Category: Direct Taxes

[CIT v. Tulsyan NEC Ltd., (2011) 330 ITR 226 (SC)]

The issue involved a batch of civil appeals filed by the
Department before the Supreme Court, related to the question of whether MAT
credit, admissible in terms of section 115JAA, had to be set off against tax
payable (assessed tax) before calculating interest u/s.234A, u/s.234B and
u/s.234C of the Income-tax Act, 1961 (the Act).

The Supreme Court, at the outset, observed that there was no
dispute with regard to the eligibility of the assessee for set-off of tax paid
u/s.115JA. The dispute was only with regard to the priority of adjustment for
the MAT credit.

The Supreme Court observed that the relevant provisions
u/s.115JAA of the Act, introduced by the Finance Act, 1997, with effect from 1st
April, 1997, i.e., applicable for the A.Y. 1997-1998 and onwards,
governing the carry forward and set-off of credit available in respect of tax
paid u/s.115JA, showed that when tax is paid by the assessee u/s.115JA, then the
assessee becomes entitled to claim credit of such tax in the manner prescribed.
Such a right gets crystallised no sooner tax is paid by the assessee u/s.115JA,
as per the return of income filed by the assessee for a previous year (say, year
one). [See section 115JAA(1)]. The said credit gets limited to the tax
difference between tax payable on book profits and tax payable on income
computed under the normal provisions of the Act [see section 115JAA(2)] in year
one. Such credit is, however, allowable for a period of five succeeding
assessment years, immediately succeeding the assessment year in which the credit
becomes available (say, years two to six) [See section 115JAA(3)]. However, the
MAT credit is available for set-off against tax payable in succeeding years
where the tax payable on income computed under the normal provisions of the Act
the exceeds tax payable on book profits computed for the year [See section
115JAA(4),(5)]. The statute envisages u/s.115JAA ‘credit in respect of the tax
so paid’, because the entire tax is not an automatic credit but has to be
calculated in accordance with sub-section(2) of section 115JAA. Sub-section.(4)
of section 115JAA allows ‘tax credit’ in the year tax becomes payable. Thus, the
amount of set-off is limited to tax payable on the income computed under the
normal provisions of the Act less the tax payable on book profits for that year.
[Refer section 115JAA(4) and section 115JAA(5)]. The Assessing Officer may vary
the amount of tax credit to be allowed, pursuant to completion of summary
assessment u/s.143(1) or regular assessment u/s.143(3) for year one, in terms of
section 115JAA(6). As a consequence of such variation, the tax credit to be
allowed for year one is liable to change. With every change in the amount of tax
payable on book profits and/or tax payable on income computed under the normal
provisions of the Act, the tax credit to be allowed would have to be changed by
the Assessing Officer by passing consequential orders, deriving authority from
section 115JAA(6) of the Act. Thus, the tax credit allowable can be set off by
the assessee while computing advance tax/self-assessment tax payable for years
two to six, limited to the difference between tax payable on income computed
under the normal provisions and tax payable on book profits in each of those
years, as per the assessee’s own computation. Although the right to avail of tax
credit gets crystallised in year one, on payment of tax u/s.115JA and the
set-off thereof, follows statutorily, the amount of credit available and the
amount of set-off to be actually allowed, as in all cases of
deductions/allowances u/s.30/u/s.37, is fluid/inchoate and subject to final
determination are only on adjudication of assessment either u/s.143(1) or
u/s.143(3). The fact that the amount of tax credit to be allowed or to be set
off is not frozen and is ambulatory, does not tax away/destroy the right of the
assessee to the amount of the tax credit.

In the cases before the Supreme Court, it was not in dispute
that the assessees were entitled to set off the MAT credit carried forward from
year one. In fact, the Assessing Officer did set off the MAT credit while
calculating the amount of tax payable for years two to six. However, while
calculating interest payable u/s.234B and u/s.234C, the Assessing Officer
computed the shortfall of tax payable without taking into account the set-off of
MAT credit.

