capable of being fulfilled in the context of transfer having
already occurred prior to the statute, it would have been specifically made
clear. Under these circumstances, keeping in mind the general principle that
vested right cannot be divested, one cannot assume retrospectivity to a
greater extent than what the Section intends.

(iv) In the Explanation 1 to S. 10A(9), present tense has
been used with an injunction that the shares ‘are not beneficially held by the
persons who hold the shares in company’. The present tense cannot be assumed
to describe the status of the shareholder as the owner, but the status of the
shares which are beneficially held. On this interpretation, the language of
the Section can only be understood to describe ‘the date on which the
undertaking was set up’ as applicable only for those who were setting up the
undertaking after the new provision, so that in case of others, the date had
to be understood at best, as on 1-4-2001, the date on which the law was
brought in the statute.”

 

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Settlement of cases : Abatement : Ss. 2(45), 245C and 245D(2A) & (2D) of I. T. Act, 1961 : Tax on total income means tax on total income after set-off of carried forward loss : Assessee paid tax correctly : No abatement u/s.245D(2) : Application to be pro

New Page 1

Settlement of cases : Abatement : Ss. 2(45), 245C and
245D(2A) & (2D) of I. T. Act, 1961 : Tax on total income means tax on total
income after set-off of carried forward loss : Assessee paid tax correctly :
No abatement u/s.245D(2) : Application to be proceeded with.


 


[Govind Builders and Developers vs. ITSC : 309 ITR
167 (Bom)].

On 14.09.2006, the assessee made an application to the
Settlement Commission u/s. 245C of the Income-tax Act, 1961 for settlement of
its case for the A. Y. 2004-05. The returned income for that year was a loss
of Rs. 93,112. The assessee had offered an additional income of Rs.53,57,375
in the settlement application. The assessee was also entitled to carried
forward loss of Rs.93,193 of the A. Y. 2003-04. For the purpose of tax payable
u/s. 245D(2A) the assessee arrived at the aggregate total income of
Rs.51,70,820 after reducing from Rs.53,57,375 the returned loss of Rs.93,112
for the relevant year and the carried forward loss of Rs.93,193 of the A. Y.
2003-04. Accordingly it computed the additional tax payable at Rs.18,55,032
and paid Rs.25,59,932 together with interest on 26.05.2007. This payment was
made in compliance with the provisions of Section 245D(2A) of the Act wherein
the last date for payment was 31.07.2007. The Settlement Commission held that
the carried forward loss was wrongly set off and accordingly there was no
compliance of the provisions of Section 245D(2A) of the Act and therefore
declared that the proceedings abated in accordance with the provisions of
Section 245D(2D) of the Act. On 13.11.2007 the assessee paid the difference as
per the decision of the Settlement Commission.

On a writ petition filed by the assessee challenging the
decision of the Settlement Commission, the Bombay High Court held as under :

“i) Section 245D(2A) is mandatory and the additional tax
had to be paid on or before 31.07.2007. The Commission could not condone the
delay or accept the additional amount after 31.07.2007, as the application
itself would stand rejected by operation of law. Once there was no power
with the Commission itself, it was not possible for the Court to act under
the extraordinary jurisdiction under Article 226 read with Article 227 of
the Constitution of India also.

ii) The Settlement Commission, while considering whether
the tax has been paid as contemplated by Section 245D(2A), has to examine
whether that tax is on the total income as disclosed. The tax payable would
be on the income as set out in Section 2(45) of the Act. The assessee was
entitled to carry forward the loss of Rs.92,370. Therefore, the assessee had
correctly paid the tax. Since the assessee could carry forward the loss of
the preceding assessment year, the finding of the Commission that the tax
was not paid was an error of law apparent on the face of the record.
Therefore the finding that the application has abated had to be set aside
and the application had to be proceeded with.”

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