The Supreme Court observed that u/s.234B, ‘assessed tax’
means tax on the total income determined u/s.143(1) or on regular assessment
u/s.143(3), as reduced by the amount of tax deducted or collected at source, in
accordance with the provisions of Chapter XVII, on any income which is subject
to such deduction or collection and which is taken into account in computing
such total income. The definition, thus, at the relevant time, excluded MAT
credit for arriving at assessed tax. This led to immense hardship. The position
which emerged was that due to the omission, on one hand, the MAT credit was
available for set-off for five years u/s.115JAA; but the same was not available
for set-off while calculating advance tax. This dichotomy was more spelt out
because section 115JAA did not provide for payment of interest on the MAT
credit. To avoid this situation, the Parliament amended Explanation 1 to section
234B by the Finance Act, 2006, with effect from 1st April, 2007, to provide
along with tax deducted or collected at source, the MAT credit u/s.115JAA also
to be deducted while calculating assessed tax.

The Supreme Court held that any tax paid in
advance/pre-assessed tax paid, can be taken into account in computing tax
payable subject to one caveat, viz., that where the assessee on the basis
of self-computation unilaterally claims set-off or the MAT credit, the assessee
does so at its risk, as in case it is ultimately found that the amount of tax
credit availed of was not lawfully available, the assessee would be exposed to
levy of interest u/s.234B on the shortfall in the payment of advance tax. The
Supreme Court reiterated that it was unable to accept the case of the
Department because it would mean that even if the assessee does not have to pay
advance tax; in the current year, because of his brought forward MAT credit
balance, he would nevertheless be required to pay advance tax, and if he fails,
interest u/s.234B would be chargeable. The consequence of adopting the case of
the Department would mean that the MAT credit would lapse after five succeeding
assessment years u/s.115JAA(3); that no interest would be payable on such credit
by the Government under the proviso to section 115JAA(2); and that the assessee
would be liable to pay interest u/s.234B and u/s.234C on the shortfall in the
payment of advance tax, despite existence of the MAT credit standing to the
account of the assessee.

[CIT v. Bharti Cellular Ltd., (2011) 330 ITR 239 (SC)]

Respondent No. 1, a cellular service provider, had an
interconnected agreement with BSNL/MTNL. Under such agreement, Respondent No. 1
paid interconnect/access/port charges to BSNL/MTNL. Bharti Cellular, BSNL, MTNL,
Hutchison are all service providers. All are governed by National Standards of
CCS No. 7, issued by Telecom Engineering Centre. Under National Standards, M/s. Bharti Cellular Limited is required to connect its network with the network
of BSNL (the service provider) and similar concomitant agreement is provided
for, under which BSNL is required to interconnect its network with M/s. Bharti
Cellular Ltd.

The question basically involved in the lead case before the
Supreme Court was : whether tax was deductible by M/s. Bharti Cellular Ltd when
it paid interconnect charges/access/port charges to BSNL ?

The Supreme Court observed that the problem which arose in
such cases was that there was no expert evidence from the side of the Department
to show how human intervention takes place, particularly during the process when
calls take place, let us say, from Delhi to Nainital and vice versa. If,
for example, M/s. Bharti Cellular Ltd (in this example, in the judgment , it
appears that BSNL is inadvertently mentioned) had no network in Nainital,
whereas it had a network in Delhi, the interconnect agreement enabled M/s.
Bharti Cellular Ltd to access the network of BSNL in Nainital; and the same
situation could arise vice versa in a given case. During the traffic of
such calls, whether there is any manual intervention, was one of the points
which required expert evidence. Similarly, on what basis was the ‘capacity’ of
each service provider fixed when interconnection agreements were arrived at ?
For example, as informed, each service provider is allotted a certain
‘capacity’. On what basis such ‘capacity’ is allotted and what happens if a
situation arises where a service provider’s ‘allotted capacity’ gets exhausted
and it wants, on an urgent basis, ‘additional capacity’ ? Whether at that stage,
any human intervention was involved was required to be examined, which again
required technical data. According to the Supreme Court, these type of matters
could not be decided without any technical assistance available on record.

The Supreme Court directed the Assessing Officer (TDS) in
each case to examine a technical expert from the side of the Department and to
decide the matter. Liberty was also given to the respondents to examine its
expert and to adduce any other evidence.

The next question which arose was whether the Department was
entitled to levy interest u/s. 201(1A) of the Act or impose penalty for non-deduction of tax. The Supreme
Court was of the view, that in the facts and circumstances of the case, it would
not be justified for the following reasons : Firstly, there was no loss of
revenue. Though the tax had not been deducted by the payee, tax had been paid by
the recipient. Secondly, the question involved in the present cases before it
was the moot question of law, which was yet to be decided. The Supreme Court
would have closed the file because these cases were only with regard to levy of
interest but the matter was remitted to the Assessing Officer (TDS) only because
this issue was a live issue and it needed to be settled at the earliest. Once
the issue gets settled, the Department would be entitled to levy both a penalty
and an interest, but as far as the facts and circumstances of the cases before
it were concerned, the Supreme Court was of the view that the interest was not
justified at this stage. Consequently, it held that there would be no levy of
penal interest prior to the date of fresh adjudication order.

M/s Green World Corporation, a partnership concern of Shri R.
S. Gupta and his wife Smt. Sushila Gupta, had set up two units for manufacturing
exercise books, writing pads, etc., at Parwanoo, in the state of Himachal
Pradesh, in the year 1995. The said units were established after declaration and
enforcement of a policy for tax holiday for a certain period specified in the
Union Budget. They had also set up a third unit for manufacturing computer
software. They started filing income-tax returns from the assessment year
1996-97 showing huge profits. In the return for the assessment year 2000-01,
they disclosed their total sales to the tune of Rs 1, 51, 69,515, of which a sum
of Rs 74, 69,314 was shown as net profit. Thus, the profits bore a proportion of
49 per cent to the gross sales. For the earlier assessment year, i.e.,
1999-2000, the proportion of the net profit to the total sales was as high as 66
per cent; of the total sales of Rs 2,97,12,106, net profits were declared to be
to the tune of Rs 1,96,77,631. For the subsequent three assessment years, i.e.,
2001-02, 2002-03 and 2003-04, the proportion of net profit to the gross sales
were 81 per cent, 95 per cent and 95 per cent respectively. The total investment
on plant and machinery for Unit No. I was shown to be just Rs 1, 25,000, and a
very small amount of money was shown to have been spent on plant and machinery
for the second unit.

On or about February 7, 2000, the Assessing Officer (“AO” )
conducted a survey at the premises of the assessee in terms of section 133A of
the Income-tax Act, 1961 (hereinafter referred to for the sake of brevity as,
“the said Act”) and verified for herself the following: (a) factum of the
existence and actual working of the unit; (b) installation of plant and
machinery working with the aid of power; (c) presence of requisite number of
workers, some of whose statements were recorded; (d) availability of stock of
raw, semi-finished and finished material prior to the assessment year 2000-01.
On or about December 19, 2002, the AO, after completing the proceeding for
assessment, passed an order for the assessment year 2000-01, accepting the
income returned by the assessee.

In the said order of assessment, the AO recorded a note which
read as follows:

“The case was thoroughly discussed with (sic) records and
relevant worthy Commissioner of Income Tax, Shimla, in the presence of the
learned Additional Commissioner of income Tax, Solan Range, Solan. Commissioner
of Income Tax has directed that since the reply submitted by the assessee is
satisfactory and up to the mark, no more information is required to be called
for and to assess the case as such. He, therefore, directed in presence of the
learned Additional Commissioner of Income-tax, Solan Range, Solan, to
incorporate that discussion in the body of the order sheet. A copy of the draft
assessment order was sent to the Additional Commissioner of Income Tax, Solan
Range, Solan, under the office letter No. ITO/PWN. 2002/03/2127, dated December
13, 2002, for according necessary approval. Approval to complete the assessment
was received telephonic from the office of the Additional Commissioner of
Income-tax, Solan Range, Solan, and assessment has been completed and the
assessment order has been served upon the assessee on December 19, 2002”.

The Commissioner of Income Tax (‘CIT”, for short), on whose
dictates the order of assessment, dated December 19, 2002, purported to have
been passed, was transferred and his successor, on or about December 5, 2003,
issued notice to the assessee under section 263 of the Act for the assessment
year 2000-01 only, inter alia, on the premise that the said order of assessment
dated December 19, 2002, was prejudicial to the interests of the revenue.

The CIT (Shimla) passed an order dated July 12, 2004, under
section 263 of the Act, inter alia, on the premise that the AO, while finalizing
the assessment had not examined the case properly. In the said order, the
following directions were issued:

a. To estimate the assessee’s income from the units at
Parwanoo at 5 per cent of the declared turnover. The income shown in excess of
5 per cent was to be treated as undisclosed income from undisclosed sources.

b. As the assessee did not fulfil many of the conditions
for being entitled to deduction under section 80-IA/IB, no part of total
income — not even the income estimated at 5 per cent of the turnover at
Parwanoo — would be entitled for deduction u/s. 80-IA/IB.

c. To charge interest under section 234B/C for non-payment
of advance tax.

d. To initiate penalty proceedings under section 271(1)
(c).

e. To examine the case records for all the preceding
assessment years including those for the assessment year 1996-97, and initiate
necessary proceedings under section 148, within a week.

f. To examine the succeeding assessment years also, i.e.,
the assessment year 2001-02, 2002-03 and 2003-04 and initiate appropriate
action under section 148/143(2), as may be applicable, in a week’s time.

The assessee preferred an appeal against the order dated July
12, 2004, before the Income Tax Appellate Tribunal (for short “ITAT”). In its
memo of appeal, the assessee raised contentions relating to: (1) Jurisdiction,
(2) Bias on the part of the CIT (Shimla), and (3) On the merits of the matter.

By reason of an order dated April 15, 2005, the ITAT allowed
an appeal filed by the assessee, setting aside the order of the CIT (Shimla) on
the jurisdictional issue alone. It did not enter into the merits of the matter.

Pursuant to the said order dated July 12, 2004 or in
furtherance thereof, notices under section 148 of the Act were issued to the
assessee for the assessment year 1996-97 to 1999-2000, 2001-02 and 2002-03.

On or about July 5, 2005, a notice under section 148 of the
Act was also issued for the assessment year 2000-01.

The assessee questioned the legality of the notice under
section 148 of the Act by filing a writ petition before the Himachal Pradesh
High Court.

Also, the CIT (Shimla) preferred an appeal before the High
Court under section 260A of the Act.

The High Court by its order dated March 2, 2006, while
allowing the appeal filed by the CIT (Shimla), dismissed the writ petitions
filed by the assessee.

On an appeal, the Supreme Court held that section 263 provides for a power of revision. It has its own limitations. An order can be interfered with suo motu by the said authority not only when an order passed by the AO is erroneous but also when it is prejudicial to interests of the revenue. Both the conditions for exercising the jurisdiction under section 263 of the Act are conjunctive and not disjunctive. An order of assessment should not be interfered with only because another view is possible.

The Supreme Court held that only in terms of the directions issued by the Commissioner under section 263 of the Act, notices under section 148 were issued. The CIT (Shimla) had no jurisdiction to issue directions. Notices issued pursuant thereto would be bad in law.

The Supreme Court considered the effect of the “noting” made by the Assessing Officer. The Supreme Court observed that the noting was specific. It was stated so in the proceedings sheet at the instance of higher authorities. No doubt in terms of the circular letter issued by the CBDT, the Commissioner or for that matter any other higher authority may have supervisory jurisdiction, but it is difficult to conceive that even the merit of the decision shall be discussed and the same shall be rendered at the instance of the higher authority who, as noticed hereinabove, is a supervisory authority. It is one thing to say that while making the orders of assessment the AO shall be bound by statutory circulars issued by the Central Board of Direct Taxes, but it is another thing to say that the assessing authority, exercising a quasi judicial function and keeping in view the scheme contained in the Act, would lose its independence to pass an order of assessment. The Supreme Court held that when a statute provided for different hierarchies and forums in relation to passing of an order as also appellate or original order, by no stretch of imagination can a higher authority interfere with the independence, which is the basic feature of any statutory scheme involving adjudicatory process.

The Supreme Court, in its conclusion observed that the case before it posed some peculiar questions. Whereas the order under section 263 and consequently the notices under section 148 have been held to be not maintainable, the Supreme Court was constrained to think that the AO had passed an order at the instance of the higher authority, which was illegal. The Supreme Court was of the view that for the aforementioned purpose, it may not go into the question of the authorities acting bona fide or otherwise under the Income Tax Act. They might have proceeded bona fide, but the assessment order passed by the AO on the dictates of the higher authorities being wholly without jurisdiction, was a nullity.

The Supreme Court, therefore, was of the opinion that with a view to do complete justice between the parties, the assessment proceedings should be gone through again by the appropriate assessing authorities. The Supreme Court, therefore, in the exercise of jurisdiction under article 142 of the Constitution of India, directed the assessment to be reopened by the CIT, Delhi.

[Joint CIT v. Rolta Indian Ltd., (2011) 330 ITR 470
(SC)]

The question which arose for determination before the Supreme
Court was whether interest u/s.234B can be charged on the tax calculated on book
profits u/s.115JA ? In other words, whether advance tax was at all payable on
book profits u/s.115JA ?

The assessee furnished a return of income on 28th November,
1997, declaring total income of Rs. Nil. On 28th March, 2000, an order
u/s.143(3) was passed determining the total income at nil after set-off of
unabsorbed business loss and depreciation. The tax was levied on the book profit
worked out at Rs.1,52,61,834, determined as per the provisions of section 115JA.
The interest u/s.234B of Rs.39,73,167 was charged on the tax on book profit, as
worked out in the order of assessment. Aggrieved by the said order, the assessee
went in appeal before the Commissioner of Income-tax (Appeals). The appeal on
the question in hand was dismissed. On charging of interest u/s.234B, the appeal
was dismissed by the Tribunal on the ground that the case fell u/s.115JA and not
u/s.115J, hence, the judgment of the Karnataka High Court in the case of Kwality
Biscuits Ltd. was not applicable. At one stage, the Bombay High Court decided
the matter in favour of the Department, but later on, by way of review, it took
the view, following the judgment of the Karnataka High Court in the case of
Kwality Biscuits Ltd., that interest u/s.234B cannot be charged on tax
calculated on book profits. Hence, the Commissioner of Income-tax went to the
Supreme Court by way of civil appeal.

The Supreme Court held that section 207 envisages that tax
shall be payable in advance during the financial year on current income, in
accordance with the scheme provided in section 208 to
section 219, in respect of the total income of the assessee that would be
chargeable to tax for the assessment year immediately following that financial
year. Section 215(5) of the Act defines what is ‘assessed tax’. Tax determined
on the basis of regular assessment, so far as such tax relates to advance tax.
The evaluation of the current income and the determination has to be made
comprising section 115J/115JA of the Act. Hence, levying of interest was
inescapable. The Supreme Court further held that it was clear from reading
section 115JA and section 115JB that a specific provision is made on that
section, which says all the provisions of the Act shall apply to the MAT
company. Further, amendments have been made in relevant Finance Acts, providing
for payment of advance tax u/s.115JA and u/s.115JB. As far as interest leviable
u/s.234B was concerned, the Supreme Court held that the section was clear in
that it applied to all companies.

The Supreme Court further held that the pre-requisite condition for applicability of section 234B is that the assessee
is liable to pay tax u/s.208 and the expression ‘assessed tax’ is defined to
mean tax on the total income determined u/s.143(1) or u/s.143(3), as reduced by
the amount of tax deducted or collected at source. Thus, there is no exclusion
of section 115JA in the levy of interest u/s.234B. The expression ‘assessed tax’
is defined to mean tax assessed on regular assessment which means tax determined
on the application of section 115J/115JA in the regular assessment.

The Supreme Court observed that the question which remained to be considered was whether the assessee, which is a MAT company, was not in a position to estimate its profits of the current year prior to the end of the financial year on 31st March. In this connection, the as-sessee had placed reliance on the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT, reported in (2000) 243 ITR 519; and, according to the Karnataka High Court, the profit as computed under the Income-tax Act, 1961 had to be prepared and thereafter the book profit, as contemplated u/s.115J of the Act, had to be determined; and then, the liability of the assessee to pay tax u/s.115J of the Act arose only if the total income, as computed under the provisions of the Act, was less than 30% of the book profit. According to the Karnataka High Court, this entire exercise of computing income or the book profits of the company, could be done only at the end of the financial year; and, hence, the provisions of section 207, section 208, section 209 and section 210 (predecessors of section 234B and section 234C) were not applicable until and unless the accounts stood audited and the balance-sheet stood prepared; because till then even the assessee may not know whether the provisions of section 115J would be applied or not. The Court, therefore, held that the liability would arise only after the profit is determined in accordance with the provisions of the Companies Act, 1956 and, therefore, interest u/s.234B and u/s.234C is not leviable in cases where section 115J is applied. This view of the Karnataka High Court in Kwality Biscuits Ltd. was not shared by the Gauhati High Court in Assam Bengal Carriers Ltd. v. CIT, reported in (1999) 239 ITR 862; and the Madhya Pradesh High Court in Itarsi Oil and Flours (P) Ltd. v. CIT, reported in (2001) 250 ITR 686; as also by the Bombay High Court in the case of CIT v. Kotak Mahindra Finance Ltd., reported in (2003) 130 Taxman 730 which decided the issue in favour of the Department and against the assessee. It appeared that none of the assessees challenged the decisions of the Gauhati High Court, Madhya Pradesh High Court as well as the Bombay High Court in the Supreme Court. The Supreme Court observed that the judgment of the Karnataka High Court in Kwality Biscuits Ltd. was confined to section 115J of the Act. The order of the Supreme Court dismissing the special leave petition in limine filed by the Department against Kwality Biscuits Ltd. was reported in (2006) 284 ITR 434. Thus, the judgment of the Karnataka High Court in Kwality Biscuits Ltd. stood affirmed. However, the Karnataka High Court had thereafter, in the case of Jindal Thermal Power Co. Ltd. v. Deputy CIT, reported in (2006) 154 Taxman 547, distinguished its own decision in the case of Kwality Biscuits Ltd. (supra) and held that section 115JB, with which the Supreme Court was concerned, was a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies; and, therefore, where such companies defaulted in payment of ad-vance tax in respect of tax payable u/s.115JB, it was liable to pay interest u/s.234B and u/s.234C of the Act. The Supreme Court, therefore, concluded that interest u/s.234B and u/s.234C would be payable on failure to pay advance tax in respect of tax payable u/s.115JA/115JB. The Supreme Court further held that for the aforestated reasons, Circular No. 13 of 2001, dated November 9, 2001 issued by the Central Board of Direct Taxes, reported in (2001) 252 ITR (St.) 50, had no application. Moreover, in any event, para 2 of that Circular itself indicated that a large number of companies liable to be taxed under the MAT provisions of section 115JB were not making advance tax payments. In the said Circular, it had been clarified that section 115JB was a self-contained code and thus, all companies were liable for payment of advance tax u/s.115JB, and consequently the provisions of section 234B and section 234C, imposing interest on default in payment of advance tax, were also applicable.

The dispute relates to the assessment year 1988-89. The
question arose in the background of the view of the Assessing Officer as well as
the Commissioner of Income Tax (Appeals), Jodhpur (in short “the Commissioner”),
that the assessee was not entitled to deductions in terms of section 43B of the
Act. The amount in question related to payability of excise duty on wastage. The
assessee took the stand that the provision for excise duty made on wastage of
IMFL in transit which is debited to the customer’s account and credited to this
account does not attract section 43B of the Act. The Income Tax Officer as well
as the Commissioner held that the assessee’s stand was not acceptable. An appeal
was filed before the Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur (in
short “the ITAT”) which decided the issue in favour of the assessee. In the High
Court, the assessee took the stand that a bank guarantee had been furnished in
respect of the amount and, therefore, there was no scope for applying section
43B of the Act. It was also submitted that section 43B of the Act applied to
payments relatable to tax, duty, cess, or fee. But bottling fees, chargeable
from the assessee under the Rajasthan Excise Act, 1950 (in short “the Excise
Act”) and the Rajasthan Excise Rules, 1962 (in short “the Rules”), and interest
chargeable for late
payment, did not amount to tax, duty and cess. The High Court held that such
fees were not covered under the ambit of section 43B.

The revenue appealed against the said view of the High Court
which, nevertheless, held that furnishing of bank guarantee was not the same as
making payment as stipulated in section 43B of the Act. The Supreme Court held
that the requirement of section 43B of the Act is actual payment and not deemed
payment as condition precedent for making the claim for deduction in respect of
any of the expenditure incurred by the assessee during the relevant previous
year specified in section 43B. The furnishing of bank guarantee cannot be
equated with actual payment which requires that money must flow from the
assessee to the public exchequer, as required under section 43B. By no stretch
of imagination can it be said that furnishing of bank guarantee is actual
payment of tax or duty in cash. The bank guarantee is nothing but a guarantee
for payment on some happening and that cannot be actual payment as required
under section 43B of the Act for allowance as deduction in the computation of
profits.

The Supreme Court further held that section 43B, after
amendment with effect from April 1, 1989, refers to any sum payable by the
assessee by way of tax, duty or fee by whatever name called under any law for
the time being in force. The basic requirement, therefore, is that the amount
payable must be by way of tax, duty and cess under any law for the time being in
force. The bottling fees for acquiring a right of bottling of IMFL which is
determined under the Excise Act and rule 69 of the Rules is payable by the
assessee as consideration for acquiring the exclusive privilege. It is neither
fee nor tax but the consideration for grant of approval by the government as
terms of contract in the exercise of its rights to enter into a contract in
respect of the exclusive right to deal in bottling liquor in all its
manifestations. Referring to various precedents on the subject, the Supreme
Court concluded that the High Court was justified in holding that the amount did
not fall within the purview of section 43B.

Note : The Supreme Court has made following observations
in its judgment : “The administration is a complex subject. It consists of
several aspects. The Government needs to strike a balance in the imposition of
tax between collection of revenue on one hand and business-friendly approach on
the other hand. Today, the Government has realised that in matters of tax
collection, difficulties faced by the business have got to be taken into
account. Exemption, undoubtedly, is a matter of policy. Interpretation of an
entry is undoubtedly a quasi-judicial function under the tax laws. Imposition of
taxes consists of liability, quantification of liability and collection of
taxes. Policy decisions have to be taken by the Government. However, the
Government has to work through its senior officers in the matter of difficulties
which the business may face, particularly in matters of tax administration. That
is where the role of the Board of Revenue comes into play. The said Board takes
administrative decisions, which includes the authority to grant administrative
reliefs. This is the underlying reason for empowering the Board to issue orders,
instructions and directions to the officers under it.”

[CIT v. Joseph Valakuzhy, (2008) 302 ITR 190 (SC)]

During the previous year relevant to the A.Y. 1992-93, the
assessee, a film producer, produced two films, namely, (i) Ex Kannikcodi; and
(ii) Santhwanam. While the first film was released and
exhibited for more than 180 days, the second film was released and exhibited for
less than 180 days. In his return of income, the assessee claimed the benefit of
carry forward of Rs.39,43,830 as amortisation expenses relying on Rule 9A(3)
which according to the assessee provided that the cost of production of the film
equal to the amount realised by the film producer by exhibiting the films that
year should be allowed as deduction in computing the profit and loss of the said
previous year and the balance, if any, carried forward to the next following
previous year and allowed as deduction in that year.

The Assessing Officer allowed the amortisation as claimed.
But the Commissioner of Income Tax in exercise of the power u/s.263 of the Act
set aside the order and directed the Assessing Officer to withdraw the benefit
of loss in view of S. 80, as the assessee had not filed his return of income
within the time prescribed u/s.139(3) of the Act.

The assessee filed an appeal to the Tribunal against the
order passed u/s.263. In the meantime, the Assessing Officer passed a fresh
assessment order in terms of the order passed in revision. The assessee filed an
appeal before the CIT(A) against the said order.

The CIT(A) took the view that S. 80 of the Act could not be
applied to the situation to which Rule 9A(3) was applicable. The CIT(A) however
found that the computation of amortisation expenses to be carried forward, as
shown by the assessee was not correct. The CIT(A) directed the AO to obtain
separate accounts in respect of the different films produced by the assessee and
determine the claim of the amortisation in accordance with the Rule 9A,
clarifying that in case there was a loss in respect of the old film on such
computation, that would have to be subject to the provisions of S. 139(3) and S.
80 of the Act. In regard to the second film, it was held that the amortisation
allowance for the next year was not subject to the provisions of S. 80 and S.
139(3) of the Act.

Being aggrieved by the order of the CIT(A), the Revenue filed
an appeal before the Tribunal. Both the appeals were taken up together for
hearing by the Tribunal and were dismissed with certain clarifications.